I listened to the Senate (July 16 2019) and House hearings (July 17 2019) on the subject of Facebook’s Libra project, with David Marcus, Libra’s CEO as the key witness.Both hearings offered good theatre and put on display how articulate US lawmakers can be. While I thought the Senate hearings were relatively boring, the House hearings had definitely more spunk, including some memorable soundbites and key moments. In part, it is because the US House of Representatives appeared to be more educated than the Senate, and displayed a greater breadth of knowledge on the topic. Here are a few random thoughts and concluding recommendations:
Why So Late?
It was somewhat ironic that hearings of this magnitude on the subject of cryptocurrency didn’t get scheduled earlier, given that we are already 10 years into the birth of Bitcoin. This was certainly a few years overdue if the US wanted to be proactive on this topic. Rep. Emmer was quick to make this observation early in his remarks (see below). Truth is, there had been several attempts by forward-thinking Representatives to bring this subject to the limelight (e.g. the Token Taxonomy Act), but everything was progressing extremely slowly for a lack of will to make it a priority. Then, suddenly, thanks to Facebook, these 2 hearings were scheduled within 30 days of the Libra announcement.
Facebook Still Not Trusted
I’m not sure if Facebook under-estimated how entrenched the mistrust of legislators continues to be towards them, as questions such as “Why should we trust you now” and “Facebook can’t be trusted” dominated both hearings, maybe more so from the Senate's side. Most Senators and Reps could not get past Facebook’s past, and kept reminding David Marcus of it. I think this was a trap that both the House and Senate fell into. By spending a disproportionate amount of time on Facebook’s past, they neglected to focus more on other important go-forward discussions such as Libra’s governance or the actual operations of the Association. Of course, some of the legislators still believed that Facebook could be stopped, and they were stacking the deck in favor of that possibility, instead of thinking more deeply about how to tame this new inevitable dragon.Regardless, Facebook believes they can ride out these fears with the passage of time, while much of the legislators approach was to remind Facebook plenty of times that this water wasn’t under the bridge yet.
Painting the Libra Association as Facebook’s New Mafia
Facebook was characterized as putting together a “cryptocurrency mafia”, given that they hand picked the initial array of supporters. Maybe half-jokingly, one Representative said that it appears that Facebook was the Godfather of that association. That analogy alone is worth a hundred imaginary implications. Granted, some of the 28 founding members joined because they may have missed out on being directly involved in early cryptocurrency trends such as Bitcoin or Ethereum, and they didn’t want to be left out, so they jumped on the bandwagon to be close to the next thing; and perhaps some others were there because they wanted to provide on-ramps and off-ramps to this new system. Regardless, the list was undoubtedly the result of careful orchestration in the selection and composition of the founding members. Facebook was called on it several times, but David Marcus refused to admit they had a heavy hand in choosing these members, citing that it was rather based on certain selection criteria that prospective members had to meet. In doing so, David Marcus dodged questions like “Did you pick them” and “were they democratically elected”. One Representative went as far as saying: “I would love to pick my voters”. However, drawing the democratic election process analogy at this early stage is far fetched. Business governance is not the same as political governance although some very decentralized blockchains believe that decentralized governance via voting is the preferred way. While it was obvious that these initial 28 founding members were handpicked by Facebook, there is nothing wrong is selecting the right initial partners in a given business venture. Let's face it, Facebook needs to kick-start this initiative in the right way.
Fearmongering
Obviously, the legislators wanted to prevent the creation of another tech giant that might later abuse their powers, but the degree of fearmongering and hypothetical uncertainty that were thrown was a bit overblown, in my opinion. Rep. Sherman made the most extreme of all hypothetical fears as he equated the Libra innovation consequences to eventually lead to something as disastrous as OBL’s 9-11 “innovative” event of flying two planes into the World Trade Center. Other more common fears that were cited included the use of funds by terrorists, money laundering, illegal uses for illicit activities, or usage by shady actors or people that were banned by the US government for security reasons. Most of these fears are ill-placed because existing regulations and practices are already in place to alleviate these risks anyways. If anything, being one network, illegal activity could be more easily traced on a blockchain than across the spaghettis and silos make-up of the current financial system.
Trust but Verify
The subject of “Trust but verify” came up a few times, but maybe not enough in my opinion, because that could have solved a lot of the trust issues. One would think that regulators could eventually put in place a series of compliance requirements, and be done with how they implement oversight (I’m oversimplifying it).Yes, Facebook breached our trust in the past, and perhaps continues to push the boundaries on monetizing our data, but this is a different venture, so let them have a chance to get it right.However, most of the House committee members couldn’t leapfrog their thinking further by discussing rather how to create the right (maybe new?) framework to regulate Libra in the future, instead of rehashing the past with old rhetoric.
Bring it On
Facebook’s message was clear. We will get it right, so bring it on. David Marcus didn’t want to hear any utterances centered on diversion on derailment, and he purposely avoided a panoply of Yes/No questions that might have handicaped Libra’s future one way or the other. In other words, Facebook and Libra are ready for scrutiny - so let it come.
What is a Libra?
If it is not a security, not entirely commodity, not an ETF, and maybe a new type of currency or payment instrument, although it is not issued by a government, then it appears to be a new beast, because it is none of the above in “any pure form”, so maybe we need a new regulatory framework for it? That was the gist of the initial line of questioning by Ranking Member McHenry, but he stopped short of calling for the need to create such a new framework (but it was very much implied, in my opinion). In other words, it was as if Rep. McHenry wanted to prove that the current set of regulations (and regulators) are not able to tame this new thing, because it is a new beast, so let’s think about whether we need something new to better regulate it.
Facebook First
It is no secret that Facebook Apps will be the first beneficiaries of Libra, with initial targets being Messenger, WhatsApp and eventually Instagram. In return, these Apps will give wallet exclusivity to Libra. David Marcus was asked several times if they would allow other currencies or wallets inside these Facebook marquis apps, but he dodged that question, and that was basically a No. Rather, he focused on touting interoperability as being the more pertinent feature. That was a valid question by the legislators, and I doubt that Facebook would open their apps to non-Calibra wallets, although it’s a reasonable ask if they wanted to be totally “open”. The fact is that Calibra wallets will find their way into other non-Facebook Apps, so why not allow the reverse to be true?
Yes/No Questions Are not Easily Answered
Given that each Committee member had a 5 minute time allowance, many of them pressed for a Yes or No answer, but David Marcus didn’t necessarily oblige. By not answering Yes / No, he displayed a dose of dogmatism, but it was done without being arrogant about it.
Libra as Foreign Currency
One Representative pointed that owning a Libra would be “like owning a foreign currency” and users that own it would be assuming the risk of value fluctuation, but Libra wasn’t explicit enough in exposing that risk to potential consumers. They have a point if one lived only inside the US bubble. But we are increasingly living in a global world, and as we interact with other parts of the world, we inevitably face the nature of local currency fluctuations. Try switching between 2 different Amazon stores in different countries, and you will get a taste of this already, as different pricing will be displayed with variations that are not the same as just the exchange rate. In Libra’s defense, being backed by a basket of the top world currencies, it could be implied that the fluctuation volatilities would be lessened due to the inherent arbitrage within the intrinsic reserve value. So in theory, Libra might become even more stable than the least stable fiat currencies that back it.
Do or Die, There is No Try
David Marcus was asked twice if he would commit to limiting the initial Libra foray into the market via 2 methods: a) operating in a sandbox-only environment, b) by limiting the launch to less than 1 million users. Marcus didn’t say No explicitly, but he strongly implied it by how he dodged that question. Obviously, this isn't a "maybe" initiative, as far as Libra is concerned.
Libra Vs. the Dollar
As expected, Rep. Green popped the question: “what impact will you have on the US dollar”, as it was perceived that Libra might compete for the dollar as the preferred currency for the world. David Marcus noted that it was far fetched to think of Libra as a competitor to the dollar, or that it would even impact the dollar’s dominance. Again, Rep. Green may have over amplified fears about the US dollar being weakened. (As a footnote, Libra stated that at least 50% of its reverse would be in USD, so there is a strong reliance on the dollar.)
Late Wake-Up Call to Cryptocurrencies
Questions about the legality of creating a currency came back more than once. “How can a private company issue a currency?”, “It is a crime to create a non-governmental currency”, “The creation of a currency is the government’s duty”. As if the Representatives were suddenly realizing that Libra was the first non-sovereign cryptocurrency, when in reality there are a few thousand of them already, with a total market value of $288B (as of July 18 2019).
Banking the Unbanked or Unbankable?
Banking the unbanked was a stated cornerstone of the Libra vision. However, in my opinion, it may be one of the weakest links in their vision and a shot across the bow. As it turns out, many of the unbanked are really unbankable by choice or circumstance, so on-boarding them will prove to be a difficult task because many of them don’t even have a government issued ID. Several Reps. questioned the validity of that Libra use case as pie in the sky. That said, serving the global remittances market more efficiently is a more plausible goal, although the last mile of Libra-to-fiat conversion in remote places will still be problematic.
Amplifying Pro-Voices as a Way Forward
Finally, despite the overall mood of opposition towards Facebook’s plans, there were a good number of positive voices among the House Representatives. Although none of them gave a free pass to Libra, they used this opportunity to remind us of the need to bring to the limelight the greater context: cryptocurrency and blockchain regulation. These pro-blockchain voices were previously known and they included Representatives McHenry, Davidson, Budd, Gottheimer, Meeks, Duffy, and Emmer. Here are some excerpts (with slight paraphrasing) of encouraging remarks that are worth noting:
McHenry: “Cryptocurrencies exist. This technology is real, and Facebook entering this new world is just confirmation. Governments cannot stop this innovation. We can choose to conduct thoughtful governmental oversight. Let’s determine whether the current regulatory framework is meeting the demands of this new technology.”Davidson: “Let’s not conflate Facebook’s mixed messages with the need to properly address issues around cryptocurrency regulation.” Budd: “Let’s not embrace reactionary positions across cryptocurrency, but rather differentiate between Libra and other cryptocurrencies.”Emmer: “I’ve heard some terribly un-informed comments today and yesterday from members of Congress...now suddenly, magically, Congress is responding when Bitcoin is 10 years old. I’m glad they decided to pay attention to the technology that could again, just like the Internet upend the way we do everything.”
These proponents in the House have an uphill battle to convince others, but I hope their understanding, knowledge and passion become contagious. The Senate is at a totally different level of understanding and engagement, in my opinion.Anecdotally, most Representatives in favor of positive crypto regulations took advantage of their 5 minutes to amplify their own message in support of cryptocurrency, and ended-up spending less time questioning David Marcus. In contrast, those who had an axe to grind and had less of an informed opinion on the topic (e.g. Ocasio-Cortez or Pressley) went straight to a direct, rapid fire line of questioning.
Biased Witnesses Panel
With my respects to them, I’m going to discount the panel of 4 witnesses since they were all chosen to be biased against Libra from the get-go. I was hoping and expecting the Committee would have assembled a more balanced group of people. One after the other, the panelists picked and poked at Libra’s weaknesses, even taking low shots at it. Some were just happy to be there judging by their visible exuberance. That segment was a total waste of time.
Recommendations for Next Steps
This is only the beginning of this process, which is expected to take perhaps a year to come full circle. Of course, the hearings are meant to dramatize the risks and amplify the potential worst case scenarios. That’s the job of these elected officials, but I urge them to not over-complicate things more than necessary. With greater understanding comes greater clarity and simplification, but a lack of understanding is generally a breeding ground for obfuscation and darkness. They don’t realize that Facebook’s approach of being “sufficiently centralized” is actually better than fully decentralized cryptocurrencies, because at least there are throats to choke: Facebook or the Libra Association. Contrast that to trying to find the ghost of Satoshi Nakamoto, or dealing with a self-effacing Ethereum Foundation that doesn’t really control Ethereum’s future anymore.
What should each party do?
Facebook:
- Further flush out their governance plans, current and intended.
- Ask their members to become more supportive in public, and state for example why they joined and why they think it’s important. (A few of them such as USV and A16Z openly published why they were joining Libra, but not all members have done that).
- Answer some of the easier questions they were asked, e.g. “Where is the (future) profit buried in this?”, “How much have you spent so far?”, “How were the initial founding members selected?”, “Can you document the lessons learned from past breaches?”, “Can you assure us that illegal activities or illegal people won’t be allowed”?
- Spend more time educating Congress in Washington via private or public activities.
House of Representatives:
- Get a broader base to become more educated.
- Bring the Token Taxonomy Act and other related cryptocurrency initiatives to the forefront of the discussions, with a goal of passing something positive before the end of 2019 (a stretch goal).
- Outline more specifically what you want from Facebook and Libra going forward, instead of picking at them.
Senate:
- Get more educated.
- Form a specific committee to better study the implications of cryptocurrencies and blockchain on US competitiveness.
- Consider creating a new regulatory entity to oversee cryptocurrency and blockchain-based technologies.
While we wait for the next steps, time is certainly on Facebook’s side. They will move faster than the Senate or the House, although scheduling these hearings was pretty fast, as it was done under an emergency pretext.It is noteworthy to point out that Chairwoman Waters began the hearings by observing that learning more about and understanding Libra doesn’t have to include opposing it.We should hope that the US Congress could see past the initial Facebook trust scars that they were so obsessed with, and realize that if they raise the bar too high for Facebook, they risk missing out on letting another US company gain global dominance in the field of digital currency. The flip side is that another non-US company could earn that dominance and run with it. Take Binance as an example, who is operating almost in international waters (as far as the regulations are concerned), and with the least amount of regulatory oversight they could possibly get by with. Imagine if Binance was a US company and asked the US Congress permission to deliver all of the services they have already introduced. If that was the case, maybe Binance wouldn’t be even 10% of their current size. So, to the US Congress, let’s not handicap US companies with unnecessary baggage that might stunt their intended growth.Given that the US eventually gets it right, will it be possible to recover lost ground in the field of cryptocurrency, digital currencies and the blockchain? That is the question that I posed in my last blog post enumerating the various groups and people who are trying to move the ball forward. Being an optimist in the blockchain field, I am hopeful that the future is brighter than what these hearings might have led one to believe.