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Mark Zuckerberg arrives to testify before a House Energy and Commerce Committee on the protection of user data, April 11, 2018.
In 2005, Walmart announced that it would seek a license in Utah for an industrial loan corporation (ILC)—effectively a bank. At the time, Walmart claimed it merely wanted to save on transaction-processing costs, but the financial world nevertheless went ballistic.
Banks of all sizes demanded that regulators prevent Walmart from opening branches and commandeering deposits. Grocers and unions joined them in opposition. Members of Congress demanded that the application be denied, and introduced bills to stop commercial businesses from operating banks. The FDIC issued an unusual moratorium on new ILC licenses, stalling Walmart’s application. By early 2007, the effort fizzled out, and the broad coalition opposed to Walmart had won.
Today, you can see a similar coalition coming together, on a global scale, to counteract Facebook, which last week announced it would create a digital currency called Libra. Already, international regulators have expressed alarm at the potential for Libra to displace global currencies, exacerbate national financial crises, expose billions to privacy abuses, and shift too much power away from democratic structures. Everyone from Facebook co-founder Chris Hughes to France's finance minister to Libras themselves—those born under the astrological sign—have opposed the proposal.
But the intense global concern with Libra has not necessarily been reflected among policymakers in the country where Facebook resides. While some pundits are confident that Libra will fall, as Walmart’s bank did, under the weight of regulatory scrutiny, the strange lack of urgency inside Washington suggests that things could go in a different direction, to the detriment of the world.
It's beyond clear that Libra is an outlandish proposal. In the name of making it easier for users to transfer cash to friends or make purchases, Facebook means to shift control over money from central banks and regulators to a private consortium of for-profit companies, which are mainly buying in because of the self-enrichment possibilities. Here’s how it would work: Customers pay—in dollars or euros or other money—to acquire Libras, and Libra will invest those reserves into money-making securities, keeping the profits for itself. In that sense, it’s a bank that pays no interest.
There are scant details about what this product actually is (A bank? A prepaid card? A currency?), who might regulate it, how basic financial safeguards like anti–money laundering standards and consumer protection compliance will be upheld, how to manage new financial risk from a private currency, whether businesses will get special privileges for partnering with Libra that discriminate against their rivals, and so on and so on. That’s completely aside from the enormous monopoly and privacy implications of Facebook loading up with more data about your purchases and preferences, and the fact that, throughout history, every time banking and commerce have teamed up, the results have been disastrous.
Facebook, a company that conceives of itself as a government, clearly doesn’t care about such trifles. It wants to rebuild its user base after privacy scandals caused usage to plummet, and thinks it can leverage two billion potential global customers into an international version of the Chinese app WeChat that will rapidly become indispensable for payments, communications, and social interaction. Taking a cut out of every Libra transaction could be far more lucrative than ad-targeting; Facebook is already talking about encrypting more interactions on the site, which adding a payment system would allow them to do.
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The global financial consequences aren't important to the company that coined the phrase “Move fast and break things.” Only, what could be broken here are national economies. “Even the IMF has now come around to the idea that capital controls are an appropriate tool for developing countries, at least in times of crisis,” says Robert Weissman, president of Public Citizen. “If Libra gets to scale, you could easily see it wiping away sovereign capacity to stop capital flight.” And that's just one of a hundred things that could go wrong.
There's a broad coalition available to stop Facebook. Notably, while a couple dozen companies partnered with Facebook to create the governing organization for Libra, none of them were banks, which, you might note, have some political power. You could see banks, regulators, politicians, workers, and citizens concerned with giving Facebook too much authority over the money system come together to campaign against Libra.
But what is our government saying about this threat? Federal Reserve Chair Jerome Powell gave the most limp response possible when asked last week, saying that Facebook discussed the proposal with the Fed, but that the central bank does not have “plenary authority” over cryptocurrencies, though it has “quite high expectations” for a safe product. It was a vague and passive statement from the leader of the organization that Libra impinges upon. And to be clear, the Fed’s inability to improve its poor payment system—checks can take several days to clear, and wire transfers, particularly internationally, can be costly—gave oxygen for something like Libra in the first place.
Outside the Fed, Trump's financial regulators have said next to nothing about Libra, but a Treasury Department report from last year endorses “meaningful experimentation” on financial technology. Trump’s Office of the Comptroller of the Currency has started to accept applications from financial technology companies for special bank charters. One economist close to the president, disgraced temporary Fed nominee Stephen Moore, considers Libra “a good thing” because it gives central bankers competition. The last time we had “competition” for money coinage, in the 19th century, we had a financial crisis every five years or so, but the point is that the administration has treated the arrival of Libra with either silence, passivity, or cheerleading.
Yes, the Senate Banking Committee has scheduled a hearing on Libra next month, and just yesterday, the House Financial Services Committee followed suit. House Committee Chair Maxine Waters urged last week that all planning on Libra cease until regulators and politicians can assess potential risks, and her team is scrambling to do so; staffers were spotted scouring government reports on virtual currencies last week.
According to Hill aides, committee staff will receive a briefing from the Securities and Exchange Commission this week, an ominous sign considering the sympathies for cryptocurrencies at that agency. Commissioner Hester Peirce, a former Senate aide, has been given the nickname “crypto mom” for her enthusiasm over the topic, and has generally supported self-regulation and giving crypto “room to breathe.”
A financial technology (fintech) task force that Waters announced in May will likely get first crack at Libra, which means that any legislative efforts to regulate or even analyze Facebook’s proposal will have to run through them. Waters has sought consensus throughout the committee, though that has begun to break down. If a few Democrats on the committee support Libra, will Waters defy them and act anyway?
A rump faction of progressive members, including Congressman Jesús “Chuy” García of Illinois, had already been looking at new legislation to close loopholes to keep banking and commerce separate. “Allowing Facebook to behave like a bank without being regulated like a bank would be bad enough,” García told the Prospect in a statement. “Allowing it control over the money supply is an even scarier idea.”
Other members have trepidation over Libra. “An expansion into consumer finance raises a lot of important questions about [Facebook's] monopoly power, potential threats to fair competition, and new risks to our financial system,” says Representative Katie Porter (D-CA), a freshman member. It's likely that more members will announce opposition in the coming days.
But the lack of preparedness, and outsourcing to groups like the SEC that likely support Facebook's efforts, should cause concern. That's especially true because Facebook is running a familiar playbook by foregrounding vulnerable communities who they say will be helped by Libra.
Specifically, Facebook has pitched Libra as a way to give the unbanked access to the financial system. This is not true—the unbanked are unbanked because they don’t have enough money or enough guidance to navigate the financial system, not because they’re desperate for Facebook to give them a digital wallet—but it’s proven to be a good way to get Democrats representing low-income communities on the side of financial “innovation.” “We’ve already seen how it plays out with payday lending,” said one Financial Services staffer, referring to members of the Congressional Black Caucus who defend the predatory companies.
Outside groups have heightened sensitivities toward Libra that go well beyond what we've heard from Congress. “We need any and all congressional committees and regulatory bodies with potential jurisdiction over Libra to immediately launch vigorous investigations of its implications for systemic risk to the financial system, potential exploitative practices it could undertake, privacy implications, the ways in which it will entrench the economic and political power of Facebook and other companies involved, and more,” said David Segal of Demand Progress, a group that opposes concentrated corporate power.
There is certainly plenty that Congress can do on the subject. Re-upping the bill proposed in 2006 when Walmart tried to become a bank, which would close the loophole allowing commercial businesses into banking, is a start. Many of the 125 Republican co-sponsors of that bill remain in Congress, to say nothing of the Democrats. Correspondingly, loopholes in the Gramm-Leach-Bliley Act that allow banks to own larger shares of commodities could also be closed. The Expedited Funds Availability Act of 1987, which standardized wait periods for money transactions to clear, could be amended to shrink the time to hours or even minutes, forcing the Fed to improve its payment practices. And anyone could introduce a bill reinforcing the principle that coinage of currency backed by reserves is the exclusive province of central banks.
Moreover, if helping the unbanked is the end goal, public options like giving everyone the opportunity to open an account at the post office, or a permanent bank account through the Fed, would solve that problem far more elegantly.
For now, policymakers seem way too complacent about something Mark Zuckerberg considers a fun widget for increasing Facebook engagement, even though it has the potential to blow up the world economy many times over. With an administration that's eager to get out of any business's way, only Congress has real standing to take seriously the implications of Libra. It doesn't look to me like they've started to do that just yet.
