David Marcus before the Senate banking committee
Big tech executives are getting a taste for life as regulated organizations.
It remains to be seen how much they like it and whether they think it’s worth the candle for the extra revenue handling payments may bring.
On Tuesday, David Marcus, head of Calibra – the Facebook subsidiary designing a new global cryptocurrency for retail and business users – appeared before the Senate banking committee and tried to order back the tide of disapproval that has overwhelmed the Libra project since its announcement in June.
The scene had been set the day before by US Treasury secretary Steven Mnuchin, when he made clear that “the Treasury department has expressed very serious concerns that Libra could be misused by money launderers and terrorist financiers”.
Casting the Facebook project in with bitcoin and other virtual currencies, Mnuchin declared: “This is indeed a national security issue.”
The Treasury secretary is, of course, following his boss.
Tariff Man had used Twitter to confess himself “not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air”, adding that “similarly, Facebook Libra’s ‘virtual currency’ will have little standing or dependability. If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks.”
Donald Trump is apparently a fan of another currency, stronger than ever, both dependable and reliable. “It is called the United States Dollar!”
You won’t have to trust Facebook- David Marcus, Facebook
Mnuchin says the Treasury has made it clear to Facebook – as well as to other providers of digital financial services – that they must implement the same anti-money laundering (AML) and combatting the financing of terrorism (CFT) safeguards as traditional financial institutions and register with the US Treasury’s Financial Crimes Enforcement Network (FinCEN).
For his part, Marcus confirmed in his prepared testimony that the Libra Association will do this, though he seemed to be rather stretching his credibility with an initial appeal to patriotism.
“I believe that if America does not lead innovation in the digital currency and payments area, others will,” says Marcus, cheekily allowing the thought to hang in the air that an attack on Facebook is somehow an attack on America.
However, he rather undermines this by explaining that the Libra Association will be headquartered in Geneva and so it will be supervised by the Swiss Financial Market Supervisory Authority (Finma).
Senator Sherrod Brown, a Democrat from Ohio, didn’t seem interested in any of this. He went straight to what has always been the key point, which is not trust in cryptocurrency but rather trust in Facebook.
“Facebook has a long track record of abusing users’ trust,” he opened up. “You know that Mr Marcus. Until recently, you headed Facebook messenger when you were allowing other companies like Netflix and Spotify and the Royal Bank of Canada access to read Facebook users’ private messages.” (RBC has denied that it accessed Facebook users’ messages.)
As Marcus prepared for his appearance, news had broken that the Department of Justice is now reviewing a proposed settlement of $5 billion, recommended by the Federal Trade Commission, for Facebook’s continued abuse of users’ privacy after it had undertaken to improve on this in 2012 and failed to do so.
Brown’s question was a simple one. “Do you really think people should trust Facebook with their hard-earned money?”
And Marcus’s reply was not exactly reassuring. “As Facebook will only be one among 100 members of the Libra Association, you won’t have to trust Facebook.”
That’s not a great answer.
Marcus has at least provided some hints as to Facebook’s true motives for launching Libra, which was supposed to be about helping the unbanked, but is in fact, obviously, about profiting from commercial transactions and associated payments between its 2.27 billion average monthly users.
Marcus spells this out for anyone who hasn’t been paying attention.
“We expect that the Calibra wallet will be immediately beneficial to Facebook more broadly because it will allow many of the 90 million small and medium-sized businesses that use the Facebook platform to transact more directly with Facebook’s many users, which we hope will result in consumers and businesses using Facebook more.
“That increased usage is likely to yield greater advertising revenue for Facebook.”
Banks have allowed Facebook this opportunity by the slow speed, high cost and inconvenience of sending money across borders through the conventional financial system. This is a particular issue for immigrant workers doing low-wage jobs in the US and Europe, and sending money back to their families.
However, it is not remotely clear why creating a new currency, backed by no government, is the answer to this.
In July, Remitly became the latest fintech unicorn, raising $135 million through a series E equity funding round that puts a valuation of $1 billion on a business that allows low-cost transfer of money from 16 developed markets, including the US, to almost 50 emerging markets.
Remitly discloses its exchange rate up front and charges $3.99 to transfer money from the US to the Philippines within minutes, or zero cost if recipients can wait for three to five days. The existing financial system can accommodate this using bank deposits, mobile money or even cash.
If those concerns are not addressed and the regulatory oversight is not appropriate, we will not launch… until it is- David Marcus
The conventional banking system has woken up, just in time.
Citi chief executive Mike Corbat sounds ready for the challenge of Libra.
“The way we think about it is that the market is moving and likely moving quickly towards 24/7, real-time frictionless, ubiquitous global money movements and payments, and that’s just the reality and that’s going to happen, and I think we’re pretty well-positioned around that,” he says.
Everyone foresaw the social network moving into payments. Jamie Dimon told Euromoney in June about fintech, Silicon Valley and big tech: “They’re all coming for us.”
In mid -July, he seemed less worried.
“We’ve been talking about blockchain for seven years and very little has happened, and you’re going to be talking about Libra three years from now,” he told analysts on JPMorgan’s second-quarter earnings call. “I wouldn’t spend too much time on it.”
Dimon lays out the message US policymakers and global regulators appear already to have received loud and clear.
“We don’t mind competition and the request is always going to be the same – you need one level playing field, and governments are going to insist that people who hold money or move money all live according to rules where they have the right controls in place,” he said.
Has the moment passed for Facebook? Does its plummeting reputation now make success for Libra a more remote possibility, albeit one with the potential for notable disruption of the financial system?
In Washington, Brown wanted to know whether, if regulators and policymakers told Facebook that Libra was a bad idea and that it shouldn’t launch it, the company would still go ahead?
You don’t get as far up the corporate ladder as Marcus without being able to sidestep that one.
He agreed that he had heard from Mnuchin and many others the serious and legitimate concerns that arose from Libra, “and if those concerns are not addressed and the regulatory oversight is not appropriate, we will not launch… until it is”.
This one will run and run… starting now in front of the House of Representatives.