Facebook's cryptocurrency hopes hit a wall in Washington

The Financial Times

David Marcus, the co-creator of Facebook’s potentially revolutionary new cryptocurrency, spent much of this week reassuring members of Congress that it would not be launched until it had regulatory sign-off.

What he did not say, but what some believe is inevitable after Mr Marcus spent a bruising two days on Capitol Hill, is whether hostility in Washington and other capitals might mean the currency is significantly delayed, or even abandoned entirely.

“This is not going to happen next year, especially as it is an election year,” said Ben Koltun, a senior research analyst at Beacon Policy Advisers, a Washington-based political consultancy. “It is very hard to see how a regulator would approve this under the kind of political pressure they are being put under.”

Mr Marcus hoped his two three-hour hearings would show Facebook was listening to politicians’ concerns and willing to collaborate on addressing them.

So far, Donald Trump, the US president, Steven Mnuchin, the Treasury secretary, and Jay Powell, the head of the Federal Reserve, have expressed reservations about the scheme.

But any hope that Mr Marcus might get a better hearing from members of either the Senate banking committee or the House financial services committee was quickly dashed when Sherrod Brown, the Democratic senator, began his remarks by describing Facebook as “dangerous”.

“They are like a toddler who has gotten his hands on a book of matches,” Mr Brown continued. “Facebook has burnt down the house over and over and called every arson a learning experience.”

Mr Brown’s remarks showed that Facebook’s biggest problem with Libra is that in launching a new product which requires regulatory approval, the company has given lawmakers a chance to punish them for previous wrongdoing by not granting it.

“Facebook thought they could hide behind the fact that there are 27 other partners in Libra,” said one Congressional official. “But members know that this is Facebook’s project, and this is a chance to go after them for things like Cambridge Analytica.”

On several occasions during the two hearings, members of Congress raised privacy concerns such as the Cambridge Analytica data scandal in which user data were leaked to a political research group through a third-party app. The scandal triggered greater scrutiny from governments across the world, including two lengthy hearings in 2018 where Mr Zuckerberg testified in front of Congress. On Wednesday a report by a working group set up by the G7 group of countries warned of “serious risks” associated with Facebook’s new currency, including those relating to “anti-money laundering and countering the financing of terrorism”.

Martha McSally, a Republican senator for Arizona, said at this week’s hearings: “Mr Marcus, I don’t trust Facebook. And it’s because of the repeated violations of your users’ privacy, repeated deceit.”

Garrick Hileman, research associate at the London School of Economics and head of research at Blockchain, a crypto wallet company, said: “What’s come through is the lack of goodwill and trust from Congress. They don’t take Facebook’s word at all — it’s been a pretty consistent theme and a bipartisan theme.”

Facebook’s poor reputation in Washington is not the only problem, though. Members of Congress were also concerned by specific aspects of the Libra scheme, such as how Facebook could maintain anti-money-laundering standards, especially when it opens up the platform to other developers, and why the Libra Association that will run the network was to be based in Switzerland.

Maxine Waters, the Democratic chair of the House financial services committee, commented that Switzerland had a history as “a monetary haven for criminals and shady corporations”.

Mr Hileman said: “One has to wonder if the choice of Switzerland for its headquarters was a bit of a premature fumble, because it’s not playing well optically. It doesn’t look good that you are putting this offshore, out of reach of US and even EU regulators.”

Stephen Palley, a partner at the Washington law firm Anderson Kill, said that many of the specific regulatory concerns voiced by policymakers are “solvable”.

The company could introduce digital tools to help track and even freeze funds if regulators demanded it, for example.

But Mr Palley added that it would be a bigger problem if regulators decided to treat Libra as a security, an exchange-traded fund, or even a bank, as some members of Congress have suggested.

Mr Marcus was keen to rebut the idea that the new currency would qualify as a bank, pointing out that it would not offer other banking services or garner interest for users, and should instead be treated purely as a payments system.

Daniel Murphy, a senior associate at the Milken Institute’s Centre for Financial Markets, said: “The question of what activities constitute ‘banking’ is a bigger one than Facebook can answer, but gets to the heart of the issue.”

“Should policymakers be comfortable with big tech companies becoming the face of financial services for consumers? Is regulating a bank’s balance sheet on the back end enough, or do we now have to rethink the way we regulate our financial system?”