Why the US Senate hates Facebook cryptocurrency
This summer, Facebook attracted worldwide attention by announcing the launch of its own cryptocurrency. Most people did not like the idea and Libra has brought on against itself a deluge of criticism from both the authorities and users.
In June, Facebook confirmed rumours that it was developing its own cryptocurrency, which could “fight” with the US dollar. As the project documentation stated, the social network intends to create a stable coin tied to a basket of several fiat reserve currencies. Due to that, more than 2 billion people, the number of people who visit the social network every day, would be able to get access to cheap and innovative financial services.
The idea immediately received a response from almost all participants in the traditional and cryptocurrency financial systems. Regulators around the world have expressed concerns about Libra. And on June 18, the G7 countries — the club of the world's largest economies — warned that “social” cryptocurrency could even shake global financial stability.
In particular, the Big Seven believes that Libra bears many risks in the field of money laundering, financing of terrorism, tax evasion, protection of consumer rights and their data, as well as competition in the financial market in general.
And that’s not the exhaustive list of "threats."
“The more freedom corporations acquire, the more difficult it is to follow the movement of capital and conduct restrictive policies. On such a scale, Libra might start to pose systemic risks along with large banks, and it will be more difficult to control it. The authorities are also not sure how well they will be able to control Libra in order to ensure that it is not used for criminal purposes, ” says Maxim Korkodinov, financier and cryptanalyst.
Meanwhile, in the US, senators were so concerned about the new Facebook project that they even presented sketches of a law prohibiting large technology companies from releasing their own cryptocurrencies, calling meanwhile Facebook representatives for "interrogation".
Senate vs Facebook
As a result, last week, the US Senate Banking Committee held a public hearing on Facebook and its “cryptocurrency” venture. The social network was represented by the head of the
blockchain development department David Markus. And, he had a hard time.
The senators almost did not raise the issue of the technology itself, which is behind Libra, and almost did not delve into the technical details. Most of all they were interested in whether the social network would use Libra for its own profits.
One of the most vivid critics of Libra was Senators from Democrats Sherrod Brown. In particular, he recalled almost all the scandals of users privacy violation by social network. Then Brown asked if Marcus really believed that people should trust Facebook with all their hard-earned money and whether he would like to receive his entire salary in Libra currency.
“I would receive, as it is secured by reserves in proportion of 1 to 1,” said Marcus, adding that Libra is not created with the goal to “replace the banks.”
Another most popular topic at the hearing was the consumers protection and their data.
For example, Democrats senator Kirsten Lea Cinema asked the Facebook representative what should a Libra user from the United States do, if his
crypto-wallet, that had been developed in Spain, were hacked by somebody in Pakistan. The authorities of which country should the client contact in that case, the legislator inquired.
Marcus dodged the answer, saying that Americans "are more likely to use a wallet developed in America." Otherwise, the question should be settled by the terms of service.
The Facebook representative also said that Calibra, a subsidiary of a social network that develops a wallet for Libra, will not “share” user data with its parent structure or even with the Libra Association, which is developing the cryptocurrency.
In the end, the arguments of Marcus did not convince US senators. Brown said that Facebook repeatedly "betrayed the trust of people," and that he has no idea what the company should do to "make us trust them."
Next, Brown promised to support legislative initiatives that “tame” the social network if it releases Libra. The senator, however, did not go into the details of the proposals, as well as whether he would support the bill prohibiting technical companies from issuing their own cryptocurrencies.
The next day, the hearings continued, this time in the Committee on Financial Services of the House of Representatives. And, to cut it short, the senators continued to express their skepticism about cryptocurrency, and Marcus kept on protecting it.
The hearing did not make it clear whether the US government would ban Libra. But it became clear that at least in the States Facebook will have to try really hard to get permission to emit "social" cryptocurrency.
Moreover, the coalition of consumer rights protection joined the position of the authorities. It even called on members of the Libra Association, which includes PayPal, MasterCard, Visa, Uber and others, to abandon the project.
In any case, that was hardly the last debate.
“The authorities definitely do not want to hand power and influence into the hands of Libra and its supporting corporations. We will undoubtedly see many more debates on this topic,” says Korkodinov.
Moreover, if all Facebook users receive cryptocurrency, its money supply can reach the amount of money in circulation of some countries.
“Facebook has 2.4 billion users, Libra will also include an audience and introduce its products in Instagram, WhatsApp and other companies. No country or bank has such coverage. With such a scale, Libra is quite capable of reformatting the payments industry and pressing down the positions of banks, as well as reducing influence and dependence on the dollar, which of course the US authorities do not like,” the expert believes.
In addition, Facebook "set its goals" right in the heart of governments - their money.
“The authorities view Libra as the first serious private money. They do not like private money, they want to keep the monopoly,” says Satoshi Fund developer Andrey Sobol.
Fire from everywhere
Within the business community, as well as the crypto industry, there is no united opinion on Libra.
For example, Scott A. Shea, the founder and chairman of Signature Bank of New York, is confident that “social” cryptocurrency will negatively affect the privacy of users, and competition. Moreover, Facebook is already almost a monopolist in the social media market, and together with Google, the two companies control 82% of the total digital advertising market.
It is difficult to call criticism being baseless. For there is a long “train” of scandals around Facebook, both about the user data protection, as well as unfair practices in the market.
As for the crypto industry, the biggest claim towards Libra is that it will be centralised, which contradicts the principles of cryptocurrencies.
“Basically, this attitude is due to the fact that Libra will be centralised in the near foreseeable future, subject to censorship and will be created for the interests of corporations, and not for the benefit of ordinary people. Also, people's attitudes towards providing access to personal data and preserving theit confidentiality have become more cautious,” explains Maxim Korkodinov.
It means that Facebook will get full control over the all transactions.
“There are two issues here: permissioned, not permissionless blockchain with possible embedded KYC/AML and transaction censorship, as well as the provision of fiat currencies and their derivatives,” says Andrei Sobol.
Although in the crypto industry itself there are also enough examples with centralisation. Take the situation with
Ethereum and DAO, when, the Ethereum Foundation de facto single-handedly “rolled back” transactions in the blockchain, which led to a split of cryptocurrency. EOS did the same thing last year.
Claims are a nice thing, but it is quite possible that at this stage Libra should be centralised in order to get approval from the authorities. After all, they cannot give "green" light to something that cannot be controlled.
“I don’t think that centralisation is a very big problem, taking into account the goals for which Libra is planned to be used and given the market it is directed to at the moment. For Libra, centralisation and legal compliance are currently the only way to launch their own currency. Although in the future they have plans to become decentralised,” says Maxim Korkodinov.
And therefore Facebook had to and will have to make compromises in the future in order to launch its project.
Facebook cryptocurrency really bears many risks. Centralisation, data integrity, the financial system stability is just a short list of them. There are enough advantages in it as well.
To name the one, a cryptocurrency can provide a simple, cheap system for money transfers that can be used by billions of people around the world.
“Most of all I hope that Libra will be able to make payments and transfers very convenient and with lower commissions than during traditional settlements. At the global level, the area of financial settlements is developed very poorly now. It is inconvenient and expensive. Moreover, many people have no access to the banking system at all and it’s a very big problem,” says Maxim Korkodinov.
It can also become a really reliable stable coin, which we lack so much in the market. Libra can even stimulate the development of decentralised applications, the expert believes.
Libra’s other vital task is to test how ready the authorities are for changes and a future in where they may not have full control over the financial system and its participants.
“Libra is needed as an icebreaker, which will or will not make the way through the regulators,” - says Andrey Sobol.
In any case, for the first time in modern history, there is a private company that is serious about questioning the power of the existing system. It might be just the first robin of the impending future. But, the main thing is that in the new reality the authorities and companies should not forget about the main thing - the users and their rights.
Author: Alexey Ryabukha