Facebook’s ambitious cryptocurrency plan greeted by wall of regulatory
The social network’s announcement Tuesday caught the attention of senior Congressional finance committee members, global regulators, former lawmakers and industry insiders who highlighted potential roadblocks and downsides in Facebook’s ambitions.
“With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users,” Rep. Maxine Waters, a Democrat and chair of the House Financial Services Committee, said in a statement Tuesday, asking that the company agree to a pause the project until Congress and financial watchdogs can take a closer look.
On Tuesday morning, the social network announced that it would launch a cryptocurrency, run by the nonprofit Switzerland-based Libra Association sometime in 2020. The project will not be fully run by Facebook, according to its white paper. It’s being spurred by a collaboration of organizations that so far include Mastercard, Visa and PayPal, Stripe, Uber and Spotify. Still, Facebook has plans to profit from it through a new subsidiary Calibra that is building a digital wallet to store and exchange the cryptocurrency.
Facebook shares jumped initially on Tuesday after the launch, but gave up the gains throughout the day and ended lower. The stock was lower again in premarket trading Wednesday.
‘All kinds of alarms’
Although it’s not controlled entirely by the social network, lawmakers are on high alert following Facebook’s high-profile data and election scandals. That awareness appears to be spilling over to the cryptocurrency launch — especially for politicians who are also calling for a break up of big tech.
Former Rep. Barney Frank, a key architect of the post-crisis financial reform, said “without a doubt” it will become a hotbed issue ahead of the 2020 election. That, combined with cryptocurrencies’ anonymity “raises all kinds of alarms.”
“There’s already a concern that Facebook is being used by bad actors to disguise their identity and pretend to be other people — cryptocurrency enhances your ability to do that,” the former congressman told CNBC in a phone interview. “In this case particularly it’s a problem because there is potential synergy between the anonymity you get from cryptocurrency and the ability to mislead people on Facebook.”
This week’s public hesitation on the crypto plan came from both parties. The senior Republican on the House Financial Services Committee, Rep. Patrick McHenry, called for a hearing on the project and “its potential unprecedented impact on the global financial system,” while senior Democrat on the Senate Banking Committee, Sen.Sherrod Brown, said “Facebook is already too big and too powerful and has used that power to “exploit users’ data without protecting their privacy.”
“We look forward to responding to lawmakers’ questions as this process moves forward,” a Facebook spokesperson told CNBC.
On an international level, a Group of Seven nations, or G7, working group will meet this week to discuss how to patrol cryptocurrencies on a global scale in light of Facebook’s announcement, according to the Financial Times. The group will reportedly include central banks and the International Monetary Fund, and look into how to prevent money-laundering. Meanwhile, Bank of England governor Mark Carney said at a conference organized by the European Central Bank in Portugal Tuesday that he is keeping an “open mind” on the planned cryptocurrency, but warned that it could face intense regulation if and when it takes off.
“Anything that Facebook is doing is obviously receiving greater scrutiny from the government’s perspective,” Circle CEO Jeremy Allaire said. “I think this is a tipping point for regulation and for mainstream awareness.”
Allaire, whose cryptocurrency company is backed by Goldman Sachs and also launched a U.S. dollar-backed stablecoin with Coinbase, said Facebook and a broader group of companies’ entrance is an overall positive for the industry. The Libra blockchain a digital ledger that can be seen by multiple parties but can’t be altered “looks interesting,” Allaire said, but it’s still not entirely clear just how “open” it will be and over what time frame.
Who sees the data?
Matthew Roszak, CEO and founder of Bloq and chairman of the Chamber of Digital Commerce, said that Facebook won’t have a majority governing power over the cryptocurrency. But the new blockchain platform will supply plenty of new customer information.
“There’s a treasure trove of new data here. The question is, who has access to it, and who has eyes on that?” Roszak said.
Regulators will likely question tech giants’ end game when it comes to this new data set. While Facebook might not want access to certain types of data, there’s an “obvious desire to monetize this,” according to Stephen Palley, partner at Anderson Kill and co-chair of the firm’s blockchain and virtual currency group.
“How do you can you really have something that is decentralized and distributed that is actually controlled by a bunch of Silicon Valley plutocrats? Color me skeptical,” Palley said. “There’s some non-trivial antitrust questions that haven’t been widely answered. This might lead to them being more heavily regulated.”
There’s also the recurring criticism of too much power in the hands of a few tech companies. The Justice Department is reportedly preparing an antitrust probe of Google and has been given jurisdiction over Apple’s practices as part of a broad review into tech companies’ behavior, according to Reuters. Meanwhile the Federal Trade Commission has reportedly taken over probes into Amazon and Facebook’s effects on competition.
Pressure is coming from both sides of the political aisle heading into the 2020 presidential election. Sen. Elizabeth Warren has been the most vocal presidential candidate on the issue. Her campaign sponsored a billboard in San Francisco that said “BREAK UP BIG TECH.” President Donald Trump said in a recent CNBC interview that “there is something going on in terms of monopoly” when it comes to technology companies.
“Lawmakers are going to say look, Facebook, you’re already huge,” Rep. Frank said. “Please don’t get into another line of work that’s just too much. You don’t want to have this conglomerate that does all of this stuff.”
New crypto laws
Some in the industry say Facebook’s entrance could bring awareness and understanding of how these networks work, and spur legislation. The interest by tech giants may “force” lawmakers to learn and understand the issues and bring attention to the space, according to Kristin Smith, head of external affairs at Blockchain Association, a D.C. lobbying group.
“At the moment, Facebook obviously has some problems in Washington,” Smith told CNBC. “They’ve lost trust with many policymakers so there’s a tough road ahead to show that an effort that is part of a broader group, and that there’s going to be very open governance. There’s definitely going to be some work to do in gaining trust.”
Smith is lobbying for U.S. policies including cryptocurrency tax treatment to change in order to accommodate the new tech. For example, the tax code has a de minimis exemption for personal foreign currency transactions. Cryptocurrencies do not qualify for the exception and based on guidance issued in 2014, the IRS treats virtual currencies as property under US tax law, meaning the sale or exchange of tokens for other goods is a taxable event, she said.
“That’s something that does add a lot of friction into the system and is definitely going to need to be cleaned up and fixed in the U.S. tax code for this to fully take off,” said Smith, whose firm lobbies for public policy on blockchain issues.
Momentum in Congress
Rep. Warren Davidson, a member of the House Financial Services Committee, is one of the relatively few lawmakers pushing for blockchain legislation. He and a handful of other Congressmen introduced a bill earlier this year that looks to exempt cryptocurrencies from federal securities laws that apply to traditional equities.
He acknowledged data and privacy concerns but said it “highlights the danger of what’s at stake if we don’t get regulation right.”
“If Facebook starts to have that kind of influence on payment processing I think that’s going to cause lots of concerns,” he said. “The way to make sure that that doesn’t happen whether it’s Facebook or anyone else in the space is to move legislation.”
Libra will likely be able to leverage Facebook’s more than 2.7 billion monthly users to finally bring cryptocurrencies into the hands of everyday, non-technofiles. Because of its size and reach Davidson said people are realizing “there’s more than just bitcoin.”
The so-called Token Taxonomy Act, which he said at the time would send a powerful message to entrepreneurs that “the U.S. is the best destination for blockchain technology,” could get new life because of Facebook’s announcement. The congressman said the fact that the Libra project is launching in Switzerland may be a wake up call for regulators and “emblematic of trend” of American innovators bringing their ideas abroad because of a lack of regulatory clarity.
“Our capital markets are phenomenal and our scale is phenomenal and the ideas are American. They’re there launching out of the outside of the U.S.,” he said. “Congress is supposed to pass laws. I certainly hope this is enough time to motivate people to start paying more attention to this.”