Libra season is over. On October 24, Facebook founder and Turing Test dropout Mark Zuckerberg testified to U.S. Congress for five hours about the cryptocurrency that Facebook wants to launch next year — but which now might never launch at all. Here’s what went down.
What was this hearing about?
Zuckerberg appeared before the 62-member United States House Committee on Financial Services, for a hearing titled “An Examination of Facebook and Its Impact on the Financial Services and Housing Sectors.” Representatives mostly focused on Libra, data privacy, Facebook’s policy of allowing disinformation in political ads, and the company’s violation of housing anti-discrimination laws.
Real quick, what’s Libra again?
Libra is Facebook’s would-be cryptocurrency, aimed at making international online payments frictionless, fee-free, and available to people around the world without bank accounts. Facebook announced it this June and wants to launch it in 2020.
It’s technically not just Facebook’s. Facebook is one of several founding members of the Libra Association, which is based in the global financial centre of Geneva, Switzerland. But everyone agrees that Facebook is the de facto controller of the operation, and that the U.S. government is the one it has to please.
Plus Facebook entirely owns Calibra, a digital wallet for holding your Libra coins. What a confusing combination of names! Anyway, other people can also make wallets, but Calibra will probably be the default, and only cool nerds will use someone else’s wallet.
Facebook’s stated goal is to enable billions of unbanked people to access digital payments for the first time, in underdeveloped or unstable places like Venezuela and India, as well as their friends, family, and business contacts in more developed countries.
What happened up to now?
Libra’s in trouble. Since Facebook announced it this June, things haven’t gone well. Seven of the 27 other partners backed out earlier this month, including Visa, MasterCard, eBay, Stripe and PayPal, before the Libra Association’s first meeting, but just after senators sent them letters boiling down to “You are entering a world of pain.” Zuckerberg spent Thursday in that world.
Previously, the Financial Services committee questioned David Marcus, CEO of Calibra. Zuckerberg has testified before other Congressional committees before, but this is his first hearing since Facebook announced Libra.
Democrats on the Financial Services committee are developing a “Keep Big Tech Out of Finance Act” that would explicitly prohibit large tech companies from acting as financial institutions or issuing currencies, so Zuckerberg knew he was talking to politicians who want to stop Libra from happening.
Facebook has said repeatedly that it wants to play by the rules, and that it will get regulatory approval in the U.S. before launching Libra. But this statement, as several representatives pointed out today, is more ambiguous than it sounds.
What’s the U.S. government’s problem with Libra?
Is Libra money? Would that make Facebook a bank? The government—or at least the Democrats on the committee, plus some Republicans and Donald Trump—think so. They believe Facebook is trying to avoid the regulations that govern existing financial institutions.
What happened at the hearing?
The entire five-hour hearing, led by committee chair Maxine Waters (D-Calif.), is on video here. I’ll break it down in slightly less than five hours. Let’s talk about the Libra discussion first.
Is Facebook competing with the U.S. government?
Facebook says they want to be regulated, but by whom? Zuckerberg told Rep. Chuy García (D-Ill.) that Libra shouldn’t be regulated as a bank, or by the SEC. Rep. Ed Perlmutter (D-Colo.) asked Zuckerberg if a Calibra wallet is like a bank account. “We’re not a bank,” Zuck replied. “We’re not applying for a bank charter.” Perlmutter interrupted: “That’s the problem!”
Zuckerberg calls Libra a “payment system.” Several representatives don’t see it that way: Why not just make a coin that fully follows the dollar? (Chris Dixon, who heads the crypto fund at Libra partner Andreessen Horowitz, has suggested pegging Libra to the dollar alone.)
What do they care? Because it threatens the dollar’s supremacy. Rep. Madeleine Dean (D-Penn.) called Libra a “shadow currency that would operate more like a government.” Rep. Brad Sherman (D-Calif.) pointed to the dollar’s role as the world’s main reserve currency, and said this demand for dollars is profitable for the U.S. Treasury, and thus for tax-paying Americans.
Crypto lawyer Felix Shipkevich, principal at Shipkevich PLLC, tells Lifehacker that financial institutions are so heavily regulated because otherwise they threaten to usurp the role of government. When people buy Libra coins, they’re handing over their local currency. What happens, for example, if Libra is a huge hit in Venezuela, and Facebook ends up owning 10 per cent of the bolivar? Facebook would be heavily invested in the success of Venezuela, and vice versa. What happens, he says, if Facebook becomes too big to fail?
Concerns about Facebook’s international currency exposure weren’t raised at the hearing, but representatives pressured Zuckerberg about the choice—his choice, as they see it—to base Libra in Switzerland. Why not in the good old U.S. of A., where Facebook is based, along with its biggest (ex-)partners? (Facebook, like many U.S.-based companies including Google and Apple, “bases” its international operations in Ireland to avoid U.S. taxes. Unlike Google and Apple, it does not operate in China.)
Is Facebook in charge of Libra?
Zuckerberg kept insisting that Facebook is just part of a larger group controlling the currency—“We’re a part of it, we don’t control it.” Representatives kept insisting that oh come on, we all know you’re in charge.
Rep. Ayanna Pressley (D-Mass.) pointed out that Zuckerberg has a controlling vote in Facebook, and that Facebook has control of Libra: “Libra is Facebook, and Facebook is you.”
Rep. Juan Vargas (D-Calif.) said Zuckerberg could move the association to the U.S. if he wanted. When someone said that Zuck “controls” Calibra CEO Marcus, Zuck laughed and said well, Marcus is his employee, but “control” is strong. Cute, but not really a rebuttal.
More Libra concerns
Congress is troubled by the prospect of end-to-end encryption enabling illegal transactions, particularly money laundering, funding of terrorism, and sex trafficking. Zuckerberg wouldn’t commit to any safety measures that could hobble the frictionless, I.D.-less process of buying and selling Libra—and that’s the problem. Rep. Sherman lit into Zuckerberg and Libra in a West Wing-level rant:
You’re gonna be making powerful burglary tools, and letting your business partners commit a burglary. You’re going to create a currency…I call it the Zuckbuck…and say ‘Oh, it’s our business partners!’…The poor and unbanked need pesos, they need dollars, so they can buy something at a local store. You’ve done no effort to help the unbanked anywhere else, at any other time.
You should, you should create a payment system with a close-to-zero fee. But the real money is in the tax evaders, to some extent the drug dealers….For the richest man in the world to come here and hide behind the poorest people in the world, and say that’s who you’re trying to help? You’re trying to help those for whom the dollar is not a good currency: the drug dealers, terrorists, and tax evaders.
Zuckerberg said multiple times that Libra isn’t primarily about making money for Facebook. But it doesn’t really matter if that’s true. Facebook’s Calibra plans to avoid fees—but that’s because it’s a loss leader. It’s become obvious that a free valuable digital service will have other, more insidious costs. What Congress fears is that Libra will be worse for the world than transaction fees.
Why are all these questions from Democrats?
U.S. Republican representatives were a lot friendlier to Zuckerberg. Their main narrative was that the world needs a U.S.-friendly competitor to China’s planned state-backed cryptocurrency, which is exactly what Zuckerberg said in his prepared statement. (Rep. Anthony Gonzalez, R-Oh., rejected this “Libra vs. China” framing.)
They also helped Zuckerberg repeat his main talking point: The current financial system is stagnant, and even if Facebook isn’t the “ideal” entity to shake it up, someone has to. And they’re the ones with the resources to kindly bestow this gift upon the world.
There’s truth here, of course; existing financial institutions are greedy and corrupt, and regulations don’t stop them from repeatedly endangering the world economy. They underserve the poor, except to squeeze more money out of them. While the answer isn’t necessarily a new cryptocurrency controlled by one of the few institutions worth more than any bank, it’s not like the status quo is in line with Democratic values. Which is why it was weird to see Republicans supporting the guy who wants to fight the banks, and Democrats telling him to stop.
When Zuckerberg overreached, implying (by way of gentle denial) that Libra wants to build a whole new financial system to replace the old one, Rep. Trey Hollingsworth (R-Ind.) tried to cover for him. Even the Republicans’ support was trying to frame Libra as not so big a deal.
Republicans did have some issues, but these frequently spilled outside the discussion of Libra.
What happened besides Libra?
Because Facebook is involved in every part of public and private life, there’s a lot that Congress wants to say to it.
This is where Republicans were more worried. Multiple representatives complained about Facebook censoring speech—leading Zuckerberg to say Facebook doesn’t censor legally permissible speech (other than sexual activity, which no one mentioned), only de-emphasise it with tactics like demoted search results, labels attached to known disinformation sites, and algorithmic ranking.
Rep. Bill Posey (R-Fl.) asked why Facebook was censoring posts on the dangers of vaccinations. (It’s not.) In other words, Florida Man Goes Anti-Vax.
Democrats, of course, are worried Facebook is allowing too much speech—specifically disinformation from political ads, which Facebook recently declared that it wouldn’t fact-check. The committee was not pleased.
Alexandria Ocasio-Cortez put it best when she asked specifically which lies she could tell in political ads. Zuckerberg said no, she couldn’t pay to target black neighbourhoods and tell them the wrong election date, because Facebook would ban disenfranchising or vote-suppressing ads.
Then Ocasio-Cortez asked if she could run an ad against Republicans in primaries, claiming they voted for the Green New Deal. Zuck mumbled, “I think probably.”
Zuckerberg tells @AOC that he DOES NOT KNOW if she could run ads in a GOP primary saying one of the candidates supports the Green New Deal
— Judd Legum (@JuddLegum) October 23, 2019
The hearing’s stated scope included housing discrimination violations, and these were not neglected. Several representatives yelled at Facebook (again) for letting housing advertisers illegally target ads by race and other protected classes. They quizzed Zuckerberg on civil rights and the diversity of his own teams, and what sounded like gotcha questions ended up proving that he was pathetically unprepared to talk about his own company’s biggest legal violations and what it’s doing to fix them.
The most blistering 2 minutes from today’s Facebook hearing (supposedly about Libra) is Rep. Joyce Beatty (D-OH) absolutions lighting in to Zuckerberg (and Sheryl Sandberg) about civil rights pic.twitter.com/4cd28Tyg2O
— Marcus Gilmer (@marcusgilmer) October 23, 2019
Rep. Katie Porter (D-Calif.) described dismal conditions for the Facebook content monitors who crawl through the frequently disturbing banned content on the site, with just nine minutes a day designated for emotional coping. She asked Zuck to volunteer to spend an hour a day for a year as a content monitor (like his past year-long projects). He said it didn’t seem like a good use of his time.
There’s still a lot of anger over the Cambridge Analytica data breach, so that came up a few times, especially to question Facebook’s ability to securely manage people’s money. (Fun fact, Cambridge Analytica dabbled in its own cryptocurrency, which was supposed to “help people store and sell their online personal data.”)
Also Zuck asked Maxine Waters for a pee break.
Actual quote: "Can we have a break after this next round […] after the next five minutes? I'm up here, I'm drinking a lot of water…"
— Nick Douglas (@toomuchnick) October 23, 2019
What will happen now?
Rep. Sherman predicted the next step in his bullshit-cutting speech: “[You say] you’re going to wait for regulators to sign off. Regulators are working with old statutes. Your lawyers are gonna show that there’s a loophole in the 1940 Investment Company Act that gets you where you want to go, and the regulators can’t stop you. You’re gonna call that regulatory approval, as if the people in 1940 knew what you had in mind.”
But not if the Keep Big Tech Out of Finance Act passes, specifically targeted at Facebook (and at any competitors like Amazon that toy with their own competing coins).
Not if Libra compromises, and governments are happy with a compromise like multiple cryptocurrencies, each tied to an existing currency.
And not if Facebook and its remaining partners get so sick of fighting governments that they give up, and Facebook looks for a different way to make itself the financial layer that you just can’t afford not to use.
Because until governments take heavy anti-trust actions against tech giants, like breaking up Facebook as presidential candidate Elizabeth Warren plans—and breaking up Amazon and Google while we’re at it—these heirs of Ma Bell and Standard Oil will continue to swallow the world. Maybe some people will be better off that way. Will you?