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Congress Scolds Facebook Instead of Moving Fintech Innovation Forward

Congress Scolds Facebook Instead of Moving Fintech Innovation Forward

WASHINGTON – David Marcus, the man in charge of developing Facebook’s Libra cryptocurrency, spent six hours testifying in front of Congress this week. The first two hours of testimony came in a “hearing” in front of the Senate Banking Committee on Tuesday. The next four hours of testimony came in front of a “hearing” in the House Financial Services Committee on Wednesday. And he deserves a medal for surviving the ordeal.

Because Congress wasn’t in a mood to “hear” Marcus. He was there to be a human piñata – a prop in Congress’ increasing contentious battle with Silicon Valley (a battle that spilled out into other tech-related congressional hearings this week).

In fact, there was very little discussion about how Libra should work – or what was needed on both the policy and execution side to make it work. There was no discussion about how innovation should work in the payments space. And there was no discussion about crypto’s potential (or lack thereof) to change the way money works.

Instead, Congress wanted to make sure Marcus knew Facebook shouldn’t be trusted to develop Libra. And to make speeches that would appear on TV. And that’s what it did.

This was the opening statement from Sen. Sherrod Brown (D-Ohio):

Facebook is dangerous. They’re like a toddler that’s gotten its hands on a book of matches and is burning the house down. And they’re calling it a learning experience.

They’re moving fast to undermine our democracy. Now they want us to trust them to run their own currency and bank.

Then you had Sen. John Kennedy (R-La.):

I have great respect for Facebook, but Facebook now wants to control the money supply. What could possibly go wrong?

On the House side, we had the most disgusting attack of the week, courtesy of Rep. Brad Sherman (D-Calif.).

The most innovative thing that’s happened this century is when Osama bin Laden came up with the innovative idea of flying two airplanes into towers. That’s the most consequential innovation, although this may do more to endanger America than even that. People won’t call this Libra. They’ll call it the Zuck Buck.

Sherman’s theatrics didn’t end there…

Zuckerberg can’t print money yet. And he’s under attack because he can’t provide privacy to his users. But with this, he can provide privacy to drug dealers and sanctions evaders.

The scary thing is that I’m not cherry-picking. This is how the two days of testimony went.

A member of the House of Representatives or Senate would briefly talk about how bad Facebook was. And then they’d ask a variation of one of five questions:

  1. Why should we trust you?
  2. Will you launch without regulatory approval?
  3. What are you going to do to prevent criminals and terrorists from using your network?
  4. What are you going to do to protect data and consumer privacy?
  5. What are you going to do to protect competition?
  6. Why are you threatening the dollar as the world’s global reserve currency?

And Marcus would give a variation of responses:

  1. He said Facebook knows it has to work hard to earn the trust of Libra and Calibra users. In fact, if they don’t trust Facebook, the project will fail. That’s also why the company open-sourced the network and made sure Facebook would be just one of (an eventual) 100 members governing the network with just one vote. The network won’t be controlled by Facebook.
  2. Over and over again, Marcus pledged Libra would not launch until it resolved all of the regulatory concerns that had been raised and had all the regulatory sign-offs it needed to operate legally.
  3. Marcus said anti-money laundering (AML) and know-your-customer (KYC) regulations would largely be enforced at the wallet level, though there would be some enforcement at the network level as well. He also said that people would have to upload a government ID to use the system. And he suggested that the AML and KYC procedures that Libra put into place would be cheaper and far more effective than anything in the market right now. Marcus also promised that Libra would be in compliance with all U.S. AML and KYC laws.
  4. In terms of data privacy, Marcus said Libra and the Calibra product would be separate products from Facebook. And that you wouldn’t be able to use a Facebook login to sign up to use the cryptocurrency. And he promised that data would not be shared with Facebook.
  5. In terms of protecting competition, Marcus said third-party wallets were free to operate on the Libra network as well and that there would be interoperability between the Calibra wallet and third-party wallets. He did not promise that third-party wallets would be integrated into Facebook or WhatsApp. He did commit to having other payment methods (credit cards and debit cards) on Facebook and WhatsApp though.
  6. Marcus was very careful to say Libra had no interest in banking or setting monetary policy. He believed that was the role of central banks and the banking system. Marcus said any banking services that might be offered would be done through and in partnership with existing banks

After Marcus responded, the members of Congress would return to how Facebook couldn’t be trusted to keep its word on any of this – with House Democrats suggesting that no tech company with more than $25 billion in revenue be allowed to offer payment or financial services. And then the cycle would repeat with the next questioner.

To be fair, Facebook hasn’t exactly covered itself in glory. It’s done a terrible job of protecting its users’ data and privacy. And Marcus didn’t have very good answers for whether people would be able to make legal purchases of guns using Libra (this was a key question for Republicans). So yes, Facebook deserves some scorn.

And there were some voices of reason – voices that were actually interested in innovation and wondered how Libra would work. Sen. Pat Toomey (R-Pa.) and Rep. Patrick McHenry (R-N.C.) were most notably in that camp.

In fact, McHenry has gained instant hero status in the bitcoin community. First he went onto CNBC and said “there is no capacity to kill bitcoin.” And then in the hearing, McHenry said this…

Washington cannot become a place where innovation goes to die. Just because we have a proposal we don’t understand doesn’t mean it should end. It’s just a proposal. We need thoughtful oversight. Digital currency exists. Blockchain is here. Facebook’s entry is just a matter of scale.

We should not deter this innovation. Governments should not stop this innovation. Countries have tried and failed to stop bitcoin.

Unfortunately, this was a minority view among both parties. There was an opportunity for legislators and private industry to make progress on key issues surrounding an innovative new proposal. And too many politicians used it as an opportunity to score political points instead of constructively discuss issues.

It was a wasted opportunity of colossal proportions.

Now Facebook will have to work out a whole host of regulatory concerns with an alphabet soup of agencies with zero incentive to work quickly, little interest in providing much needed cryptocurrency regulation and congressional support to do nothing.

Good luck with that.

Bitcoin was the clear winner this week. It’s clear very few in Congress consider bitcoin a threat. And they’re willing to stay out of its way.

But if attitudes about crypto and fintech at the federal level don’t change soon, companies that want to innovate the financial system are going to flee the U.S. They’ll head to Europe and Asia where their technology will be embraced by regulators and widely used by consumers. And America will wonder when it stopped being a leader in fintech. And we’ll point to this week.

Good investing,

Vin Narayanan

Senior Managing Editor, First Stage Investor

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