Friday, June 21, 2019

Legislators hear alarm bells in Facebook crypto announcement

By Anne Sherry, J.D.

Several high-ranking legislators expressed concerns about Facebook’s role in a new cryptocurrency, Libra. Representative Maxine Waters (D-Cal), chair of the House Financial Services Committee, asked Facebook to agree to a moratorium on developing a cryptocurrency until Congress and regulators can take action on privacy and security risks. Senator Sherrod Brown (D-Ohio), ranking member of the analogous Senate committee, called on financial watchdogs to scrutinize the development closely.

On June 18, the Libra Association issued a press release from Geneva announcing plans to develop Libra as “a simple global currency and financial infrastructure that can empower billions of people.” The Libra Association is a nonprofit founded by Facebook and dozens of other companies it recruited to the project, including major payment processors, venture capital firms, and blockchain groups. Facebook also announced that it had formed a subsidiary, Calibra, that will develop a digital wallet for Libra, available both as a standalone app and through Facebook’s Messenger and WhatsApp products.

The Libra announcement promises that the currency will be built on a reliable blockchain and backed by a reserve of real assets called the Libra Reserve. According to the Libra Association, these underpinnings will make the system scalable, secure, and reliable, while the currency will be fungible, widely accepted globally, and stable. Unlike existing blockchain systems that have not reached wide adoption, Libra targets the mainstream, particularly the 1.7 billion adults that remain outside of the financial system, the majority of whom have a mobile phone.

Despite the announcement’s assurances, Waters raised privacy and security concerns and asked Facebook to agree to a moratorium on developing a cryptocurrency “given the company’s troubled past.” Her statement sums up these troubles:

Facebook has data on billions of people and has repeatedly shown a disregard for the protection and careful use of this data. It has also exposed Americans to malicious and fake accounts from bad actors, including Russian intelligence and transnational traffickers. Facebook has also been fined large sums and remains under a Federal Trade Commission consent order for deceiving consumers and failing to keep consumer data private, and has also been sued by the government for violating fair housing laws on its advertising platform.

According to Waters, with the cryptocurrency market lacking a clear regulatory framework, the announcement should be a wake-up call for regulators to look into the privacy and security concerns, cybersecurity risks, and trading risks posed by cryptocurrencies. Waters concluded that in addition to the moratorium, Facebook executives should appear before the Financial Services Committee to testify on these issues.

Representative Patrick Henry (R-NC), ranking member of the Financial Services Committee, wrote to Waters to ask for a hearing on Libra. “It is incumbent upon us as policymakers to understand Project Libra,” he stated. “We need to go beyond the rumors and speculations and provide a forum to assess this project and its potential unprecedented impact on the global financial system.”

Brown was more general in his statement, not asking for action by Facebook or any specific regulator but “calling on our financial watchdogs to scrutinize this closely to ensure users are protected.” Like Waters’ statement, Brown’s says that Facebook has used its size and power “to exploit users’ data without protecting their privacy.” He added, “We cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight.” The statement also says that Brown and Committee chair Mike Crapo (R-Idaho) sent a letter to Facebook last month requesting information about their privacy practices and cryptocurrency announcement, but that Facebook has not provided a written response.

Representative Brad Sherman (D-Cal) expressed concerns that Libra is at “risk of being exploited for illicit finance, among other potential impacts.” He called the platform’s openness to creating anonymous accounts “a reckless decision which would prevent the company from carrying out ‘know your customer’ and anti-money-laundering monitoring required for banks and other payments companies by U.S. law enforcement.”