[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
EXAMINING FACEBOOK'S PROPOSED
CRYPTOCURRENCY AND ITS IMPACT
ON CONSUMERS, INVESTORS, AND.
THE AMERICAN FINANCIAL SYSTEM
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
JULY 17, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-40
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
39-740 PDF WASHINGTON : 2020
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California PETER T. KING, New York
GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri SEAN P. DUFFY, Wisconsin
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANN WAGNER, Missouri
BILL FOSTER, Illinois ANDY BARR, Kentucky
JOYCE BEATTY, Ohio SCOTT TIPTON, Colorado
DENNY HECK, Washington ROGER WILLIAMS, Texas
JUAN VARGAS, California FRENCH HILL, Arkansas
JOSH GOTTHEIMER, New Jersey TOM EMMER, Minnesota
VICENTE GONZALEZ, Texas LEE M. ZELDIN, New York
AL LAWSON, Florida BARRY LOUDERMILK, Georgia
MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia
RASHIDA TLAIB, Michigan WARREN DAVIDSON, Ohio
KATIE PORTER, California TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
BEN McADAMS, Utah JOHN ROSE, Tennessee
ALEXANDRIA OCASIO-CORTEZ, New York BRYAN STEIL, Wisconsin
JENNIFER WEXTON, Virginia LANCE GOODEN, Texas
STEPHEN F. LYNCH, Massachusetts DENVER RIGGLEMAN, Virginia
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
C O N T E N T S
----------
Page
Hearing held on:
July 17, 2019................................................ 1
Appendix:
July 17, 2019................................................ 113
WITNESSES
Wednesday, July 17, 2019
Brummer, Chris, Professor of Law, Georgetown University Law
Center......................................................... 77
Demiros, Meltem, Chief Strategy Officer, CoinShares.............. 84
Gensler, Hon. Gary, Professor of the Practice, MIT Sloan School
of Management; Senior Advisor to the Director, MIT Media Lab;
and Co-Director, MIT's Fintech@CSAIL........................... 80
Marcus, David, Head of Calibra, Facebook......................... 4
Pistor, Katharina, Edwin B. Parker Professor of Comparative Law,
Columbia Law School............................................ 79
Weissman, Robert, President, Public Citizen...................... 82
APPENDIX
Prepared statements:
Brummer, Chris............................................... 114
Demiros, Meltem.............................................. 131
Gensler, Hon. Gary........................................... 145
Marcus, David................................................ 164
Pistor, Katharina............................................ 171
Weissman, Robert............................................ 183
Additional Material Submitted for the Record
Waters, Hon. Maxine:
Written statement of Chainalysis............................. 204
Written statement of counteringcrime.org..................... 206
Written statement of the ICBA................................ 209
Written statement of NAFCU................................... 213
Pressley, Ayanna:
Press release dated June 18, 2019............................ 215
Tlaib, Hon. Rashida:
Written statement of Americans for Financial Reform Education
Fund....................................................... 218
``Diversity in Blockchain's Initial Review of Facebook's
Project Libra,'' dated June 24, 2019....................... 224
Written statement of epic.org................................ 261
Marcus, David:
Written responses to questions for the record submitted by
Chairwoman Waters.......................................... 264
Written responses to questions for the record submitted by
Representative Posey....................................... 280
Written responses to questions for the record submitted by
Representative Wagner...................................... 284
Written responses to questions for the record submitted by
Representative Hill........................................ 287
Written responses to questions for the record submitted by
Representative Davidson.................................... 289
EXAMINING FACEBOOK'S PROPOSED
CRYPTOCURRENCY AND ITS IMPACT
ON CONSUMERS, INVESTORS, AND
THE AMERICAN FINANCIAL SYSTEM
----------
Wednesday, July 17, 2019
U.S. House of Representatives,
Committee on Financial Services,
Washington, D.C.
The committee met, pursuant to notice, at 10:13 a.m., in
room 2128, Rayburn House Office Building, Hon. Maxine Waters
[chairwoman of the committee] presiding.
Members present: Representatives Waters, Maloney,
Velazquez, Sherman, Meeks, Clay, Scott, Green, Perlmutter,
Himes, Foster, Beatty, Heck, Vargas, Gottheimer, Lawson, San
Nicolas, Tlaib, Porter, Axne, Casten, Pressley, McAdams,
Ocasio-Cortez, Wexton, Lynch, Adams, Dean, Garcia of Illinois,
Garcia of Texas, Phillips; McHenry, Posey, Luetkemeyer,
Huizenga, Duffy, Stivers, Wagner, Barr, Tipton, Williams, Hill,
Emmer, Zeldin, Loudermilk, Davidson, Budd, Kustoff,
Hollingsworth, Gonzalez of Ohio, Rose, Steil, Gooden, and
Riggleman.
Chairwoman Waters. The Committee on Financial Services will
come to order. Without objection, the Chair is authorized to
declare a recess of the committee at any time.
Today's hearing is entitled, ``Examining Facebook's
Proposed Cryptocurrency and Its Impact on Consumers, Investors,
and the American Financial System.''
I now recognize myself for 5 minutes to give an opening
statement.
Today, we are here for a hearing on Facebook's proposed
digital currency, Libra, and digital wallet, Calibra, and their
impacts on consumers, investors, and the financial system. Our
first witness is David Marcus, Calibra's CEO. Following his
testimony, a panel of experts will share their views on
Facebook's plans.
I have serious concerns with Facebook's plans to create a
digital currency and digital wallet and its effort to enlist
partners that expand its reach, like MasterCard, PayPal, Visa,
Uber, Lyft, and Spotify. Facebook is apparently trying to
create a new global financial system that is intended to rival
the U.S. dollar.
This venture is slated to be based in Switzerland, which
has a history of being a monetary haven for criminals and shady
corporations. Facebook's plans raise serious privacy, trading,
national security and monetary policy concerns, not only for
Facebook's over 2 billion users, who will have immediate access
to these products, but also for consumers, investors, and the
global economy.
In addition, Facebook has proposed backing Libra tokens
with government currencies and government-guaranteed
securities, and holding them in a so-called Libra Reserve, to
be governed by Facebook and its partners. Ownership of
government assets on such a massive scale without proper
oversight threatens to concentrate government influence in the
hands of a few elites.
Ultimately, if Facebook's plans come to fruition, the
company and its partners will yield immense economic power that
could destabilize currencies and governments. Facebook's
proposed entry into financial services is all the more
troubling because it has already harmed vast numbers of people
on a scale similar to Wells Fargo, and demonstrated a pattern
of failing to keep consumer data private, on a scale similar to
Equifax.
Facebook remains under a 2011 consent order from the
Federal Trade Commission for deceiving consumers and failing to
keep consumer data private. In the wake of the Cambridge
Analytica scandal, in which Facebook provided 50 million users'
private data to a political consulting firm, the company will
reportedly pay a record $5 billion fine to the FTC for data
privacy failures.
In addition, Facebook has allegedly insecurely stored user
passwords dating back to 2012, paid unsuspecting teenagers to
download spyware, experienced a hack of nearly 50 million
accounts, and experienced a software bug that granted third-
party access to 6.8 million users' photos. It has also been
sued by HUD and civil rights groups for violations of the Fair
Housing Act, in what amounts to modern-day redlining. Facebook
also allowed malicious Russian state actors to purchase and
target ads in a campaign to influence the 2016 election.
I am also concerned about the lack of diversity in
Facebook's upper ranks, and I fear that if these plans go
forward, women and minorities, and women- and minority-owned
businesses may be excluded from participating fully.
In light of these and other concerns, my colleagues and I
wrote to Facebook earlier this month to call on it to cease
implementation of its plans until regulators and Congress can
examine the issues associated with a large technology company
developing a digital currency, and take action. The Independent
Community Bankers of America and others support this common-
sense step. Facebook's plans also raise larger concerns about
big tech's expansion into financial services, as it appears to
inappropriately mix commerce and banking activities.
So today, we will discuss a draft bill, the Keep Big Tech
Out of Finance Act, which would prevent large platform
utilities like Facebook from becoming financial institutions
and block them from creating their own currencies. Today's
hearing is only the first step in our oversight and legislative
process. I look forward to hearing from our witnesses.
The Chair now recognizes the ranking member of the
committee, the gentleman from North Carolina, Mr. McHenry, for
5 minutes for an opening statement.
Mr. McHenry. We are here to go beyond the headlines. We are
here to sift through the speculation and the hearsay. Here is
just one of my favorite headlines which asks, ``Is Facebook
forming a Crypto Mafia as Libra Foundation's Members Boost Each
Other's Businesses?'' Washington must go beyond the hype and
ensure that it is not the place where innovation goes to die.
Just because we may not fully understand a new technology
proposal does not mean we should immediately call for its
prohibition, especially when that proposal is just that, a
proposal. But let's face it. Let's be honest. It is Facebook.
And I am skeptical, but we can either make you a political
talking point or we can choose to conduct thoughtful
governmental oversight. That is my hope for this day:
thoughtful government oversight.
The reality is whether Facebook is involved or not, change
is here. Digital currencies exist. Blockchain technology is
real and Facebook's entry in this new world is just
confirmation, albeit at scale.
The world that Satoshi Nakamoto, author of the Bitcoin
White Paper, envisioned, and others are building, is an
unstoppable force. We should not attempt to deter this
innovation, and governments cannot stop this innovation, and
those who have tried have already failed.
So the question then becomes, what are American
policymakers going to do to meet the challenges and the
opportunities of this new world of innovation? Some politicians
want us to live in a permission-based society, where you need
to come to the government, and ask for its blessing before you
can begin to even think about innovating. Those are the
politicians who would rather kill it before it grows.
But there are others who believe in the vibrancy of
American ingenuity, American innovation, who recognize that our
economy is built off of generations of entrepreneurs and
innovators through competition, through testing, through
tinkering, and through iterating, which got us here today.
To be clear, it is not about advocating for a break-it-and-
figure-it-out-later approach, but when it comes to finances, we
must ensure that consumers and investors are protected.
So, Mr. Marcus, let's get to work. Let's have that
conversation. Let's answer those questions. Instead of a knee-
jerk reaction of banning something before it begins, my
Republican colleagues and I want to first try and understand
it, and, in turn, based off what we learn, determine whether or
not our current regulatory framework meets the demands of this
new technology. That is why we are here today.
Look, I don't have a crystal ball. I have no idea if Libra
will lead to greater financial inclusion, and lower remittance
costs, which would mean families could send money to each other
more cheaply and easily than today, or if it is just a ploy to
shoot Facebook's Twitter mentions through the roof. We will
see.
But what I do know is this: Republicans stand ready to work
with innovators to successfully implement responsible
technology here in the United States, here, domestically,
before we lose out to other countries around the world. So I
ask my colleagues on both sides of the aisle to join together
in supporting innovation, ingenuity, and the entrepreneurial
spirit that this nation was founded upon.
I am grateful for this hearing. I called on Chairwoman
Waters to have this hearing a month ago, and this is a
bipartisan approach to oversight.
And with that, I would like to yield the balance of my time
to Mr. Hill.
Mr. Hill. I thank the ranking member. This timely hearing
touches on critical areas of jurisdiction within our committee:
fintech innovation; oversight questions related to the use of
and trading of cryptocurrencies; and the intersections of
financial services and big data. We therefore must ensure that
we are asking thoughtful questions, as we learn about and
analyze these rapidly emerging trends.
As a former community banker, I understand the importance,
with appropriate regulation and balance, to benefit American
consumers, and as lawmakers we all need to ensure that all the
companies that operate here in America, with American
consumers, are in full compliance of those laws. America is
evolving into a digital era, and we need to make sure that we
are asking the right questions. I urge my colleagues to do
that, but always trust but verify.
I yield back.
Chairwoman Waters. Today, we have two panels. I want to
welcome our first witness, Mr. David Marcus, chief executive
officer of Calibra. David Marcus has been CEO of Calibra for
the last 2 months and also identifies himself as working for
Facebook. Prior to Calibra, Mr. Marcus explored blockchain and
served as vice president for messaging products for Facebook.
He has also served as president of PayPal and other tech
companies.
Mr. Marcus, without objection, your written statement will
be made a part of the record. You will have 5 minutes to
summarize your testimony. When you have one minute remaining, a
yellow light will appear. At that time, I would ask you to wrap
up your testimony so we can be respectful of both the committee
members' time and others.
Mr. Marcus, you are now recognized for 5 minutes to present
your oral testimony.
STATEMENT OF DAVID MARCUS, HEAD OF CALIBRA, FACEBOOK
Mr. Marcus. Thank you, Madam Chairwoman. Chairwoman Waters,
Ranking Member McHenry, and members of the committee, thank you
for the opportunity to appear before you today.
My name is David Marcus and I am the head of Calibra at
Facebook. For most of my life I have been an entrepreneur,
building products aimed at improving people's lives. For many
years, my focus has been financial services. I became PayPal's
president after it acquired my last startup, and I moved to
Facebook about 5 years ago to run Messenger, and more recently
to lead our blockchain efforts.
In my written testimony, I describe the mechanics of Libra.
Today, I want to explain why I am optimistic about what Libra
can offer the world. But before I get there, I want to make
clear that we recognize we are only at the beginning of this
journey. Federal Reserve Chairman Powell has said publicly that
the process for launching Libra needs to be patient and
thorough, rather than a sprint to implementation. Treasury
Secretary Mnuchin reinforced those views at his recent press
conference.
We strongly agree with both of them. We will take the time
to get this right. We expect the review of Libra to be among
the most extensive ever. We are fully committed to working with
regulators, here and around the world. Chairwoman Waters,
speaking on behalf of Facebook, I pledge to you that Facebook
will not offer the Libra digital currency until we have fully
addressed regulators' concerns and received appropriate
approvals.
I would like to start by sharing the vision for Libra.
Libra is intended to address an important problem. Imagine a
daughter who wants to send money home to her mom in another
country. Of the $200 she sends, $14, on average, will be lost
because of fees. It can also take several days or even a week
for the mother to receive the money, a delay that can prove
disastrous in an emergency. Not to mention lines may be long
and collection points may be in high-crime areas.
But it doesn't have to be that way. Wouldn't it be easier
and safer if people could securely and inexpensively receive
money transfers through their smartphones, just like they do
for so many other things today? That is what Libra is about,
developing a safe, secure, and low-cost way for people to
efficiently move money around the world.
To realize Libra's promise, Facebook and 27 other
organizations have founded the independent Libra Association.
These include companies in the payments technology,
telecommunications, blockchain, and venture capital industries,
and nonprofits like Women's World Banking, who is here today,
along with staff from the Libra Association.
The Libra Association will govern the Libra blockchain
network and administer the Libra reserve. It will establish the
rules of the road and will prioritize privacy and consumer
protection, and it will implement safeguards that require
service providers in the Libra network to fight money
laundering, terrorism financing, and other financial crimes. We
expect these safeguards will at least meet, if not exceed,
existing standards and improve the integrity of the global
financial system.
When fully formed, we expect the Libra Association to
include 100 diverse members. Facebook will only have one vote
and will not be in a position to control the association, nor
will Facebook or the Libra Association position themselves to
compete with sovereign currency or interfere with monetary
policy. In fact, the Association will work with the Federal
Reserve and other central banks to minimize the risk of any
competition with their currencies or interference with their
monetary policy. These areas are properly the province of
central banks.
Finally, I would like to turn to Facebook's role in
realizing the potential of Libra. To facilitate Libra's use,
Facebook has established a subsidiary, known as Calibra, that
will offer one of many digital wallets on the Libra network.
Using the Calibra Wallet, consumers will be able to save,
spend, and send Libra right from their smartphones. If this is
successful, Facebook will benefit from more commerce across the
family of apps that it operates.
Calibra will be affordable and accessible and also be safe
and secure, with strong safeguards to protect users' accounts
and information. We expect that the Calibra Wallet will be
governed by rules administered or enforced by FinCEN, OFAC, and
the FTC. It will also be regulated by State financial
regulators.
Calibra is committed to protecting the privacy of its
customers. The Calibra Wallet will not share individual
customer data with the Libra Association or even with Facebook
except for limited circumstances such as preventing fraud or
criminal activity in complying with the law.
I am excited about the potential that Libra and Calibra
hold, and I am proud that we have initiated this effort here in
the United States. I believe that if America does not lead
innovation in digital currency and payments, others will. If
our country fails to act, we could soon see a digital currency
controlled by others whose values are dramatically different
from ours. I believe that Libra can drive positive change for
many people and can provide an opportunity for leadership
consistent with our shared values.
I look forward to answering your questions.
[The prepared statement of Mr. Marcus can be found on page
164 of the appendix.]
Chairman Waters. Thank you. I now recognize myself for 5
minutes for questions.
Mr. Marcus, Facebook's 2.7 billion users entrust you with
their most intimate thoughts, pictures, feelings, ideas, and
sensitive information. Yet at every opportunity to demonstrate
growth, competence, and responsibility, Facebook has let us
down.
As I already noted, Facebook has a long list of scandals,
including its repeated failures to safeguards its users' data.
You said that we don't need to trust Facebook because it will
only be one of 100 members in the Libra Association that will
manage this project. But that is not entirely true, is it? The
project was Facebook's idea. Facebook is spearheading it and
recruiting partners. Facebook's subsidiary, Calibra, will
provide consumers with a digital wallet to store Libra tokens.
As I understand it, no member of the Association has paid
anything towards the project.
So my question is, why should we trust Facebook to do these
activities?
Mr. Marcus. Thank you, Madam Chairwoman. I think trust is
really essential, and it is clear that we have made mistakes. I
believe we are owning these mistakes and working hard in
remedying them and working hard at improving on all fronts.
But as far as the Libra Association is concerned and the
way that this project has been developed, we have invested
everything that has been invested so far in Libra--you are
absolutely right--and we have built all of the code base, the
technology, up to this point. But we have also given, donated,
if you will, the technology, because it is now open source for
the whole world to be able to use and leverage. As a result, we
are not controlling the code base, and by the time we launch,
we will be one of 100 members with no special privilege.
As far as the wallet is concerned, I believe that the idea
here is that one day we will launch and suddenly 2 billion
people will arrive on the Calibra Wallet. This is not the
approach we are taking. People will have to open specific
Calibra accounts, so they are not going to be able to use their
Facebook account. They have to open new accounts. And in order
for them to do that they will have to upload a government-
issued ID to identify, so that we can meet our Know-Your-
Customer (KYC) requirements.
Chairwoman Waters. Thank you. Mr. Marcus, I can appreciate
that you understand that there is a trust problem here, given
its disregard for U.S. law and its massive scale. I think
foreign countries could find it difficult to effectively
regulate Facebook, Libra, or Calibra. It is not clear the
Federal Reserve or other U.S. regulators have the authority to
regulate you, and yesterday the Swiss regulator, that you are
saying would regulate you, actually said that it has never been
contacted by Facebook about this project.
So, Mr. Marcus, you responded to a request by members of
this committee for a moratorium on your activities by stating
that you would continue to work with regulators before going
forward, but if the regulators lack the authority to adequately
oversee you, how can you work with them to resolve concerns?
Will you stop kind of dancing around this question and commit
here, in this committee, before the duly elected
Representatives of the American people, to a moratorium until
Congress enacts an appropriate legal framework to ensure that
Libra and Calibra do what you claim it is intended to do, which
to serve the public good?
Let me just say that we are all in support of innovation.
It is not one side of the aisle versus the other side of the
aisle. But if you talk to any member on this committee, they
will know nothing about Libra. They will know nothing about
Calibra. They will know nothing about how it is organized. They
will know nothing about the role that Facebook is going to play
in this big association that now has 28 companies and is
looking to get 100 companies.
And so despite the fact that we all support innovation, and
we all understand what is important for our economy to grow,
and for development and for the future of this country, we need
to be on top of and understand something as massive as this
project, and that does not mean we don't support innovation.
With that, I will turn to the gentleman--well, yes, if he
has time to answer. Please, go right ahead.
Mr. Marcus. Chairwoman Waters, I agree with you that this
needs to be analyzed, understood, and the proper oversight
needs to be set up before Libra can launch, and it is in this
spirit that we released a White Paper very early, before any
launch, so that we could have the time to engage with all of
the proper regulators and central banks and lawmakers to ensure
that we will get this right. And this is my commitment to you,
Madam Chairwoman. We will take the time to get this right.
Chairwoman Waters. Thank you very much. The gentleman from
North Carolina, Ranking Member McHenry, is recognized for 5
minutes.
Mr. McHenry. I want to keep this simple. Mr. Marcus, I have
read your White Paper. I understand the nature of digital
currency and digital technology. What is a Libra?
Mr. Marcus. Congressman, Libra is a digital currency, a
Reserve-backed digital currency.
Mr. McHenry. Is it a security?
Mr. Marcus. We don't believe it is, Congressman.
Mr. McHenry. Is it a commodity?
Mr. Marcus. Congressman, based on current U.S. law I
believe it might be a commodity, but we see it as a payment
tool.
Mr. McHenry. Is it an exchange-traded fund?
Mr. Marcus. It is not, Congressman.
Mr. McHenry. Okay. So it is none of the above, in any pure
form, like other digital currencies. Correct?
Mr. Marcus. Congressman, it is designed to be a payment
tool.
Mr. McHenry. A payment tool. Okay. So if it is none of the
above in our current structure, what I am really getting at is,
how do you comply with regulations?
Mr. Marcus. Congressman, the way that we comply with
regulations is in a number of ways. First, as far as the
Calibra Wallet is concerned, it is registered as a money
services business with Treasury, and with FinCEN. It is
applying, and has received a number of State licenses, and will
operate the same way that other wallets operate, as far as--
Mr. McHenry. That is Calibra. I am asking about Libra.
Mr. Marcus. As far as the Libra Association is concerned,
these are active conversations we are having, notably with the
working group of the G-7, as well as FINMA, which is the Swiss
financial regulator.
Mr. McHenry. Okay. So there is tension between the notion
of a decentralized currency, or something decentralized, and
ultimately privacy, and ultimately anti-money- laundering and
Know-Your-Customer elements. These things stand in conflict
with one other and are very difficult things to resolve.
In your White Paper, you say that after 5 years, there will
be a transition point, and you will go from a permission-based
to a permission-less system. Post-transition, how do you
reconcile the need for controls which allow you to comply with
anti-money-laundering and Know-Your-Customer (KYC) regulations,
with that decentralized notion of a fully decentralized digital
currency?
Mr. Marcus. That is a very good question, Congressman, and
the way that this will work is that the association will still
have the ability to set the rules when it comes to anti-money-
laundering programs, and CFT and KYC requirements for the
network. And what we expect, even when the network transitions
to permission-less, without getting lost in the weeds, is that
the vast majority of validators will likely be the ones
providing services, so likely larger companies.
Mr. McHenry. So you are saying in the nature of the wallet,
that is how you get to anti-money-laundering, and Know Your
Customer, not the nature of the digital currency. So going from
a permissioned system, with these nodes, ultimately 100, to a
permission-less system, you are saying it is not going to be
the nature of that technology of a Libra. It will be in the
nature of the wallets on either side of this?
Mr. Marcus. That is correct, Congressman, but on top of
that the Libra Association will continue to have an AML program
and will still be under the supervision of FinCEN.
Mr. McHenry. Okay. So getting into that question of anti-
money-laundering provisions, and complying with FinCEN, is your
view that you are going to be like Western Union, or is it
going to be your view that you are more like your former
employer, PayPal?
Mr. Marcus. Congressman, I believe that it depends on the
entities that you are talking about, as far as the wallets are
concerned. It will definitely be more like the PayPal types of
businesses that operate in the payment space. And as far as the
Libra Association is concerned, that is the conversation we are
having, because--
Mr. McHenry. So is it your view that the development
internally at Facebook is for you to be a competitor to Alipay
and to WePay?
Mr. Marcus. Congressman, yes.
Mr. McHenry. And to be a competitor to Venmo and PayPal?
Mr. Marcus. Congressman, so yes, we have a number of
wallets that are working with us on the network side but that
will compete on the wallet side, on the network.
Mr. McHenry. Will that consumer data be kept separate or a
part of the Calibra data collected from consumers? Will that be
a part of Facebook's overall knowledge of consumers or will it
be separate and distinct?
Mr. Marcus. No, Congressman, we will make a strong
commitment to keep that data separated from social data.
Mr. McHenry. Separate and distinct.
Mr. Marcus. Yes.
Mr. McHenry. Final question here: If you are seeking to be
a competitor to Alipay and to WePay, why are you doing this in
Switzerland and why are you using a basket of currencies? Why
not the good old American dollar, and to bring down the
transaction costs, which is seemingly the ultimate goal here?
Mr. Marcus. Congressman, first I want to say that the
choice of Switzerland has nothing to do with evading
responsibilities or oversight. The goal with Switzerland is to
home this Libra Association in an international place that is
the home of--
Mr. McHenry. Okay. Skip beyond that.
Mr. Marcus. So that is really why. The second thing is for
the same reason we would like for Libra to be a digital, global
currency, and as a result to be one unit of digital currency
for the whole world, and this is why we believe it was the
right approach.
Mr. McHenry. Thank you.
Chairwoman Waters. The gentlewoman from New York, Mrs.
Maloney, who is also the Chair of our Subcommittee on Investor
Protection, Entrepreneurship, and Capital Markets, is
recognized for 5 minutes.
Mrs. Maloney. Thank you. Mr. Marcus, as you can see there
are a lot of questions about this project. It is big and very
bold. Some would say it is too bold. The Chairman of the
Federal Reserve, Jay Powell, was in here just last week saying
that he thinks it could be a systemic risk. The former Chairman
of the CFTC, Gary Gensler, is going to testify later that he
believes it should be covered by the Investment Company Act. So
we have a lot of concerns and a lot of questions.
And I take it that it is a ``no'' to the chairwoman's
question about requesting a moratorium on Libra until
policymakers can figure out how to handle it. Was that a yes or
a no to her question, when she called for a moratorium?
Mr. Marcus. Congresswoman, the commitment is that we will
not launch until we have addressed all concerns fully and have
the proper approval.
Mrs. Maloney. Okay. I take that as a ``no.'' So what I want
to ask you is, will you commit, right here in this hearing
room, to walk before you run? Will you commit to doing a small
pilot program for Libra first, limited to no more than 1
million users, and overseen by the Federal Reserve and the SEC?
Will you commit to that?
Mr. Marcus. Congresswoman, the steps we have taken--and
this is the reason why we announced the White Paper in the
plans, instead of launching and then figuring it out after,
which is what happens sometimes with technology products, most
often, actually. In this very care, we are deliberate about
taking the time to get this right--
Mrs. Maloney. With all due respect, that is not what I
asked you, and given the lack of trust that people have in
Facebook--you breached the trust of users over and over again.
Just last week you were reportedly fined $5 billion for selling
your users' private data without their knowledge or permission.
So I would like to ask you again, will you commit to
walking before you run? Because if you go ahead and launch
Libra without doing a pilot program first, there are too many
risks. The Libra reserve could be managing too much money,
which could make it systemic, too much money could be pulled
out of banks in order to buy Libra, which former FDIC Chair
Sheila Bair has written about and warned about. So, the risks
are very great.
Now personally, and this is only my own personal belief, I
don't think you should launch Libra at all, because the
creation of a new currency is a core government function and
should be left to democratically accountable institutions that
are accountable to the American people. But at the very least
you should agree to do this small pilot program first, fully
overseen by you and the Federal Reserve and the SEC. I think
that is a modest request.
So will you commit right now to doing a small pilot program
first? Yes or no?
Mr. Marcus. Congresswoman, we will continue to engage with
regulators and the working group at the G-7 that is notably
looking after the issues that you raised to ensure that however
we launch this it is responsibly and it is with the appropriate
oversight, in a very responsible way. You have my commitment on
that.
Mrs. Maloney. If you will not commit to testing this out as
a pilot program first--I think it is a reasonable request--then
I think that Congress should seriously consider stopping this
project from moving forward.
There is a lot of concern about Facebook. A lot of people
think that it has really become too powerful, that it has
become a monopoly. And now you are telling us that Facebook's
digital wallet for Libra, called Calibra, will be the only
wallet that can be embedded into What's App and Facebook
Messenger. Given how dominant these two apps are, I think that
raises serious concerns about market concentration, and
potentially, monopoly concerns.
So will you commit to allowing third-party wallets on
What's App and Facebook Messenger?
Mr. Marcus. Congresswoman, may I answer the one point about
what you said earlier? I just want to address it really quick,
which is that the current system is really not working for
people, and for way too many people, and others are leading and
plowing ahead, and I believe that if we don't--
Mrs. Maloney. Please, sir, would you answer my question? I
get to ask the questions in this committee. Will you commit to
allowing the third-party wallets on What's App and Facebook
Messenger? Yes or no? It is a simple question. Yes or no?
Mr. Marcus. Congresswoman, other wallets are going to
actually be interoperable with the Calibra Wallets that will be
integrated in What's App.
Mrs. Maloney. So do you believe in competition and market
access? If you believe in it, then you would allow them to be
embedded also, third party. Will you allow it?
Chairwoman Waters. The gentlelady's time has expired.
Mrs. Maloney. Thank you.
Chairwoman Waters. The gentlewoman from Missouri, Mrs.
Wagner, is recognized for 5 minutes.
Mrs. Wagner. Thank you, Madam Chairwoman. I am concerned
that a 2020 launch date demonstrates deep insensitivities
around how Libra could impact U.S. national security, the
global financial system, the privacy of people across the
globe, criminal activity, and international human rights.
Mr. Marcus, I have a number of questions so let's try and
move as expeditiously as possible. Are you taking any steps to
ensure that the dollar is not overtaken as the leading
international currency that undergirds global economic
stability?
Mr. Marcus. Yes, Congresswoman, and the first of many steps
is that the dollar is most likely going to be the predominant
part of the reserve.
Mrs. Wagner. It is 58 percent, generally speaking, euro
about 19. I don't know what your numbers are, in terms of--
Mr. Marcus. Congresswoman, first, the dollar will be one of
the predominant currencies backing Libra, and then the other
part is really the engagement that we currently have with the
G-7 working group, with the Fed, and with the Financial
Stability Board. We will continue to engage in those
conversations.
Mrs. Wagner. I serve also as the vice ranking member of the
House Foreign Affairs Committee, and I am hoping to understand
how the U.S. Government could effectively implement sanctions
if Libra were to take off. As you likely know, North Korea uses
cryptocurrencies to evade our sanctions all the time. If the
Treasury Department demanded that the Libra Association
blacklist certain Libra addresses in order to comply with U.S.
sanctions, how would Libra respond?
Mr. Marcus. Congresswoman, I want to make a strong point
here because it is really important. Whether Libra launches or
it doesn't launch, there will be other networks. There are
other networks. There are other cryptocurrencies. And those are
not coming here--
Mrs. Wagner. You are not suggesting that if it is okay if
others evade U.S. sanctions, then it is okay if Libra does?
Mr. Marcus. I am absolutely not saying that, Congresswoman.
That is why I am saying that we are here and we are engaging
with FinCEN. The Libra Association will be also registered with
FinCEN, and we will have strong AML and KYC programs, as well
as from all of the wallets operating here in the United States,
of course full enforcement of sanctions, and then some.
Mrs. Wagner. Libra could have significant geopolitical
implications, frankly, from a human rights perspective, for
instance. Despotic leaders could ban Libra and penalize users.
How are you approaching establishing appropriate human rights
safeguards as you develop the Libra platform?
Mr. Marcus. Congresswoman, I believe that one of the
driving forces of the association being financial inclusion, we
will have the right representatives around the table--
Mrs. Wagner. Which specific organizations, because your
folks sure couldn't answer that yesterday when I asked--which
ones are you specifically working with to address potential
human rights impacts?
Mr. Marcus. We have Mercy Corps, Women's World Banking, and
Kiva that are already founding members of the Libra
Association, and there will be more organizations that have
dedicated all of their lives and energy in addressing the very
problems that you are raising.
Mrs. Wagner. I am curious to understand how you think the
Libra platform would interact with Section 230 of the
Communications Decency Act, which prevents State and local law
enforcement from protecting citizens from illicit activities,
for instance, if Libra is explicitly being used to further a
criminal act negotiated on Facebook Messenger.
Mr. Marcus. Congresswoman, Section 230, as I understand it,
is relating to the Facebook technology product and we have the
protections of Section 230. I don't believe that this applies
to payments.
Mrs. Wagner. Terrorists and criminals use Facebook to
fundraise, to recruit, and to connect with buyers. Facebook's
moderation just does not seem up to the task and Libra could
make it, I believe, even easier for these nefarious actors to
move money. Before launching Libra and potentially compounding
the situation, how will you be addressing the digital back-
markets that run rampant on the Facebook platform?
Mr. Marcus. Congresswoman, the first way we will do that is
ensuring that on the Calibra Wallet, everyone who opens a
Calibra account has to identify with a government-issued ID,
and as a result we will have strong identity and a fullly
staffed team to address--
Mrs. Wagner. My time has expired. I yield back to the
Chair. I have other questions I will submit for the record.
Thank you.
Chairwoman Waters. Thank you. The gentlewoman from New
York, Ms. Velazquez, is recognized for 5 minutes.
Ms. Velazquez. Thank you, Madam Chairwoman.
Mr. Marcus, we do not want to stifle innovation, but we do
have a healthy dose of skepticism. This is not Silicon Valley.
You cannot work out problems as you go. So all of those
problems need to be resolved and worked out before you launch
Libra.
So for the third time on this side, I pose the question to
you: Will you commit yourself to not launch Libra before all
the concerns from the Federal Reserve and all the regulators
are addressed? Yes or no?
Mr. Marcus. Absolutely, Congresswoman, and I want to
reiterate this commitment that this was the spirit in which we
announced early, and we will do what is right to address--
Ms. Velazquez. Okay. I just want a yes-or-no answer. Thank
you.
Mr. Marcus, we gave the Federal Reserve increased oversight
over non-banks. We don't know yet what you are. If the FSOC
designated you a SIFI, would you submit to enhanced oversight?
Mr. Marcus. Congresswoman, I don't believe that the--
Ms. Velazquez. But you don't know what you are, so--
Mr. Marcus. No, but Congresswoman, the Libra Association or
Calibra have no plans to engage in banking activities, and as
far as the Calibra Wallet is concerned, we will be active in
the payment space, like many other non-banks are active in the
payment space. But that said, we will, of course, comply with
all regulations.
Ms. Velazquez. We want to make sure that companies that do
not fall into the normal bucket of regulatory authority could
not threaten the U.S. financial system. So I would like to ask
you, according to the Libra Association's White Paper, members
of the Libra Association will consist of geographically
distributed and diverse businesses, nonprofit and multilateral
organizations, and academic institutions.
Sir, by what criteria were the initial members of the
association chosen?
Mr. Marcus. Thank you for your question, Congresswoman. The
way that the initial members joined was a result of a wide
outreach, and it is a combination of companies that can
accelerate the acceptance and utility of Libra, companies like
Uber and Lyft and Spotify, that can accelerate the acceptance
of Libra within current merchant networks, like Visa and
MasterCard, that can inform how to drive financial inclusion,
like Mercy Corps, Kiva, and Women's World Banking. And now, the
Libra Association is starting that phase of welcoming more
members that will be even--
Ms. Velazquez. Okay. I hear you. You want to get to 100,
right?
Mr. Marcus. That is correct, Congresswoman.
Ms. Velazquez. So if a member were to determine that they
no longer wish to participate in the association, what is the
process for withdrawal?
Mr. Marcus. Congresswoman, at this stage we are in the
process, all of us, the 28 organizations, of ratifying the
charter, and as a result of this process--
Ms. Velazquez. So you don't know yet.
Mr. Marcus. No. As a result of this process, if members do
not wish to participate they can drop, and there will be a
process on an ongoing basis for members that do not wish to
participate.
Ms. Velazquez. So do you think a member's withdrawal could
threaten the value of the Libra currency?
Mr. Marcus. No, I don't believe that's the case,
Congresswoman.
Ms. Velazquez. Mr. Marcus, according to the Libra
Association's White Paper, the Libra Association has a target
launch of the first half of 2020. When do you expect the
Association's charter to be finalized, and will the charter be
available for review by regulators, lawmakers, and the public?
Mr. Marcus. Absolutely, Congresswoman.
Ms. Velazquez. This question was asked before, so I will
yield back the balance of my time.
Chairwoman Waters. Thank you. Point of clarification, Mr.
Marcus, did you commit to the moratorium, or to Ms. Velazquez?
Mr. Marcus. Madam Chairwoman, I committed to waiting--
Chairwoman Waters. Excuse me. I just need a yes or no.
Mr. Marcus. Madam Chairwoman, I just want to be precise. I
committed to waiting for us to have all the appropriate
regulatory approvals and to have addressed all concerns before
we move forward.
Chairwoman Waters. Thank you very much. That is not a
commitment. I wanted to clarify that.
The gentleman from Arkansas, Mr. Hill, is recognized for 5
minutes.
Mr. Hill. I thank the chairwoman. Mr. Marcus, again, thank
you for being here. I wanted to talk a little bit about what
appears to be a core business element for Calibra and that is
the issue of remittances. The World Bank says that the single
most important challenge in remittances around the world is
lack of transparency and cost, and the average cost of global
remittances is about 7 percent. So tell me what fees you will
be charging for moving money inside the Calibra system?
Mr. Marcus. Congressman, the goal for Calibra is to charge
very little or nothing at all for transactions, for person-to-
person (P2P) transactions. We are hoping that we can offer that
part of the service for free.
Mr. Hill. And then, therefore, on B2B or B2P, you would be
charging something in Libra currency, fractional Libra
currency?
Mr. Marcus. There will likely be small merchant fees that
will be competitive, very competitive with the current fees
that are paid by merchants.
Mr. Hill. And inside the Calibra system, you will earn
revenue from advertising as well?
Mr. Marcus. No, Congressman. No advertising in Calibra. The
Calibra revenue streams, when we start working on that, which
we haven't at all and we don't plan to for a number of years,
will likely be by offering a range of financial services in
partnerships with existing financial institutions and banks.
Mr. Hill. And so in those remittances, which are so
important to countries all over the world--we know what
percentage of GDP remittances represent--particularly in
Central America, and in Mexico, where I think it is the third-
largest source of hard currency, for example, 20 percent in
Honduras--both sides of that equation would be subject to KYC?
Mr. Marcus. Yes, Congressman. On the Calibra Wallet, you
will not be able to open an account without having proper KYC.
Mr. Hill. And one of the issues in the Third World,
obviously, is they don't have a stable currency and are subject
to inflation, terrible inflation. I think I read a note that 94
countries, representing 48 percent of the world's population
and 16 percent of world GDP, experience, on a regular basis, 10
percent or more inflation per year.
So is it your view that the Calibra Wallet will have a more
stable currency than their local currency, or more stable
value, I should say, than their local currency?
Mr. Marcus. Congressman, the way we've designed the
reserve, and again, subject to proper oversight and review from
the G-7 working group and others, is to have a very stable
value-retentive digital currency. So, yes, it will be a very
high-quality digital currency, in a number of countries that
are currently receiving a lot of their income from abroad, they
will now receive a lot of their income from abroad in a stable
currency that will retain its value.
Mr. Hill. What do you think, though, about--obviously many
of those same Third-World countries, and some larger than Third
World, have very strict controls on foreign currency. They have
currency controls. They have currency boards. They don't allow
their consumers to take action outside their home currency and
they don't allow their home currency to be taken out of the
country. How does Libra plan on dealing with that?
Mr. Marcus. Congressman, this is going to be a country-by-
country answer. There are lots of countries that have the
problems you highlighted and that don't have currency controls,
that we think we can address right away. And then for other
countries, it will definitely be a country-by-country approach.
The one thing I want to highlight, though, is the fact that
any wallet--not only Calibra--that is actually built on top of
the Libra network will be interoperable with one another,
meaning that to provide the value that we intend to provide for
so many people, we don't need to be the only wallets, and in
certain regions it will be other wallets, but they would still
benefit from interoperability.
Mr. Hill. I thought that was an interesting conversation
with my friend from New York about the exclusivity of the
wallet, Calibra Wallet, at What's App, for example. You do plan
on having--and you have 100 members that are not interested in
Facebook having any more monopoly than they do now, so would
you have Visas, or debit or credit systems available as a
wallet?
Mr. Marcus. Congressman, we will have a number of other
payment methods for commerce on the Facebook platform, and
Instagram as well, including debit, credit cards, other
wallets. And as far as P2P payments, there will be more--
Mr. Hill. There will be competition on P2P payments, even
on Facebook's application?
Mr. Marcus. There will be on traditional currencies, the
same way that in Messenger, you can currently use debit cards
to do P2P.
Mr. Hill. I yield back. Thank you, Madam Chairwoman.
Chairwoman Waters. The gentleman from New York, Mr. Meeks,
who is also the Chair of our Subcommittee on Consumer
Protection and Financial Institutions, is recognized for 5
minutes.
Mr. Meeks. Thank you, Madam Chairwoman, and Mr. Marcus,
thank you for your testimony.
I can say, with confidence, that Lehman Brothers, Bear
Stearns, and the entire subprime mortgage ecosystem did not set
out to bring the global financial system to its knees. I can
say, with confidence, that the legitimately brilliant minds and
Nobel prizewinners, in fact, behind LTCM, did not set out to
trigger the Asian financial crisis, but they nearly broke the
global markets. And I can also say, with confidence, that the
deregulation of the early 1980s and bankers did not set out to
trigger the savings-and-loan crisis, but they did.
Not only that, they all typically founded their logic and
innovation, expanding access to financial services, and
arguments of inclusion, and yet they all broke the system, and
the people at the bottom of the socioeconomic ladder
systemically paid the heaviest price.
So you may be speaking earnestly when you tell us your
lofty goals, but I was here in Congress when Secretary Paulson
came to us and told us we were within days of a complete
shutdown of the global financial system. Now, I don't expect
you to understand what that was like, but I assure you it was
absolutely terrifying and one of my worst moments in Congress.
I want America to remain a global leader in financial
services innovation, and I believe that we have regulators, et
cetera, that are the best in the world. But let's do this.
Let's assume that Facebook manages to get even just 10 percent
of its current user base to the Facebook Libra wallet. Do you
understand that that would absolutely make you a systemically
risky financial institution, and that we would expect FSOC to
designate you as such, and the Fed to create a special
regulatory oversight program for Facebook accordingly? Would
you agree to this?
Mr. Marcus. Congressman, first of all I want to recommit,
we will actually--
Mr. Meeks. Yes or no? Would you agree to this?
Mr. Marcus. I do want to share that if we have 10 percent
of the Facebook--
Mr. Meeks. I only have a small amount of time.
Mr. Marcus. I want to answer your question to the best of
my ability, Congressman, and if we had 10 percent of our user
base, which is 200 million people, using a Calibra Wallet, we
would be the same size as many other non-bank payment wallets
around the world, including here in the U.S., including another
one that is part of the--
Mr. Meeks. Let me reclaim my time. You are not answering my
question, because even banks, anybody that is holding money
would be considered a bank.
Let me ask this. Do you agree that, defined simply, an
organization that holds deposits and makes loans is a bank?
Similarly, banks, in the past, did issue their own currency, or
IOUs, and clear their payments. Finally, some banks are run as
nonprofit organizations or cooperatives. Therefore, are both
Facebook and Libra organizations planning to establish bank
holding companies with full organization and capital structure
we require to protect the global financial system from systemic
risk and systemic collapse?
Mr. Marcus. Congressman, we will not engage in banking
services. We will focus on payments.
Mr. Meeks. You are taking people's money, right, and you
are holding their money, correct?
Mr. Marcus. Congressman, the same way that you have Venmo
and PayPal and Square Cash and a number of other payment
companies.
Mr. Meeks. So what you are telling me is you are not going
to organize as a bank--you didn't answer my first question--
which would put you under the regulations of FSOC and others,
so that we can make sure that there is no systemic risk here,
because of what you are doing and your size that could bring
down the entire Federal Government, the entire financial
services industry, but let me ask you one more question. I have
40 seconds.
In the Dodd-Frank Act, we established the CFPB to serve as
a financial regulator focused specifically on the best
interests of consumers. Do you believe that the CFPB currently
has authority over both the Libra organization and the Facebook
Libra wallet? And why did you not conclude--well, do you think
the CFPB has jurisdiction?
Mr. Marcus. Congressman, we are engaged in conversation
with all FSOC agencies, including CFPB, and it is not for me to
decide who has appropriate oversight.
Mr. Meeks. Why didn't you include compliance with CFPB in
your prepared testimony?
Mr. Marcus. Congressman, this is because we are currently
engaged with all of these agencies, and I wanted to share where
we were right now, at this point in time, with the knowledge
that we have at this time. But we will have a more complete
outreach by the time we are ready for launch, because we are
going to take the time to get this right.
Chairwoman Waters. Clarification. I understand that you are
absolutely opposed to FSOC's oversight and that you don't think
they should be allowed to designate you as a SIFI. Is that
right?
Mr. Marcus. Madam Chairwoman, I am not opposed to any
regulation, and we have had conversations with FSOC.
Chairwoman Waters. Thank you very much. Thank you. We will
move on to the next person.
The gentleman from Missouri, Mr. Luetkemeyer, is recognized
for 5 minutes.
Mr. Luetkemeyer. Thank you, Madam Chairwoman. Over here,
Mr. Marcus. Thank you.
You made a statement a while ago where you said that the
current system is not working, and that concerns me because I
think the current system is working. It is not working as
efficiently, maybe, as you would like to see it work, but I
think the system right now works because it is kind of traffic
control. And if you are on a country road, and you have 5 cars
going through an intersection, you don't need traffic control
and you can go, whatever you want to do, and it doesn't cost
you any time to go through an intersection.
If you have an intersection that has 30,000 cars a day
going through it, you need some traffic control to go through
there, to protect people, for safety purposes, to be able to
transact their ability to go through that thing in an efficient
way. And I think you're talking about the size and scope of
money transactions, and, yes, it costs a little bit of money
right now to be able to transfer money around the world, but
that is because of safety and security concerns, as well as the
mechanisms that are in place to be able to do that.
I think what you are trying to do is take away some of
those costs, but we are concerned about the safety and
transactional transparency, what is going on here. So the
system is working but you would like to improve it, is what I
think you meant to say a while ago. Is that right?
Mr. Marcus. Congressman, first, I really believe that the
system is not working for way too many people right now, and I
don't believe that the reason the people who earn less and who
have less pay more is because of the regulation and having KYC
and AML. I believe we can do that technology at a much lower
cost.
Mr. Luetkemeyer. What you just said, though, is you agree
that the system is working. It is just not working as
efficiently as you would like to see it, so I accept that.
A while ago, you said that you want to offer more financial
services as you go down the road, and just a minute ago, you
said you wanted to offer no banking services. So, which one is
it? Are you going to have deposits down the road that you pay
interest on? Are you going to take deposits at all? Are you
going to have lending that you are going to be doing, to some
of the customers? What kind of financial services or banking
services are you intending to grow into?
Mr. Marcus. Congressman, it is too early, but if we are to
engage in those services we will partner with existing banks
and financial institutions the same way that other payment
companies have done it. I am talking here exclusively about the
Calibra Wallet, and I think I need to be precise here.
Mr. Luetkemeyer. Okay. With regards to the specific assets
that you are going to hold in reserve, who puts the money in?
Who puts the assets in to begin with? Who owns those assets?
What do you do with any dividends or interest or any returns on
those investments that you make? Who shares in those profits?
Mr. Marcus. Congressman, the way the reserve is built is if
consumers buy into Libra, the fiat money they use to buy Libra
ends up in the reserve and is actually custodied with large
banks, or potentially a better form of custody, even, depending
on the outcome of some of the conversations we're having with
the G-7 working group and the recommendations that they will
come with. And so the reserve is always proportional to the
number of Libra coins in circulation.
And if the reserve generates a return, it will be used for
two things: number one, to pay for the Association and the
operation of the whole Libra network; and number two, to return
some of the investment back to original investors and backers
of the system who will put in a lot of resources to get it off
the ground.
Mr. Luetkemeyer. One of the things as we look at this is,
if I have a business and I am trying to sell a thousand widgets
to some company in France, and I want to use the Libra system
to facilitate this, when I get done with this transaction, I
have an income off of that, and so I have to report that to the
IRS. Is there a cost to change back from the Libra to the
dollar so that I then can explain to the IRS the kind of
transaction and the kind of money I earned off of this
transaction? Is there a fee for doing that when you transfer it
back from Libras to dollars?
Mr. Marcus. Congressman, there will be probably small fees
because there will be agents and exchanges that will be
involved in the process of converting fiat into Libra and back
to fiat. But from an IRS and tax standpoint, as far as the
Calibra Wallet is concerned, we will have the proper tools
built into the product so that people can report their taxes.
Mr. Luetkemeyer. My time is up. Thank you.
Chairwoman Waters. The gentleman from Georgia, Mr. Scott,
is recognized for 5 minutes.
Mr. Scott. Mr. Marcus, I have listened very attentively to
your testimony and to the response to several of my colleagues'
questions here--Ms. Waters, Mr. McHenry--and you keep
mentioning your White Paper as a defense to the answer to the
questions. But I want to call your attention to the fact that
neither your White Paper nor your subsequent Facebook posts
offered any concrete details as to how you plan to implement or
enforce strong anti-money-laundering, how you plan to enforce
Know-Your-Customer protections, and most importantly, to ensure
what all of us are concerned about: the safety of our financial
system.
Right now, tell us what specifically--do not say the White
Paper--what are you going to do--what do you see as the
responsibilities of Libra to combat anti-money-laundering to
protect our financial system? Could you tell us right now, just
point at it?
Mr. Marcus. Yes, Congressman. There are wo parts to that
answer: first, the Libra Association itself. The Libra
Association will be based in Switzerland but will still
register with FinCEN, and as a result we will have an AML
program, and we will have guidelines for all the members to
enforce the right KYC standards, and the AML/CFT programs.
As far as the Calibra Wallet is concerned, for every
account opened we will ensure that everyone KYC's appropriately
with government-issued ID, and we will have very strong AML
programs.
Mr. Scott. Okay, but what about this, Mr. Marcus?
Currently, the full responsibility to file suspicious activity
reports (SARs) is on our banks or other money services
businesses, and law enforcement uses these SARs to investigate
and prosecute criminal terrorists. And in your July post, you
spoke only of the ability for these law enforcement and
regulators to conduct their own analysis of off-the-chain
activity. Do you feel that this represents a shift away from
Libra's own responsibility to monitor and enforce anti-money-
laundering or customer protections?
Mr. Marcus. No, Congressman. The reason I wrote this is
that the approach that Libra is taking is using blockchain, and
blockchain gives additional visibility to law enforcement and
regulators compared to the current system to conduct their own
investigations instead of solely depending on banks or
regulated entities' self-reporting. But that does not mean that
we on the Calibra Wallet side and all of the other members
operating on top of this network will not have very strong AML
programs and will not file suspicious activity reports.
Mr. Scott. All right. So, now you are marketing this
currency as a new entity to financial services, and with that
will surely come new and innovative methods of committing
financial crimes. What you bring is new; criminals out there
are going to invent ways to deal with it.
Let me ask you, what are you anticipating as some of the
new ways that criminals may attempt to extort and exploit Libra
for illicit use? And how do you plan to combat this? You are
planning something new, but you also have to have the ability
to be able to not just look down the road but to be able to
look around corners to see what that criminal has in store for
us. What say you?
Mr. Marcus. I could not agree more with you, Congressman,
and I believe that we can improve on the current system because
we have a chance this time around to think through the way that
the network is designed, the way that the on- and off-ramps are
properly regulated with proper KYC controls, the proper way to
monitor activity and report it with new technologies. And I
think this system might be potentially better on these fronts.
Mr. Scott. Thank you, Mr. Marcus.
Chairwoman Waters. The gentleman from Michigan, Mr.
Huizenga, is recognized for 5 minutes.
Mr. Huizenga. Thank you, Madam Chairwoman. And there is so
much to cover and so little time. I am going to try to go
through and get to some new territory.
I was not planning on doing this, but you used the term,
``fiat currency'' a couple of times, and I thought I knew what
that meant, but it seemed a little odd that you were using it
in the way that you were. And so I went to Wikipedia. ``Fiat
money'' is a currency without intrinsic value that has been
established as money. Fiat money does not have use value and
has value only because a government maintains its value or
because parties engage in exchange to agree on its value.
Wikipedia might need to update its definition a little bit
because we see that people are using cryptocurrencies with no
backing. And I am curious, why do you feel the need to have a
reserve? Because it strikes me that you are using a fiat
currency to create a fiat currency and to have a reserve of
that.
Mr. Marcus. Congressman, the reason we have a reserve is
that we believe that to create a high-quality payment tool, we
need that digital currency to be very stable. And as we have
seen with a number of other currencies out there, digital
currencies, they are very volatile, and as a result they are
not a very good medium of exchange or payment tools.
Mr. Huizenga. So it is a trust issue?
Mr. Marcus. No, Congressman. It is a stability issue. It is
an inherent quality that--
Mr. Huizenga. I guess, stability and trust.
Mr. Marcus. --good money has, which is, if it is stable,
then it is good money; if it is not stable, then it is not.
Mr. Huizenga. But couldn't your stability be influenced by
people's trust levels of the currency?
Mr. Marcus. Yes and no. In other words, the way that--
Mr. Huizenga. You fit perfectly into Washington with both a
yes and a no.
[laughter]
Mr. Huizenga. It does strike me, though, as a little bit,
as many nonbanked and underbanked, as you have said, is one of
the goals of trying to get in it, get them involved in the
financial space, oftentimes they are not in that space because
they have a distrust of financial institutions. And it does not
take anyone much time to find some well-publicized issues of
trust with a number of the companies that are involved in
Calibra. And so I am not sure exactly how you are going to
address this, but let me get back to the regulatory
implications of this.
I had the pleasure of being the Chair of the Monetary
Policy and Trade Subcommittee at one point, as well as the
Capital Markets Subcommittee, and I am the Ranking Member now
on that. And as I have always said, as we have been looking at
these crypto assets, cryptocurrencies, and as Ranking Member
McHenry asked, is it a security? Is it an exchange-traded
product? What exactly is this? Is it fish or fowl? And it seems
that it is more of a platypus to me, that it kind of evolves in
its different parts. And I am curious, are you able to actually
maintain the core and essence of a cryptocurrency and asset if
you are really under all this regulation?
Mr. Marcus. We believe we can, Congressman, because we
believe that in order for any form of digital currency and
payments system to reach mass--
Mr. Huizenga. Would you like to see all of the other crypto
assets and cryptocurrencies under the exact same regulation
that you are? Or are you trying to create and carve out this
new product?
Mr. Marcus. Congressman, I cannot speak for other crypto
assets--
Mr. Huizenga. Certainly, you must have some thoughts on
that, because if you are looking at it, saying, well, that is
not working for them, otherwise why would you be coming and
asking for this regulatory burden?
Mr. Marcus. Because we believe that this is a digital
currency. If you compare it to other digital currencies or
cryptocurrencies, it serves a different purpose. This one is to
serve a purpose of payment. It is a payment tool. And as a
result, when it reaches so many people, we believe that
appropriate regulation and oversight is required.
Mr. Huizenga. As we were having a little confab up here, my
friend, French Hill, said you might be the equivalent of
American Express traveler's checks of days of old.
Mr. Marcus. I do not think of it that way, Congressman,
but--
Mr. Huizenga. Okay. For the benefit of the lower dais and
the staff, those were things that were actually paper and you
carried them with you.
[laughter]
Mr. Huizenga. You bought them at a bank. You actually put
in a fiat currency towards it.
All right. My time has dwindled. I'm sorry. We have a lot,
and I have one last quick thing, which is the Chair had
asserted that you had not been in contact with FINMA, with the
Swiss. Is that true or not true? Because you had said earlier
that you have been.
Mr. Marcus. Congressman, we have been in touch with FINMA.
The other agency was the privacy agency that we have not
reached out to, but we have had continuous engagement with
FINMA.
Mr. Huizenga. I will be following up with some written
questions, so thank you.
Chairwoman Waters. The gentleman from Colorado, Mr.
Perlmutter, is recognized for 5 minutes.
Mr. Perlmutter. Thanks, Madam Chairwoman, and I am going to
kind of take off where Mr. Huizenga just left off, just to help
me understand the deal.
So, I have $5, and I go and I buy one token of Libra for 5
bucks. You take that 5 bucks, and what do you do with it?
Mr. Marcus. Congressman, the $5 you would use to buy Libra
would end up being in the reserve, and so in the current
contemplated basket, it would mean that 2\1/2\ dollars will be
in the reserve and another 2\1/2\ of your dollars will be in a
basket of euro, pound, yen, et cetera, in the reserve. And as a
result, because the reserve is one for one, your Libra unit of
value will always be backed by the same value in the reserve at
all times, guaranteeing stability and low volatility.
Mr. Perlmutter. And that reserve is in the Cloud? That
reserve is in a bank? That reserve is where?
Mr. Marcus. That reserve is custodied with very large
global banks that provide custodial services to a number of
companies, but this is something that we are also in
discussions on with the G-7 working group to ensure that there
is proper regulatory oversight in how the reserve is managed
and how it is custodied as well.
Mr. Perlmutter. All right. We have this medium, this
currency of some court, called ``Libra,'' and now it is half
here, and half there. I want to use it. I want to buy something
in Paraguay, which, if I were using dollars, was going to cost
me 4 bucks. So how do I do that? I then go to Calibra, and
Calibra is like my credit card, and it wires four-fifths of a
token of a Libra to Paraguay?
Mr. Marcus. Congressman, you would use any of the wallets,
Calibra being one of them, to transfer the money that you
wanted to transfer to that other country. And the way it would
work is the same way that you would use any payment apps here
in the U.S. like Venmo or PayPal.
Mr. Perlmutter. It is a wiring system, more or less, except
that I am using Libra. Calibra is a wiring system. Venmo, you
know, I Venmo my daughter 20 bucks, okay? It is done, it is
wired, it is over. I could have gone to the bank, and they
could have wired it to her. But I use Venmo.
Mr. Marcus. It is very similar to your experience on Venmo,
Congressman.
Mr. Perlmutter. I think what we are struggling with is,
what are you? I mean, you are a medium. You are an
intermediary. You are facilitating financial transactions. And
it is not as if we have not had problems with that in the
history of the world. You have a money changer in the process
of turning my buck into a Libra into a euro. So, that is
biblical. The transaction is something we have had from the
beginning of time, but it is a faster kind of wiring and more
immediate transaction. Am I mistaken in that?
Mr. Marcus. No, Congressman. It is also much, much lower
cost for the people who end up needing it the most.
Mr. Perlmutter. And I appreciate that, but for us, we have
seen banks fail. We had the old saying, ``What is good for GM
is good for America.'' And they had to go through a Chapter 11
back in the recession. I do not think that will happen to
Facebook or whomever is backing this whole process. But it is
possible, it is certainly possible. And so our responsibility
is to your depositors or the people who buy these tokens or who
use your credit card system.
We are trying to figure out what kinds of regulations, and
I think you are getting really good questions from both sides
of the aisle because we all have this same question for you.
And that is the resistance you are feeling, because we think
you are a bank, but you are not quite like a bank. And if you
are a bank, we regulate the heck out of you because we have
seen a lot of people lose money where there has not been
regulation. That is the resistance that I feel. I want to
support your innovation. I want to support the efficiency that
you people believe you are bringing to the table. But I also do
not want anybody getting hurt here.
Mr. Marcus. Congressman, we are completely aligned on that.
We do not want anyone hurt, and we want the proper regulatory
oversight, and this is why we have announced our plans very
early, and we are here and engaging with all of the regulatory
bodies here in the U.S. and around the world to ensure that we
have the right regulatory framework and oversight and we
address all the concerns that were raised today, yesterday, and
that were raised by Chairman Powell and others.
Mr. Perlmutter. Thank you for your testimony.
Chairwoman Waters. The gentleman from Wisconsin, Mr. Duffy,
is recognized for 5 minutes.
Mr. Duffy. Thank you, Madam Chairwoman. Mr. Marcus, how are
you doing? I have to tell you, this is absolutely brilliant,
innovative, creative, and to come from Facebook and to leverage
your network is pretty amazing. I was shocked at how bright it
was, not to hit a sore point. But, quickly, who gets to use
Calibra and Libra?
Mr. Marcus. Anyone can open a Calibra account, go through
KYC, in countries where we can operate.
Mr. Duffy. This is a $20 bill. Do you know who can use a
$20 bill?
Mr. Marcus. Yes, Congressman.
Mr. Duffy. Who can use it? Or maybe a better question is,
who cannot use a $20 bill?
Mr. Marcus. I believe the answer to your question is
everyone, anyone--
Mr. Duffy. Everybody can use a $20 bill. This $20 bill does
not discriminate on anything. You could be a murderer. You can
say horrible things. You can say great things. This $20 bill
can be used by every single person who possesses it.
With regard to your network, can Milo Yiannopoulos or Louis
Farrakhan use Libra? And I bring that up because both of those
individuals have been banned from Facebook.
Mr. Marcus. Congressman, first I want to say that--
Mr. Duffy. No. A simple question. We only have 5 minutes.
You have to answer a question so we can do the best job in
vetting what you want to do.
Mr. Marcus. I know, but we must be thoughtful about those
issues, Congressman, so I am trying to respond appropriately.
On one side, I just want to stress that a platform that
enables you to communicate and share ideas, while Facebook we
believe is a platform that accepts ideas across the political
spectrum, it has to protect--
Mr. Duffy. I somewhat disagree with that, but--
Mr. Marcus. --from hate speech and others, and so that is
one thing. When it comes to money--
Mr. Duffy. Can Milo use that? Can Louis Farrakhan use this
system? They have been banned from Facebook. Can they use it?
Yes or no?
Mr. Marcus. Congressman--
Mr. Duffy. Yes or no?
Mr. Marcus. I do not know yet, Congressman, because--
Mr. Duffy. Okay. If I am a gun dealer, I can use a $20
bill, because if it is a lawful gun, that happens all across
America. On Facebook, you do not allow gun sales. So can a gun
dealer who is abiding by American law, can they use your
system?
Mr. Marcus. This is a question that is really important to
get right, Congressman, and we have not written a policy yet--
Mr. Duffy. See, and that is what concerns me. I love what
you are doing, but when you say, ``we at Facebook are going to
set the social policies of who can use this cryptocurrency'',
in a way, you are going to set the social policy of who is in
and who is out. And what is great about this is everybody gets
to use it. And what I fear is maybe in a roundabout way what is
happening in China with their social scoring--if you get the
right social score, you can get a loan. You can get an
apartment. You can access the train. Maybe Facebook is doing
the same thing here where, if you meet our social standards,
which a lot of people here do not necessarily agree with your
social standards though we use your platform, that is the way
you access the network, so we have to conform our behavior to
the standards of Facebook to be on the network, where I think
the right answer would be, listen, everybody, if you are
abiding by the law, has access to this system.
Mr. Marcus. Congressman, personally, I believe that we
should not be in the business of deciding what people can do
with their money or not. But that being said, this is an
important question, and we need to be thoughtful about the
policy.
Mr. Duffy. I think you are going to get some major pushback
when we look at your network and you say who is on and who is
off, and you are the judge and the jury. And for this system, I
think you are going to see a lot of pushback from both sides.
Go ahead, quickly.
Mr. Marcus. This is why I believe we need to be very
thoughtful about this, and my commitment to you is--
Mr. Duffy. I think the thoughtful answer is, I am going to
behave like the fiat currency. The thoughtful answer is, if you
abide by the law, you have access to it. That is the thoughtful
and the right answer. But you have not given me that, which
gives me great pause and concern that the model of Libra is
going to be the model of Facebook where you get to decide, and
that concerns me.
I am also concerned about the data privacy and how you are
going to use the data. A lot of us have had concerns about the
data use on Facebook. How will you use this data? Because what
we post on Facebook and who we are friends with is one thing.
How we spend our money is really powerful information, and you
have access to that, too. And I would like to dig deeper with
you on that point, but also, the freedom and liberty that comes
from the $20, I think you should offer that same freedom and
liberty on your network, and maybe we can talk more about that
later. And I appreciate you coming here and testifying, and
kudos on the innovation.
I yield back.
Mr. Marcus. Thank you, Congressman.
Chairwoman Waters. Thank you.
The gentleman from Connecticut, Mr. Himes, is recognized
for 5 minutes.
Mr. Himes. Thank you, Madam Chairwoman. Mr. Marcus, thank
you for being here. This has been one of the more interesting
hearings we have had in a little while.
In the last Congress, I had the honor of chairing the new
Democrat Coalition, 104 Democrats, and if we do one thing, we
get excited about innovation. But this is not an app that
measures your heartbeat. This is a complete overhaul of the
circulatory system of the global economy. A lot of the concern
you are hearing here I think is just around its sort of
shocking ambition.
I want to ask you a specific question and take you through
a specific scenario that gets at a larger concern that I have,
and just so that folks at home can kind of follow along, let us
just imagine that I am an American user of Libra, and my rent
is $1,000 a month, and just for simplicity's sake, let us say
that this month it is 1,000 Libra a month.
Now, because Libra is backed by a basket of currencies, let
us just imagine that one of the currencies, sterling, devalues
dramatically in 2 weeks. I think, if I recall my banking and
economic days, that I will find that in the next month, my rent
in Libra will be--let's just pick a number--1,100 Libra but
still $1,000 a month. What I am getting at is that users will
have the profoundly unfamiliar experience of assuming foreign
currency risk. Am I correct in that?
Mr. Marcus. Congressman, yes, there will be fluctuation,
but the way that we are intending to design the reserve, again,
in consultation with the G-7 working group of finance
ministries and central banks, is going to be in such a way
that--we have looked historically at the volatility that the
dollar would have had in the last 20 years compared to the
Libra with the proposed basket. And if you look at the fact
that half of the basket is dollars, it should be fairly stable.
That being said--
Mr. Himes. But wait, wait. You acknowledge--I got it. You
acknowledge that consumers everywhere, users of Libra, will for
the first time, if they have previously been using their
domestic currency to purchase domestic goods, experience
foreign currency risk.
Mr. Marcus. They will have some degree of volatility--
Mr. Himes. Right. Okay. I think that is an important point
for people to understand. And I am not saying that is good or
bad, but traditionally, the regulatory apparatus here has said
that if you are going to assume an unfamiliar risk, that risk
will be disclosed to you with full transparency. And the
mechanism we have traditionally used to disclose that kind of
risk is through public filings and disclosure.
Now, you said this is not an exchange-traded fund (ETF). I
am a former banker. This looks to me exactly like an exchange-
traded fund backed by a series of short-term instruments in
foreign currency. It looks exactly like an ETF to me. It even
has a creation and remittance mechanism. Elaborate for me on
why this is not an exchange-traded fund. And if there is any
ambiguity, what I really am getting at here is you need to
clear--if, in fact, the regulators determine that it is an ETF,
you need to clear 1940 Act registration hurdles, which that may
sound technical, but that is designed to protect that rent
payer who discovers that their rent went up for reasons they do
not understand.
So, tell me why this is not an exchange-traded fund?
Mr. Marcus. Congressman, there are three points of why we
believe it is not. Despite the fact that you are right that it
uses some operational mechanisms that are similar, we believe
that it is not because Libra is a payment tool. And typically,
if the question you are asking is whether we--
Mr. Himes. But wait, I need to stop you there. The SEC does
not say if you are a payment tool, you are not an exchange-
traded fund. The SEC says if you have a security that is backed
by other securities, you are an exchange-traded fund. And you
may quibble with me that you are not a security, but you are
certainly backed by other securities. Is that not correct?
Mr. Marcus. Congressman, it is mainly currencies, but I do
want to answer your question. First, we believe that no one
will buy Libra as an investment because it is designed for
stability. That is number one.
Number two is that when you look at the definition of the
securities or the Howey Test that has been used by the SEC, it
actually uses the idea that you invest for a profit that will
result in the management of the product, and this product is
not a product, it is a payment tool. It is not going to be
actively managed. And you cannot use an ETF for payments. This
is actually designed as a payment tool to enable people to
retain value, not to--
Mr. Himes. Since I am almost out of time, let us go back to
my original question. How will you make transparent what you
acknowledged is foreign currency risk that consumers will face?
How do you envision doing that?
Mr. Marcus. Congressman, as far as the Calibra Wallet is
concerned, you will have transparency and education built into
the product.
Mr. Himes. Okay. Thank you. My time has expired. Thank you,
Madam Chairwoman.
Chairwoman Waters. The gentleman from Ohio, Mr. Stivers, is
recognized for 5 minutes.
Mr. Stivers. Thank you, Madam Chairwoman. And welcome, Mr.
Marcus.
We all say we want to encourage innovation, and I
appreciate your innovation, and I really do want to encourage
innovation. And I would just like to kind of walk through a
timeline so we know where we are in the innovation process
here. And correct me if I am wrong, or I will just ask a couple
yes-or-no questions. It was about 60 days ago you announced the
idea, correct?
Mr. Marcus. Congressman, it was on June 18th, yes.
Mr. Stivers. June 18th. The White Paper was on June 18th,
but I thought in May, you put out--there was nothing in May?
[Witness nods head no.]
Mr. Stivers. Okay. We are 30 days from the White Paper. So,
this is a really early congressional hearing. And with that, I
understand that you will not have the answer to every question.
I do appreciate your commitment to be willing to ensure that
you meet all the regulatory hurdles and comply with the law.
The value I see in this innovation is, of course, for cross-
border payments because that is so expensive today, and,
second, for the unbanked, and you talked about both of those
domestically. But can you just tell us what is in it for
somebody domestically who already has a bank account and is not
looking for cross-border payments? I do not see a big
application for those folks.
Mr. Marcus. Congressman, I am glad you asked, because I
doubt that people will pay their rent with Libra any time soon,
to just answer the question from earlier. The general use case
that we believe will happen in the U.S. when you have a bank
account and you are properly banked is that if you want to send
money abroad, you will connect your debit card with one of the
wallets. You will buy just the right amount of Libra you need
to actually make that cross-border transaction. You will save a
lot in the process, but then if money comes back, you will
redeposit it back to your bank account.
Mr. Stivers. And so you do not expect people to be holding
Libra because the point is to have a stable currency, not a
volatile currency. That is where the value comes in, in cross-
border payments, because about 60 percent of the world's
population lives in a country that does not have a stable
currency. I appreciate that, and I think there is some value in
that.
I do have some concerns about the potential of money
laundering. As you know, cryptocurrencies and the Silk Road
sort of started as a way to anonymously finance illicit
activity or as one of the early things that it was used for. I
am concerned about cross-border payments that then are going to
people who have sort of bad intent, and I am curious, will you
put a limit on the amount of any individual transaction? And I
know, again, it is early. I recognize the timeline of where we
are. But do you expect to put a limit on how much somebody can
transfer in Libra to someone else?
Mr. Marcus. Congressman, we are going to continue our
engagement notably with Treasury on this topic, and my
expectation is that there will be limits, depending on where
the money is sent or where it is coming from. My hope is that
between two consumers of American-regulated wallets like
Calibra and others who will have proper KYC and AML, we can
avoid having artificial limits. But we will probably need
limits across the network to ensure that those activities can--
Mr. Stivers. And I am not asking you to put artificial
limits in. I was just curious, and obviously I want to make
sure you comply with Know Your Customer and anti-money-
laundering because that is complying with the law, which you
said you would do, and I think that is really important.
Mr. Marcus. We will, Congressman.
Mr. Stivers. Do you expect to have the Libra Association
vote to exclude companies like Chick-fil-A or anybody else that
might have social views that you disagree with?
Mr. Marcus. Congressman, this is actually not going to be
my decision or Facebook's decision. It is going to have to be a
decision that is going to be made by the council of members of
the Libra Association and the Libra Association itself.
Mr. Stivers. And I recognize that. I will just urge you to
not use this for social engineering but to use it to meet the
intent that we talked about of helping the unbanked and helping
people with cross-border payments. I hope that is the purpose
and not just social engineering.
I appreciate your time today. There are a lot of unanswered
questions. I may send some in writing. I do appreciate the
innovation. I appreciate your time, and I look forward to
working with you as you work to make sure that you follow every
law and regulation. I know it will be a challenge because you
will be dealing with 200 countries' regulations.
Thank you so much.
Mr. Marcus. Thank you, Congressman.
Chairwoman Waters. The gentleman from California, Mr.
Sherman, is recognized for 5 minutes.
Mr. Sherman. Madam Chairwoman, we need to get Mark
Zuckerberg here. This is the biggest thing or it tries to be
the biggest thing this committee will deal with this decade.
And while we have one of his employees here, this is
Zuckerberg's program.
Now, we are told by some that innovation is always good.
The most innovative thing that happened this century is when
Osama bin Laden came up with the innovative idea of flying two
airplanes into towers. That is the most consequential
innovation, although this may do more to endanger America than
even that.
People call this the ``Libra.'' It is not the Libra. If it
finally happens, nobody is going to call it a ``Libra.'' They
are going to call it a ``Zuck Buck.'' This is Zuckerberg's
baby.
Mr. Marcus gave me two promises in our conversation
yesterday, both of which he knows they will not comply with.
First, he promised that all the Know Your Customer and
anti-money-laundering is going to be adhered to. But that
applies only to the Calibra Wallet, and he hopes to have
hundreds of other wallets created by others. Keep in mind as to
Bitcoin, 46 percent of the transactions, according to one
academic study, are for drug dealers and other nefarious
operations. Hamas advertises they want Bitcoin contributions.
Bitcoin, however, has a problem. There is no off-ramp. There is
no way to just go buy something with a Bitcoin. You can
eventually with a Zuck Buck.
And, finally, the White Paper put out by Facebook says the
Libra protocol does not link accounts to real-world identity. A
user is free to create multiple accounts by generating multiple
key pairs. So this is a godsend to drug dealers and sanctions
evaders and tax evaders.
Zuckerberg has billions, but he does not have the authority
to print more until he gets this. We went from the U.S. dollar
being linked to gold, and we only printed a number of dollars
equal to the gold we had, to the dollar becoming valuable in
and of itself, and now how many dollars we print has nothing to
do with how much gold we have stored.
Mr. Marcus promised me that they would never do that, but
then he testifies here that the Libra Association will make all
the decisions and Facebook will not be in control. So much for
those promises.
America's power comes from the power of the dollar more, I
think, than the power of our military. It lowers the interest
rates in the United States by at least $1,000 a family. The
seigniorage has allowed the Fed to transfer $100 billion in
some years, often less, to the Treasury. Our sanctions in Iran,
which I have worked on for over 20 years, are effective only
because of the power of the dollar, and we are able to go after
human traffickers, drug dealers, and tax evaders because of the
power of the dollar.
We are told that they are going to solve two problems with
this. They are not going to solve those problems. Cross-border
transmission, let us do that in dollars, or let us send
quetzals to Guatemala. You have a multi-billion-dollar company,
a trillion-dollar-company. Help people make those transmissions
at low fees, but use dollars or use the local currency.
And then we are told they are going to deal with the
unbanked. If they wanted to help the unbanked, they would not
be using a cryptocurrency because cryptocurrencies are illegal
in India, the place where they have more unbanked than anywhere
else. They do not want to solve those problems.
They want to solve two other problems: problem number one,
Zuckerberg cannot print money-- yet; and problem number two,
Zuckerberg is under attack because he invades the privacy of
ordinary Americans and sells it to the highest bidder. He needs
to be an advocate for privacy. And so, he is creating a device
which will provide privacy to drug dealers, human traffickers,
terrorists, tax evaders, and sanctions evaders.
We need Zuckerberg here because we need to tell him that he
probably has the power to push this through. He will throw
around tens and hundreds of millions of dollars in Washington.
His supporters will get huge Zuck Bucks in U.S. dollars. A
hundred lawyers will tell him that what he is doing is legal
and, therefore, he is safe. But someone with an understanding
of the politics of this country needs to explain to Mr.
Zuckerberg that if cryptocurrency is used to finance the next
horrific terrorist attack against Americans, a hundred lawyers
standing in a row, charging $2,000 an hour, are not going to
protect his rear end from the wrath of the American people.
This is an attempt to transfer enormous power from America
to Facebook and a number of its allies. We need Zuckerberg
here.
Chairwoman Waters. The gentleman from Kentucky, Mr. Barr,
is recognized for 5 minutes.
Mr. Barr. Thank you, Madam Chairwoman.
Given the commentary we have heard in this committee
hearing today, and some of the very pointed questions directed
your way, Mr. Marcus, I think we are discovering why a decision
has been made to locate in Switzerland as opposed to the United
States.
Having said that, I do want to address some of the concerns
that have been raised today and ask you about them. I think
there are some legitimate questions that we can ask, but it
does seem like in Washington, whenever the private sector
produces some kind of innovation or new discovery or new
advancement, politicians and bureaucrats rush to criticize and
regulate, and there is always a presumption that the private
sector innovating is a bad thing. I think the presumption
should be totally reversed. I think we should presume that
innovation is good; it presents enormous opportunity for
financial inclusion, reducing friction in transactions. The
opportunities that are created by this innovation is laudable.
It is to be commended.
That is not to say we should not ask questions, but the
presumption in this hearing room today seems to be in the wrong
place.
Let me ask you about the possibilities, the opportunities
that this presents, particularly with respect to financial
inclusion. What percentage of users on Facebook are underbanked
or unbanked in the United States, Mr. Marcus?
Mr. Marcus. Congressman, I do not have the answer for
Facebook specifically, but I know that over 8 million
households in the U.S. are--
Mr. Barr. Why don't you know how many Facebook--Facebook is
often criticized for invading the privacy of Americans. Why
doesn't Facebook know approximately how many of its 2.6 billion
users are unbanked or underbanked?
Mr. Marcus. Because there is no way for us to know that
information.
Mr. Barr. Okay. Do you have any idea how many users of
Facebook live in rural America or so-called bank deserts?
Mr. Marcus. I do not have the exact number, Congressman,
but I can find out and follow up with your office.
Mr. Barr. Well, if you know or do not know, we would like
to know that. How will Libra and Project Libra promote greater
financial inclusion in the United States?
Mr. Marcus. Congressman, we believe that having the ability
to access digital money where you can safeguard the value that
you want to safeguard but, more importantly transact with the
people that you want to transact with for free, simply with
just a $40 smartphone and a basic data plan, is something that
would enhance the ability for people even here in the U.S.,
despite the fact that we believe this is not going to be the
main market for Libra, it will solve problems for lots of
people here in the U.S., notably the very people who are
unbanked today and send money abroad home, which makes for the
bulk of the income of their families back at home.
Mr. Barr. I will not ask a question, but I will just jump
onto the point that Mr. Duffy was making earlier. I think that
the opportunity for financial inclusion with Project Libra is
enormous and very positive. I share Mr. Duffy's concern about
what that inclusion actually means, and to the extent that
Facebook and other social media enterprises have been
criticized for political bias, I think that is important to
earn the credibility of the American people that this platform,
this financial platform be viewed and earn the confidence as a
neutral player so that the adoption can serve all and really
serve that ultimate purpose of financial inclusion.
A final question, and this relates to the testimony that
you have delivered that this project will not compete with
central banks or interfere with monetary policy. We heard from
the Chairman of the Fed, Jay Powell, recently that whereas
Bitcoin or other digital currency endeavors really do not
present a challenge for central banks, this could, because of
Facebook's 2.7, 2.8 billion users and 1.6 billion daily users,
that it does have the potential for widespread adoption big
enough to potentially displace the U.S. dollar as the world's
reserve currency and, therefore, interfere with central banking
tools, interfere with monetary policy.
Tell me how Libra will not undermine sovereign currencies
and the power of central banks. Or is the very point to
undermine central bankers and to provide greater freedom away
from central banking?
Mr. Marcus. Congressman, I want to be very clear. We do not
want to compete with the dollar or with sovereign currencies.
This is why they make the reserve. And even in our wildest
dreams, never will we come anywhere close to the size of any of
the currencies that you mentioned. But we will make sure to
work with the Fed, with the Financial Stability Board, and with
the G-7 working group internationally to ensure that the proper
controls--
Chairwoman Waters. The gentleman's time has expired.
Mr. Barr. Thank you.
Chairwoman Waters. The gentleman from Illinois, Mr. Foster,
is recognized for 5 minutes.
Mr. Foster. Thank you, Madam Chairwoman, and Mr. Marcus, I
would like to also thank you, as the co-Chair of the
Congressional Blockchain Caucus, as well as perhaps the only
blockchain programmer and AI programmer in the U.S. Congress, I
want to thank you for having rather detailed individual
briefings with me on this.
There are a couple of things I was promised during those
briefings that my staff tells me have not yet been delivered.
One of them is when we got into a detailed discussion of how
you would prevent this from being used for ransomware, I was
promised that there would be an answer. Are you prepared to
give that answer yet? If not, I would like to drill down into
just how anonymous these transactions in Libra actually would
be.
Mr. Marcus. Congressman, ransomware is a really important
issue, and the way we are thinking about it as far as the
Calibra Wallet is concerned--
Mr. Foster. No. I am interested in Libra, all right? Libra,
which is, as I understand it, an anonymous bearer instrument.
Is that correct?
Mr. Marcus. Congressman, it is not anonymous--
Mr. Foster. Is self-custody allowed in Libra?
Mr. Marcus. Congressman, yes, within limits. And as a
result, we believe that especially in countries like the U.S.
and others, you will have all the wallets that will have--
Mr. Foster. I am not worried about wallets. I am worried
about abuse of self-custody. If I own the cryptographic code
for a piece of Libra, do I own that Libra, full stop, or not?
Mr. Marcus. Yes, Congressman.
Mr. Foster. Yes, you do. Okay. Now, if I go on the Dark Web
and start offering to trade that, do you have any technical way
of stopping me from doing that anonymously?
Mr. Marcus. Congressman, yes, because there are on- and
off-ramps, and all of the on- and off-ramps are properly KYC'd.
Mr. Foster. All of them?
Mr. Marcus. Yes, that will be--
Mr. Foster. Once a large fraction of Libra would be
transferred into self-custody and then there starts to be a
significant flow among the self-custody entities out on the
Dark Web or other places, how do you prevent that from actually
allowing things like ransomware?
Mr. Marcus. Congressman, again, it's a very important
problem, and the way that we are tracking--the way that the
association will enable tools so that law enforcement and the
different wallets can understand where the movements are
happening to prevent those issues is going to be one of the
ways that we will address this. The other way that we will
address--
Mr. Foster. We are going to have to be absolutely dependent
on the fact that every single wallet is in a regulatory regime
that we trust, is that right? So if there is one wallet out in
some set of islands or something like this that does not follow
U.S.--are we just out of luck there and that all of the illicit
transactions will flow through there?
Mr. Marcus. No, Congressman, because if you are a U.S.
resident and you want to use a wallet, the wallet offering
services in the U.S. will need to be properly regulated in the
United States.
Mr. Foster. All right. We will have to have an ongoing
discussion.
I would like to also mention cybersecurity. One of the main
jobs of FSOC is to oversee cybersecurity at systemically
important firms. Now, you have seen fit to make a new
programming language for here, and I spent a little while
looking over that. There is some creative stuff in it. Some of
it is pretty much copying other things that have been done
before. Some of it is brand new. But even if it had zero
creativity in it, there would still be a problem that one wrong
line of code could generate a hole that could crash the entire
Libra ecosystem. And so the governance of that language and all
the infrastructure, from what I understand from my reading of
it, is that you are going to be distributing runtime
executables and things like that as well. And so that all of
that has to be bulletproof cybersecurity, and I was wondering
how you are going to deal with the governance of that?
Mr. Marcus. Congressman, two ways. First, we agree with you
that this is of absolute importance, and the way we are dealing
with that is that the move language that you are referencing
will have formal verification in place to avoid issues that--
Mr. Foster. To the extent that there are no compiler bugs.
Mr. Marcus. Yes, but the the compiler will not execute the
code if the code is not formally verified, and we have the
chance of having David Dill, who is a professor from Stanford
in formal verification, helping us with this issue.
The other thing that I want to say is that the association
will have guidelines on what third-party code can be published
or not. And at the very early stages, it will be very limited
to a set of templates that will avoid the issues that you are
raising.
Mr. Foster. All right, but it will be an ongoing target
because if Libra is taken to scale, it will be an enormously
fat target for cyber attacks, intrusion, insertion of inside
threats, and so on. So, this is something that, in terms of
overall financial stability, is probably as crucial as anything
else.
Thank you. I yield back.
Chairwoman Waters. The witness has requested a 10-minute
break. The committee stands in recess.
[recess]
Chairwoman Waters. The committee will come to order.
The gentleman from Colorado, Mr. Tipton, is recognized for
5 minutes.
Mr. Tipton. Thank you, Madam Chairwoman. Mr. Marcus, thank
you for being here. This is a fascinating conversation, and I
think a lot of the questions are expressing concerns not for
innovation but just in terms of what we are going to be seeing
come out the end once the process is completed.
I did have one question, because there does seem to be some
confusion, and you didn't actually clarify, in terms of exactly
what we are talking about with Libra, in terms of being a
security, an ETF. You said possibly a commodity that could be
there.
Along those lines, when you are looking at your
association, the Libra Association, you have Visa, MasterCard.
Are you doing any active recruitment, talking to any other
financial institutions to be in the Association?
Mr. Marcus. Congressman, the Association membership is
actually open, as long as members meet the criteria that has
been published. Of course, that could be subject to change and
is in control of the Libra Association. But we expect that
there will be a number of financial institutions, including
banks, joining its ranks.
Mr. Tipton. Will that have continued monitoring as you are
bringing in association members, just to make sure that bad
actors don't potentially get into the association?
Mr. Marcus. Yes, Congressman.
Mr. Tipton. One of the things that we have had a fair
amount of conversation on is Know Your Customer, the ability to
be able to identify who those people are. And I wanted to be
able to follow up a little bit on that, in terms of the
commitment that you are seeing coming out of Calibra.
We passed and signed into law last year the Mobile Act, to
be able to open up a bank account with your driver's license.
But it was followed with commitment from the banks that that
information would be eliminated once the account was open, and
it wasn't going to be retained. Are you making the same type of
commitments?
Mr. Marcus. Congressman, the general desire, as far as the
Calibra Wallet is concerned, is to only retain the data for as
long as it actually is required to operate the service, not any
longer. If the government-issued ID that is captured is not of
any use, notably, for protections, then we will commit to the
same rule.
Mr. Tipton. Okay. And I think it is important because, not
to parse on words, but when you say ``desire to,'' I think that
is something that we would like to be able to see a commitment
to, in terms of the policies that you are going to be putting
in, just to be able to protect privacy, because I think it has
been spoken here several times. You know there are some real
concerns over Facebook and issues with privacy right now.
You have talked a lot about also wanting to be able to
reach out to the underserved, talking about overseas payments,
but we have actual banking deserts within the United States
right now. One of the key components is obviously to be able to
have high-speed internet access. In my home State of Colorado,
14 percent of our population does not have access to high-speed
internet. Do you have any plans to be able to do outreach, to
be able to build out some of those networks, to be able to
provide the access that you said that you would like to see for
underserved markets?
Mr. Marcus. Congressman, not as part of the Calibra effort
per se. That being said, Facebook has invested, and continues
to invest in helping providing access around the world, and
will continue doing so. But as far as the Calibra Wallet is
concerned, we are really focused on that population that
currently has smartphones and a basic data plan and is
underserved or not served at all by current financial services.
Mr. Tipton. Okay. Thanks. And we have had concerns from
some of our constituents, some of our community banks. They are
saying that they have some worries that Libra, Calibra, the
Libra Association represent a point of competition for
traditional financial institutions and payment systems as they
overlap on some of the core functions between your proposal and
the kind of products that your proposal could lead to, into the
regulated institutions.
Do you believe that Libra, Calibra, and the Libra
Association should be subject to some of the same regulations
on the banking side as our financial institutions are?
Mr. Marcus. Congressman, first I want to recognize the role
that community banks play. It is absolutely essential and I
hope that they can participate in services on top of the Libra
network as well.
And as far as banking regulation, if we ever enter into
providing banking services, which right now we are not
considering, then yes, we would need to have proper banking
regulation. But as it is contemplated right now, as far as the
Calibra Wallet is concerned, we are going to be focused on
payments.
Mr. Tipton. Great. And my time has expired. Thank you. I
yield back, Madam Chairwoman.
Chairwoman Waters. Thank you. The gentlewoman from Ohio,
Mrs. Beatty, who is also the Chair of our Subcommittee on
Diversity and Inclusion, is recognized for 5 minutes.
Mrs. Beatty. Thank you, Madam Chairwoman, and thank you,
Mr. Marcus, for being here today.
This is kind of a great segue for me, with my colleague
talking about the underbanked and the unbanked. You have heard
a lot today, and we have tried to gather a lot of information,
whether it was cybersecurity, governance, antitrust, investment
ownership, and now the unbanked and underbanked.
As you heard, I am the Chair of the Diversity and Inclusion
Subcommittee. So when I hear underbanked and unbanked,
traditionally that goes to a lot of people who have some
challenges economically. I have gone through your White Paper,
and as I look at that, it wasn't very unique in your problem
statement to me when you were citing 1.7 billion adults
globally remain outside of the financial system and that Libra
will connect the world to them in a unified financial
ecosystem. I think that is a lot of words, but when I think
about the underbanked and unbanked, here is the question that I
want to ask you.
I want to focus on one of the reasons that I read that
Libra gives us for why we need a global currency, and that is
to address the millions of unbanked and underbanked people in
the world. Despite this claim, in response to a question at
yesterday's Senate Banking Committee hearing from Senator
Brown, you stated that Libra is not designed to compete with
bank accounts. Additionally, you said, in response to Senator
Kennedy, that Libra will not engage in banking.
Can you tell me how Libra banked and unbanked and
underbanked, how you will work with them if it is not meant to
compete with the banking accounts, and if you are not engaging
in banking?
Mr. Marcus. I am glad you asked that question,
Congresswoman, and I want to separate the different types of
services that will be provided.
Mrs. Beatty. You have to do that quickly because I have two
more questions.
Mr. Marcus. I will do my best. The first one is that we
are--
Mrs. Beatty. Let me ask you this way. Yes or no, are you
competing with banking or not, in your opinion?
Mr. Marcus. No, Congresswoman, but we will offer--
Mrs. Beatty. Do you consider yourself a bank?
Mr. Marcus. No, because we will not offer--
Mrs. Beatty. Are you taking people's money and letting them
pay for things, letting them transfer monies?
Mr. Marcus. We will be active in payment services,
Congresswoman, and enable all of these people who currently
don't have access to modern payment systems to move their money
around and have access to the world economy, and as a result we
will be in the payments business, Congresswoman, as far as the
Calibra Wallet is concerned.
Mrs. Beatty. Let me ask you another question on governance.
I think in your opening statement, you said that it would not
be overpowered by Facebook because you would only have one
vote. In the world of banking--because in my mind it is still
banking--we are dealing with a lot of banks who merge. So let's
say with your one vote you would buy Stripe, or you would buy
Spotify. Would that now still give you just the one vote or
would that give you more control? Because we know these things
merge and get bought out all the time. If you bought those
things, would that give you more power?
Mr. Marcus. It would not, Congresswoman, because in the way
that the governance is currently structured no one entity can
have more than one voice or one percent of the vote.
Mrs. Beatty. Someone asked about the training in financial
literacy. We know those who are unbanked and underbanked are
that for a reason. This is very complicated. We have some of
the best minds here, on both sides, and clearly there are a lot
of unanswered questions, or clearly you can tell from our
questions there is a lot of disagreement with this.
How do you take somebody from my district, who is
underbanked or unbanked, and educate them? No financial
literacy. They think you are a bank, because even when you
mention PayPal and those systems, which you were the president
of--I used PayPal as a store owner, but it was tied to my
credit card, it was tied to the regulations of the Federal
Government. How do you tell us that it is not banking? Because
if it is not tied to any of those things, how does it work?
Where is my protection? What happens if I do this--and we
already know I am ignorant to the process--and then I want my
money, I want my Libras back. Can I get them all back?
Mr. Marcus. Yes, Congresswoman.
Mrs. Beatty. With no problems, I can get them all back and
put that money back into my account?
Mr. Marcus. Yes, Congresswoman. In the same way that PayPal
and others are connected to the banking system, Calibra Wallet
will be also connected.
Mrs. Beatty. My time is up. I yield back.
Chairwoman Waters. Thank you. The gentleman from Texas, Mr.
Williams, is recognized for 5 minutes.
Mr. Williams. Thank you, Madam Chairwoman. I want to echo
the comments of some of my colleagues that this hearing
somewhat seems somewhat premature. So far, private companies
are beginning to form an association and have released, as we
have talked about, a 12-page White Paper describing the general
idea of this global cryptocurrency.
It seems like there is a lot more work to be done
internally at Libra before we, in Congress, can seriously
examine all the regulatory and security hurdles that we all are
concerned about, that you have heard from both sides today.
There are many more pressing issues that we need to deal
with, I believe, before we all go home for the August recess in
a couple of weeks. We have not acted on the impending debt
ceiling. Our reckless government spending is out there. There
is still no budget deal. There is no EX-IM authorization bill,
and that has businesses all over the country nervous. And we
are at the beginning of hurricane season and we still can't get
the flood insurance package to a vote on the Floor.
I understand the interest in this new idea. I am from the
old school. But I think our time would be much better spent
working on issues that will benefit the American people
immediately rather than pre-emptively trying to stop this idea
from even being explored by Facebook and other industry
participants.
We should not discourage the private sector. I am a big
private sector guy. We should not discourage the private sector
from investing their own time, and their own money to research
these new technologies. No matter what policies we enact up
here in Congress, the private sector is the engine that creates
solutions to some of these great problems.
Mr. Marcus, I applaud your entrepreneurial spirit, and it
leads me to believe you are probably a capitalist; are you not?
Mr. Marcus. I believe we all are in this country.
Mr. Williams. Okay. Thank you. That is good. That helps our
record there.
And also, with that in mind, do you believe that the
private sector rather than the government is better suited to
explore the potentials of blockchain technology in the
financial services space?
Mr. Marcus. Congressman, I believe that in this specific
case it requires both the innovation capabilities of the
private sector and the oversight of the government and
regulatory bodies for this project to be successful,
specifically.
Mr. Williams. Facebook has already stated that it won't
launch the cryptocurrency in India, due to regulatory issues.
Can you explain the issues you ran into in India, and do you
anticipate that you will not be able to launch this project in
other countries?
Mr. Marcus. Congressman, there will be countries in which
the Calibra Wallet itself will not be able to operate, but
since the network is interoperable and other wallets can emerge
in different regions, and transactions are possible between
wallets, unlike the current system, which constrains
transactions within one wallet, we believe that others will
emerge in other countries that will enable access to a greater
number of people who currently don't have access to modern
financial services.
Mr. Williams. Something that I saw in your White Paper is
that the Libra Association will be run as a nonprofit, yet it
will pay dividends to investors who provide capital to jump-
start the ecosystem. Can you go into greater detail on how you
reconcile the association being a nonprofit yet you will pay
dividends to the investors?
Mr. Marcus. Yes, Congressman. The association is a
nonprofit, membership-based association under the laws of
Switzerland, that are slightly different. And the goal for the
association is not to generate a profit, but if it has to pay
out income streams, it will pay taxes on those income streams,
as covered by the Swiss law.
Mr. Williams. As a small business owner, I am a Main Street
America guy, 50 years in business. I see the benefits that this
could have on remittance payments to other countries, and with
the lowering transaction costs. Innovation is a good thing and
there is no reason we should be stopping this idea so early in
its existence.
With that being said, I begin to get concerned if this were
going to be used in lending. Is the eventual goal to use
cryptocurrency for lending?
Mr. Marcus. Congressman, as far as the Calibra Wallet is
concerned, it doesn't have any plans to do so, as of now. I do
believe that there might be banks around the world that might
want to engage in those types of services, but this is
definitely the province of banks and not something that the
Calibra Wallet will do itself, and it is not in the plans right
now.
Mr. Williams. Okay. Really quickly, the White Paper also
states that the Libra blockchain is pseudonymous, as you say,
and allows you to hold one or more addresses that are not
linked to their real-world identity. How do you plan on
striking the correct balance between privacy and a user's
ability to hide criminal activities?
Mr. Marcus. I am really glad you asked this question,
Congressman, because I think this is misunderstood. That fact
that there is no personally identifiable information on the
blockchain is not a virtue of the fact that people are not
identified on the platform. It is just that it would be
irresponsible to have personal data be publicly available. That
being said, wallets and on- and off-ramps will be regulated and
will have proper KYC.
Mr. Williams. Okay. My time is up. Thank you for being here
today.
Chairwoman Waters. The gentleman from Guam, Mr. San
Nicolas, who is also the Vice Chair of the committee, is
recognized for 5 minutes.
Mr. San Nicolas. Thank you, Madam Chairwoman.
Mr. Marcus, what does the organization project the average
user will have as a Libra balance?
Mr. Marcus. Congressman, we have not projected average
balances at this point.
Mr. San Nicolas. Do you really expect me to believe that?
Facebook is built around average users, average number of hits.
Visa, MasterCard, all these huge players are signing up, and
you guys have no idea how much you expect to have in the
average Libra account?
Mr. Marcus. Congressman, it will really vary, depending on
where the usage of Libra, the currency and the network--
Mr. San Nicolas. Okay. Can you give me a low estimate and a
high estimate of what the variation is expected to be?
Mr. Marcus. Congressman, again, we have not made
projections for this but we would be happy to follow up with
your office and your team when we do.
Mr. San Nicolas. First of all, I absolutely disbelieve
that. Like I said, those organizations are built around
understanding their users and what they are anticipating their
usage is going to be. And I think that you are just trying to
hide that figure, because when you actually start doing the
math, it becomes very, very alarming.
In your own posts, sir, you mentioned that billions of
users--``We firmly believe that if Libra is successful, it can
be a nonlinear step change for billions of people who need it
the most.'' So if you are talking about $100 in a Libra
account, if you are talking about $100 billion. If you are
talking about $1,000 in a Libra account, if you are talking
about $10,000 in a Libra account--and so I think that the
amounts that we are talking about, in terms of an average user,
is critical in order to understand the full scope of how
pervasive this kind of action is going to be, and I am going to
go through why that is so critical.
If 20 founding members, a lot of big-shot companies that
have come together seemingly overnight and surely under the
radar, and the White Paper that you submitted says that you
will have 100 members in the second half of 2020, which is a
year from now, that is 72 new members. You are going to triple
your growth in one year, and you guys don't even know what the
average Libra wallet is going to hold. We are just going to
pretend that that figure is just some unknown number, but we
are going to bring in 72 new players.
Are any of these players Fortune 500 companies?
Mr. Marcus. Yes, Congressman.
Mr. San Nicolas. How are you able to convince Visa and
MasterCard and 72 new Fortune 500 companies to sign up for
something without even knowing what the average user amount is
going to be?
Mr. Marcus. Congressman, I want to respectfully say that I
am not hiding anything. I am here responding truthfully to all
the questions with the information I have at this time.
Mr. San Nicolas. Yes, that is what you are saying, but
sensibly, I think we can all be sensible people. You won't get
these huge Fortune 500 companies signing up if they don't
understand what they are signing up for.
And the reason why this is so critical is because when you
have--even Facebook alone, in your own post, you said you have
90 million businesses on the Facebook platform that are going
to be able to attest to how this is going to be something that
is going to be an empowerment for those businesses. And that is
just the Facebook platform. We are not talking about the
MasterCard platform or the Visa platform or the platform of
these 72 other companies that are all lining up without any
kind of idea of how much they are actually going to be getting
involved with.
And this is so important because we are talking about
billions of users, and tens or even hundreds of dollars. That
is money that is getting sucked out of the U.S. financial
system and being put into whatever this cabal is putting
together in terms of Libra and Calibra.
The USA has less than 5 percent of the global population
and yet 15.28 percent of the global GDP, in dollars. That many
users and that many dollars means that the USA is going to be
disproportionately affected by Calibra and Libra. And once we
impact disproportionally U.S. dollar demand by sucking dollars
into Libras, interest rates will have to rise to attract
dollar-denominating investors, higher interest rates will
injure the U.S. economy and U.S. jobs, and higher interest
rates, perhaps more importantly, will raise the financing cost
of funding U.S. military operations and national security.
And if that is going to be the case, how do we put a stop
to it? Let's say we have hundreds of millions of users in the
U.S., and they have all put in thousands of their own dollars.
How do we put a stop to it once that risk presents itself?
Because if that risk presents itself and we can't put a stop to
it, what happens then? And if you think that the Congress or
the elected leaders are going to be able to put a stop to it,
one thing that you need to realize is, when you have hundreds
of millions of users, in thousands of districts, it is going to
be next to impossible politically to do that.
I yield back.
Chairwoman Waters. The gentleman from Georgia, Mr.
Loudermilk, is recognized for 5 minutes.
Mr. Loudermilk. Thank you, Madam Chairwoman. Mr. Marcus,
thank you for being here. I know it has been a long day. Look,
I want to thank you for not only your time being here but also
your willingness to look at new ways of doing things. That has
been the strength of our country.
Quite frankly, I don't care for Facebook. It is a nightmare
for many of us in this type of position. I don't care for some
of the filtering that is done, suppressing some of our posts
because of political content, but if you are a private
business, that is your right to do so.
But I do appreciate anyone who challenges the status quo to
look for something new and a better way of doing it. We have
concerns here, and I think this is actually a platform where we
can address those concerns. We can begin a dialogue, and I
appreciate that.
What you are experiencing right now has been experienced by
any innovator throughout our history. The Washington Post, in
the early 1900s, had an article entitled, ``Man Will Never Fly,
and Shouldn't.'' And it went through all the reasons why we
should even stop testing an airplane, especially when you had
two bicycle mechanics from Dayton, Ohio, trying to fly when
scientists and engineers couldn't.
Thomas Edison--there were dozens and dozens of articles
written about how the light bulb was a dangerous invention if
it was ever accomplished, and would be a public health threat,
and it should be stopped immediately.
Now all of those ended up being great advancements that,
rightfully so, were regulated by government for public safety
and health benefit--reasons that it could be done safely.
But the point is we can't demean these things until we
actually look into them, and this is the dialogue I want to
have. I have concerns. I do have concerns, but I think unless I
am willing to express those concerns, and I am willing to
actually hear your answers, we are getting nowhere. And so with
that, I don't want to use up all of my time.
One of the big concerns of mine, from spending time in the
IT industry, in data security, is, look, cryptocurrency is used
for illicit financing--money laundering, terrorism financing,
human trafficking. In fact, it is estimated that criminals used
cryptocurrency to steal $1.7 billion from investors just last
year, and 56 percent of that happened here in the United
States. The Treasury Secretary said he is concerned that Libra
could be used for these purposes.
How can you assure us and the American people that this
isn't going to be just another illicit financing tool?
Mr. Marcus. Congressman, thank you, and I share this
concern, and this is actually something that I care about
personally, a great deal. I don't want the creation that we are
working towards to be used for those types of purposes at all,
and we believe that with the appropriate controls, with the
proper AML programs, the proper KYC on- and off-ramps, that we
will improve on the current system.
There are a lot of illicit activities that are currently
happening in our existing financial system, and I actually
believe that with the combination of the right technology and
the ability for law enforcement and regulators to also have a
view into some of the movements, that we will improve on the
efficacy of AML and counterterrorism funding programs.
Mr. Loudermilk. Some of the pushback we have gotten from
law enforcement--I have been an advocate for looking at
blockchain for the technology. A lot of folks here have a fear,
some justifiable fear, of cryptocurrencies. When you remove the
stigma of cryptocurrency I think blockchain is a valid
technology we look at for data security, but we do get a lot of
pushback from law enforcement on the use of blockchain.
Have you had engagement with law enforcement on this, and
if so, what are their thoughts, their concerns, their
acceptability? How are you going to do that interface?
Mr. Marcus. Congressman, we will continue to engage,
notably with FinCEN and the Treasury Department, and notably
the department that looks after money laundering and
counterterrorism funding, with Under Secretary Mandelker and
her team, and also globally with a number of law enforcement
and regulators.
Mr. Loudermilk. With the remaining time I have, I have
other questions I can submit for the record, but you basically
are going to be a global payment system, which is typically
regulated, as central banks are done, pretty heavily regulated.
Would it be appropriate for FSOC to actually designate Libra as
systemically important, as some have said that you will be?
Mr. Marcus. Congressman, again, it is really not for me to
say who should regulate us, but we definitely have been engaged
with not only FSOC but all of the agencies under the FSOC
umbrella, and we will engage mostly in payment services. But it
is not for us to determine.
Mr. Loudermilk. Thank you.
Chairwoman Waters. The gentlewoman from Massachusetts, Ms.
Pressley, is recognized for 5 minutes.
Ms. Pressley. Thank you, Chairwoman Waters. I really do
appreciate your continued leadership and returning this
committee to its oversight role. I want to emphasize to you,
Mr. Marcus, and to my colleagues on both sides of the aisle,
that the reason we are here today is oversight, or more
accurately, the lack of oversight in this space. The fact that
we have arrived this far along in the conversation without any
regulatory guardrails to inform the development of this
project, on its face, just that fact alone is a problem.
It is long past time that we stop compromising on
consumers' privacy in the pursuit of profit. When consumers'
well-being is on the line, echoing the sentiments of the
gentleman from Arkansas, we cannot afford to simply trust but
not verify. And so that is what we are here to do today, to
verify.
So, Mr. Marcus, yes or no, since my time is short, are you
familiar with the content of Facebook's press release
announcing the launch of Calibra?
Mr. Marcus. I am, Congresswoman.
Ms. Pressley. Great. At the end of your press release,
there is a disclaimer that states, ``These forward-looking
statements may differ materially from actual results, due to a
variety of factors and uncertainties, many of which are beyond
our control.'' In it, you go on to admit that this is all,
``based on assumptions that you believe to be reasonable'', as
of the date of this press release.
Madam Chairwoman, I ask for unanimous consent to submit to
the record Facebook's press release announcing the launch of
Calibra.
Chairwoman Waters. Without objection, it is so ordered.
Ms. Pressley. So, yes or no, would you trust your money
with a company that essentially admits that it is just winging
it?
Mr. Marcus. Congresswoman, I don't believe that is the case
and this is why we have shared our White Papers and our--
Ms. Pressley. Reclaiming my time, the disclaimer ends by
saying that you, ``undertake no obligation to update these
statements as a result of new information or future events.''
Again, moving on.
On the issue of underbanking, which is an issue this
committee is very committed to addressing under the leadership
of Chairwoman Waters, Representative Beatty was citing your
White Paper where you identify 1.7 billion people globally who
lack access to financial institutions. That is a lot of people.
Half of all adults who don't have bank accounts are living in
just 7 countries: Bangladesh; China; India; Indonesia; Mexico;
Nigeria; and Pakistan.
Yes or no, are any of Libra's 27 partner organizations
based in these countries?
Mr. Marcus. Not at this stage, Congresswoman, but by the
time we get to 100 members we hope to have a more
representative slate of the very people that we want to serve.
Ms. Pressley. Mr. Marcus, do you believe, as has been
claimed, that authentication is the reason many of these people
don't have bank accounts?
Mr. Marcus. Congresswoman, there are a number of issues but
my understanding is yes, identity is a big problem and--
Ms. Pressley. Okay. Moving on--
Mr. Marcus. --a greater problem.
Ms. Pressley. Reclaiming my time. So the same bank report
finds that almost two-thirds of people who don't have bank
accounts say it is because they lack enough money to open one.
Here is a rapid-fire round for you, Mr. Marcus. Does the
Calibra Wallet require a bank account? Yes or no?
Mr. Marcus. No, Congresswoman.
Ms. Pressley. Does the Calibra Wallet require a smartphone?
Mr. Marcus. Yes, and now you can buy one for--
Ms. Pressley. Reclaiming my time. Would these potential
users be paid any interest on the money they store in Libra
currency?
Mr. Marcus. Congresswoman, it is like cash, and as a result
it doesn't earn interest.
Ms. Pressley. Okay. So if your solution to the world's
unbanked is a currency that requires them to have a bank
account--
Mr. Marcus. It doesn't.
Ms. Pressley. --a smartphone, and no returns on their
savings, I am not actually sure you really understand what the
source and root of the problem really is. It is clear to me,
when it comes to Facebook and its initiatives, we simply cannot
trust or verify.
But I would add and underscore that the reason we are here,
and that you even have this opportunity to pursue it, is
because the Federal Reserve has failed to offer Americans an
equitable, reliable, efficient, safe, and secure system to
access and move their money.
I yield back.
Chairwoman Waters. Thank you.
The gentleman from Ohio, Mr. Davidson, is recognized for 5
minutes.
Mr. Davidson. Thank you, Madam Chairwoman. I really
appreciate you holding this important hearing today. A
bipartisan group of my colleagues have worked for nearly 2
years trying to provide light touch regulatory certainty to
many aspects of this market.
Mr. Marcus, I appreciate you being here on behalf of
Facebook, and in some ways a representative from the Libra
Association, because you have brought to the world's attention
a space that previously has been dynamic in the American
market, lots of American innovators, but you see a lot of
companies leaving the U.S. market for Switzerland, for
Singapore, and for others, not to avoid U.S. laws, but to find
the regulatory certainty that we have highlighted does not
currently exist in the United States today.
With that, Madam Chairwoman, my hope is that the committee
will hold future hearings on cryptocurrency regulation so we
can properly address these issues, and as we have seen, not
entirely conflate them with Facebook's mixed messages here or
mixed history across numerous other platforms, if there are
platforms.
Already, there are several legislative proposals in
Congress that address the cryptocurrency sector, including the
Token Taxonomy Act, a bill which I am leading alongside fellow
committee colleagues Gottheimer, Budd, Gabbard, and Rose.
With that, one of the key differentiators with Libra as a
currency, from many other tokens in this space, is
centralization. When you look at an open blockchain token, or
you look at the Bitcoin that has come to represent the entire
blockchain, to many people, it is like the architecture is the
internet but the specific instance is a website. People know
this famous website, Bitcoin, but they are not able to really
associate the broader architecture of blockchain.
And just like Facebook launched, and many other things will
continue to launch, when the internet was in its early stages,
we couldn't conceive of all the specific instances that would
take place on the internet, in the blockchain space, in the
tokenized economy. We are not really yet able to foresee all of
the specific applications. That is why I think it is very
important that we continue to hold hearings on the topic.
Tokens could represent title to a car, deed to a land, software
license, or goods or services.
But what you are proposing is essentially different. It is
a currency. It is not just a payment system. Calibra is a
payment system, but you want to do it in a way that is
different with the means of exchange. A store of value that is
exchanged in a similar way to currency--not yet legal tender,
not required to be accepted everywhere. But, essentially, how
is this different than what Christine Lagarde at the
International Monetary Fund proposed as a synthetic currency?
Mr. Marcus. Congressman, the first big difference is that
unlike the SDR that you are referencing, this digital currency
will be available to consumers and will be designed as a medium
of exchange from the ground up.
Mr. Davidson. Yes, I don't think that is different at all.
It is just whether the central bank is the Libra Association or
the IMF. So, you still have a central banker. If you think of
it as a bank, in the sense of that, the central authority, the
idea that the Libra Association could ever become
decentralized, I think gives a lot of people pause, because you
intend to have it pegged to not just a bundle of currencies,
but in the White Paper, short-term securities.
Currently, under U.S. law, if you are trading in securities
as the underlying basis for the asset that you are selling,
that is regulated as a security. Why would it not be considered
a security? Do you have a special Facebook clause?
Mr. Marcus. No, Congressman, certainly not, and the reason
we believe that Libra is not a security is because it is
designed as a payment tool, and that -
Mr. Davidson. Okay, reclaiming my time. Others have posited
that a relatively simple, stable coin--which isn't entirely
stable because it is denominated in other things--could be
characterized as swaps or demand notes, both of which are
treated as securities. The SEC's head of digital assets,
Valerie Szczepanik, confirmed at a hearing last week that it
does not matter that the stable coin does not have an
expectation of profits. The expectation of profit is key
because of the structure of it. In the case here, it would be
regulated as a security.
Setting that aside, we look at the other issues. The
board--I am going to have to submit a ton of these questions in
writing--when you look at the Know-Your-Customer provisions,
and I listen to so many of my colleagues talk about how are we
going to prevent illicit finance, I look forward to seeing
Secretary Mnuchin or Chairman Powell ask how we are going to
regulate the dollar. Mr. Duffy had an exact right point.
And if you, at Facebook, or the Libra Association presume
to sit over top of this and filter transactions the same way
that you filter content on your alleged platform, I think the
public is going to be out.
Last I would say, do you plan to launch this outside the
United States if you can't get regulatory certainty in the
United States?
Mr. Marcus. Congressman, I am glad you asked the question,
and we will not actually proceed until we get all of the
concerns addressed and the properly regulatory oversight here
in the United States.
Mr. Davidson. My time has expired.
Chairwoman Waters. The gentleman from New Jersey, Mr.
Gottheimer, is recognized for 5 minutes.
Mr. Gottheimer. Thank you, Madam Chairwoman, and, Mr.
Marcus, thank you for being here today.
Facebook claims that its new Libra venture is motivated, in
part, by a desire to serve the unbanked. While I appreciate
this motivation, I am a little confused on how your product
will directly help the unbanked and underbanked, given that the
unbanked are operating solely with cash. How is a person who is
unable to open a bank account going to be able to open a Libra
account, convert their cash to Libra, and then transmit those
Libra to third parties?
Mr. Marcus. Thank you for your question, Congressman. The
way that the Calibra Wallet will approach this is in
partnership with cash-in and cash-out agents in the relevant
countries where banking penetration is very low. And as a
result, consumers who don't have bank accounts will have the
ability to access the Libra network and buy and sell Libra.
Mr. Gottheimer. So they have to have a center where they
would go to, to actually convert, and help to set those up?
Mr. Marcus. Congressman, we would use the existing network
of cash-in and cash-out. Again, this is speaking for the
Calibra Wallet.
Mr. Gottheimer. Okay. Thank you. I think we agree on a key
point, that blockchain technology is inevitable, and I believe
that the new frontier presented by blockchain and similar
financial technologies are an opportunity for American
leadership, economic growth, and job creation, versus losing
out in disgust to China and to Europe and others.
In my district, the 5th District of New Jersey, so many
different people work in the financial sector or on the cutting
edge of financial technology, and it can be a tremendous job
creator for the State. We also agree that we need to create an
environment that encourages technologies to start here, grow
here, and create U.S. jobs rather than going overseas.
We know the Libra Association is currently composed of 28
American companies. I am deeply concerned that Libra will be
based in Switzerland, as you have also heard. This is a big
concern of ours. And so, echoing Mr. Davidson and others, would
you agree that part of the reason why you made the decision was
not to avoid guardrails but instead to avoid the lack of
legislative certainty we have here in the United States?
Mr. Marcus. Congressman, again, thank you for raising this
because the choice of Switzerland, again, had nothing to do
with us evading our responsibilities or oversight. But we
really wanted the Libra Association, and the Libra digital
currency, to be recognized globally as a unit of measure that
was acceptable, and as a result, Switzerland offered the
international platform to do that. And we hope that one day,
many, many years down the line, the Libra Association can work
very closely with organizations hosted in Geneva, like the WTO,
the WHO, and the Bank of International Settlements in Basel.
Mr. Gottheimer. We have heard quite a bit, many of us, if I
can unpack that a little bit more, and why Mr. Davidson and I
and others focused on that Token Taxonomy Act, which was
bipartisan legislation, as you just heard, which provides some
rules of the road for blockchain with a light touch but leaves
space for American innovation.
Part of our goal, because many companies that have been to
our offices have said, ``Hey, we need some certainty here. We
need some guardrails.'' Maybe not Facebook, but others have
certainly said to us, ``Hey, the reason we are going elsewhere
is because we don't actually know the rules of the road here.''
Have you heard that? Is that something--and it may not have
factored into your decision-making in that direct case, but is
that something that you have heard from partners you have
talked to?
Mr. Marcus. Congressman, yes, I have heard from different
companies in this space that regulatory clarity would be
helpful, yes.
Mr. Gottheimer. And I know you have seen our piece of
legislation. Are there other things that you think we should be
doing to help the United States establish itself as a global
leader on cryptocurrency? Are there other steps we could be
taking in this body?
Mr. Marcus. Congressman, I think the first thing we can do
is ensure that projects that are within the right oversight and
done responsibly actually see the light of day instead of
losing our leadership to other nations that are plowing ahead.
Mr. Gottheimer. That is one of our big concerns here is
losing that space but also making sure that people don't, as
you pointed out, don't evade, whether it is on privacy issues
or others, evade U.S. jurisdiction just to do that, and I think
it is a very big concern, I know, of me and many of my
colleagues. We are very concerned, and this affects a lot of
people and especially, as I pointed out, the unbanked and the
underbanked that I am worried about, as time goes on, and how
do we make sure that we don't abandon them in this process. I
think it is very, very important as we grow.
I yield back. Thank you very much, Madam Chairwoman.
Chairwoman Waters. Thank you. The gentleman from North
Carolina, Mr. Budd, is recognized for 5 minutes.
Mr. Budd. Thank you, Madam Chairwoman. I think it is
important that members of this committee be able to
differentiate between Libra, which as I am understanding it, is
not truly cryptocurrency, and then other tokens like Bitcoin,
before discussing legislation. And I would encourage Members to
use outside groups like the Coin Center, the Blockchain
Association, and the Digital Chamber as resources. Those are
very helpful and they provide a lot of clarity. Topics like
this require a different sort of regulation, so the more
educated we become, the better.
If America is to remain and continue to grow and be a world
leader in financial innovation and technology, then it is vital
that this committee not embrace reactionary laws against
cryptocurrencies, or even this, Libra. But we must
differentiate between Libra and similar tokens, to Bitcoin from
Libra.
Mr. Marcus, I want to talk about the issue of Libra
remaining politically neutral. I know this came up yesterday in
the Senate, and my colleagues who have gone before me,
including Mr. Duffy, Mr. Barr, and Mr. Davidson, and some
others, have raised concerns on this, and I share those same
concerns.
In that vein, do you have any guidelines in place at this
point in the process on how you will maintain political
neutrality on your platform, and if not, will you commit to us
today that you will develop guidelines and make those
guidelines transparent to the public?
Mr. Marcus. It is an important question, Congressman, and
there are two parts to this answer. The first is the Libra
Association, and the Libra Association will naturally not have
oversight or decision-making around how Libra can be used, as
long as it is lawful uses. And then the second part is the
Calibra Wallet, and my commitment to you is that as far as
policies come, we will be very thoughtful and we will share
these with you when we get closer to finalizing the policies
that are specific to the Calibra Wallet.
Mr. Budd. Thank you. When you were talking about part one,
the Libra Association, to be differentiated from Calibra, you
said, ``if it is lawful.'' I think Mr. Duffy really pointed
this out, that if it is lawful, it should be able to be used--
you should be able to use Libra, and not the whims of the
ideology of Facebook.
My concern is that you are going to let hearings like
these, where you get nailed on national TV, inform decisions
about who you do business with, and who you don't do business
with, similar to financial institutions that have sat right
where you did.
We trusted Facebook with our data and they failed, so I am
concerned that without the proper protocols in place, people
should pause before trusting Libra with their financial
information. And this opinion is based on countless examples of
conservative de-platforming, in general, by big tech.
As my colleague, Senator Marsha Blackburn, said, ``Tech
companies like Google and Facebook need to start embracing the
spirit of the First Amendment, not just their own employees.''
Moving on, in its published materials, the Libra
Association commits to the Libra network transitioning from a
permissioned network to a permission-less one. I think that is
in 5 years. Is that correct?
Mr. Marcus. The stated goal, Congressman, is to start that
slow transition 5 years after the launch.
Mr. Budd. Mr. Marcus, given that this would require
investors in the association to give up all their interest in
revenue generated from this created reserve, what incentive
would they have to do that?
Mr. Marcus. Congressman, actually this is not the way it
will work, because we believe that the current members who will
run nodes on the blockchain will likely continue to be
represented, because in a transition to permission-less you
would have delegation of voting, and the delegation will likely
be done to the members that would actually have activity on top
of the network. So we believe that it won't be as dramatic of a
shift in governance than what has been portrayed.
Mr. Budd. How can we be assured by you that this off-ramp
to permission-less actually occurs?
Mr. Marcus. Congressman, this is something that we would
need to embed in the governance of the association, and we are
currently working on finalizing the charter with the other
members, and this charter and the set of rules, notably on AML,
KYC, and others, will be made public.
Mr. Budd. Okay. Thank you very much, and I yield back my
remaining time.
Chairwoman Waters. The gentlewoman from New York, Ms.
Ocasio-Cortez, is recognized for 5 minutes.
Ms. Ocasio-Cortez. Thank you so much, Madam Chairwoman. I
am grateful that we are having this hearing today. Thank you,
Mr. Marcus, for coming forward today to testify before our
committee.
I believe we are here today because Facebook, which is a
publishing platform, an advertising network, a personal
telecommunications network, a surveillance corporation, and a
content distributor, now also wants to establish a currency and
act, through its wallet, as, at minimum, a payment processor.
Why should these activities be consolidated under one
corporation?
Mr. Marcus. Congresswoman, the one thing that we are
focused on, really, is solving problems for the very people who
are left behind right now, and we believe it is important
because we have the ability to invest, and we have the products
to deliver those services that will solve problems, the same
way we have reduced costs for people to communicate on our
messaging apps.
Ms. Ocasio-Cortez. I see. Libra is, according to your White
Paper, a unit of currency backed by a reserve governed by the
Libra Association. Now, to economists, to Members of Congress,
and to accountants, the term ``backed'' has a very specific
meaning, and usually incorporates monetary policy, yet the
Libra White Paper does not define ``backed.'' Rather, it states
that Libra will be ``backed by government currency and
government securities.''
So what does ``backed'' mean, in your sense?
Mr. Marcus. Congresswoman, it means that it will have a
reserve, one for one. For every unit of Libra, you will have
the corresponding value in stable currencies.
Ms. Ocasio-Cortez. Does this mean, as stated, that the
Libra Association does not set monetary policy but it mints and
burns coins in response to demand from authorized resellers. As
it appears today, if there are more Canadian Libra users than
U.S. users, will there be more Canadian dollars in the Libra
reserve to meet potential redemptions?
Mr. Marcus. No, Congresswoman. The way that the reserve
basket will be determined will be stable and continue to be
stable, and we will work with the G-7 working group to ensure
that it has the proper--
Ms. Ocasio-Cortez. Thank you. And so this governance over
the reserve is the Libra Association, correct?
Mr. Marcus. Yes it is, Congresswoman.
Ms. Ocasio-Cortez. And currently, the Libra Association is
governed by Facebook, Uber, eBay, Spotify, Visa, Thrive
Capital, Union Square Ventures, and a handful of nonprofits as
well as some other partners, correct?
Mr. Marcus. That is correct, yes.
Ms. Ocasio-Cortez. Were they democratically elected?
Mr. Marcus. No, Congresswoman, but we hope that we will
have the proper regulatory oversight, because we agree with you
that this should have the proper oversight to ensure proper--
Ms. Ocasio-Cortez. Who picked the founding members of this
governance over the currency?
Mr. Marcus. Congresswoman, the membership is open, based on
certain criteria. The first 27 other companies that have joined
are the companies that have shared that desire to come and
build this network and solve problems.
Ms. Ocasio-Cortez. I see. We are discussing a currency
controlled by an un-democratically selected coalition of
largely massive corporations.
Do you believe currency is a public good?
Mr. Marcus. Congresswoman, I believe that sovereign
currencies should remain sovereign, and we do not want to
challenge sovereign currencies. We just want to augment their
capabilities in a way that they can be--
Ms. Ocasio-Cortez. But do you believe currency is a public
good?
Mr. Marcus. Congresswoman, I believe that sovereign
currencies are sovereign, and as result they should continue to
be sovereign--
Ms. Ocasio-Cortez. Do you believe Libra should be a public
good?
Mr. Marcus. Congresswoman, again, we will work with all of
the regulators and address all concerns, and the regulators
will determine--
Ms. Ocasio-Cortez. I will take that as a no? I should take
that as a no?
Mr. Marcus. It is not for me to decide, Congresswoman.
Ms. Ocasio-Cortez. Okay. I will take that as a no.
You stated yesterday, in front of the Senate Committee,
that you would be open to accepting 100 percent of your pay in
Libra. In the history of this country, there is a term for
being paid in a corporate-controlled currency. Do you know what
that term is?
Mr. Marcus. I do not, Congresswoman.
Ms. Ocasio-Cortez. It is called ``scrip.'' Are you familiar
with ``scrip?''
Mr. Marcus. I am not, Congresswoman.
Ms. Ocasio-Cortez. It's the idea that your pay could be
controlled by a corporation instead of a sovereign government.
Do you think that there is any risk here? From scrip to the
issues with how Facebook handled our elections, we are seeing a
destabilizing in our public goods. By facilitating
instantaneous purchases to a digital wallet, Calibra and Libra,
how could--my time has expired. Thank you very much.
Chairwoman Waters. The gentleman from Tennessee, Mr.
Kustoff, is recognized for 5 minutes.
Mr. Kustoff. Thank you, Madam Chairwoman, for convening
today's important hearing, and thank you, Mr. Marcus, for
appearing today. You have been through 2 days now of
questioning, both on the Senate side and now before our
committee. And as I have sat here today, I have heard a number
of comments, certainly those who appreciate the innovation that
Facebook is trying to apply and those that don't want to stifle
innovation, but certainly concerns from both sides of the
aisle.
And as I listen to the questions being asked today, and
your responses, the graphics that have been shown periodically
through the day of President Trump's tweets about what Facebook
and Libra are trying to do and accomplish, and his concerns--
just a few minutes before this hearing, I did a local radio
interview in my part of West Tennessee, and the radio host
expressed very general concern about Facebook and Libra, which
all boils down to this: How do you propose educating and
talking to my constituents about the need for what you are
trying to do and how it will benefit them? How do you explain
it to them where they are not concerned and they are not
scared?
Mr. Marcus. Thank you, Congressman. The way that we are
going to make sure that there is proper education in the
Calibra Wallet is that it will be designed with education in
the product experience itself. And so at every step of the way,
consumers will understand what they are doing and what Libra
can do for them.
I do believe that it will help many people reduce costs,
notably for sending money around the world, and we will be very
clear in education on the Libra Association side. We will
continue to have social impact partners that are focused on
financial literacy, because all around the world it is really
important to improve on financial literacy, to improve on
financial inclusion itself. And as a result, we, at the Libra
Association, will continue funding programs and let experts
help on that front.
Mr. Kustoff. Do you understand why consumers, and from my
standpoint, constituents, are concerned and even maybe a little
scared of your technology and what you are trying to do?
Mr. Marcus. Congressman, absolutely, and this is why we
will need to do this the right way. That has been my commitment
and is my commitment, that we will take the time to get this
right, including on education and communication to consumers.
Mr. Kustoff. Mr. Marcus, a number of questions have been
asked, most recently by Congressman Gotteheimer, about the
decision to locate in Switzerland. You have heard that. I
assume you heard those concerns yesterday. I assume you have
heard those concerns for some period of time. I would just ask
you directly: Why not have it located in the United States?
Mr. Marcus. Congressman, I want to say that Switzerland has
nothing to do about evading our responsibilities or oversight,
but we do want the Libra digital currency to be accepted and
recognized as a global unit of measure on the internet, and as
a result, placing it, homing the association in Switzerland was
the right choice because it is the home of many internationally
recognized and trusted organizations.
That being said, I believe that the vast majority of
corporations, companies, startups, that will benefit from
developing and building on the Libra network will be here in
the United States and will create jobs here in the United
States and will, of course, be subject to all U.S. law and
regulation.
Mr. Kustoff. Mr. Marcus, I can appreciate that, but isn't
it important that Americans trust what you are trying to do,
and wouldn't they more likely trust it if it were located in
the United States and, in some way, lightly regulated by
American authorities?
Mr. Marcus. They probably would, Congressman, although they
will have a relationship with American companies, and as a
result they will have a trust, or not, of the different wallets
that will operate. And that being said, the goal of the Libra
digital currency is also to serve a lot of populations that are
not in the U.S., and as a result, we felt that the choice of an
international home for the Libra Association was the right
decision.
Mr. Kustoff. Last question: You understand why American
consumers would be concerned that it is not located in the
United States and instead located in Switzerland?
Mr. Marcus. Congressman, I think as far as the consumers
here in the U.S. are concerned, their funds, if they use an
American wallet, will be here, not in Switzerland.
Mr. Kustoff. Thank you. I yield back.
Chairwoman Waters. The gentlelady from North Carolina, Ms.
Adams, is recognized for 5 minutes.
Ms. Adams. Thank you, Madam Chairwoman, and thank you for
convening the hearing, and, Mr. Marcus, thank you for coming.
Like many of my colleagues, I, too, have great concerns about
Facebook's entry into the financial services industry. I have
gained a little more insight today, but I do have some
questions.
I want to follow up on Ms. Ocasio-Cortez and ask you to
explain a little bit more how a company becomes a member of the
Libra Association. Can you just give me a brief answer? I have
several questions I want to ask you.
Mr. Marcus. Of course, Congresswoman. There are sets of
criteria that have been established and that are public, and
any company or organization meeting these criteria can actually
join the association as a member. This is a process that is now
being led by the Libra Association.
Ms. Adams. Is the process public?
Mr. Marcus. Yes, Congresswoman.
Ms. Adams. Okay. So, can a wealthy individual investor
become a member?
Mr. Marcus. No, Congresswoman, because the criteria has
different buckets, so it is either corporations that are active
in delivering services or companies in the blockchain area,
or--
Ms. Adams. Okay. Let me move on. So, consumers can't
either?
Mr. Marcus. Congresswoman, all consumers will be able to
use Libra.
Ms. Adams. That is not what I asked, though. Can consumers
become members of the Libra Association? No, they cannot.
Mr. Marcus. No, Congresswoman.
Ms. Adams. All right. It costs at least, what, $10 million
to become a member of the association?
Mr. Marcus. Congresswoman, this is not a cost. Members will
have to invest in the ecosystem to ensure that it is properly
funded--
Ms. Adams. But that is an entry fee?
Mr. Marcus. It is not a fee, Congresswoman. This is an
investment in the ecosystem.
Ms. Adams. Okay. Let me circle back on Mr. San Nicolas'
line of questioning. Why would any of the companies in the
Libra Association make a major investment like this in this
payment tool?
Mr. Marcus. Congresswoman, I believe in my conversations
with all of them, they agree with us that the status quo is not
working for too many people and that people deserve better.
They deserve lower cost and they deserve a lower barrier of
entry to digital money, and that is why they have joined. And
then, of course, they have their own goals that are business
goals because they believe that if lower cost--
Ms. Adams. Okay, let me reclaim my time, and move on then.
As a free service, Facebook's business model relies primarily
on advertising and its marketing platform to make a profit. In
2017, 90 percent of Facebook's $40 billion in revenue came from
digital ads and users' data. And that is the core business
model. Is that correct?
Mr. Marcus. Of Facebook, the company, Congresswoman?
Ms. Adams. Yes.
Mr. Marcus. Yes, it is.
Ms. Adams. Okay. So you expect us to believe that you are
going to start collecting financial data and not share it
because you promised not to do that?
Mr. Marcus. Yes, Congresswoman, and as well because there
will be many other wallets that we will have to compete with
that are not active in social media or advertising, and as a
result, we will have to make good on those commitments.
Ms. Adams. Okay. What, if anything, has been learned from
the Cambridge Analytica scandal that other data hacks that have
occurred on Facebook's platform? What, if anything, have you
learned?
Mr. Marcus. Congresswoman, we have learned a lot, and we
now have tighter controls on data. We have tighter controls on
keeping data from people using our services safe. We have
tighter controls on election integrity, and we have invested
greatly in election integrity and ads transparency.
Ms. Adams. I would be interested in what the steps are.
When you say tighter control, can you give me an example? I
have 45 seconds.
Mr. Marcus. Congresswoman, yes. For instance, what happened
with Cambridge Analytica, the way the platform was opened back
then is not possible anymore on the Facebook platform today.
Ms. Adams. Okay. How much has Facebook invested in the
formation of Libra, Calibra, and the Libra investment token
that will earn a share of interest?
Mr. Marcus. Congresswoman, this investment has not happened
yet. We are in the phase of ratifying the charter with other
members of the association, and then members can decide how
much they want to invest, and we will take part in that process
like every other member.
Ms. Adams. Thank you, sir.
Madam Chairwoman, I yield back.
Chairwoman Waters. The gentleman from Ohio, Mr. Gonzalez,
is recognized for 5 minutes.
Mr. Gonzalez of Ohio. Thank you, Madam Chairwoman, and
thank you, Mr. Marcus, for being here. I am going to jump right
in.
I think what today's discussion is really about is trust
and whether we can trust your company. I think you are pretty
low on the trust spectrum currently, for very good reason. But
essentially, what we are talking about on the association side,
is the governing body of Libra, correct?
Mr. Marcus. Yes, Congressman.
Mr. Gonzalez of Ohio. Okay. And of the members today, how
many did you hand-select?
Mr. Marcus. I'm sorry?
Mr. Gonzalez of Ohio. How many did you recruit? How many
did Facebook recruit?
Mr. Marcus. Congressman, we approached a wide range of
companies.
Mr. Gonzalez of Ohio. But how many did you approve of? One
hundred percent of them?
Mr. Marcus. Congressman, they met the criteria, and they
had the willingness to participate. When we get to the 100--
Mr. Gonzalez of Ohio. But you got them, right?
Mr. Marcus. --we will not be involved in the decision of
who gets to join.
Mr. Gonzalez of Ohio. Okay, but to date, you have recruited
all of the members, correct?
Mr. Marcus. Congressman, we have approached a number of
companies. Those are the companies that--
Mr. Gonzalez of Ohio. I think the answer is yes, so we will
keep going. First, you created the coding language. Most
decisions to date have been made by your company. The claim has
been Facebook will not have undue influence over the platform.
We are all politicians in this room. I think if we could hand-
select our voters, we would feel pretty comfortable about our
ability to influence whatever decisions are made. So, I would
suggest that that is not an accurate claim.
Second, there is something glaringly missing from the
group, which is everyday users. Why would you exclude users
from having voting authority over the association?
Mr. Marcus. Congressman, first, I do want to correct one
fact, which is, yes, we have created an investment in all of
the code up to this point, but now it is in the open-source
community and available to be contributed.
Mr. Gonzalez of Ohio. Great.
Mr. Marcus. And to the consumers' question, because we
believe that to meet our regulatory requirements across the
association we need entities that are established, that know
how to operate those types of programs that are trusted, but
this is also why we believe that over time, it is important to
have a transition to giving people more of a voice in--
Mr. Gonzalez of Ohio. I will talk about that in a second.
Quickly, on the membership side, you have to be able to
validate, and you need a $10 million investment. Can a Chinese
state-owned enterprise get in?
Mr. Marcus. Sorry, I could not--
Mr. Gonzalez of Ohio. Can a Chinese state-owned enterprise
get into the membership?
Mr. Marcus. Congressman, this is not my decision. It is the
Libra Association's decision. But there is--
Mr. Gonzalez of Ohio. Which you have undue influence over.
Mr. Marcus. There is a key principle, which is that if
Libra is not accepted in a certain country or cannot be used, I
believe that companies for said country should not be part of
the--
Mr. Gonzalez of Ohio. So, the answer is maybe. Now, I want
to talk about how you are actually going to transition. I
wonder how you will actually do this, because the promise of a
permission-less system is the decentralization. It seems like
if you are fully decentralized, you would not actually need the
Libra Association. Help me square those two. They seem to be in
conflict.
Mr. Marcus. You are right, Congressman, to raise this
important point, and the way that we are thinking about this is
that since Libra will always have to have a reserve, that it
will be backed one to one, there will be some form of
centralization in the management of the reserve because we will
need the right oversight to ensure that it is managed
appropriately to retain stability. And as a result, we believe
that there will still be an association that will not only look
after the key principles to operate the network within the
bounds of regulation and ensuring that proper programs are
around, but that does not mean that the governance and the
voting has to be the same as today.
And so I think we can achieve the balance of having more
openness, and to me the key issue with a permission-less
network is the ability to have nodes be more fungible and as a
result ensure the integrity of the network over a long--
Mr. Gonzalez of Ohio. I actually think this is the hardest
thing for you. I do not actually think it will occur. If I had
to predict, I just do not think it will occur because they are
just fundamentally in conflict. When you talk to crypto purists
or blockchain purists, these things do not match. So I do not
think it will happen. I think what we are most likely to see is
a 100-member organization that you guys basically control,
which, frankly, I love the innovation, but that scares me, if I
am being honest.
And then the last point on Calibra specifically, a quick
question: Is it the only wallet that will be directly
integrated to Facebook?
Mr. Marcus. Congressman, it will be interoperable with
other wallets.
Mr. Gonzalez of Ohio. But directly integrated.
Mr. Marcus. Calibra Wallet will be integrated in WhatsApp
and Messenger, alongside other wallets for traditional fiat
payments.
Mr. Gonzalez of Ohio. And so as a fully controlled company
of Facebook, a subsidiary of Facebook, the argument that you
will not be sharing data across--I would imagine you share data
between Facebook, the Big Blue App, Instagram, and Messenger. I
would be shocked if you are not also sharing data at some point
with Calibra and Facebook. I hear you: ``We promise we will do
this.'' Back to what I said at the beginning, nobody trusts you
right now.
I yield back.
Ms. Tlaib [presiding]. Thank you. The gentlewoman from
Pennsylvania, Ms. Dean, is recognized for 5 minutes.
Ms. Dean. Thank you, Madam Chairwoman.
Mr. Marcus, thank you for being here before us, and what I
would like to do is, with a focus on that notion of trust,
number one, say that I was dismayed by your comments that you
said we do not need to trust you--I think this was before the
Senate--that we do not need to trust Facebook because there are
28 other partners, and eventually 99 other partners in the
association.
No, we do need to trust you. We absolutely need to trust
you.
Before we look forward to the possibility of Libra, why
don't we look back and take a look at the record $5 billion
recommended fine against Facebook. Could you be very specific,
not euphemistic but very specific, as to the wrongdoing that
generated a $5 billion recommended fine?
Mr. Marcus. Congresswoman, first, I do agree absolutely
that trust is essential and that Facebook should be trusted.
What I meant in my comments is that even if you do not, you
will not need to because Facebook will not have outside power
or governance over the network.
Ms. Dean. I wonder if maybe you would answer the other
piece of my question, which was, it is tough to trust when the
collection, storage, and misuse of information of your users
generated a $5 billion recommended fine. Can you be specific?
What have you learned? What has Facebook learned? What is the
specific wrongdoing for which you are being fined?
Mr. Marcus. Congresswoman, I cannot comment on the FTC
investigation because it is not yet public, but what I can tell
you is what we have learned. And what we have learned is that
we cannot launch a service and then figure out how it can or
cannot be misused. We have to take steps in order to ensure
that what we launch is actually--
Ms. Dean. You cannot be more specific than that when the
very thing you are putting before us today, a preformed
association, is the exact same idea of what you just talked
about, putting something forward without really testing it all
first?
Mr. Marcus. Congresswoman, nothing is launched and nothing
will launch until all concerns are addressed.
Ms. Dean. Again--
Mr. Marcus. I made that--
Ms. Dean. Again, Facebook has to learn some lessons,
lessons that you can actually say in open testimony to the
public as to the wrongdoing and the misuse of information.
Please, assure us that Facebook has the ability to say so now.
Mr. Marcus. Yes, Congresswoman, we have made mistakes, it
is true.
Ms. Dean. What are those mistakes, so that we can learn and
make sure that you have learned?
Mr. Marcus. We have made mistakes around how to best
protect consumers' data and privacy. We have been working on
getting better at that.
Ms. Dean. Did you share consumers' data in unauthorized
ways?
Mr. Marcus. Congresswoman, there were a number of issues,
and we made--
Ms. Dean. So, the answer is yes. Thank you.
Mr. Marcus. --a number of mistakes, and we--
Ms. Dean. The answer is yes. In connection with that fine,
consider this: The FTC's investigation was set off by a New
York Times and Observer of London report which uncovered that
Facebook, the social network, allowed Cambridge Analytica, a
British consulting firm to the Trump campaign, to harvest
personal information of its users. Do you find that incredibly
troubling?
Mr. Marcus. Yes, Congresswoman, but those things are not
possible anymore on the Facebook platform.
Ms. Dean. But they were possible and they took place.
Mr. Marcus. Because we reacted too slowly, but this is
not--
Ms. Dean. You allowed the harvesting of information for the
Trump campaign. Is that correct?
Mr. Marcus. Congresswoman, I do not have the details--
Ms. Dean. Thank you. It is apparent that the reporting
shows so.
Let us flip to the other side. I think before you move on
to Libra, you ought to clean up the messes of the past and be
very transparent. The opaqueness is not working.
Let us talk about this. This is structured as a nonprofit,
and yet we know that you are going to take dividends or
interest and then distribute it out to the association members.
Is that correct?
Mr. Marcus. Congresswoman, yes, this is correct.
Ms. Dean. Will that be dividends and income?
Mr. Marcus. Congresswoman, for whatever streams of income
the association will pay out and not keep because it is a
nonprofit, it will not generate a profit for itself. It will
pay appropriate taxes. And I do want to say that I completely
agree with your statement that this process cannot be opaque.
It has to be in the open. And this is exactly why we have
shared our plan so openly--
Ms. Dean. And yet you had trouble being transparent about
the past, so I do worry about the future.
What is the projected income that will be generated, the
interest that will be generated, say in the first year?
Certainly, you have some timelines: a first year; a second
year; a third year. What is the income you are anticipating for
Facebook?
Mr. Marcus. Congresswoman, we are not optimizing for that.
What we are optimizing for--
Ms. Dean. I do not want to talk about optimizing. I want to
talk really hard facts, numbers that people can dig into,
because I do not think the simple example you gave of the young
woman trying to send $200 and you guys are just on a mission to
help her send money to her mother in a war-torn country really
explains why you would want to get into this business. It has
to be for profit? Where is the profit?
Mr. Marcus. Congresswoman, we have done that for
communications, for the very same woman you were describing.
Now, she can communicate with her family for free using our
products. It was not the case before those products were
available.
Ms. Dean. I will note--
Ms. Tlaib. Time is up.
The gentleman from Indiana, Mr. Hollingsworth, is
recognized for 5 minutes.
Mr. Hollingsworth. Good afternoon, Mr. Marcus. I appreciate
you being here and investing some time with us and talking
about these things.
I wondered if you might take a deep breath, and take a step
back. This is something that you are clearly passionate about,
something that you clearly believe in. I wonder if you might
tell us kind of what that North Star is? I know you have said
it many times here, but I wondered if you might say it again,
kind of why are you so passionate about this? Who is this going
to help and how is it going to make a difference to that
person?
Mr. Marcus. Thank you for that opportunity, Congressman. I
am passionate about this because too many people are left
behind, the costs are too high, and the very people who are
left behind are the people who cannot afford to be left behind.
So the less you have, the more you pay within our current
financial system, and the more you need to depend on digital
money and free or very low cost services to move your money
around, the less access you have. And so we believe that
advancing technology and building the ability for people with a
simple $40 smartphone and a basic data plan to have access to
digital money services would be a huge progress for many people
who need it the most.
Mr. Hollingsworth. All right. Certainly, the fields of
Indiana are far from Silicon Valley, but that is exactly
something that they can sympathize with, the feeling as though
they are on the outside of the financial system or marginally
hanging onto the financial system or that the costs of using
the financial system are very high to them. That is something
that I hear every day all the way across the district, and it
is something that is really important to them. This committee,
over a number of years, has done a lot of great work in trying
to right-size some of the regulatory framework, trying to help
participants get into the market, trying to enable and empower
those Hoosiers, who are Americans, and those around the world
that you mentioned as well.
If the architecture of this is to be a transaction-oriented
platform, tell me a little bit about how that differs from a
cryptocurrency? Because this is really a digital currency
versus a cryptocurrency, and the architecture is very
different, and I wanted to talk about that for a second.
Mr. Marcus. Congressman, there are two parts that are
different.
Mr. Hollingsworth. Yes.
Mr. Marcus. The first one is really the digital currency
itself because it is backed one for one with a very stable
reserve that will confer stability to the digital currency.
Mr. Hollingsworth. When you pay something, you know what
the value is that you are paying, and all the stories about
cryptocurrencies--gosh, I paid for my pizza with this, and I
could be a billionaire today if only it were worth that then,
right? So, it's designed for stability in the system to ease
transaction flow?
Mr. Marcus. Correct. This is one. And, two, the way that
the technology has been built and the blockchain has been
designed, it has been designed for speed and scale so that it
can meet the demands of the large community that we hope to
serve one day.
Mr. Hollingsworth. Right, but the fundamental difference in
the architecture--and, again, I will not purport to be a
technology expert--is that this is not a permission-less
system, right, in the sense that it is peer-to-peer? This will
go through a central clearinghouse that says XYZ individual
owns Libra because they are in this register. They can access
it, but you have to be a permissioned corporation to access it
or a permissioned member to access that database. Is that
right?
Mr. Marcus. It is partially right, Congressman. The
blockchain is a permissioned but open blockchain, and as a
result, you do not need to be a member to be able to build
services or products on top of the blockchain.
Mr. Hollingsworth. Truth. Right. To build services on top
of, but you cannot go in and make changes to the ledger itself,
right? That requires permission?
Mr. Marcus. Congressman, there is no central body that
actually decides what can be added to the blockchain. The way
that the consensus algorithm that is used works is that a
transaction is proposed, and then as long as two-thirds of the
nodes approve of that transaction being added to the ledger, it
is added to the ledger.
Mr. Hollingsworth. Right, right, which is different,
though, than a pure peer-to-peer technology, right?
Mr. Marcus. That is correct, Congressman, because it uses a
consensus algorithm.
Mr. Hollingsworth. And I guess what I am getting to is this
is a different type of asset/currency that looks and feels a
lot more like a currency and should be regulated more like a
currency, right? As though it is a transacting business, where
there is a central place at which we can do AML work? We can do
other pieces. That is very different than a cryptocurrency and
I guess maybe haphazardly or maybe in a C-minus way I am trying
to draw that distinction so that individuals understand that
this is different than a pure peer-to-peer network that has no
ability to do that by virtue of its design. But the
architecture that you have thoughtfully proposed here--not put
in place but thoughtfully proposed--has that central piece
where we can do that very work. Because the goal of AML is to
deny access to the financial system by nefarious actors, right?
We have the ability to do that here, that we would not
otherwise have the ability to do in a pure peer-to-peer
architecture. Is that true or untrue?
Mr. Marcus. Congressman, yes, and that is why we took the
permissioned approach to start with so that we can have trusted
parties run nodes to start.
Mr. Hollingsworth. And I sincerely appreciate how that
architecture reflects the North Star that you first--
Ms. Tlaib. The gentleman's time has expired.
Mr. Hollingsworth. --started talking about. Thank you, Mr.
Marcus.
Ms. Tlaib. The gentleman from Illinois, Mr. Garcia, is
recognized for 5 minutes.
Mr. Garcia of Illinois. Thank you, Madam Chairwoman. Thank
you for being here this morning, or this afternoon now, Mr.
Marcus.
Following up on some of the previous questions, what is in
it for partners if not to entrench Facebook or their own market
power by participating in this coalition that you have
assembled?
Mr. Marcus. Congressman, thank you for your question. The
different members have different roles that they will play on
top of the Libra network, and it will benefit their core
business. So, for instance, when you think about the network
companies like Visa and Mastercard, they will play a role of
enabling that Libra is accepted at their merchants, and as a
result will have a business opportunity to do so. When you
think about the companies like Uber and Lyft, they will be able
to not only reduce costs for accepting payments, but also a
number of their drivers, when they get paid, send money back
home, and they could build services around this at a lower cost
for them.
Mr. Garcia of Illinois. Okay, so it is all benevolence.
Mr. Marcus. No, it is not, Congressman.
Mr. Garcia of Illinois. Let me change gears briefly.
Hawaii's Senator Brian Schatz has noted, in a private
conversation he has had with some of the 27 members of the
Libra Association--and the Association includes companies like
Uber, Mastercard, and Visa as well as some nonprofits like
Facebook and Mercy Corps--that Facebook has portrayed the Libra
Association as a collective as if Facebook is just one of many
voices in this venture. But as Senator Schatz revealed,
Facebook's voice is more like the godfather's voice in the
family. It is true that it is just one voice among many, but it
is also the only voice that matters.
Here is what Senator Schatz said: ``Members of the
consortium actually have lots of questions, too, similar to the
questions that are being offered on this dais. And they have
great reservations about moving forward, but they do not want
to be left out because of Facebook's market power.''
Facebook's history with partners has added to their
caution. The game maker Zynga, for example, faced a dramatic
loss of revenue after Facebook backed away from a close
relationship with the company. Facebook also strained
relationships with many publishers last year when it changed
the algorithms behind its newsfeed to de-emphasize news
stories.
My question is: Are they participating because they are
afraid of Facebook and they might as well be friends with
Facebook?
Mr. Marcus. No, Congressman, and I want to fully own the
fact that we are in a leadership position now, but we will not
be in that same position by the time the network launches. And
the existing 27 other companies and the number of other
companies, the long list of other organizations all around the
world that are applying to join the association just want to
join because they believe that together we can build a better
system for people.
Mr. Garcia of Illinois. And a better world, I suppose.
A quick question. What content will Facebook harvest when a
user transacts with Libra? Will it be just the transaction
data?
Mr. Marcus. Congressman, yes, so on the Calibra Wallet, we,
of course, will need to authenticate consumers before they can
open an account. But there will be no other data than the
actual transaction data that is needed to serve the purpose of
the wallet.
Mr. Garcia of Illinois. What other data will Facebook
monetize apart from the transaction data?
Mr. Marcus. Congressman, we will not monetize transactional
or account data nor share it even with Facebook itself.
Mr. Garcia of Illinois. Okay. We have learned that Facebook
has repeatedly allowed third-party users access to data without
Facebook users' consent. Now Facebook promises that its Calibra
subsidiary will not share data with Facebook. How can we be
sure that this policy will not change in the future? And what
would enshrine this promise that you have made?
Mr. Marcus. Congressman, it is a very fair question, and I
understand that people have concerns, and commitments have been
made, and here there is one thing that will be very different,
which is that if we fail to earn people's trust and fail to
deliver on our commitments, then they will not use the Calibra
Wallet. We will have portability built in, and we will have the
ability for anyone to use any of the many wallets that will be
available that will all be interoperable. And if we do not make
good on commitments and if we do not earn people's trust by
making good on these commitments for very long periods of time,
we cannot actually win. And we do want the Calibra Wallet to be
successful, and as a result, we will have to make good on these
commitments.
Mr. Garcia of Illinois. Thank you. I yield back, Madam
Chairwoman.
Ms. Tlaib. The gentleman from Virginia, Mr. Riggleman, is
recognized for 5 minutes.
Mr. Riggleman. Thank you, Madam Chairwoman, and thank you
for being here, Mr. Marcus.
One more time, since you can see I am usually close to last
in these proceedings, what is your title one more time as we go
forward?
Mr. Marcus. My title is, I am the head of Calibra at
Facebook.
Mr. Riggleman. Head of Calibra at Facebook. I have some
questions, and we are going to get right into it, because we
have had enough getting going on here.
My first question is: After a White Paper, there is usually
an implementation plan. Do you foresee all of your partners
being involved with the implementation plan for Libra or for
Calibra? And once in place, can we as partners in the U.S.
Government look at the regulatory side of this as we go
forward?
Mr. Marcus. Congressman, yes, this is my commitment that we
will not go forward until we have addressed all concerns and
met the regulatory bar and oversight bar that is needed for
this network to operate the right way.
Mr. Riggleman. Yes, sir, and you might have answered this,
but are the partners right now involved in the open-source
development of Libra and its applications?
Mr. Marcus. Congressman, some of them are stepping up and
are actually starting to be involved in the development, and I
expect that since we just open-sourced the code base about 4
weeks ago, we will have a lot of outside contributions going
forward.
Mr. Riggleman. That was my surprise, so I took a little bit
of a look at Libra Core, the JavaScript front end, it actually
accesses the back end, which is Rust. It helps with the actual
transactions. And I know it is very, very new, but what
surprised me was it looked like there is already an
international flavor to it. I think Rust is 37 people in San
Francisco, so I went ahead and did a GitHub search on who is
actually leading the development on the Libra Core side, and it
looks like--I think it is going to be international because it
looks like a native Nigerian is actually building the actual
Libra Code in front of the code development of Libra Core. When
I look at things from an intelligence background, I wonder, is
this going to be international? Are there going to be
scalability issues? Because when you look at the number of
transactions that you are doing right now, but I was really
surprised by the Rust language as it was in the background.
My first question is: Why was the Rust language chosen as
the implementation language for Libra? And do you believe right
now from what you have seen, that it is mature enough to handle
the issues and the security challenges that will really affect
these large cryptocurrency transactions?
Mr. Marcus. Congressman, excellent question on the security
of the code and who can commit to the code, and the Libra
Association will own the repository for the code, and as a
result, while there are many flavors and branches being
developed by third parties, only safe, verified code will
actually be committed to the actual Libra Core base that is
going to be under the governance of the Libra Association.
Mr. Riggleman. And that is what I really am hoping, because
right now--and when I was looking at the nightly build
releases, it looks like Libra was built on nightly builds of
the Rust programming language. And it is a little interesting
because that is not how we usually did releases in the DOD, and
I was wondering what features of Rust are only available in the
nightly builds, and this is something you can get back to me
on. What features are only available in the nightly builds that
are not in the official releases of Rust? And does Facebook see
that as a concern that they are depending on unofficially
released features of the Rust program language? In other words,
do you see right now why the nightly releases and do you see
this as just a function of the prototyping phase of this?
Mr. Marcus. Congressman, I do not have all the answers to
your very technical questions, but I commit that we will get
back to you with more details on your question once my
technical team can get back to you.
Mr. Riggleman. And, really, some of this is not just based
on technical questions but the international applicability of
Libra. For instance, we just had 8 members of the major banks
sitting here, and their issue was information sharing based on
laws that we have in place right now and the confusion over
sharing that data with foreign subsidiaries. And I will link
into this: If we already have those laws on the books, and if
we are looking at CFT, if we are looking at AML, based on my
background that is some of the things that concern me. And also
with scalability, you are looking at large transactions and
blocks, I think, that maybe have never been done before, and
you can probably agree that is why we need the White Paper and
the open-source development. But when you are looking at the
issues that you have for regulatory, especially for AML, I
think the problem for me is we have to look at this as an
international problem because I think eventually you are going
to have international wallets. I think wallets will be built
around the world, and I think that is something that we are
going towards, and that is why the scalability question, who is
actually doing this, who is partnering, and this is very
concerning to me. And it is really easy to access these
individuals on GitHub and to see that somebody from Lagos,
Nigeria, is the main code writer for one of these instances is
something that concerns me, just based on my background.
Mr. Marcus. Those are absolutely fair concerns,
Congressman, but, again, I want to stress that the Libra
Association as a governance body will actually validate
committers to the code and will make sure to be very thoughtful
about who can commit to the code. And I would be happy to
follow up with your office on--
Mr. Riggleman. And at the end, I think many Members,
bipartisan-wise, would love to see an implementation plan built
on top of the White Paper. Thank you, sir.
Mr. Marcus. Thank you, Congressman.
Ms. Tlaib. The gentlewoman from Texas, Ms. Garcia, is
recognized for 5 minutes.
Ms. Garcia of Texas. Thank you, Madam Chairwoman, and thank
you, sir, for being here. I know it has been a long day, and I
think the end is almost in sight. But I must tell you I have
some real concerns about your premise that you are really doing
this to help the unbanked. For me, it just seems that although
you have said in a Washington Post article that this will
enable anyone who has a $40 smartphone and a basic data plan to
have access to a digital form of money--I do not know about
you, but my smartphone costs a lot more than $40, and my data
plan costs maybe that or more.
How is this really going to work for the unbanked? The
unbanked, to me, are like the people in my district, a working-
class district in Houston, who really are money-order or
paycheck-to-paycheck, cash-only consumers. How is that really
going to help them? How are they going to really have access to
something like this and be able to negotiate what I think could
be a very complex system?
Mr. Marcus. Congresswoman, thank you for your question. The
reason in America that people remain on the fringes of the
system is because the costs are too high, and--
Ms. Garcia of Texas. But the cost of the phones and data
plans are also high. Are you going to work with your Facebook
foundation to provide more connectivity for people around those
areas who do not have access to mobile plans?
Mr. Marcus. Congresswoman, the focus of Calibra is really
on the financial side and enabling people to have digital
money. But the costs of smartphones and data plans are coming
down as a result of competition in--
Ms. Garcia of Texas. But why would they need digital money?
They can get that $20 bill that my colleague was showing off at
the other end?
Mr. Marcus. I'm sorry. I could not hear you.
Ms. Garcia of Texas. I said, why would they want digital
money if they can get the green dollars?
Mr. Marcus. Congresswoman, they would because probably they
need to send a portion of that money to someone in another
country or on the other side of the country, and the ability
for them to access these--
Ms. Garcia of Texas. Let us go to that example that you
used, $200 that somebody wants to send, and I think you said it
would be, I forget, did you say--
Mr. Marcus. $14.
Ms. Garcia of Texas. $14? I guess you are talking about
either a money order or some sort of wire transfer?
Mr. Marcus. Cross-border remittance or payment.
Ms. Garcia of Texas. They can do that fairly quickly, and
they can do it without any advertisement. They can do it
without any other charges. So the consumer is the decider of
what is going to happen, right? Like with you, how do you see
the person who is utilizing this? Are they a customer? Are they
a consumer? How will you treat this? And are you just frankly
using that person to be able to sell another ad and do
something for your company?
Mr. Marcus. No, we are not, Congresswoman, and I do want to
stress that not only the current system is expensive, but it is
extremely slow. Cross-border payments take on average 3 days--
Ms. Garcia of Texas. I think you have already said that,
but I am talking about in terms of costs. I sit here and I
frankly cannot believe that you are not going to charge anybody
for anything. You are not a charity, right?
Mr. Marcus. No, Congresswoman, and I can explain--
Ms. Garcia of Texas. You are not a charity. How much money
have you all already invested in this project? I think an
article I read said you have been in this for a couple of
years. How much have you all spent already?
Mr. Marcus. Congresswoman, quite a bit of resources, but I
can explain what--
Ms. Garcia of Texas. How much have you--
Mr. Marcus. --the upside is for Facebook.
Ms. Garcia of Texas. How much have you spent?
Mr. Marcus. I do not know the exact number but--
Ms. Garcia of Texas. $20 million, $30 million, $40 million,
$100 million?
Mr. Marcus. We have invested what is required, and I think
that is why it is a good--
Ms. Garcia of Texas. So you are not going to tell me how
much you invested, but you are trying to convince me that there
is not going to be a time that you are going to want to recoup
that investment?
Mr. Marcus. Yes, we will, Congresswoman, and--
Ms. Garcia of Texas. And how will you do that without
charging people, charging for ads, or charging the person who,
in my view, you are using for your agenda to get--I do not even
know what to call what you all do. It sounds almost like
something straight out of a Dan Brown novel: ``We belong to the
Libra. We get to decide.''
Mr. Marcus. Congresswoman, if I may answer your question,
I--
Ms. Garcia of Texas. I want you to be more transparent.
Mr. Marcus. I want to be more transparent, and I want to
tell you what is in it for Facebook, if you give me 1 minute.
Ms. Garcia of Texas. Well, you have 20 seconds. That is all
I have.
Mr. Marcus. Okay. I will do it in 20 seconds. There are two
things that we will benefit from at Facebook. One is we have 90
million small businesses and a lot of users who will have the
ability to transact with one another and they currently cannot
transact with one another. And once that happens, that means
more commerce--
Ms. Garcia of Texas. But see, again, that is something they
can do with a credit card--there are so many other ways that
they can do that.
Mr. Marcus. They cannot in a number of regions because they
do not have access to those services.
Ms. Garcia of Texas. Regrettably, I have lost my time, but
hopefully--
Ms. Tlaib. Time has expired.
Ms. Garcia of Texas. --you or someone from your group can--
Ms. Tlaib. The gentleman from Tennessee, Mr. Rose, is
recognized for 5 minutes.
Mr. Rose. I want to thank Chairwoman Waters and Ranking
Member McHenry for holding this important hearing, and, Mr.
Marcus, if you want to finish the answer you were in the midst
of right there, I would appreciate hearing that answer. You
might just start over, actually.
Mr. Marcus. Thank you for the opportunity, Congressman. The
two ways that Facebook will make money off the Libra network
is, number one, the ability for the 90 million businesses and
the billions of users who are currently on our various products
to transact with one another. And if they can suddenly transact
with one another--some of those businesses cannot even accept
digital payments today, so the idea that there is more commerce
on the platform will actually drive those small businesses to
expand, and as they expand, they will buy more ads on the
Facebook platform, and that will be an indirect way for
Facebook to benefit.
The second way that we will benefit is that over time, if
we earn people's trust and they use the Calibra Wallet, we will
offer a range of services, lower-cost access to capital and
others, in partnerships with banks and financial institutions,
and this will be another source of revenue for the company that
is completely de-correlated from ads, but that is in many
areas.
Those are the two ways that Facebook will benefit from the
Libra network being a success.
Mr. Rose. Okay. Thank you. One of my general thoughts
surrounding blockchain space comes down to a simple dichotomy:
either the crypto-tokenization blockchain space will be a
valuable innovation in the long term; or it is not a
particularly valuable innovation. If the former is true, then
it is important that the U.S. creates as certain a regulatory
environment or regime as possible. By creating regulatory
certainty, the value of the growth in this space can be
captured here in the United States, whether that value be in
job creation or the creation of intellectual property or other
benefits. If the latter is true, and this is not a particularly
valuable innovation, then any discussion may not bear fruit,
but it is ultimately no harm, no foul.
However, the truth of the matter is that whatever one's
feelings are on the Libra Project or any other blockchain-
related efforts, currently there does not seem to be an
adequate regulatory structure to ensure that innovation can
flourish while consumers are still protected. That is why I am
a cosponsor of the Token Taxonomy Act. There are still many
questions to answer in this space, but the goal of the Token
Taxonomy Act is one that is quite laudable. Not all blockchains
are created equal, and we as a committee and a Congress should
discuss the nuances of distributed ledgers versus blockchains,
permission versus permission-less blockchains, and utility
tokens like Filecoin versus cryptocurrencies like Bitcoin.
The Token Taxonomy Act is a good first step in that it aims
to codify a regime for tokens that do not fit well into our
current securities law framework.
Mr. Marcus, was it a coincidence that the Libra Association
decided to headquarter in Switzerland, when Switzerland has
previously outlined clear regulatory guidelines for the
industry?
Mr. Marcus. Regulatory clarity in Switzerland was just one
of the components, but, yes, it was factored in the decision.
Mr. Rose. Libra strikes me as being very similar to a
currency ETF both in that its value is derived from a basket of
currencies and the way the basket is managed seems to operate
much like an ETF. If this is true, perhaps it should be
regulated by the SEC. Perhaps this is a mischaracterization.
The point is that we need to carefully study the mechanisms of
any new innovation in this field to understand how they should
be regulated. Leveraging existing regulatory agencies like the
CFTC, the SEC, and State agencies makes sense, but it is our
job here in Congress to write laws that make it very clear who
will be the ultimate regulator of a potential product. It is
Congress' job to give the SEC clear rules that they can
interpret and apply. The SEC is doing its best, but they are
stuck applying a litany of very old rules to 21st Century
technology. We need to help them succeed by providing some
updated guidance. That is the only way we are going to ensure
that any development in this space is safe and sound and occurs
right here in the most innovative economy in the world.
With that, I yield back the balance of my time.
Ms. Tlaib. Thank you.
Without objection, I would like to enter into the record
the following materials: a letter from the Electronic Privacy
Information Center, EPIC; ``Diversity in Blockchain's Initial
Review of Facebook's Project Libra; a letter from the
Independent Community Bankers of America; a letter from
Americans for Financial Reform Education Fund; a New York times
op-ed written by Chris Hughes, the co-founder of Facebook,
entitled, ``It is time to break up Facebook''; and another op-
ed by the same person in the Financial Times entitled,
``Facebook Co-founder, Libra coin would shift power into the
wrong hands.''
Without objection, it is so ordered.
Ms. Tlaib. With that, I would like to recognize myself for
5 minutes. Thank you, Mr. Marcus, for joining us. A lot of
people have been using the word ``innovation.'' That is a bit
misleading. I think what this is really about is making more
money, owning people's information, owning their
identification, owning their person, all of which very much is
interconnected with the livelihood of the residents we
represent.
Mr. Marcus, who picked the first 28 corporations of the
Libra Association?
Mr. Marcus. Congresswoman, the original 28 members are a
result of a wide outreach, and those are the first out of 100.
Facebook will not be in a position to pick and choose the next
members and will not be involved in the process. This is a
process that is actually now driven and solely in the hands of
the Libra Association.
Ms. Tlaib. Thank you, Mr. Marcus. So, Marc Andreessen sits
on the board of Facebook. Mark Zuckerberg, the CEO of Facebook,
sits on the board of Breakthrough Initiatives. Peter Thiel is
the founder of PayPal and is on the board of Facebook. Ben
Horowitz is the founder of Anderson Horowitz and on the board
of Lyft. Just looking at that, simply looking at the small
sample of individuals, there appears to be multiple close
relationships on Facebook's board and across the Libra
Association members.
Recently, Forbes asked the following question: Is Facebook
forming a crypto mafia as the Libra Foundation members boost
each other's business?
One example they provided is that Anchorage, one of Libra
Association's founding members, raised funding from Visa, which
is also a Libra Association founding member. You do not think
that creates a power imbalance for a small group of people to
manage a high percentage of the world's transactions? Are you
worried about undue influence?
Mr. Marcus. Congresswoman, I appreciate your question. I
can assure you that the participants up to this point are
participants that have joined because they can add value on the
network and provide services that are relevant to the people we
serve--
Ms. Tlaib. I am sure they are valuable, Mr. Marcus. No one,
I think, would oppose that they are valuable. But each of the
Libra Association companies have investors or shareholders to
answer to, so how do you see them serving two masters in a
competing payments world?
Mr. Marcus. Congresswoman, we hope that the Libra network
is just a network and that every single company will be able to
build services on top of the network the same way that
companies build services on top of the Internet, and as a
result, we believe that conflicts will be limited by that, and
the fact that, 100 members by the time we launch.
Ms. Tlaib. Yes.
Mr. Marcus. But we hope that we will have many more, and,
again--
Ms. Tlaib. So can a member of the Libra Association, the
group of friends, be voted out by Libra users?
Mr. Marcus. Congresswoman, no, this is not currently
contemplated. But the way that the governance will evolve will
allow for that in the future.
Ms. Tlaib. Mr. Marcus--and this is important--the banked
and the founding members have a choice to protect their data,
but will the unbanked and underbanked have to trade their data
and privacy to transact?
Mr. Marcus. They will not, Congresswoman.
Ms. Tlaib. How is that possible?
Mr. Marcus. Because this is a payments network and a
payments service, Congresswoman, and consumers will have
choices. And if they want to use a wallet that is solely in the
business of payments and not in the business of advertising at
all, they will have the choice.
Ms. Tlaib. One of the barriers for the unbanked community,
as you probably know, is access to an ID. So if the same Know-
Your-Customer/anti-money-laundering restrictions exist here for
the Libra network and wallet, how will this serve the unbanked
now?
Mr. Marcus. Congresswoman, this is a very important
question, the problem of identification for financial
inclusion, and this is something that we are actively working
on with a number of outside NGOs and others to find the best
approach. But there are a number of people who have the ability
to identify themselves and who are left behind today, and we
can serve them today.
Ms. Tlaib. The public manages large cryptocurrencies such
as Bitcoin, as you probably heard. However, with the Libra,
each founding member had to pay a minimum of $10 million to
join and become a validator, whatever, node operator, thus each
founding member gaining one vote in the Libra Association
council. How does the Libra Association reflect the diverse
population you are trying to reach, including the underbanked
and unbanked?
Mr. Marcus. This is a really important question,
Congresswoman, and the way that we plan to arrive to the right
level of diversity and representation is by being very
thoughtful at the Libra Association as we add more members
towards the goal of 100 or more members by the time the network
launches.
Ms. Tlaib. Thank you, Mr. Marcus.
I now recognize the gentleman from Wisconsin, Mr. Steil,
for 5 minutes.
Mr. Steil. Thank you. Mr. Marcus, I appreciate you being
here. I have been listening to today's testimony. I appreciate
you guys innovating, bringing forward a White Paper, having
this discussion about how to properly regulate what is a new
idea. I think some of the conversation today has drifted a bit,
where people are coming after you as if you launched this
product, and now we are upset that you did that without the
regulatory framework in place. I commend you for the fact that
you brought forward a White Paper. You are discussing the idea.
We are having the conversation today so we can be ready
tomorrow if you choose to move forward with this.
In particular, in listening to the discussion today, I
think it is clear that Libra exhibits characteristics of many
different things for which we have a regulatory construct. We
discussed whether Libra should be viewed as a currency, as a
security, an ETC, a money market fund, et cetera. And whatever
concrete institution ultimately emerges from this first draft
of the White Paper, I think you have stated you do not dispute
the fact that at some level it is going to be regulated and you
are open to that.
You also signaled that there are deficiencies in the U.S.
regulatory approach, and that was part of the decision-making
process to locate the Libra Association in Switzerland and not
in the United States or in Silicon Valley and under a more
clear U.S. jurisdiction. And for me, if America does not lead
in the digital world, others will. And I am concerned about the
values that some of these others might bring to the table where
I feel confident in the values that the United States
regulatory approach will bring.
And so can I ask you the question how, not if, because I
think we have answered that, that it should be regulated, but
how should we regulate Libra, Calibra, the Libra Association,
to be thoughtful about this in the context of policymakers?
Mr. Marcus. Congressman, thank you for the question. There
is one important point, which is that the clarity of regulation
was definitely one of the factors for Switzerland, but one out
of many.
Mr. Steil. Sure.
Mr. Marcus. I do think that we would have had the ability
from a regulatory framework to do that in the United States,
but it is less clear, to your point, what the framework would
be.
That being said, as far as the Calibra Wallet is concerned,
it is very clear. We are registered as a money services
business with FinCEN and with Treasury. We have State licenses
that we are obtaining and continuing to obtain, and so there is
total clarity there. And I believe that where we need more
clarity is really around the Libra Association and how the
reserve is managed. And even for that point, there is just no
clear regulation right now, even in Switzerland or elsewhere.
And this is why the engagement that we are having with the G-7
working group, the Financial Stability Board, and others, the
conversation that we are having we hope will result in some
form of oversight, especially over the reserve, because this is
something that a lot of people have concerns about. I have
concerns about ensuring that commitment is bound by law when it
comes to the reserve. And that is the commitment we are making,
that we will take the time to find--
Mr. Steil. I appreciate that, and the reason I am digging
in on the regulatory approach is from a policymaker
perspective, the area that I can have the most influence on is
that regulatory framework.
We have noted a couple of times, I think, in your
testimony, that you do not look to be regulated as a security
by the SEC. Can I ask, is there anything specific as it relates
to securities laws that concerns you if you fell under the
regulation of the Howey Test in our SEC regulation that we
should be looking at today to be prepared for tomorrow?
Mr. Marcus. Congressman, I do not believe we are a security
because we are not--
Mr. Steil. Not whether or not you are, but remove that
because I think that will be debated for days and months to
come. But is there anything in the securities law that gives
you pause, that makes you not want to fall under the Howey
Test?
Mr. Marcus. Certainly, because as far as Libra is concerned
it is a payment tool, and we want it to be accessible to
everyone. This is not going to be an investment, and if it was
not available to everyone, then it would not be able to deliver
on its mission.
Mr. Steil. I think that note is helpful about how our
securities law limits people's access into some of the
investment products that we have in the United States, and it
will have a significant impact into the product that you are
looking to deliver.
I want to shift gears slightly. One of the areas in reading
the White Paper and some of the commentary that is out there, I
think there may be a real role in countries with unstable
currencies. And as you look at the global perspective, shifting
away from the United States for a moment--I appreciate your
time today. I will follow up with you on the topic, and I yield
back.
Ms. Tlaib. The gentleman from Massachusetts, Mr. Lynch, is
recognized for 5 minutes.
Mr. Lynch. Thank you. I am not trying to get in the way of
your job, but I do want to say, and I know the gentleman from
Wisconsin is new, but I would respectfully remind him that that
is exactly what Facebook did when they came in without a
regulatory framework, without even a White Paper. That is how
they operate. The mantra for Facebook was, ``Move fast and
break things.'' That was their mantra when they got into
business.
Mr. Steil. Will the gentleman yield for a moment?
Mr. Lynch. No. I have limited time here.
I would add that they also have taken an approach to
business that, rather than ask permission, they just apologize
later, and that is what they have done over and over and over
again with the personal data of their customers. Their business
model--and thank you for coming--is to really use an adhesion
contract, 18 pages, that basically authorizes Facebook to
vacuum up the behavioral surplus, all of the information about
their users, and then they sell it or they deploy it on behalf
of their advertisers. That is the model that you have. And I am
just worried that you are going to use the same model for
Calibra.
What is the terms-of-service agreement going to look like
here? Is it going to be, you click, ``I agree,'' and then all
of your rights are gone? Because that is the model you have
with Facebook, right?
Mr. Marcus. Congressman, if you will give me the
opportunity, I do want to talk about--
Mr. Lynch. Well, really quickly. You have to--
Mr. Marcus. Thank you.
Mr. Lynch. We only have so much time here.
Mr. Marcus. First, I do want to defend the advertising
business model that Facebook has. It enables people--
Mr. Lynch. No, no. I am asking about Calibra. I am asking
about what are you going to do, what is the terms of service
agreement going to look like? Is this going to be another
adhesion contract?
Mr. Marcus. No, Congressman, and we will not share data,
financial data and account data, even with Facebook itself,
Congressman.
Mr. Lynch. Okay. You have not had a good record on that.
Let me ask you a couple of questions. According to ProPublica,
you have about 52,000 data points on every one of your regular
users on Facebook. Is that right?
Mr. Marcus. I do not have the exact answer to that
question.
Mr. Lynch. That is what they have. I think they are right.
We feel that the ability of this to scale is really where
the dangers come in. You have 2.7 billion customers. When you
come in, if this scales--and it is designed to scale, right?--
we are worried that, and not just us in Congress but Jay Powell
over at the Fed, and Treasury Secretary Mnuchin, are concerned
about the impact it would have on monetary policy and the
strength of the dollar. Is this something that could be tested
in a sandbox environment, in a smaller environment where we do
not have to worry about those scaling problems affecting the
economy more broadly or the strength of the U.S. dollar?
Mr. Marcus. Congressman, the first point I would like to
make is that we will--
Mr. Lynch. Would you commit to doing this in a sandbox
environment so that we do not have to worry about the
regulatory issues and the privacy issues? We would have a
chance to look at your product, and it is a product. You get a
token here. That way we would be able to answer some of the
regulatory questions. Are you willing to commit to that?
Mr. Marcus. Congressman, I commit that we will take the
time to address all concerns and to ensure that we do this the
right--
Mr. Lynch. In a sandbox environment.
Mr. Marcus. Congressman, I do not want to get into the
specifics now about--
Mr. Lynch. Well, that is what I am asking you for.
Mr. Marcus. But my commitment to you is that we will take
the time, we will not move fast on this.
Mr. Lynch. The commitment that you are going to take your
time is, first of all, not the way you have operated in the
past, and it is meaningless. It is meaningless. If I tell you I
am going to take my time, what is that? What is that?
Mr. Marcus. Congressman--
Mr. Lynch. That is just an indication of pace. It does not
mean you are going to do anything different than we want you to
do. And I would just be--it looks to me like you are going to,
right from day one you are going to be a systemically important
financial institution, and so you should be ready for that
regulation coming at you on day one, the way you are operating
right now, the lack of transparency.
Let me ask you, Facebook has not done privacy very well.
Would you commit to accepting a fiduciary duty on behalf of the
private--
Ms. Tlaib. The gentleman's time has expired.
Mr. Lynch. Okay. Thank you. I thank the Chair.
Ms. Tlaib. The gentleman from Minnesota, Mr. Emmer, is
recognized for 5 minutes.
Mr. Emmer. Thank you, Madam Chairwoman.
Mr. Marcus, I have heard some incredibly uninformed
comments from Members of Congress today and yesterday. As I am
sure you are aware, Bitcoin is now 10 years old and now
suddenly, magically, Congress is responding. In other words,
after more than a decade, Congress has apparently started to
care.
I am glad that after all these years, Congress has finally
decided to pay attention to the technology that could again,
just like the Internet, upend the way we do everything in our
lives.
Unfortunately, some people want to unnecessarily restrict
it or even ban it. They fear change. Nothing has been more
clear on this committee than the blind aversion to change that
some of our Members have constantly espoused, even when it was
not required, or even the subject of the hearing.
I am amazed at how easily Representatives from California
are so willing to suppress the innovation occurring in their
own State and, as much as they would like to be a separate
country, the benefits those innovations could have for these
United States. I do not want to be partisan. This is not a
partisan technology. In fact, Representative Bill Foster, a co-
Chair of the Blockchain Caucus like myself, has been a long-
time champion and advocate for these innovations. It has never
been a cornerstone of my grandfather's Democratic Party to
oppose innovation.
Chairwoman Waters was, in fact, correct when she began this
hearing that merely learning more about and understanding Libra
does not have to include opposing it. I hope that will be the
same approach to understanding the breadth and depth of
cryptocurrency which Libra does not represent, but thankfully
amplifies our discussion of that topic.
Unfortunately, Mr. Marcus, you and your company have
decided to approach this undertaking with as equal a level of
ignorance and misunderstanding as those who wish to quell any
new developments in cryptocurrency. I am afraid you have failed
to realize that there is much to do in Washington in terms of
educating both Members of Congress and regulators on the
benefits of this technology. I hope someone whose opinion you
value conveys to you how wrong you have been operating. People
have concerns with the amount of data you have on them, and now
you want to be their money, too.
I hope members of this committee investigate the fact that,
``The people already have options separate from your central
control.'' My colleagues are incredibly fearful of the money
laundering and criminal activity in cryptocurrencies, but the
dollar in all fiat-backed currencies have been proven to be the
largest means of illicit behavior and money laundering. This
does not mean we need to suppress individual freedom.
Individuals insistent on the exclusion of middlemen and the
freedom of the individual will continue to create open networks
separate from central control. Unfortunately, Libra is not
designed to minimize middlemen. It, in fact, relies on them.
At the end of the day, Libra presents an incredible
opportunity to define what it is not. It presents an incredible
opportunity for everyone on this committee to learn more about
actual cryptocurrencies. The committee has already sent out a
press release that this is only our first step in regulation of
oversight of Libra. A lot has been said about the concern that
the payment systems are unregulated. However, payment systems
like the one you propose are already subject to regulation by a
number of agencies. I think it is important that my colleagues
have a full understanding of the law as it currently exists so
that we may make better decisions here.
Treasury, as demonstrated by Secretary Mnuchin on Monday,
regulates payment systems for anti-money-laundering compliance.
The FTC regulates them for fraud. Each State regulates them for
consumer protection, among other things. New York has its own
specific regime and so forth. This regulatory landscape applies
to payment systems like Libra and is different and distinct
from laws that may or may not apply to typical social media
platforms.
When this hearing was announced, I was optimistic that this
was finally the time a major company wanted to be involved with
this revolution and that the Majority wanted to actually think
and learn about these new innovations. It appears, however,
they have decided to entrench themselves in the fear of the
unknown and the fear of change. And your company has done
nothing to allay these fears.
As you move forward acknowledging that the bill to ban your
actions has no constitutional basis, let alone a basis in
logic, and that no one is willing to actually put their name on
this proposal to ban private innovation, will you work with me
and invest in educational efforts to show these Members of
Congress that we should work to better understand the
innovations underlying cryptocurrency rather than doing their
best to put their head in the same and ignore change?
Ms. Tlaib. The gentleman's time has expired.
The gentleman from Texas, Mr. Green, who is also the Chair
of our Subcommittee on Oversight and Investigations, is
recognized for 5 minutes.
Mr. Green. Thank you, Madam Chairwoman.
Mr. Marcus, I am concerned about the dollar. As you know,
there is a competition for currency supremacy. The dollar is
the preferred currency in the world. The yen competes, the euro
competes, and there are others. But the question I have for you
is this: How will this impact the dollar? This is our currency.
The dollar is the means by which we have the opportunity to
influence the economic order in the world. How will this impact
the dollar?
Mr. Marcus. Congressman, the first thing that I want to
state is that we are not competing nor do we want to compete
with the dollar and--
Mr. Green. The question is not whether you want to compete
with the dollar. The question is, what impact will you have on
the dollar? The dollar is supreme. Do we give up our supremacy
because of a cryptocurrency?
Mr. Marcus. No, Congressman, and we're engaged in
conversations, notably with the Fed and the Financial Stability
Board, to explore how we can ensure that the dollar and
monetary policy is not influenced at all by--
Mr. Green. Here's the concern. Things tend to metamorphose.
Things rarely remain stagnant. We live in a dynamic world.
You're starting out with just a small piece of the economy as
it were. We don't know what this will become. Surely, you can
understand the consternation of people who are charged with the
responsibility of overseeing the Fed, which happens to be the
means by which we have influence with our economy and the
dollar.
So we have this consternation and I would greatly
appreciate it if you could allay some of my consternation with
reference to the impact that this may have on the dollar.
Mr. Marcus. Congressman, the reserve will be composed
mainly of dollars and we expect that a number of--
Mr. Green. Excuse me. Sorry to be rude, crude, and
unrefined. Please forgive me, okay, but my time is limited.
You said, mainly of the dollar. You said earlier when
testifying in this room to questions posed by another Member
that another country could also buy into the reserve. I believe
China may have been mentioned.
Is it true that China can buy into this reserve?
Mr. Marcus. No, Congressman. The current contemplated
reserve is to be approximately 50 percent dollars and a number
of other currencies, euro, pound, yen, notably, and--
Mr. Green. Euro, pound, yen, and I've indicated to you
earlier that we are in competition with the euro. The pound we
would be under competition with it, as well. The yen, that's
the Japanese currency, we would compete there.
So you have these other currencies and you have the dollar,
but the question becomes, how is this going to be balanced such
that it doesn't impact the marketplace itself for currency?
Mr. Marcus. Congressman, I believe that the use case for
Libra is such that it will be used mainly outside of the United
States, although it has real solutions to real problems in the
U.S., as well, and as a result, because of the composition of
the reserve, we believe that the inflow to dollars will be
important and as a result retain the relevance, of course, of
the dollar.
Mr. Green. Our dollar is a currency that is preeminent
outside of the United States. So saying to me that this is
something that will impact things beyond our borders does not
give me the level of comfort I need when my concern is with the
dollar, which seems to transcend boundaries.
Any place in the world that you happen to visit, the dollar
is available to you. There are countries that prefer the dollar
to their own currency. I'm still asking for more, and if you'll
send me something, I'll be more than honored to peruse it, and
I will yield back the balance of my time.
Mr. Marcus. Thank you, Congressman.
Ms. Tlaib. The gentleman from Texas, Mr. Gooden, is
recognized for 5 minutes.
Mr. Gooden. Thank you, Madam Chairwoman, and Mr. Marcus,
thank you for being here today.
Mark Zuckerberg came in front of Congress in April 2018 and
Facebook established its Blockchain Division in May of 2018.
Does that sound accurate?
Mr. Marcus. Yes, we started this journey in May 2018.
Mr. Gooden. And you served on the board of directors for
Coin Base, which is a billion dollar digital currency exchange,
from about December of 2017 to August of 2018, is that
accurate?
Mr. Marcus. That is accurate, Congressman.
Mr. Gooden. Would it be accurate to say that you're more or
less an expert on this and you understand how this works, how
these exchanges, Bitcoin, Blockchain, et cetera, et cetera,
things that many of us are not experts on, you're pretty
proficient in?
Mr. Marcus. I would say that's accurate, Congressman, yes.
Mr. Gooden. Going down that line, you would also say that
you know how profitable this can be, right?
Mr. Marcus. Congressman, yes, I believe that we have a good
opportunity, if we enable more people to participate, to offer
services that could generate revenues.
Mr. Gooden. But this is supposed to be a nonprofit
operation, isn't it?
Mr. Marcus. I'm talking about the Calibra Wallet, which
will directly impact Facebook.
Mr. Gooden. It's going to be a nonprofit?
Mr. Marcus. No. Calibra is a for-profit entity and it is
the entity that will build the wallet that will be offered to
Facebook consumers.
Mr. Gooden. Is digital currency illegal in certain parts of
the world? Can you touch on that?
Mr. Marcus. Yes, Congressman, there are a limited number of
countries that prohibit buying and selling or using digital
currencies.
Mr. Gooden. I also want to mention privacy violation
concerns, things that Americans have been concerned with. The
American consumers, would you say, do they trust Facebook? Do
they feel comfortable with your company?
Mr. Marcus. Congressman, I believe we have a lot of work to
do to earn people's trust and clearly we have definitely to
make those very strong commitments when it comes to privacy and
make good on those commitments for very long periods of time.
Mr. Gooden. I guess one of my concerns I share, I think
it's bipartisan, we're a little concerned. I don't object to
innovation and this sounds very exciting potentially, but
there's a level of distrust with Facebook just because of some
of the things that have taken place over the last year.
Would you be able to tell us if the CEO plans to come and
testify before us as this thing goes down the road?
Mr. Marcus. Congressman, I can't speak to that, but I'm
leading this project and I'm here today and I plan to continue
to engage appropriately.
Mr. Gooden. Thank you. I yield back.
Ms. Tlaib. The gentlewoman from California, Ms. Porter, is
recognized for 5 minutes.
Ms. Porter. Hello, Mr. Marcus. Thank you for your patience
during the long testimony today.
I want to look back at the history as we try to understand
what might become of our future with Libra. Are you familiar
with the terms, ``Wildcat Bank'' or the ``Free Banking Era?''
Mr. Marcus. I am, Congresswoman.
Ms. Porter. I want to explain to everybody that there's a
concept that Wildcat Bank was a bank that was chartered under
State law back before banks were federally regulated from about
1836 to the mid-1860s and they were called wildcat banks,
according to one theory because they were in locations so
remote that you may see wildcats.
The point is that wildcat banks were ultimately unreliable.
They became known for distributing worthless currency and
putting customers at risk and as a result of that, in 1863, we
enacted in Congress the National Banking Act.
How is the basic concept of a single currency pegged Stable
Coin, the Libra, where an issuer will take dollars and give
digital bank notes and vice versa fundamentally different from
the bank notes of wildcat banks where banks took U.S.-backed
dollar coins in exchange for their own paper money which could
and often did become worthless?
Mr. Marcus. Congresswoman, I believe that the very
important distinction here is that the reserve will be a one-
for-one reserve. I understand that the banks and the issues
that arose from the wildcat banks are actually that they went
into fractional reserves, and as a result had insufficient
reserves to back the value of the currencies they were issuing.
Ms. Porter. Good point, Mr. Marcus. Which regulator will be
responsible for ensuring that the association maintains that
one-to-one reserve? Will it be the FDIC?
Mr. Marcus. Congresswoman, this is a concern we have, as
well, and we believe that the association will need to have the
right oversight and meet the satisfactory bar for oversight in
how it guarantees that it cannot deviate from a full one-to-one
reserve.
Ms. Porter. So, it will be self-regulation? Isn't that what
the wildcat banks were also doing and that's how they then
drifted into fractional reserve and there was no oversight or
knowledge of this, which is why customers put their money in
those wildcat banks because they believed, perhaps wrongly,
that there was a one-to-one reserve, or that their money was
safe. Without the FDIC guarantee, isn't this just exposing
people to the same--aren't you creating yesterday's problem
tomorrow again?
Mr. Marcus. We are not, Congresswoman, but I do share your
concerns, and that's why I believe that having the proper
oversight, not self-regulation, at the association level,
notably on the reserve, is important, and I want to go further.
What I would like is for any consumer at any given point in
time when they hold the Libra to have full transparency of the
value of the reserve backing the Libra coin at any given point
in time.
Ms. Porter. But structurally, that's always what we believe
about banks, that if we go to get our money, it will be there,
but that's precisely why we have banking regulations, so that
in fact, the consumers' expectation is true.
I wondered if I could ask you, I know with Libra, it's
going to be pegged to a basket of currencies, about 50 percent
dollars, I believe you just heard my colleague say, and 50
percent like weirdly-sized paper currency from a few different
other countries. It sounds a lot like what's in my daughter's
piggy bank, which is kind of a mix of U.S. dollars and money
she has been given from friends who have come back from other
countries.
What's to stop the association from changing the contents
of the basket to, say, a hundred percent Venezuelan bolivars at
the stated exchange rate and that would again have the effect
of making the Libra currency worthless?
Mr. Marcus. Congresswoman, that is why we believe that we
need the right oversight for the reserve. The basket--
Ms. Porter. What is the right oversight?
Mr. Marcus. Proper regulation, and we--
Ms. Porter. By whom?
Mr. Marcus. To be determined by the G-7 Working Group in
collaboration with--
Ms. Porter. Let's run through some and see if you like any
of these. FDIC.
Mr. Marcus. Congresswoman, we will not engage in banking
activities. As a result, I don't think that the FDIC--
Ms. Porter. You're going to take people's U.S. dollars,
give them something that you're going to call currency, and you
don't call that banking activity? Do you call it money-changing
activity, because we do have laws that apply to money-changing?
Mr. Marcus. Congresswoman, you have my commitment that we
will have the proper oversight and regulatory oversight of the
association, notably on the key issue of the reserve, but I--
Ms. Porter. And respectfully, Mr. Marcus, this is not a
personal thing at all, but I had the commitment of so many
bankers in my lifetime that they would do the right thing by
homeowners they foreclosed on, that I have to have better than
that.
I just wanted in my last 5 seconds to suggest that you
check out 18 U.S. Code 486, which makes it a crime to create
private money that is metallic coin. I don't see why that
criminal statute doesn't also inhibit the creation of digital
coin.
Thank you.
Ms. Tlaib. The gentlewoman's time has expired.
The gentleman from Missouri, Mr. Clay, who is also the
Chair of our Subcommittee on Housing, Community Development,
and Insurance, is recognized for 5 minutes.
Mr. Clay. Thank you, Madam Chairwoman.
Mr. Marcus, could you discuss where you believe Libra ranks
on the scale of global innovation? Is it akin to Facebook, e-
mail, or is it merely a new way to move money, similar to
PayPal or Square?
Mr. Marcus. Congressman, at this point, it's an idea and a
concept. I hope it is very successful because if it is, many
people will benefit from it, and so I hope it's going to be a
big success for the very people that we hope to serve.
Mr. Clay. Thank you. Will Libra holders be subject to
counterparty risk if the reserves are mismanaged?
Mr. Marcus. Congressman, the reserve will be one-for-one,
and we need to find the proper oversight so that it remains
one-for-one.
Mr. Clay. Under what circumstances could a holder of Libra
lose their money?
Mr. Marcus. Congressman, for instance, if they use wallets
that do not offer consumer protections but in the case of the
Calibra Wallet, we will offer full consumer protection in such
a way that if you encounter fraud or have issues, we will make
you whole.
Mr. Clay. And so there would be some kind of insurance for
the customer?
Mr. Marcus. Correct. It's going to be something that is
part of our Consumer Protection Program when it comes to the
Calibra Wallet.
Mr. Clay. My colleagues have already discussed systemic
risk, but I'd like to dig a little further. What are your
thoughts about having a separate regulator who would only
regulate digital currencies, such as Libra?
Mr. Marcus. Congressman, it is not for me to say who should
regulate us, but my commitment is that we will meet all
regulation and work with and consult with regulators and
lawmakers to ensure we do this right.
Mr. Clay. And, of course, the customer would pay a premium
for the regulation. Is that how you envision that?
Mr. Marcus. I'm not sure I understand your question,
Congressman.
Mr. Clay. Someone would have to stand up and fund the
regulator. How would that be paid for? Would you have any ideas
or thoughts on that?
Mr. Marcus. Congressman, that is not my province.
Mr. Clay. Okay. Let's go to another subject. What
guardrails would be in place to prevent a run on the Libra
currency?
Mr. Marcus. We have a one-for-one reserve, Congressman. As
a result, a run on the bank would be impossible, provided the
reserve remains one-for-one, and we hope to have the right
oversight to ensure that it remains that way.
Mr. Clay. Would portfolio managers be incentivized to seek
higher returns on their investments from Libra association
members?
Mr. Marcus. Are you talking about the Libra currency
itself, because the Libra currency is designed to be stable,
and as a result, it will not have appreciation. It's designed
to stay stable.
Mr. Clay. And the association members are the investors,
right?
Mr. Marcus. Correct. Association members invest in the
ecosystem in order to kick start the Libra network.
Mr. Clay. And they would make a return on their money how?
Mr. Marcus. Congressman, my apologies for not understanding
your question the first time around. The way that investors
make their money back is by having a portion of the income that
is generated by the reserve after it has paid all of the costs
for the Libra association.
Mr. Clay. I see. Thank you for your responses, and I will
yield back the balance of my time.
Ms. Tlaib. Thank you. The committee will now take a 5-
minute recess to set up the second panel.
I'd like to thank--I'm so sorry. I should have thanked you
first, Mr. Marcus. I apologize. It's the first time I'm
chairing this committee. But I'd like to thank you so much for
coming before this committee.
Again, we'll take a 5-minute recess to set up for the
second panel.
Thank you.
[recess]
Mr. Clay [presiding]. The committee will come to order. Our
second panel consists of: Chris Brummer, professor of law,
Georgetown University Law Center; Katharina Pistor, Edwin B.
Parker professor of comparative law, Columbia Law School; the
Honorable Gary Gensler, who is currently professor of the
practice, MIT Sloan School of Management; senior advisor to the
director, MIT Media Lab; and co-director of MIT's
Fintech@CSAIL; Robert Weissman, president, Public Citizen; and
Meltem Demirors, chief strategy officer, CoinShares.
Welcome to all of you. Each of you will have 5 minutes to
summarize your testimony. And without objection, your written
statements will be made a part of the record. With one minute
remaining, a yellow light will appear. At that time, I would
ask that you wrap up your testimony so that we can be
respectful of both the witnesses' and the committee members'
time.
Mr. Brummer, you are recognized for 5 minutes to present
your oral testimony.
STATEMENT OF CHRIS BRUMMER, PROFESSOR OF LAW, GEORGETOWN
UNIVERSITY LAW CENTER
Mr. Brummer. Thank you so much. Members of the committee,
thank you for inviting me to testify at this hearing. My name
is Chris Brummer and I am a law professor at Georgetown
University Law Center. I am here today solely in my academic
capacity, and it is an honor to be before this committee again.
White Papers like the one we are struggling to understand
today have emerged as the common tool through which digital
asset companies communicate with potential consumers and
investors about new projects and ventures. However, White
Papers have faced a mountain of criticism for their hyperbolic
language, false promises, and omissions of material information
that consumers would need before purchasing a digital asset.
Indeed, the last time I was here to share my views before many
members of this very committee, we discussed precisely these
challenges.
But today, we have a twist. Criticisms of White Paper
disclosures have focused on early-stage, cash-strapped
startups. Rarely have they been directed at a multinational
technology company with the resources to marshal top-flight
legal as well as technological talent.
Yet, this time it is different. The Libra White Paper is
peppered with big promises and few details, and the project
involves risks to purchasers and, at least potentially, the
financial system, that are not disclosed. And yet even for me,
a staunch supporter of innovations and upgrades to our
financial system, this is, at a minimum, disappointing.
The White Paper is no mere public brainstorming exercise or
a technical exposition, but is instead intended to condition
the market for the adoption of a product that Facebook wishes
to sell to billions of people around the world, and the lapses
are all the more problematic given the securities-like features
of Libra coins and possible implication of U.S. securities
laws.
In the limited time available, I want to focus on some of
the most problematic red flags. First, the Libra White Paper
fails to inform people, in unambiguous terms, that they can
lose their money, and that runs on the coin are possible.
Instead, the White Paper routinely suggests, and doubles down
on the idea that Libra will virtually always provide stability
in terms of the purchasing power of the new currency.
But that is not necessarily the case. The Libra is subject
to foreign currency risk, something the White Paper does not
clearly acknowledge, and, indeed, could cost their holders
money in the form of lost purchasing power, should there be a
run on any of the underlying currencies in the basket.
Moreover, runs on the Libra itself could be catalyzed for
reasons that have nothing to do with the underlying basket,
including a hack of Calibra, or revelations that sensitive
consumer data had been shared with Facebook or other Libra
Association members.
Second, the White Paper fails to clearly explain that Libra
holders will be exposed to counter-party risk should the
reserve investment strategy prove to be mismanaged or poorly
executed. Although, ``The goal will always be value
preservation,'' any money raised from interest earnings
ultimately, after operational and developmental expenses, is
going to fund dividends to early investors in the Libra
investment token for their initial contributions. As a result,
the fund is structured in a way that creates incentives for
their portfolio manager to accumulate, over time, higher-
yielding investments.
Finally, the White Paper fails to disclose how its promise
of a secure, scalable, and reliable blockchain could be
compromised by whatever is the weakest link in its ecosystem,
including changes in wallets operating in jurisdictions with
lax AML and KYC rules.
And this is, honestly, just the tip of the iceberg, with a
host of critical questions about the rights, duties, and
selection criteria for authorized resellers and Libra
Association members, not to mention how the folks are intending
to manage potential conflicts of interest.
In my written testimony, I show how these kinds of
disclosure issues populate the document and are especially
problematic since this offering has, again, securities-like
features, including the fact, among other things, that it
appears to operate nearly identically to ETFs.
Critically, these kinds of emissions are more than just a
matter of technicalities. They indicate varying ways in which
potential Libra coin purchasers, everyday people, are far from
fully informed, and are not on a playing field, vis-a-vis
Libra's sponsors.
There are 99 problems, and this White Paper is one.
[The prepared statement of Mr. Brummer can be found on page
114 of the appendix.]
Mr. Clay. Thank you, Mr. Brummer.
Ms. Pistor, you are now recognized for 5 minutes.
STATEMENT OF KATHARINA PISTOR, EDWIN B. PARKER PROFESSOR OF
COMPARATIVE LAW, COLUMBIA LAW SCHOOL
Ms. Pistor. Thank you very much, Chairman Clay and Ranking
Member McHenry. Thank you to the other members of the
committee. Thank you for the opportunity to participate in this
hearing to examine Facebook's proposed global currency, the
Libra.
I am a professor at Columbia Law School, where I have
taught for the past 18 years, mostly in the field of corporate
law and finance, comparative law, and law and development. I am
also the director of the Law School's Center on Global Legal
Transformation.
Based on my research and analysis of the Libra White Paper
and related documents that have been released so far, and a
close reading of other comments and analysis of Libra, I have
come to the following conclusions.
First, Facebook's Libra is designed to become a new global
currency that will complement existing fiat currencies. It is
designed as a for-profit currency.
The Libra White Paper promises to create a seamless,
global, safe, and inclusive payment system based on modern
digital technologies. Libra is labeled a stable coin and, as
such, aims at delivering low volatility and high liquidity to
its customers, the holders of Libra coins, who shall be able to
exchange their Libras against local fiat currency on demand
without suffering major haircuts.
To this end, Libra is backed by a reserve composed of safe
assets. The safe assets of choice are bank deposits and the
liquid debt of reputable sovereigns. These assets owe their
safety to public backstopping mechanisms in the form of deposit
insurance and the full faith and credit of the issuing
sovereign. In effect, the sponsors of Libra and their profit-
earning beneficiaries will be free-riding on a public safety
net for which they are not paying, and they are extending the
safety net to users around the globe.
The main governance architecture of Libra resembles
currency boards employed by some countries that use currency
baskets to back their currencies, such as Singapore and Kuwait,
with the important difference that Libra shall deliver profits
for its beneficiaries. All interests and dividends will be
allocated to the members of the Libra Association and/or
investors in the Libra tokens, which are distinct from Libra
coins; none to its customers, the holders of the Libra, and I
would suspect that in the event of an insolvency of the
reserves, there will be no money transferred to the users of
the Libra.
The central node of what will become an ecology of
financial intermediaries is the Libra Association, based in
Geneva, Switzerland. It will exercise control over the
admission of future members, manage the Libra Reserve,
determine asset eligibility for the Reserves, decide whether to
amend the protocol on which Libra runs, and determine if, when,
and how Libra's architecture will evolve from a club-like or
permissioned system to a permission-less system.
This concentration of power is unmatched by any meaningful
accountability to anyone. The choice of the legal structure
means that the members of the Libra Association will be
insulated from liability and accountable only to themselves.
They will not be accountable to holders of the Libra coins, nor
to the citizens of countries that create the safe assets used
to backstop the Libra.
Facebook plays a central role in the creation of Libra, and
the first 28 prospective members of the association have been
recruited by Facebook, and given Facebook's control over the
start-up phase, it is reasonable to assume that most, if not
all of the other 100 original founding members will be hand-
picked by Facebook, as would be the management team which would
be put in place after the first 5 members have signed up.
Existing legal regulatory frameworks, in the United States
and elsewhere, are highly incomplete and leave ample room for
legal as well as digital arbitrage. They were not designed to
govern digital currencies. Regulators are currently using a
case-by-case approach to extend their reach, which is no match
for the fast-moving technological change.
Libra's global reach exacerbates these problems. Many of
the activities associated with managing Libra and its reserves
will be beyond the reach of regulators in the United States, or
any other country, for that matter. The current level of
transnational regulatory cooperation does not match the
versatility of a private actor, such as Facebook, to pick and
choose from legal systems around the globe which laws and
regulations best suit its needs.
Thank you very much. I yield back the rest of my time.
[The prepared statement of Ms. Pistor can be found on page
171 of the appendix.]
Ms. Tlaib [presiding]. Thank you, Ms. Pistor.
Mr. Gensler, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF THE HONORABLE GARY GENSLER, PROFESSOR OF THE
PRACTICE, MIT SLOAN SCHOOL OF MANAGEMENT; SENIOR ADVISOR TO THE
DIRECTOR, MIT MEDIA LAB; AND CO-DIRECTOR, MIT'S FINTECH@CSAIL
Mr. Gensler. Chairwoman Tlaib, Ranking Member McHenry,
members of the committee, thank you for inviting me here to
testify. It is so good to be back with you here again.
I began my finance career in the private sector, with
Goldman Sachs, for 18 years. Later, as a Treasury official,
when I first testified in this room, I also was a witness of
the sudden Asian financial crisis. I was later an advisor on
the Sarbanes-Oxley Act, with Chairman Oxley right there, and
after the crisis, I served as CFTC Chair, helping to reform a
$400 trillion swaps market, and I am now honored to be a
professor of the practice at MIT, teaching about fintech and
digital currency.
These experiences have taught me some lessons I bring to
consideration of Facebook.
First, all of the finance has one foundation, and it is
trust, for hundreds of years. Unfortunately for Facebook, for
some unexplained reason, they chose to make these bold
proposals when trust in their company is not in good supply.
Second, although Facebook's Libra proposal may seem
unprecedented, if not just for its sheer breadth and scale, we
have seen this show before. ``Trust us to innovate. Trust us to
revolutionize finance.''
Enron: ``Trust us to set up sophisticated, unregulated
electronic energy trading.'' What did we get? Accounting
scandals, manipulated electricity markets, and bankruptcy
filing.
Long-term capital management: ``Trust us to set up a new
type of algorithmic hedge fund with $1 trillion of
derivatives.'' Failure and systemic risk followed.
LIBOR: ``Trust us to set up the world's most relevant
interest rate.'' What followed? Manipulated rates on trillions
of home mortgages and consumer loans.
These all hurt millions of Americans. They are also
personal for me, as I lived each one of these in the official
sector, trying to clean up the mess.
Third, tech has already made big strides. Think PayPal,
Square, Stripe, TransferWise, Venmo, Zelle, China's Alipay, and
WeChat Pay leapfrogged big finance and now dominate Chinese
payments. There is Amazon Pay, Google Wallet, Amazon Coin,
Apple Pay, and recently Apple announced, with Goldman Sachs, a
MasterCard Apple card.
You see, the truth of the matter is there is a lot of
innovation going on, and Facebook has tried as well, 3 times,
with limited success. Facebook Credits closed in 2013. Facebook
Messenger Payments closed their peer-to-peer in Europe just
this month. Facebook's What's App Pay Pilot has stalled in
India.
Fourth, Facebook's ambitious proposal needs significant
regulatory guardrails.
First, the Libra reserve. Where the money is needs to be
regulated by the SEC for what it is, in essence, a pooled
investment, multi-currency ETF. And if, for some reason,
technically the law doesn't cover it, then Congress can step in
and ensure that it is covered, or regulated as a bank, like
Congresswoman Porter mentioned.
Regulating the Libra reserve, like Western Union, under 49
State money transmission laws, as Facebook suggested here
today, forgets tough lessons of failed shadow banking. It just
doesn't make sense.
There needs to be tight investment restrictions, including
prohibiting loans--I was glad to hear that today--but guarding
custody of funds. That is what China and Kenya did when Big
Tech came in. They said it was very restricted.
Second, the Libra Association's manager should be
registered as an investment advisor.
Third, customers' Libra custody in Calibra needs to be
tightly regulated for customer protection, ensuring Facebook
doesn't use, lose, or abuse customers' Libra. I think that is
part of the economics. They want to use those Libra coins. They
also need to protect the data by true firewalls, not just by
protecting customer consent clauses.
Fourth, the accounting of the payment system: The Libra
blockchain should adopt payment infrastructure rules consistent
with Federal Reserve policies. And lastly, Libra will have the
same challenges as Bitcoin guarding against illicit activity.
Being registered by FinCEN won't stop the rest of the Libra
network, the broad global network, from self-custody, and the
ground truths are there are no easy solutions.
Trust, so important to finance and innovation, is easy to
lose, and best to verify, as Members on both the Republican and
Democratic sides have said, and it is critical to be
responsively regulated.
I look forward to your questions.
[The prepared statement of Mr. Gensler can be found on page
145 of the appendix.]
Ms. Tlaib. Thank you, Mr. Gensler.
Mr. Weissman, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF ROBERT WEISSMAN, PRESIDENT, PUBLIC CITIZEN
Mr. Weissman. Thank you very much, Madam Chairwoman, and I
thank both you and Mr. McHenry for holding this hearing so
quickly after the Facebook announcement, and treating this
issue with the seriousness and thoughtfulness and care that it
deserves.
Facebook is not making this proposal because it is
interested in competing with Western Union. Facebook is making
this proposal because it wants to be in the middle of as many
transactions that occur across the planet as possible. If it
can get all of them, it will take that. That is a serious
business that this committee absolutely must be paying
attention to.
I want to raise three particular concerns with Facebook's
proposal that I think could be ameliorated with extremely
aggressive regulation, but not cured.
But before that, I want to make a point that follows on
from what Mr. Gensler just said. Facebook, as a company, cannot
be trusted. I mean that in two senses. First, it is not just
that people don't like Facebook. Facebook has repeatedly
violated its own privacy policies. It is not an external thing
that was exposed on them. They adopted their own policies and
they violated them, not once, not twice, but over and over and
over and over and over again. Look at the last consent decree.
See the listing. Wait until we see this consent decree. See the
listing. This is a company that cannot be trusted.
But it is worse than that, and this is the second point.
Even as Facebook maintains its promises, they are unilateral,
voluntary, and subject to change at any time. Key features of
Facebook's Libra proposal are completely up for grabs and
change over time.
For example, the one-to-one reserve would make a
difference, but they could unilaterally alter that commitment.
The idea that the money will be invested in stable currencies
would make a difference but a promise that could unilaterally
be invested. The idea that there would be a firewall between
Calibra and Facebook--a unilateral promise that could be
invested, and you would be foolish to think they won't change
that one, because they change their privacy policy almost every
year.
Against that backdrop, there are three particular
considerations I want to raise. First, the competition policy
and monopolistic implications of this proposal. As we have
heard today from Facebook, immediately upon adoption of Calibra
it will be available to 2.7 billion users around the world. It
is a certainty that Facebook will dominate the market for Libra
and perhaps for all digital financial transactions. There may
or may not be other wallet competitors in Libra, but no one is
ever going to compete with that. We are going to see Facebook
immediately extending its dominance in social media to now the
dominance in the payment transfer business.
The Libra Association itself has the makings of a cartel.
There is already talk about giving discounts among the Libra
members, for sure going to be used to advantage those who are
on the inside and disadvantage those who are on the outside,
under the leadership of the dominant member of the cartel,
Facebook.
We have a long tradition in the United States of separating
banking and commerce, under the Bank Holding Company Act. That
has expressed a lot of wisdom, and protected us from a lot
worse financial crises, and we need to apply those principles
going forward.
Second, there are big concerns about consumer protection.
Inherent in the Libra proposal is the idea that you are going
to make no-interest loans as a user to Facebook, the idea that
you can adopt foreign exchange currency risk. Big problems. But
within this new Facebook Libra ecosystem, there are massive
consumer protection problems as you have a global privatized,
orderless currency. What happens when you get that payday loan
that they are bragging about? You just didn't realize it was
from Ukraine, and the choice of law became Ukrainian law.
Third problem, privacy. Again, as I say, there is no reason
to believe that there will be a separation between Calibra and
Facebook, but even if there is, Facebook will understand what
is going on based on users' use of Facebook. They will gather
all this data.
Whether or not they do what they say they are going to do,
if this process proceeds, we are likely to see the creation of
a corporate surveillance leviathan with no precedent in world
history, and only imagined in dystopian science fiction novels.
That is not just a matter of things being creepy; it is a
matter of them monetizing, commercializing our lives. It is a
matter of them worsening, potentially, the algorithmic
discrimination that is already an increasing problem. It is a
matter of them then leveraging that data to crush their
competitors. It is a matter of overall less innovation, not
more innovation, both in the digital economy and in the rest-
of-the-world economy.
Finally, as a last point, I just want to say this committee
is now floating the idea of the Keep Big Tech Out of Finance
Act. We think that is exactly the right approach going forward.
This is far too dangerous a proposal to permit to proceed. That
is one way to shut it down, and I hope this committee does, in
fact, do that.
Thank you very much.
[The prepared statement of Mr. Weissman can be found on
page 183 of the appendix.]
Ms. Tlaib. Thank you.
And Ms. Demirors, you are now recognized for 5 minutes to
present your oral testimony.
STATEMENT OF MELTEM DEMIROS, CHIEF STRATEGY OFFICER, COINSHARES
Ms. Demirors. Thank you.
Good afternoon, Chairwoman Tlaib, Ranking Member McHenry,
and members of the committee. My name is Meltem Demirors and I
am chief strategy officer of CoinShares, a digital asset
management firm that operates across four jurisdictions,
including the United States and the European Union. As of
today, we manage $800 million in assets, on behalf of thousands
of investors.
I am also here to share my insights as a business owner, an
investor, and an advocate for and user of cryptocurrency.
Today, I would like to discuss cryptocurrencies, mainly
Bitcoin, emphasize why Bitcoin is different from Libra, and
outline what that means for innovation here in the United
States. Let's start with Bitcoin. Bitcoin is the best-known,
most valuable, and most established cryptocurrency. Bitcoin is
three things: Bitcoin is a technology; Bitcoin is a network;
and Bitcoin is also a cryptocurrency.
Now, Bitcoin as a technology is not regulated. Much like
the internet, the Bitcoin network could be considered a public
good. However, the companies being built to provide products
and services on top of the Bitcoin network are subject to
regulation in their respective jurisdictions.
Over the last 5 years, I have built 3 investment firms and
invested in over 150 cryptocurrency-focused companies in over
30 countries. Fully over half of those companies have been
incorporated in, and opened from, the United States of America.
The United States enjoys a robust, well-developed capital
market and boasts a long track record as a place where
innovators can build businesses. These 150 companies now employ
nearly 5,000 people, in cities like San Francisco, Charlotte,
New York, Boulder, Austin, and Atlanta, but also London,
Singapore, Zurich, and Berlin, just to name some.
Cryptocurrency has reached a point of inevitability. It is
inevitable that the Bitcoin ecosystem will continue to grow and
contribute to the digital economy. The question is where.
The traditional approach of drawing a regulatory perimeter,
which has been used in the past to saddle jurisdiction, is
challenging to apply in this digital world that is not
constrained by the physical borders of the past. We are seeing
a wave of interest in cryptocurrencies and countless imitators,
which borrow some features of, but are decidedly not
cryptocurrency.
Libra is not a cryptocurrency. I am not here to pass
judgment on Facebook or its efforts, and I commend their
altruistic aspirations, but they are just that: aspirations.
First, Bitcoin is decentralized, which means no entity or
group has the power to block or censor the use of the network.
Libra is centralized. A small group of companies will have the
ability to block and censor transactions.
Second, Bitcoin is its own asset, backed by its own
scarcity and the demand for it. There is no entity that holds
assets that gives Bitcoin value. Libra, in contrast, is backed
by a pool of assets that are domiciled abroad. Asset management
is a regulated activity.
Lastly, Bitcoin is permission-less, meaning anyone in any
part of the world has the ability to enter and exit the network
without requiring permission. Libra is permissioned. The Libra
network is controlled by a private group which will determine
who has permission to access this network.
The Bitcoin network supports thousands of companies all
around the world. Libra benefits one entity, Facebook. Facebook
is not a public entity. It is a privately owned, for-profit
company.
Libra may represent an exciting opportunity for Bitcoin but
it cannot and should not be compared to Bitcoin. Like the
internet, it is critical that Bitcoin remains open for
permission-less innovation. Companies here in the United States
serve tens of millions of customers, service billions of
dollars of regulated legal commercial activity, and employ
thousands of people who are building on Bitcoin and
cryptocurrency networks.
While the Bitcoin community is global, we should endeavor
to keep companies here, in the United States, regulated under
our laws, where benefits accrue to the American people and the
economy, not to foreign jurisdictions.
The decisions you weigh now will determine the future of
these open, permission-less technology networks and capital
formation. That future is not 5 or 10 years away. It is here
and it is now. I urge you to view Bitcoin as open public
networks that enable innovation and growth, and to treat Libra
and its future imitators--and there will be many--in the
context of the facts. Private efforts led by corporations
holding billions of dollars of the public's money. These things
are not Bitcoin and are not cryptocurrencies.
I thank you for your time, and I look forward to your
questions.
[The prepared statement of Ms. Demirors can be found on
page 131 of the appendix.]
Ms. Tlaib. Thank you. I now recognize the gentleman from
Missouri, Mr. Clay, who is also the Chair of our Subcommittee
on Housing, Community Development, and Insurance, for 5
minutes.
Mr. Clay. Thank you, Madam Chairwoman, and let me thank the
panel for your testimony today. Let me start with Mr. Weissman.
Currently, many people believe that cryptocurrency can
coexist within our current monetary system, given that
cryptocurrencies only constitute a very small fraction of the
economy's financial assets. However, if an entity like
Facebook, with 2.5 billion users, decides to go ahead and bring
Libra to market, this can change rather quickly. How can this
pose a threat to the U.S. central banking system if the
majority of Facebook users in the U.S., in a few years, use
Libra as a viable currency?
Mr. Weissman. I think there are a whole series of potential
risks, Mr. Clay. One has to do with the systemic risk created
by Libra itself. The possibility that there is a run on the
Libra, if it gets up to scale, will require massive
intervention by the public, on a scale that would probably
dwarf TARP, or the alternative is to let the whole thing go
under, which seems almost impossible to imagine.
A second problem is that Libra itself may encourage runs on
foreign currencies--maybe not the dollar at first, maybe
eventually the dollar. If you lose confidence in a national
currency, the ability to move into this allegedly stable
alternative currency can create a quite self-perpetuating cycle
that creates, itself, another kind of financial crisis.
I think that the scale of this proposal is such that you
have to run these scenarios that are very hard to get your head
around and take them seriously. You are right to ask the
question.
Mr. Clay. Thank you for that.
Professor Brummer or Mr. Weissman, regarding sanctions, can
you please explain how the Libra Association and the companies
that grow out of the Libra construct can ensure that
international and U.S. sanctions regimes will be followed?
Mr. Brummer?
Mr. Brummer. Thank you, Mr. Clay, for that question.
I think one of the challenges that pertain to the Libra
ecosystem--and it is not just a problem with sanctions but it
is a problem with anti-money-laundering and really the way in
which it is being set up--is that ultimately the weakest link
in the network can become a gateway for all kinds of
wrongdoers.
Now the promise that Facebook is making right now is to say
that our infrastructure that we are developing, like Calibra,
will be subject to all relevant U.S. rules. The challenge is
that it is creating a platform that will allow others to
develop infrastructure outside of the United States, and,
indeed, outside of internationally well-supervised regimes, and
they are making the promise that they will develop certain
kinds of codes of conducts and standards for onboarding those
applications into the ecosystem, but they fail to explain--
Mr. Clay. Yes, how would they prevent sanctioned persons
from getting on that platform and exchanging?
Mr. Brummer. If there is the kind of anonymity that they
are claiming, and they explicitly state in the White Paper that
their blockchain will allow clients to hold one or more
addresses that are not linked to their real-world identity,
which, by the way, seems to--while the Bank Secrecy Act travel
rule, which requires institutions to pass on certain customer
information, including the name and address of the
transmitter--it seems to certainly enable, in the absence of
further elaboration from Mr. Marcus, exactly how they plan to
prevent threats to U.S. national security.
Mr. Clay. Let me ask anyone else on the panel, in the
remaining time, what does the Libra Association need to do to
vet those who wish to join it or build on this blockchain?
Anybody?
Mr. Gensler. If I could just say, there is not currently a
way that you could actually foreclose somebody on the sanctions
list from getting this coin and transacting. The on-ramps and
off-ramps, the only way you could do that is if you literally
put in the computer code, what they call Libra Core, put in
there the prohibitions and so forth, and they are not going to
plan to do that.
To your second question, I think the Libra Association,
because it could control, for particularly developing
countries, the monetary policy, it needs to have wide-open
governance, and right now it is just large corporations and a
handful of nonprofits.
Ms. Tlaib. Thank you.
Mr. Clay. Thank you.
Ms. Tlaib. I now recognize the gentleman from North
Carolina, the ranking member, Mr. McHenry.
Mr. McHenry. Ms. Demirors, my question for you is about the
outline you have given in your testimony. You make the
distinction between Libra and cryptocurrencies, so let's talk
about cryptocurrencies. When you have the President of the
United States, the Secretary of the Treasury, and the Chair of
the Federal Reserve, in the same week talk about
cryptocurrencies a decade after Satoshi wrote the White Paper,
it is probably a decent thing to draw attention to the
industry, right?
How long have you been in the wider crypto or digital
currency space?
Ms. Demirors. I have been working in the digital currency
space professionally for the last 5 years, and individually, as
a member of this open source global community, for the last 7
years.
Mr. McHenry. Okay. Let's talk about the opportunities of
cryptocurrency. Innovation is happening, and it is happening
across the globe.
Ms. Demirors. Absolutely.
Mr. McHenry. You mentioned, though, that there are
challenges working in the United States. What are those
challenges right now?
Ms. Demirors. The primary challenge is the lack of
jurisdictional and regulatory clarity. I do commend many of the
regulators here in the United States that companies interact
with. I personally have interacted with the CFTC, the SEC, the
IRS, OFAC, FinCEN, law enforcement, State banking regulators,
and a host of other policy-making bodies and enforcement
agencies.
But even in the characterization of cryptocurrency, there
seems to be key differences. The SEC has long deliberated
whether cryptocurrencies are securities or not, and has reached
the conclusion that Bitcoin is not a security.
The CFTC treats Bitcoin, and some of the products around
Bitcoin, as a digital commodity, if you will. In contrast, the
IRS treats Bitcoin and digital currencies as property. This
inconsistent treatment makes it very challenging for companies
to determine how to operate within the existing regulatory
frameworks here in the United States. It costs a tremendous
amount of capital for these early-stage companies to hire
lawyers, to find experts, and to come here to D.C., to speak
with their representatives on these important topics.
This is of big concern to me, as an investor.
Mr. McHenry. What is the key takeaway, as a policymaker?
How do we ensure that innovation is going to happen here in the
United States, as opposed to some foreign regime?
Ms. Demirors. We need clear guidance, much as Switzerland's
FINMA laid out in 2018. They established a very clear set of
policies and a regulatory framework that has been applied
consistently.
Mr. McHenry. Okay, permission-less versus permissioned
networks, let's talk about the distinction between
decentralization, permission-less, versus what is Libra.
Ms. Demirors. Sure. The whole idea that makes the coin so
compelling and so exciting is this idea that started with the
internet, of open source software development, where you had
code that anyone could use to build anything they wanted, but
that a group of people chose to run, which established the
foundations of the internet.
Similarly, the Bitcoin network, which is operated by
individuals and entities that run computers with the Bitcoin
code around the world, is open and accessible to anyone. Anyone
can make proposals to change the code, anyone can audit the
code, but most importantly, anyone can build a business on top
of the Bitcoin network and use this network to drive
innovation, whether that is in enabling new types of value
transfer or whether that's in enabling all sorts of other
services we can't yet imagine.
Mr. McHenry. Why is that important? Why is that an
important distinction and architecture--decentralization,
permission-less.
Ms. Demirors. Absolutely. As the other experts on this
panel have discussed in their testimony, there is a tremendous
anti-competitive component to what Facebook is proposing to do.
This is a private group of 100 corporations who have ties to
Facebook and its executives in various ways, who will be
responsible for determining what the code supporting the Libra
network is, who gets to run nodes and participate in the
network, and what transactions and applications and products
and services are allowed and disallowed.
This is in sharp contrast to what Bitcoin and other openly
distributed cryptocurrencies are. They are open for anyone to
build on. Libra is a private, for-profit enterprise that
benefits large corporations and for-profit entities who already
have a tremendous amount of power.
Mr. McHenry. Okay. So what is your take on Libra, the
currency, as another competitive force in digital payments?
Ms. Demirors. My position is this: Facebook should be
allowed to innovate, just as anyone else in this country is
allowed to innovate, but it should not be allowed to pursue
this path under the guise of being an open cryptocurrency like
Bitcoin. That analogy is very dangerous and it is factually
incorrect. It represents something entirely different. It has
been categorized as an ETF. I would say it is a mutual fund
that represents two classes of interest. It is a for-profit,
anti-competitive effort that makes it much harder for small
startups and innovators to build businesses serving that same
audience and enabling digital value transfer.
Mr. McHenry. While, at the same time a distributed ledger
and cryptocurrency and digital assets are a wave of the future.
Ms. Demirors. Absolutely.
Mr. McHenry. I yield back.
Ms. Tlaib. Thank you. The gentlewoman from New York, Ms.
Velazquez, is recognized for 5 minutes.
Ms. Velazquez. Thank you, Madam Chairwoman. Earlier today,
I told Mr. Marcus that this is not Silicon Valley and that all
problems with the Libra and the association need to be worked
out before the launch date. He wasn't clear on whether or not
Libra was willing to delay its launch date.
By a show of hands, do you agree Libra should delay its
launch date until all legal and regulatory concerns have been
addressed and approvals have been granted?
[show of hands]
Ms. Velazquez. Okay.
Professor Pistor and Professor Gensler, many of us
questioned Mr. Marcus this morning on the Libra Association's
decision to place its headquarters in Switzerland. Why do you
think the Libra Association chose Switzerland for its
headquarters? What advantages could the Swiss regulatory system
offer Libra that the U.S. system does not, and what problems
does this present?
Ms. Pistor. I do not want to deny the fact that Switzerland
has the signaling effect of being the home for many
international institutions, but that is also interesting
because international organizations are actually public, non-
profit organizations, so I think there is a signal effect.
In terms of the regulatory benefits, I think the set-up of
the association itself is an interesting benefit, because you
can set up an association that is supposed to be a nonprofit
organization and yet use it to plow back these profits to its
members. I also think that Switzerland is trying to position
itself right now as a major jurisdictional hub for
cryptocurrencies and has issued a number of papers where they
are trying to do so.
They have the benefit of trying to be less fragmented than
the United States system, but I think they also have a long
history of having laxer financial regulations.
Ms. Velazquez. Thank you. Mr. Gensler?
Mr. Gensler. I think that Switzerland offered them all the
things that Professor Pistor just said, but I also think that
they think that under Swiss law, it is probably a little less
likely that it is a security than under U.S. law, so there is
some of what we used to call regulatory arbitrage that is going
on as well, and the tax law arbitrage that Professor Pistor
mentioned, that you could have a nonprofit and yet still pay
dividends, which is kind of foreign to the way we think here.
I think it is also a signaling effect to all of their users
that they are less controlled by the U.S., and when this Libra
reserve gets big at some point in time, if any developed
country is going to use the Libra instead of the U.S. dollar,
and ``Libra-ize'' instead of ``dollar-ize'', I think it
signals, in the future, hey, we are not under the control of
whatever future U.S. President and sanctions regime of the
future.
Ms. Velazquez. Thank you. Professors Brummer and Pistor,
earlier today I asked Mr. Marcus if the Libra Association would
be willing to submit to enhanced oversight by the Federal
Reserve if it was designated a SIFI by the FSOC. He initially
responded by saying the Libra Association has no plans to
engage in banking activities. However, as you both know, in
Dodd-Frank we gave the FSOC specific authority to designate
non-banks as a SIFI in order to increase their oversight so
they do not threaten the financial system.
In each of your opinions, what type of systemic issues
could Libra and the association pose, and should the FSOC
investigate these issues?
Mr. Brummer. Thank you for that question. It is very
important. First, to the extent that there is a run on any of
the currencies in the basket, there could be an incentive to
ultimately liquidate their Libra holdings, so that destabilizes
the coin.
Second, as I mentioned, if there is some kind of
operational failure, people can decide, hey, someone can hack
into this wallet so why should I keep it, in which case, again,
you decide to liquidate the Libra holdings.
If you scale up--and I wanted to add that that is entirely
possible, in part because it is Facebook, but it is not just
Facebook. What would happen if Uber and Lyft required the use
of Libra for their services or offered some of their consumers
the benefit? Then, you imagine it becoming quickly systemically
important, and, as a result, that is a huge thing.
And the last thing is banks. People are saying to regulate
Facebook like a bank, perhaps. One of the questions that I
think is worthwhile considering is would Facebook even be
eligible for a banking license? A de novo review would require
an investigation, of, say, Facebook's earlier violations.
Ms. Velazquez. Ms. Pistor, do you have a comment?
Ms. Pistor. Just briefly. I think because the United States
is essentially with its own sovereign debt and with its bank
deposits that might be used backstopping the currency probably
will be the country that will have to backstop any
uncertainties or run on the Libra, even if it emanates from
elsewhere in the world.
Ms. Velazquez. Thank you. I yield back.
Ms. Tlaib. The gentleman from Arkansas, Mr. Hill, is
recognized for 5 minutes.
Mr. Hill. Thank you, Madam Chairwoman. Thanks for this
panel. I hope you found the day as interesting as we have.
Mr. Weissman, thanks for your watchdog work on behalf of
Americans.
One thing, listening almost to all the questions on and off
today, there is a burden hanging over the room which is that it
is Facebook in here testifying. So a question to you, if this
were General Electric and they were proposing this innovation,
you would still have your same questions, and we would still be
monitoring trust-but-verify, Ronald Reagan style. But would you
be downshifted a level of alert if it were--and again, we could
say JPMorgan Chase or GE, just a personal view on that
question.
Mr. Weissman. Since you know the organizations, I don't
want to say anything nice about those companies. But that is
absolutely correct, and for a couple of reasons.
Mr. Hill. And you would say with logical reasons, and the
Majority has screened many reasons, and many Americans are
frustrated with--
Mr. Weissman. Two key reasons. One is the history of
privacy violations, obviously implicated by this. Two, the
anti-competitive effects. No other company can do what Facebook
can do, and suddenly, magically make appear this new product,
inside your phone, inside your life, inside our mind, for 2
billion people.
Mr. Hill. Yes. Good. Thank you for that.
And on this issue on the business of banking,
traditionally, yes, we have separated commerce from banking and
we have a long legislative history on that, but the business of
banking in those laws--whether you talk about the Bank Holding
Company Act or any other--is taking deposits and making loans.
And if you are not in both you are not, as a general statement,
legally in the business of banking.
Ms. Pistor, when you think about what you have seen, or Mr.
Gensler, would you say that that remains to be seen and that is
why we are having this hearing, just to find out, well, what is
the business mission here? What are the businesses? You
suggested that they be regulated like a bank, but they have not
yet said they are a bank.
Mr. Gensler. I spent 18 years at Goldman Sachs and my whole
life has been about finance and money.
Mr. Hill. Right.
Mr. Gensler. I think when you take somebody's money and
then you invest it--in this case they want to invest it very
tightly and narrowly--it has a banking function. And we have
this term, ``shadow banking,'' for banking functions that are
not regulated like banks. I think it just would be malpractice
to leave it to the 49-State money transmission.
Mr. Hill. No, that is a good point. Thank you.
Mr. Gensler. That is what I think.
Mr. Hill. And I think that is what this hearing is about,
is trying to decide what is the best oversight, and I think Mr.
Marcus was fairly open to say, yes, we are interested in what
the right oversight is too, and you have your views and we have
ours. So, thank you for that.
Ms. Demirors, I was very intrigued, and I thank you for
your conversation about all the business you have. One that
concerns me--I think a lot of international people fly on
Boeing aircraft. I think a lot of them own Apple phones. I
think a lot of them attend the World Bank meetings in
Washington, D.C. A lot of people are satisfied that the United
Nations is headquartered in New York.
I am shocked that we have to go to a neutral country in
order to have global acceptance of a product. You seem to take
the other side, that you are happy to have these businesses in
America. Can't the U.S. be a reasonably good location for the
association to be headquartered? Why would we not put it here
in the United States?
Ms. Demirors. Absolutely. I think there are two fundamental
issues here. First, in the U.S., there are a number of
different agencies--the regulators, policymakers--that have
oversight of the various functions that the Libra Association
would like to perform.
Switzerland, on the other hand, where the association is
headquartered, has a different track record. It is in a place
that has been very open to cryptocurrency projects and other
similar innovators, and it has a clear regulatory framework
that is more permissive.
In my view, part of the effort to location the association
in Switzerland is to provide that clear, simpler regulatory
framework to the Libra Association and its members. So, I think
it should be here.
Mr. Hill. Yes, thank you, and I appreciate you having your
businesses in the United States. And that is not a jingoistic
point of view, from my point of view. You raised it in your
testimony.
My view would be that Mr. Weissman would be happy, and you
might be happy, if they were domiciled here, and if that
compelled the U.S. to have that better operating environment,
regulatorily and legally, for this kind of activity, which I
don't think we are putting the genie back in the bottle and
therefore the use of blockchain, the use of tokenization is
going to be around the world as we watch it. And so I would
like to see that innovation here under the right regulatory
framework. Thank you all for being here, and I yield back my
time.
Ms. Tlaib. The gentleman from New York, Mr. Meeks, who is
also the Chair of our Subcommittee on Consumer Protection and
Financial Institutions, is recognized for 5 minutes.
Mr. Meeks. Thank you, Madam Chairwoman. I like that--Madam
Chairwoman.
Thank you all for your testimony today, and Mr. Gensler, of
course, it is good to see you here today. You were with us in
the depths of the financial crisis, and I suspect that you may
agree with my earlier statement, in fact, in listening to your
opening statement, that no large company sets out to willingly
break the financial system. But through a combination of moral
hazards and failure to incorporate negative externalities and
regulatory loopholes, have allowed major systemic crises over
the past decades.
So what I want to do is probably ask all of you some
questions that I asked Mr. Marcus this morning, but before I do
that, I want to point out an intellectual sleight-of-hand, if
you will, that Mr. Marcus did in answering my questions, and
those of many of my colleagues, many Members of Congress.
He states that they seek to build a system for money
transfer. The comparison is consistently made to PayPal or
Venmo or Western Union, but to the best of my knowledge, users
don't hold wallets on those platforms, don't store money until
it is used in a Western Union account. Rather, customer
accounts, which are held at banks, are deducted when a payment
is made.
Let me then ask a question, because I am worried about
systemic risks, and I asked Mr. Marcus this morning, that if
Facebook managed just 10 percent of its current user base to
the Facebook Libra wallet, would you agree that they would be a
systemically risky financial institution, and should they be
designated as such by FSOC, and do the regulators even have the
capacity to develop dedicated and enhanced oversight regimes
for Facebook in such event?
I will start with Mr. Brummer, and then Mr. Gensler.
Mr. Brummer. That is an excellent question, and certainly
if Facebook was managing those kinds of assets, given its
customer base, I think it would be certainly be systemically
important.
And the question about the expertise at the Federal
Government level is precisely the fact that you have to think
about coordinating, under FSOC, an appropriate response, not
just in terms of the banking and financial stability level but
also with all of those consumers and all of the frailties that
we have been discussing all day long--how exactly do you
protect everyday Americans from those particular risks? And I
think that you would have to be elevated to a matter of
prudential, systemic, and also just customer and investor
protection.
Mr. Gensler. I will give a bit of a technical answer, but
quickly, having helped you all work through that Dodd-Frank
bill. Title VIII of Dodd-Frank had two systemic provisions. One
is as companies, and one is as payment infrastructures or
clearinghouses. There was actually a third one, activities.
It depends on the size that this would get to, and even if
it was 10 percent of their user base, if they only had small
balances, I think Congress, rightly, made sure that the FSOC
couldn't just designate anybody as systemic. If the balances
were really small, it might be a little challenging for FSOC to
designate them as systemic. If the balances were large, I think
yes.
I think on the payment infrastructure side, is it a
systemically important clearing and payment and settlement
system? If it was 10 percent and it was embedded in the world
that way, I think it is quite likely that the FSOC would be
able to do it. But it would depend on the facts and
circumstances.
Mr. Meeks. Let me ask this question, because I don't know,
given that when we were asking the questions, we were talking
about if it was a security or a commodity. That is a question,
and then who would be the regulator? What would be the
appropriate regulatory authority?
Would you say that they should be listed so that all of the
regulators, at some point, would be regulating them, or should
Congress look at creating a new regulatory authority that just
looked and specialized over cryptocurrency and Bitcoin, et
cetera? Ms. Pistor or Mr. Gensler?
Mr. Gensler. I will just say I don't think we need another
regulation in Washington. I will just say that.
Mr. Meeks. I agree.
Mr. Gensler. But I think that if it impinges on investor
protection, which this feels like--you know, a great Indiana
poet, James Whitcomb Riley, said, ``When I see a bird that
walks like a duck and swims like a duck and quacks like a duck,
I call that bird a duck.'' I mean, this thing looks like an
exchange trade and I am just using common sense here. If
Congress needs to fill a gap to make sure it is--
Ms. Tlaib. Thank you.
Mr. Gensler. --under the securities laws, I would do that.
Ms. Tlaib. The gentleman from Ohio, Mr. Davidson, is
recognized for 5 minutes.
Mr. Davidson. Thank you, Madam Chairwoman. Thank you to our
witnesses and to my colleagues who are here on this really
important topic.
Mr. Gensler, you mentioned regulatory arbitrage, and
certainly in this space we have seen a fair bit of it. The SEC
has cracked down on some of the big fraudsters that essentially
were just launching securities in violation of U.S. securities
law.
However, that regulatory framework, as Ms. Demirors has
pointed out, has driven a lot of companies to find certainty in
places like Switzerland or Singapore. Would a bright-line test
that says if it meets this test right here, we know that it is
a security, and if it falls on the other side of that, we know
that it is not, provide the certainty the market needs?
Mr. Gensler. I think that it could but it could also
provide certainty for ways for good lawyers to cleverly work
around it. I think whether it is the Supreme Court Howey test,
or just in the last few weeks the SEC put out a lot of guidance
in this area.
It has been slower than I think we want. I will agree with
that. But I think they are slowly, under Chairman Clayton,
trying to give some certainty to this area.
Mr. Davidson. Right. Bill Hinman has provided a lot of
that, and, unfortunately, that is not really--I appreciate
their efforts but, frankly, it is Congress' job to provide that
certainty. And if we just want to live with a court decision,
Howey, and apply the Orange Grove test to things--you know, if
you are swinging an orange grove hammer, a lot of things look
like an orange grove.
Talking about one other principle that you talk about, we
have provided that in a group of bipartisan folks, in the Token
Taxonomy Act, and it lays out a four-part test that if it meets
this, then you can know. You don't have to go on a case-by-case
basis, and pre-clear your idea with the SEC, and maybe you talk
to the right person and maybe you don't, and maybe you can
spend as much on lawyers as Facebook did. Maybe you have 2
years before you need to launch, but maybe you don't.
And a lot of companies have just sat down and talked to me
and said, ``Look, no offense, but we don't trust you guys. We
are going to launch this in Switzerland or Singapore.''
So, we are trying to provide that certainty for the market.
I want to ask one question specific to Libra. Their
association would be governed by a board. Their association has
central control in its proposal, and those seats I think would
be considered assets, right? They would be presumably fungible.
They could be sold. They say they are going to be governed in a
different way. The underlying proposal is not just a bundle of
currencies but short-term securities. Under securities law
right now, I think as you point out, you don't have to do
arbitrage. You just have to apply existing law. That would be
treated as a security, correct?
Mr. Gensler. The members of the board would get something
called a Libra Investment Token, and that is unambiguously a
security, and I think even Facebook has agreed to that.
Mr. Davidson. Okay. Thank you.
Ms. Demirors, you have highlighted a lot of background
information about Bitcoin and about the immutable distributed
ledger and the benefits of that, decentralization versus
centralization. A lot of people in this space will use a phrase
that you may be familiar with: ``There is Bitcoin and then
there is shitcoin.'' Are you familiar with that phrase and what
people might mean by that?
Ms. Demirors. I am.
Mr. Davidson. Could you elaborate on how people would
differentiate the two?
Ms. Demirors. Absolutely. I think the idea here is Bitcoin
has had a long track record. The network has been operating for
10 years. The Bitcoin network has been tested. The
decentralized nature of the Bitcoin protocol has been tested.
People have tried to co-opt control of Bitcoin source code and
push it in certain directions that benefit their business
models, and this network, and this protocol, and its open-
source governance have withstood that test.
It is robust, it has been tested, and it has had the
benefit, frankly, of spending its first 5 years, in its
nascency, sort of operating in this environment of innovation
and not having a lot of regulatory attention.
Mr. Davidson. Is there a central authority that could
dilute the value of Bitcoin?
Ms. Demirors. No.
Mr. Davidson. Is there a central authority that could
filter transactions at Bitcoin?
Ms. Demirors. No. That can only be done through the
products and services that people utilize to access the
network.
Mr. Davidson. Like Coinbase, for example?
Ms. Demirors. Absolutely. That is a U.S. company that is
regulated based on the facts of what its business model is.
Mr. Davidson. Right. And just like in the U.S., the Federal
Reserve or the Treasury doesn't change the dollar. The people
at the edges, the banks, generally do that. But with Bitcoin
you can still engage in peer-to-peer transactions, like cash,
correct?
Ms. Demirors. Absolutely.
Mr. Davidson. And because of open source code, you could
have a wallet, correct?
Ms. Demirors. Absolutely.
Mr. Davidson. All of these features are different than many
of the things that people call, colloquially, ``shitcoin,''
because the value can be distorted by a central authority. So,
people do really have their assets at risk.
We absolutely need the certainty that legislation can
provide in this space. I hope we have a hearing specific to the
Token Taxonomy Act soon. I appreciate my colleagues and the
time, and I yield back.
Ms. Tlaib. The gentleman from Georgia, Mr. Scott, is
recognized for 5 minutes.
Mr. Scott. Thank you, Madam Chairwoman.
First, let me say what an excellent panel we have, very
knowledgeable. Thank you.
Mr. Gensler, it is great having you here, my good friend.
We did a lot of yeoman's work with CFTC when you were Chairman,
and me as Chairman of our committee on cross-border and on
derivatives, swaps, the whole nine yards. It's good to see you
again.
Let me tell you what I think is the Achilles heel in Libra
right now. This morning, if you recall my testimony, I kept
asking Mr. Marcus, and several of us on the committee kept
referring to the White Paper and so I looked at this White
Paper and I think we found an Achilles heel here, several, but
here's one that we may have omitted.
In that White Paper, it states that globally, 1.7 billion
adults remain outside of the financial system with no access to
traditional banks, and I questioned him on that and he assured
me that in order to obtain what he called a Calibra Wallet,
there must be strong Know- Your-Customer requirements in place,
including a government-issued ID, and this is particularly
acute when you're dealing with online activity. When you're
dealing online, one of the big reasons why many consumers are
unable to access the financial services is due explicitly to a
lack of identifiable proof of identification.
I want to ask you all, how do you see Libra expanding
access to financial services to the unbanked and underbanked,
1.7 billion adults across the world, particularly on an online
platform, when you can't simply hand over an ID card like you
can to the bank teller, and while at the same time navigating
the need to verify customers' identification who may not have a
government-issued ID and are unable to get one? How do we mesh
this with online?
I think that is an Achilles heel there. We're moving fast
in technology but I don't think, if I take this, I can't give
an ID card.
Go ahead, Mr. Gensler?
Mr. Gensler. Three quick points. Sub-Saharan Africa, half
is unbanked but half of the unbanked have mobile phones. That's
the good news.
The sad news is you're absolutely right about government
IDs. I think the Calibra Wallet they're promoting will be
inside of these anti-money-laundering laws, but there are also
going to be a lot of other wallet providers, and so my other
two points is those other wallet providers will be in the lax
jurisdictions that might not take the necessary precautions to
get the government IDs.
The third point is it's absolutely true that this will have
a lot of leakage, that there will be lots of Libra tokens, just
like there are lots of Bitcoin tokens that are floating around
outside of the Bank Secrecy Act and that's just going to
happen.
Mr. Meeks. Mr. Weissman?
Mr. Weissman. Yes. I think you're exactly on point. I think
it's an unsolvable conundrum.
If you look at what they've said, in addition to exactly
what Mr. Gensler is saying, they want it to be that you can
walk up to a convenience store anywhere in the world, hand them
money, and get Libra. That's the vision. Okay. That's one hat.
They also say the Calibra Wallet will interconnect with
other wallets. So even if Calibra does Know Your Customer, a
different wallet that doesn't, you still put the money back
into Libra.
I think the possibilities for sanctions and money
laundering and tax evasion are unlimited and history tells us
if the opportunity is there, it will absolutely be exploited.
Mr. Meeks. Yes, thank you.
Ms. Tlaib. The gentleman from Tennessee, Mr. Rose, is
recognized for 5 minutes.
Mr. Rose. Thank you.
Many have expressed concern that Facebook could out-compete
banks and non-depository financial institutions and become some
sort of financial services monopoly. I understand Facebook has
demonstrated a dominance in the social media space, but I want
to better understand this financial services monopoly idea.
The Libra Association is made up of 28 founding members,
with more to come, many of which have played in the payment
processing space for a long time. Some of these firms are very
large. Visa and MasterCard have billions of cardholders and
process trillions of dollars' worth of transactions.
Some have argued that this association is a thinly-veiled
attempt of Facebook eventually attempting to create a bank. It
may or may not be, but I am more reminded of another payment
innovation that started in the 1950s and 1960s as associations
of like-minded companies: the bank card payment networks.
Banks issued their own cards but banded together as
regional bank card associations to create networks that worked
for the consumers, merchants, and issuing banks. Eventually
those associations were spun off as independent companies that
we have and use today.
I'm not saying that Libra and bank card network innovation
are the same thing, but it does strike me that there are
similarities and it might be helpful to look at previous case
studies to inform how we look at new innovations.
Ms. Demirors, if we were to think of Libra like a payment
innovation, can you talk a little about the potential
similarities between card payment in its early stages and what
Libra is or eventually might be?
Ms. Demirors. I don't think any of us are saying that
Facebook doesn't have the right to innovate. After all, the
U.S. is the birthplace of many innovations and we're seeing a
wave of financial technology innovations in different areas.
I think what we are seeing here is that the ability to
compete and to create innovative new financial products and
services should be possible, regardless of an institution's
size, balance sheet, or political power.
I think what Facebook is attempting to do is fundamentally
different from creating a card payment network. Facebook is
already in the hands of 2.7 billion users. It already is on
everyone's phones, on everyone's laptops, and has committed
repeated violations of these users' privacy, and what they are
attempting to do is not to create a new payment network.
What they're attempting to do is pass off this idea as a
cryptocurrency, which it is not. They're attempting to use
regulatory cover to get away with doing something that would
typically be regulated, which is asset management,
fundamentally different.
Mr. Rose. So, differentiate, go further and differentiate
between the consumer protection concerns with what Libra is and
what a true cryptocurrency is?
Ms. Demirors. My fundamental concern is related to
stability. If we think about the various types of risk that
investors take when they custody their assets or purchase
financial products from an institution--we experienced this in
the United States 10 years ago--you are taking inherent risk.
When someone purchases a Libra, they're giving up their
real world assets. They are giving up fiat, giving it to the
Libra Association to receive tokens. These assets are placed in
depository banks and institutions around the world. This is a
core banking function. This presents risk from counterparties.
It presents risk in consumers being able to retrieve the
principal that they have used to obtain the Libra tokens, and
it presents systemic risk in the context of the broader
financial system.
Mr. Rose. And why are permission-less blockchains better
for consumers?
Ms. Demirors. When you buy Bitcoin, when somebody makes a
decision to purchase Bitcoin, they are not buying a pool of
assets. They are not exchanging their principal for financial
instruments. They're buying what is essentially a digital
commodity that is backed by its own scarcity and the demand for
it. It is not a pooled fund. There are no assets or banks that
have to create an instrument that backs the value of Bitcoin.
This is fundamentally different.
Mr. Rose. As we move forward and we think about this
independent association, there comes a time when one would
surmise that the participants might want to monetize their
interest in the association.
I'm curious, Mr. Gensler. You nodded your head. Paint that
picture for me. How does that work?
Mr. Gensler. I think particularly if the association is
associated with the float, the interest that's coming off of
this reserve, that would be very attractive. They're monetizing
that really upfront called Libra Investment Token. There are
two tokens here.
I think to your earlier question, if I could just say I
don't know if Facebook will be successful. This is their fourth
attempt in payments, but we do know in China, the two big
companies, Alipay and WeChat Pay, dominate payments, over 90
percent of payments.
Ms. Tlaib. The gentleman's time has expired.
Mr. Gensler. I think that's what they're going to do.
Mr. Rose. I yield back.
Ms. Tlaib. The gentleman from Illinois, Mr. Foster, is
recognized for 5 minutes.
Mr. Foster. Thank you, Madam Chairwoman, and thanks to our
witnesses.
I'd like to talk a little bit about what the regulation
requirements ought to be for not only Calibra but crypto
exchanges in general.
Do you think, first off, that Calibra and other crypto
wallets should be subject to custody and segregation
requirements, Mr. Gensler or anyone else?
Mr. Gensler. I would say yes, and I think that a custody at
Coin Base and Kraken and Gemini and the exchanges has been a
honey pot for theft and cybersecurity risk, and that if
Congress could step in, maybe not this Congress but a future
Congress, to give clear authority, whether it's the SEC or the
CFTC, but clear authority to regulate even a Bitcoin exchange,
which maybe could be put into this token.
Ms. Demirors. I'd like to make a factual distinction. Libra
is not a cryptocurrency. Cryptocurrencies are fundamentally
different. The business of exchanging cryptocurrencies is a
regulated activity and has been for the last 5 years in this
country, and so I want to distinguish and draw a very clear
line that Libra and cryptocurrency should not be--
Mr. Foster. But they don't differ in terms of the sort of
frauds that can take place, frauds, theft of customer assets,
everything bad that can happen if you don't have segregation
requirements and so on.
Mr. Brummer. And could--
Mr. Gensler. I think that's right and Calibra is going to
control the Calibra Wallet funds because it's a custody fund.
Mr. Brummer. And ultimately, custody is a functional
activity and even regardless as to what kind of sort of digital
asset you're ultimately dealing with, you have to ask and
tailor custodial rules to the nature of what you're trying to
regulate.
Certain kinds of questions as to what happens to the
custodial responsibilities of a bank when there's a fork in
that cryptocurrency, those kinds of questions obviously have to
be answered, and it's not at all clear as to what those answers
in actuality will be.
Mr. Foster. Okay. And could you say a little bit about the
sort of abuse of trading practices that are possible with
current crypto exchanges and might be possible also with Libra,
things like front-running, wash trades, all this sort of--
Mr. Gensler. It's all possible.
Mr. Foster. Is it taking place?
Mr. Gensler. It's a feeling. It's well-documented by a
company called, I think it was Bitwise, but you might remember
a filing at the SEC about fake trading, but most exchanges
around the globe are not regulated, other than this custody
issue and for money laundering, but it's rare that they're
regulated for manipulative behavior.
Mr. Foster. Any anonymously held thing, is there any way to
prevent things like wash trades even if they're anonymously
held?
Mr. Gensler. It's not even about the technology. Around the
globe, the largest exchanges are not regulated by the SEC or
similar securities regulators.
Ms. Demirors. I have to point out, though, many exchanges
are in fact regulated by the jurisdictional regulator where
they operate and by the customers that they serve. There is a
case that is now being tried, New York v. DFS, which is looking
at a number of exchanges.
The second distinction I would make here is since 2016, all
of the exchanges here in the United States that are under the
purview of U.S. regulators, including the CFTC, have
voluntarily joined the CFTC in creating a market oversight
committee that looks at these practices and these accusations
that have been leveled around wash trading and there is effort
within the industry to self-regulate in absence of clear
guidance, but I will say that this wash trading activity is not
happening here in the United States because exchanges here are
regulated as any other exchange would be.
Mr. Gensler. I differ with my fellow witness at the table.
The wash trading is absolutely happening here. They're not
regulated for market manipulation; they're regulated for
custody of the funds and anti-money-laundering.
Mr. Foster. It seems like if they are truly anonymous, it's
very hard to even identify wash trading if you just don't know
who's actually participating in it.
Mr. Brummer. And it's notable that in the governance rules,
there are no explicit ways to determine potential conflicts of
interest or any other kinds of activities. So even from a self-
regulatory perspective, as it pertains to Libra, there are no
obvious solutions to the problem.
Mr. Foster. Then, it relies on the anonymity or the pseudo-
anonymity of it is in fact the fundamental design problem
absent some way of going for the regulator to going through and
finding out that the same person was on both sides, the
beneficial owner on both sides of the trade. Unless there's a
way to pull the mask off and look and see who's there, there is
no way of even detecting it and that's sort of an unsolvable
problem as far as I can tell.
Let's see. I have 8 seconds left. I want to thank you for
your input on this very important subject. I yield back.
Ms. Tlaib. The gentleman from Kentucky, Mr. Barr, is
recognized for 5 minutes.
Mr. Barr. Thank you, Madam Chairwoman. Witnesses, thank you
for your testimony and your expertise today. You have been an
excellent panel, and this is an interesting topic. We're all
learning, and we still have a lot to learn about this.
As I was saying earlier to Mr. Marcus, I think the
presumption should always be on the side of financial
innovation, especially when there's the promise of greater
financial inclusion, and reduction of transaction costs and
friction.
So, I do hope that this will result in a very positive
impact on our society, but I do think we should ask probing
questions, and I appreciate the panel for offering some healthy
skepticism on one point or another.
Let me just kind of start with the basics and I think I
want to go back to Ms. Demirors. You made the comment that
Libra is not the same thing as cryptocurrency. Can you
elaborate and explain that to me?
Ms. Demirors. Yes, there are three fundamental differences
I would like to point out that are also recorded in my written
testimony I submitted.
Number one is that cryptocurrencies like Bitcoin are
decentralized. No one entity or individual can block or censor
transactions. Libra, by contrast, has an entity of these 100
members that is able to block/censor transactions and manage
the network.
Mr. Barr. But only for 5 years, right?
Ms. Demirors. That is the claim. I do not know how they
plan to decentralize this and they have offered no solid plans.
``Decentralization'' is a word that is used often, but it
doesn't really have a tangible measure. It's fairly esoteric.
I'm not sure how they will achieve it.
The second point I'll make is that Bitcoin is not backed by
anything but the demand for it. It is its own asset. It's a
digitally scarce asset and it can be likened to a digital
commodity. It is a new type of asset which introduces
challenges in trying to fit it into a box, but it isn't backed
by anything. There's no bank that holds funds. There's no
entity that holds funds that are at risk.
In contrast, Libra is the opposite. It is backed by a
basket of currencies and other securities that are held by
such--
Mr. Barr. Stable coin.
Ms. Demirors. Yes, that is what they like to call it.
Stability is relative, as we have learned through the history
of financial crises, but Libra does hold a number of assets
that substantiate the value of its token, and so the security
of those assets in question are tantamount to securing the
principal that users post to obtain Libra.
The last point I'll just make is the point of control.
Anyone can build on top of the Bitcoin network or most
cryptocurrency networks. Anyone can access these things. The
code is open source. The network is open just like the
internet. It could be considered a public good and people can
compete and build businesses.
In contrast, I don't know how the Libra network will be
open when it's controlled by 100 for-profit corporations that
are closely affiliated with Facebook.
What I'm asking for here and what I'd like to just point
out is that competitiveness and the ability to level the
playing field for all types of organizations to be able to
compete in the same market is important. Cryptocurrencies are
an open market. Libra is proposing a closed controlled market.
Mr. Barr. Let me switch to the stable coin idea and the
fact that Libra is tethered to this reserve. Isn't that a
positive innovation to reduce volatility? Shouldn't we think
that this is a positive development?
Ms. Demirors. I am not commenting on whether Libra is
positive or negative. I am commenting on the fact that Libra is
not a cryptocurrency. Libra is an ECF or mutual fund that is
backed by assets and I am not arguing that the unbanked don't
deserve access. But it's not the body shield.
Mr. Barr. Mr. Gensler?
Mr. Gensler. I think it's a very interesting innovation
that has raised 5 to 10 really important public policy issues,
but the idea that there might be a stable value coin backed by
a basket of multi-currency risk in Sub-Saharan Africa or in
Latin America or in Asia, there might be a demand for it. I
wouldn't count it out.
Mr. Barr. What is the incentive, besides this unbanked,
underbanked problem, what would be the incentive for a banked
person or the holder of a fiat currency to exchange it for--
Mr. Gensler. It's very simple. Just like in many countries,
sometimes there's a lot of transactions in dollars, because
they don't feel comfortable with their central bank, with their
monetary authority. It could be countries in very real extreme,
like Venezuela or like Ecuador adopted the dollar as an
official policy, or it could just be that a lot of things
happen.
Mr. Barr. Can someone address the risk of disruption to
central banking and the disruption to traditional monetary
policy?
Mr. Gensler. It would definitely disrupt the central
banking and monetary policy in these developing countries if
they ``Libra-ize'' instead of ``dollar-ize'' and if it got very
significant, it could start to influence the four or five or
six currencies they have underneath it. So, the dollar is going
to be half of this but if the association said it's only going
to be 30 percent, you see. It's the transition.
Mr. Barr. Thank you all. I'll have lots more questions, I'm
sure, as this develops. I yield back.
Chairwoman Waters. The gentlewoman from California, Ms.
Porter, is recognized for 5 minutes.
Ms. Porter. I was told on my way in that coming to give
praise to the panelists was not my style, but I'm really here
to just thank you in part for your service and for being here
and explaining things to the committee.
I wanted to pick up on something that Ms. Demirors said
about the differences between Libra and cryptocurrency, and a
lot of the concerns that I have about Libra, I do not have
about crypto. There are issues with cryptocurrency and many of
you have illuminated them, but I think your testimony is
incredibly important.
I wanted to pick up on the point you made about Libra being
``backed in a way that Bitcoin and traditional crypto is not,''
and I wanted to ask, we heard Mr. Marcus talk about how Libra
is backed and so I wondered if any of you, Mr. Gensler or
Professor Pistor, could talk about, what do you think he means
by ``backed'' and how should we have confidence in that, and
how is this kind of a backed stable coin different than
something like M-Pesa in Kenya, for example?
Mr. Gensler. I'm going to agree with my colleague here.
This is very different than Bitcoin for the three reasons that
she said and for other reasons, as well.
I think that it is very different than M-Pesa, but similar
in this important way. The central banks and authorities in
Kenya said anything in that fund, which was held by the phone
company SafariCom, had to be in trust, could not be loaned, and
100 percent of it had to go into the Kenyan banking system as
deposits, and similarly, in China, they made it even more
restricted, 100 percent had to go to the central bank.
So, that's where the similarities are. It's different
because this is multi-currency, and currently it's very
different because they're saying don't treat us like a bank,
don't treat us like a narrow bank and your exposition about the
wildcat banking era of the 19th Century was very helpful.
Ms. Porter. Others?
Ms. Pistor. Yes, I think that can mean different things.
It's not that the customers have a direct claim against the
reserve but the idea is that the reserve will be held in safe
assets and therefore will be able to provide liquidity.
Of course, the important point that I'm trying to make in
my testimony is that the safety comes from public-backed
stopping in the countries that provide these safe assets. So,
it's ultimately a public service provided to a private company.
Ms. Porter. Right. And when we talked with him about the
corresponding purchase with the FDIC, for example, I asked Mr.
Marcus, do you think that Libra would be subject to the FDIC,
to some kind of insurance scheme, like what is the backstop, so
that when you tell customers that this is backed, that they
know what they're getting, what kind of backstop and security
they have?
I wanted to ask--he didn't take me up on my offer to have
the FDIC regulate Libra. I was happy to run through the
alphabet soup. He can choose one of the weaker regulators, like
the OCC, if he prefers. There's an alphabet soup here we could
offer him.
I wonder if you all could comment and we can just go from
right to left here quickly, which regulators, and it could be
more than one, do you think are appropriate for Libra?
Mr. Brummer. One comment and observation that I recently
had was whether or not Facebook, if it was to become a bank,
would even satisfy the de novo review process from a banking
regulator. It's entirely uncertain as to whether or not they
would receive a license.
Certainly, the ambiguity with the term ``backed'' is played
throughout the White Paper where, on the one hand, especially
if you're describing yourself as a currency board, you're
thinking about ``backed'' in a kind of a monetary sense, but
what they're really doing and what you see in the structure of
what they're doing is creating an ETF, and yet you're creating
the ETF but you're using the language of a kind of monetary
world and that kind of obfuscation is not at all helpful to a
potential purchaser, but certainly at a base level
infrastructure, regulatory infrastructure level, you're going
to have to go with some securities level, securities regulatory
oversight through the 1940 Act and then looking at what
differentiates in terms of both the breadth and the other
characteristics and the systemic, potentially systemic
implications to ramp up from there.
Ms. Porter. Yes. This is a Full Committee hearing. It isn't
clear to me whether this is a problem for the Investor
Protection Subcommittee or the Consumer Protection
Subcommittee.
Ms. Pistor. I think the problem is that many of our
categories don't easily fit and part of financial innovation,
of course, is to create something that does not fit existing
structures. That's part of how we get the comparative advantage
and I think they're using the language in a very smart and
discriminate way and I think to avoid the kind of regulatory
framework that we have.
Let me add one more thing, which is, of course, we're
talking about a multi-jurisdictional regulatory approach that
would be needed for a global currency. So even if you figure it
out in the United States, you need to think about how
complementary regulators are elsewhere.
Mr. Gensler. SEC.
Ms. Porter. My time has expired, but I would just welcome
each of you to please follow up with me with your thoughts on
this. I'm very interested.
Chairwoman Waters. Thank you.
I will now recognize myself for 5 minutes, and let me thank
the panel for being here. You have spent some long hours here,
while all of our Members have taken the opportunity to ask
questions of Mr. Marcus, but I certainly appreciate your
participation here today, and I thank you all for helping to
unfold and make transparent some of the information that we
should have had access to that we didn't get in the White
Paper.
Let me ask you this, because I've listened to many of the
questions that you've been asked and you've covered an awful
lot, but I've been thinking about the association and I've been
thinking about the fact that the association includes about 27
or 28 companies, and Mr. Marcus said that they were targeting
about 100.
But do you think that it's going to go well beyond that
number because of what we are looking at? Are we looking at big
companies with big databases that supply whatever goods and
services and with the Libra, the Libra will be the currency
that you have to have in order to get these goods and services,
or am I just daydreaming about this? Mr. Brummer, what do you
think?
Mr. Brummer. Certainly, they have not disclosed exactly
what the selection criteria would be for ramping up even to 100
members. You have to expect that given the resources available
to the existing members, that the entry point and the
expectations of new members would be very large, and there's no
clear path to reaching the kind of decentralization and
decentralized infrastructure that Mr. Marcus is promising in
terms of evolving into a Bitcoin-like infrastructure.
Like you, I do have doubts as to how quickly they would be
able to ramp up, much less become a permission-less system.
Chairwoman Waters. Do you think they are thinking beyond
100 members of this association? Because, remember what he
said, ``Well, there's going to be a smaller governing group
that will be making these decisions, I guess, for everybody.''
So, could there possibly be thousands of companies in this
association?
Mr. Gensler. There's nothing that forbids it, and if it
helps the distribution of a product, economic rationale would
be to help distribute the Libra, so--
Ms. Demirors. But if I may, Chairwoman Waters, I think what
we've seen historically in attempts by multinational many-
member consortia consisting of thousands of members to govern
something that does involve profit and distribution of returns
and we're speaking about the largest consumer base in the
world, 2.7 billion users, that is going to quickly become
contentious.
If we look at much smaller organizations, comprised of
smaller membership, they have many governance challenges, and
my concern is that in the Libra White Paper, this governance
structure is not clearly laid out. It's not laid out where the
balance of power will be or if there is any one overriding
party or entity that makes decisions in the case that the
parties that are members of the association do not agree.
Chairwoman Waters. Has there been any discussion--yes, Mr.
Weissman?
Mr. Weissman. Yes. I think that the Facebook vision is
clear actually. I think it's that they intend to have an
oligopoly that they dominate. It is a cartel. Absolutely, they
want to--
Chairwoman Waters. A cartel--
Mr. Weissman. Yes.
Chairwoman Waters. --to dominate.
Mr. Weissman. Past 100.
Chairwoman Waters. Is it possible that all of these
companies with big data could end up with all of this data
being merged into a humongous amount of individuals in this
database that they could be merchandizing to, they could be
marketing to? Is that a part of what's going on here?
Ms. Demirors. I think until there's more transparency on
how the association intends to make money, the organizations
that join have to have over a billion dollars in assets and
contribute $10 million to join, not just anyone can join this
association, and in fact, no one was able to ask to join. I was
not invited. None of the firms I work with were invited, and so
I think that's for me the fundamental question.
If Facebook aspires to create this open permission-less
consortium that everyone can benefit from, then why is the
selection process opaque and why does it only involve
affiliates and associates of Facebook and its executives? That
would be my question. That's not a criticism, but I think more
transparency is certainly needed.
Chairwoman Waters. That's my question, too, and I basically
define this as, ``the Billion Dollar Boys are taking over.''
Thank you very much.
Now, we are going to hear from the gentleman from
California, Mr. Sherman. You're recognized for 5 minutes.
Mr. Sherman. Thank you.
We've heard from Facebook that they're absolutely dedicated
to adhering to the anti-money-laundering and Know-Your-Customer
rules. Mr. Brummer, if they were that dedicated, why would they
hire as the head of the operation someone who was head of
PayPal when they were fined $8 million for violating anti-
money-laundering laws?
Mr. Brummer. I cannot answer that question.
Mr. Sherman. None of us can. And will our anti-money-
laundering laws be binding on an institution headquartered in
Switzerland and made up of international businesses, Mr.
Brummer?
Mr. Brummer. Well, certainly U.S. rules would not apply.
Mr. Sherman. Those are the ones I'm talking about, yes.
Mr. Brummer. U.S. rules would not apply, and the bigger
risk obviously lies with those jurisdictions that are so weakly
regulated that they're falling outside of international
agreements, like the ones that FATF has recently agreed to in
June.
Certainly Swiss rules, particularly relating to both
privacy and also relating to financial regulation, are not just
different but have historically been considerably weaker, and
real questions do arise as to the ability to enforce and to
promote the kinds of norms and safeguards that we have here in
the United States.
Mr. Sherman. Okay. The history of currency, and I see we've
got a ``Zuck Buck'' behind you, the history of the dollar,
first it was based on how much gold we had in reserves. And
only when we had an ounce of gold, did we print $35. Then, we
started printing more than we had in reserves. Then, we got to
the point where we made it nonredeemable and now the dollar is
valuable. Gold is an interesting thing. It's a nice thing to
have, but nobody says, ``I'm not interested in having U.S.
dollars because they're not tied to gold.''
If Zuckerberg can replicate that, then he can do what only
the U.S. Government can do and that is print to reserve
currency. They've promised that they won't do that but that it
will always be one-to-one, but, Ms. Pistor, is that promise
from Facebook binding on the Libra committee?
Ms. Pistor. No, the association could, with a two-thirds
majority, change that.
Mr. Sherman. And if they change that, that means they get
to print money. That would be quite an incentive to change it.
Ms. Pistor. Yes. I would think that a private organization
has a problem with doing what the United States did in the
1970s because what they cannot do is unilaterally basically put
the productivity of an entire country on the line, which is
back--
Mr. Sherman. That's true.
Ms. Pistor. But they could try.
Mr. Sherman. People are creatures of habit. If I can go on
Amazon and buy a bunch of neat stuff for a thousand Libra or
Zuck Bucks and then as long as I can do that, they're valuable
things to have.
Why don't I address this to Mr. Gensler? We have a problem
in that people in Los Angeles are sending money to their
grandparents in Guatemala and they're being charged 7 or 8
percent sometimes to do that.
How is a Guatemalan grandmother supposed to buy a bag of
food for a bunch of Zuck Bucks? We're told that if we don't buy
into this wonderful new thing, that we're disadvantaging that
grandmother, but is this cryptocurrency really a solution for
her?
Mr. Gensler. What we found is Bitcoin, for all it is really
innovation, it is not being used that much in retail
transactions for the exact reason you're mentioning.
Mr. Sherman. And certainly not in rural Guatemala.
Mr. Gensler. What would have to happen is that some service
provider would provide the technology so that behind the scenes
the Libra or this Zuck Buck, as you referenced, would be traded
for the local currency so that the store owner could get the
local currency and there would be some crypto exchange or hedge
fund--
Mr. Sherman. It sounds every bit as expensive as what's
going on now. I yield back.
Chairwoman Waters. Thank you.
The gentlewoman from Michigan, Ms. Tlaib, is recognized for
5 minutes.
Ms. Tlaib. Thank you, Madam Chairwoman. Thank you all so
much for being here.
I have to tell you I'm learning a tremendous amount. The
younger people on my team have been watching this closely and
teaching me a lot, but the more I listen, and I was forced to
stay here a little bit longer, which is okay, I was able to
hear a lot more and learn more, but one of the things that
comes to mind, and we'll talk about this, is this whole thing
around systemically important financial institutions. I want to
get there, but first, Mr. Brummer, how do you feel about a
private company issuing currency? What ramifications do you all
see? You all talked about it. Historically, have you ever seen
outside--
Mr. Brummer. Right. We have. What a private company does
with money--when you use other people's money, then you should
normally expect that the government or some kind of regulatory
regime is going to want to know what you're doing with it and
have you rightfully accessed or received that money, and
whether or not it be an example, wildcat banking where you're
not just taking the money, you're not keeping it entirely in
reserve, but you're lending it on to someone else, creating
certain kinds of risks.
The challenge is when you have a private institution that's
not just lending its own money but is lending with other
people's money, and when they're trying to do that without
offering the kinds of proper safeguards or disclosures to
relevant stakeholders and investors, and that's when the red
flags are raised.
Ms. Tlaib. Okay. This question goes to everyone on the
panel. In thinking about how to protect the residents, my
residents at home, they're going to see this and they are not
going to fully understand it, just like I didn't before I came
here, the possibility of the Libra Association's failure, and
if anyone on this panel can explain the systemically important
financial institution, if they get labeled as too-big-to-fail,
how is this connected to what we're talking about now, that
this could be a possibility?
Mr. Gensler. Can I just mention one thing that's buried in
their White Paper and documents? They're trying to negotiate
with central banks around the globe to get accounts at central
banks, and your residents in your community have accounts at
commercial banks, but an account at the central bank is quite
different. That means that you get access to the discount
window, the lender of last resort.
I surely hope that Chairman Powell and others at the
Federal Reserve would not give that to this association, but if
it was very large, that would go to answer your question. At
some point in time--
Ms. Tlaib. But isn't that possible?
Mr. Gensler. --in 2008, there were decisions made by good
men and women trying to stop this country from going into
crisis and they made decisions that many of us even said, that
wasn't the right thing, to bail something out, but the Libra
Association is already negotiating with central banks to try to
get access to central bank money or accounts and that's what
would happen if it was systemic.
Ms. Tlaib. Did you have something, Mr. Weissman?
Mr. Weissman. There's another element that I think we're
not focusing on enough that relates to your constituents, and
everyone's constituents.
What Facebook wants is that transactions that occur in
Libra, wher3e people sell things, provide things, in Libra,
using Calibra, whatever, but when you have a borderless
privatized currency, you now have created this global market
with no reasonable regulation. They're talking about payday
lending. They're talking about providing financial services in
Libra. So all of the problems we know now with abusive
financial lending, orders of magnitude worse because you've got
jurisdictional problems and secrecy problems that have no
possible plausible answer.
Ms. Demirors. I'll also add, if I may, the disclosure
aspect is very important. As many of us on this panel have
mentioned, Libra represents an investment product that would
typically be regulated under the 1940 Act, and so it's very
important that people who receive Libra who may not know what
they're getting, are educated as to what they're receiving.
Financial education has been problematic across a number of
different asset classes in this country's history and so the
disclosure component, I think, is important in ensuring people
understand the risk they're taking when they choose to take
their dollars and turn them into Libra.
Ms. Tlaib. Thank you. And I'll put the questions into the
record, Madam Chairwoman, if that's permitted, but I want you
all to know, one of the things I told Mr. Marcus is about the
monopoly, the small group of friends that is being created
with--the fact that a member can vote in contrary to the
position advocated for Facebook, what would happen, what
retaliation? There's this dynamic that's there, that I think
needs to be fleshed out. We need another hearing for that.
Thank you.
Chairwoman Waters. Thank you.
The gentleman from Illinois, Mr. Garcia, is recognized for
5 minutes.
Mr. Garcia of Illinois. Thank you, Madam Chairwoman. I'd
like to thank the panel for bearing with us and all the
questions.
I have a question on banking commerce for Mr. Weissman. In
your written testimony, you mentioned that the Calibra Facebook
arrangement, ``may run afoul of the bank holding company
requirement,'' which enshrined the historic separation between
banking and commerce.
The regulatory framework in our country governing bank
regulations established law between banking and commerce for a
long time. The guiding principle of this separation, that banks
should engage in impartial credit allocation, helps guard
against market manipulation, conflicts of interest, and anti-
competitive behavior.
When the lines are blurred, problems have emerged, such as
during the gilded age when JPMorgan monopolized railroads and
manipulated rates. More recently, in 2013, the New York Times
revealed that Goldman Sachs had bought up more than a quarter
of the aluminum market and had used this ownership of the
aluminum warehouse to inflate prices of aluminum, costing
consumers $5 billion.
Mr. Weissman, would you please share why this principle is
so important and what implications does Libra have for the
erosion of this principle?
Mr. Weissman. Your question illustrates many of the key
examples. The problem is that banks get a lot of money and they
get a lot of information and they're incentivized to use their
money in risky ways, capitalizing on special information that
they have.
Now, you think about Facebook. If Facebook becomes both a
social media oligopolist monopolist that it is and a major
financial services provider, all of a sudden, let's just set
aside their claim that they're going to respect privacy lines,
assuming there's a firewall, all of a sudden now they can
combine their financial information with their social media
platform. They can advertise to you based on what you're
buying. They can go into the business of providing goods and
services and give you a discount in Libra. In fact, that's part
of the plan, just not within for Facebook to be the provider
but to be within the association.
So the possibility is both for unjust competition and
squeezing out any rival who's not part of the Facebook
ecosystem, part of the ability to manipulate and misuse
information they get from the financial side and to the non-
financial side, and there are problems that really don't lend
themselves to regulatory solutions.
There's a reason we've had that wall. It's served us well.
When we've breached it, as you say, we've paid the price. If we
breach the principles here, I think we're certain to pay the
price down the line.
Mr. Garcia of Illinois. Switching gears, there have been
reports that President Trump intends to nominate Judy Shelton
to the Federal Reserve Board of Governors. She has come out in
favor of private currencies. In a speech that she made last
year, she proposed a new international monetary system, saying
an approach, ``that permits the issuance of virtual currencies
in tandem with government-issued currencies adapting legal
tender laws to permit healthy currency competition should be
put forward.''
If the Federal Reserve loses supremacy over control of the
money supply, what challenges might that create?
Mr. Weissman. I'll go first, and you can give the better
answer.
They're endless. That means the Fed can't create--that
we've lost control of monetary policies. We've lost control of
public influence over the direction of the economy. We're also
almost guaranteeing systemic risk in situations where you're
going to have again massive bailouts because the private
currency, when it fails, and it will, is going to need some
massive bailout from whom? From the public.
Mr. Garcia of Illinois. Any others?
Mr. Gensler. I think that the crypto movement, Bitcoin and
the crypto movement has performed one thing. It's a private
form of money, even Bitcoin, and it's putting some competition
on central banks around the globe to take their legacy payment
systems and move them into the 21st Century more fully.
I actually say there's a balance. The Bitcoin and the
crypto movement has created some competition for this public
good, but then to the second part of the question, some central
banks, like Sweden, are looking at issuing a central bank
digital currency. It would still be government currency, but
the public would have access directly to central bank reserves,
and in Sweden you wouldn't just rely on the commercial bank.
So, that would be competition from the commercial bank.
Mr. Garcia of Illinois. Any final word on this, Ms. Pistor?
Ms. Pistor. Exactly the point. I think that we should think
about the form which could be crypto, but it could also be
issued by a public agent, such as a central bank.
Mr. Garcia of Illinois. Thank you. I yield back, Madam
Chairwoman.
Chairwoman Waters. Thank you very much.
Is there anyone else who seeks recognition?
[no response]
Chairwoman Waters. I think not, and let me just say to the
witnesses how grateful we are that you have come today and
you've spent time and you've helped us to formulate questions
in the way that you've shared information with us, and so we're
very appreciative on both sides of the aisle, and while we
normally do not do this, for the few of us who are here, I'm
going to break another rule.
Can we give them a round of applause?
[applause]
Mr. Gensler. Thank you.
Chairwoman Waters. Thank you very much.
Prior to leaving, we're going to take another action we
don't normally take, but I will yield 5 minutes to the ranking
member for a closing statement.
Mr. McHenry. We're each getting 5 minutes for a close?
Chairwoman Waters. Yes.
Mr. McHenry. Okay. Just to be clear, the M1 supply of money
in the United States is approximately $4 trillion, $3.8 to $4
trillion. We're talking about a private currency that has one
to two billion users who could potentially use this product.
I don't know how history is going to judge this hearing. I
fear not well, though. There's a breathlessness to the
hyperventilation about Facebook. I get that. We've seen that.
We've seen that because of their use of data, consumer data.
We've seen that because of how they responded, as well, but
there's something additional here, which is that people fear
something they don't understand.
Facebook is using a language of cryptocurrency and digital
currency. They're using the words of blockchain technology, but
what they've created is actually perfectly not either. They're
creating something different.
But there is this underlying fear among policymakers here
on the Hill because they don't understand cryptocurrency and
digital assets. That's my fear, is that this will not wear well
historically, the concerns raised, the questions raised, and
it's because politicians, when they don't understand
innovation, they want to kill it. There's a reaction and a
quick response to it.
We've even had folks at the hearing today who actually used
the very quote that I was talking about, the hyperventilating
nature of the headlines around Project Libra and actually more
broadly about cryptocurrency. I opened with that, and we had a
Member later use the exact same quote as a knock against
Project Libra.
We also had a member of the committee speak of this as a
terrorist act, as one of the worst moments in the history of
the last generation, an attack on our country, and likened
Project Libra to that. I don't think this is going to wear
well.
There are legitimate concerns about this and I think of
substance, I think that will wear well and including what this
panel has said, but there are massive forces at play, massive
skepticism of Facebook, that's clear. There are also massive
anti-competitive forces at play.
If you want to lower the cost of payments domestically and
globally, we need innovation. It is absurdly high for somebody
to remit money back to their family at home, absurdly high.
Now, we don't want terrorism financing. We want those important
protections. We also want that immigrant to be able to send
their money to their loved ones or for somebody to be able to
move their money more readily and more cheaply. We want those
innovations. So, we need a new framework to do that.
We have a technology here that is going to do that and it
has this great opportunity to do that. We want to ensure people
are protected, in particular consumers, but you can't knock
every new innovation because it's a new idea and you cannot ban
a new idea from even pursuing the regulatory framework to
operate. That is absurd. It is wrong.
But what I think this hearing does, and I think the
discussion by our government around Project Libra highlights
the nature and the utility of cryptocurrency, digital
currencies, in particular Bitcoin, and as I said earlier, due
to the nature of the technology of Bitcoin, governments cannot
kill it nor should they, and you can't kill digital currencies
broadly.
They will be enduring. They will be strong. That is the new
framework of the next generation of the internet. That is clear
and in a generation, I hope that there's some statements here
today that will still be pointed to as factual and correct
about what we will live through in this iteration of financial
technology, and I hope there won't be much that is laughed at
in 30 years.
My fear is, however, that the reactionary element that was
brought up here today in part will be dealt with, with great
disdain, after the next generation of internet technology.
I do think, however, it was a really good hearing, because
we now have before Congress a deeper understanding about these
digital assets and the breathtaking speed at which the world is
changing and how we have to catch up, and with that, thank you,
Chairwoman Waters, for the opportunity to close, and thank you
for hosting today's hearing.
Chairwoman Waters. Thank you very much, Mr. McHenry.
Allow me to begin my close with the fact that our Members
did an extraordinary job today. Both sides of the aisle came
well-prepared to ask significant questions. As a matter of
fact, I believe that we had Members on our committee today who
went a lot deeper than many of those observing what took place
today ever expected them to do.
I'm very pleased with the interest. I'm also very pleased
that we had some of our Members saying that this was the most
significant hearing we've had since the last election and this
committee was reorganized, and so I'm very pleased about that.
Let me just say I'm so pleased about the panel who is here
today. This is a panel that we absolutely needed to have here.
We don't know what it is, and when I first saw the White Paper
unveiled, I went into almost a state of shock. I could not
believe what I was seeing, that this massive effort was
underway and we didn't know what it was, where it was going,
how it was organized, who owned it, all of that, and so I
determined as the Chair of this committee that we were going to
move on it right away, that we were going to hold a hearing,
that we were going to get involved in this and not wait until
destruction takes place.
As a matter of fact, you heard some of our Members today
talk about--I think it was Mr. Meeks, he never envisioned what
was to happen in 2008 with that subprime meltdown that we had
with our financial institutions basically hitting the dust and
leaving everybody hanging and all of the harm that was done to
our constituents and communities where foreclosures took place
and people had been involved and signing on the dotted line for
mortgages that they didn't understand.
We don't intend for that to happen with this. We are going
to put the time in on it and we are going to learn a lot more
about where all of the money is, who makes all of the money,
and how it is done.
When we say we don't know what it is, we don't know if it's
a bank, if it's just a transmitter of payments, what it is, but
we're going to find out. This representation that the
association, I believe, is working as a nonprofit--no
corporation this big and this powerful works as a nonprofit
without making a lot of money, and while I am very appreciative
for the fact that it has been represented that this is all
about servicing the unbanked, that sounds good, but I'm very
appreciative for the fact that somehow Libra is going to solve
all of the problems of the dollar because the dollar is just
not functional.
The last time I had money in my pocket, it worked very
well, so I'm not only focused on it and our Members are vitally
interested in it, I think we sent a message today. I think we
sent a message that no matter how big and no matter how
powerful Facebook and all those who are aligned with Facebook
and this association think they are and how they have advanced
in our society in ways that they've collected huge data and how
they have been using that data and how they sell that data and
how they plan perhaps to sell even more data, I think we sent a
message to them today that we are focused. We're focused. We're
watching. We're on it. We're involved in it. We're going to use
all of our time learning everything we can about it, and for
those who say that we don't have an appreciation for
innovation, that's not true. We have an appreciation for
innovation, but we don't have an appreciation for those who
have something masked simply as innovation that is a global
effort for control of a currency, of a cryptocurrency.
And so again, I thank the members of this committee on both
sides of the aisle. I thank our panel, and I even thank Mr.
Marcus for coming and attempting to answer the questions that
we were asking him. He didn't answer my question about whether
or not he would support a moratorium, and certainly he didn't
answer the question about whether or not there should be a
regulator of any kind, and certainly not FSOC, that could
oversee them, so even though a lot of the questions were
skirted, it has been suggested that certainly we should have
more hearings and we should get Mr. Zuckerberg here himself.
I'm on board with that.
Thank you very much for being here, and let me just say
that we have some information that we have to share with you
before you leave that's called adjournment information.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And with that, this hearing is adjourned. Thank you.
[Whereupon, at 4:47 p.m., the hearing was adjourned.]
A P P E N D I X
July 17, 2019
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