Monday Brief: Crypto goes to Washington
Trump’s “not a fan” and Congress raked Calibra’s David Marcus over the coals, but this is the start, not the end, of digital currency.
Last week, David Marcus, head of Calibra and Facebook’s point man for its proposed Libra currency, underwent two days of grilling by Congress.
Facebook’s ambitious crypto-currency proposal has unleashed all manner of skepticism. There are a lot of genuine questions and concerns over a powerful corporation with 2.7 billion users issuing money. Here’s a short clip of Marcus getting raked over the coals by a Congressman, Sean Duffy (R-Wisconsin), who makes a theatrical statement against the proposal.
Duffy, brandishing a U.S. twenty-dollar note, extolled the virtues of anyone being able to use it, and wanted to know whether Facebook might be able to determine who can use its money, just as it can expel certain individuals from using its site.
Marcus came off weaselly in that exchange. But Marcus had to remain non-committal, because Duffy (whether he knew it or not) , exposed one of the biggest challenges: the tension between the need for privacy, and the demands any financial service must meet to know its clients.
If Marcus said yes, Facebook will have the right to say who can and can’t use Libra, he’d reveal excessive corporate power. But if Marcus had said no, then he would be opening the company to charges of negligence. (The more interesting answer would have been to note that some massive percentage of U.S. dollar bills are dusted with traces of cocaine, but that probably wouldn’t have endeared him to the House Committee on Financial Services.)
President Trump and Fed Reserve governor Jay Powell also made statements against crypto-currencies. Trump tweeted that he’s “not a fan” of bitcoin and suggested Facebook should get a bank license. (Calibra has applied for a money-operator license.)
The attacks have also come from the political left. Here’s Nobel economist Joseph Stiglitz denouncing Libra as a Facebook plot to let bad actors launder money. But his biggest argument turns on the lack of competition in payments, the oligopoly in payments technology for high fees – yet he seems oblivious to the point that Libra could be a real competitor. He also takes an odd tangent on its stablecoin blueprint; I don’t think Stiglitz is on firm ground here.
Stiglitz’s arguments seem flawed but he makes the central point that a currency requires trust, and he wonders if Facebook is worthy of our trust.
The clash in Washington appears to have caused Facebook and Calibra some pause. The tone has shifted, from Libra as a decentralized, bitcoin-like system to one in which the Libra Association would have to assume a more direct governance role.
And CNBC’s Jim Cramer says that although he likes the idea of Libra, he thinks Facebook made a political mistake and should buy Square instead, if it wants to be in payments.
But I don’t quite agree. Cramer’s looking at this from the point of a shareholder in tech companies, and he’s just interested in short-term stock movements. Facebook’s probably the most vulnerable Big Tech company to regulation and even the possibility of a forced breakup, and Libra may not win it new friends in Washington. But the vision behind Libra is far bigger than just getting a chunk of credit-card fees.
Money is a cultural and political concept, as much as a technological or financial one. It’s important to raise questions about Libra, its governance, the balance of privacy and law enforcement, and its potential impact on currencies, financial markets, and banking services.
For the past few years, as regulators around the world have grasped with crypto-currencies, we have seen offshore centers such as Hong Kong, Gibraltar and Switzerland take the lead. The only large, onshore financial market that has taken a friendly approach is Japan, but regulators there have lost some of their ardor.
The U.S. SEC and CFTC have taken two stances that have chilled the industry: essentially declaring all tokens securities, and then bringing the hammer down on players accused of breaching securities rules. It’s one reason why a lot of the innovation has taken place elsewhere.
But now Facebook has forced a discussion about digital money at the highest levels. The outcome is likely to be a deal to support Libra in ways that regulators and Congress believe doesn’t threaten the dollar and threads the needle of privacy, universality, fungibility, and KYC rules.
If so, this will put digital, programmable money at the heart of the international financial system. But it will also prove a shock to the vast majority of blockchain and crypto companies, because the rules of the game will have changed, and they’ll be living in Facebook’s world.