Libra hearing full of gunpowder: regulators find it difficult to trust Facebook

After Zuckerberg was "bombarded" by US lawmakers last year about the data abuse issues exposed by Facebook's cooperation with Cambridge Analytica, Facebook was "summoned" again today.

This time, the Libra digital currency and data privacy issues became the subject of the hearing.

On June 18, with the release of the Libra white paper by Facebook, the most important player in the cryptocurrency world entered the market. Such a big move naturally could not escape the vigilant eyes of US regulators. On July 2, after US Representative and Chair of the House Financial Services Committee Maxine Waters called for a moratorium on the development of Facebook's Libra, other members of Congress also joined her.

At 10 a.m. Eastern Time on July 16, David Marcus, the "father of Libra," spent more than two hours answering a series of sharp questions from the U.S. Senate Banking Committee.

(David Marcus at the hearing, photo from TechCrunch)

Hearing scene: full of firepower and tense atmosphere

The atmosphere at the hearing can be described as "tragic". Members of the US Senate Banking Committee publicly expressed that " Facebook is dangerous ", " No one likes Zuckerberg ", " No one here is willing to trust you anymore ", "Facebook's entry into payment is to make an already too powerful company even more powerful". The main questions raised by the members to Marcus include:

• Given that Facebook has a history of manipulating user privacy data, disregarding journalistic professionalism, and manipulating user emotions to sell ads, why do you ask us to continue to trust you when you are doing financial payments, which requires the most trust? Which of the problems you promised to solve in the past have you really solved? If you trust Libra, are you personally willing to put all your assets and salary on it?

• Why is Libra’s headquarters located in Switzerland instead of the United States? How can Libra effectively protect consumer data and deal with money laundering and terrorist financing, fraud and misappropriation? Especially since Libra is cross-border, if the scammer is from Spain and the consequences of the fraud are in another country, which country’s laws should you follow to protect users? Which legal department should users call?

• Will Facebook allow other digital wallets to be used on the platform? How will it deal with competitors?

• What is Libra’s business model? Who are the people in charge of the committee?

In response to each question, Marcus's general tone of answer continued the summary in the testimony released the day before the hearing: Libra will comply with all US regulations and will not issue currency until the concerns of US lawmakers are resolved. The specific answers are as follows:

Trust issues . People don’t have to trust Facebook because it is just one of the 28 current Libra Foundation members, and may be just one of 100 or more board members in the future. Facebook only has one vote, and Libra is built on an open source system, which Facebook does not want to and will not control.

(28 members of the current Libra Foundation)

Not only that, Marcus also expressed his willingness to put his personal assets and salary in Libra to show his trust in the system.

In addition, other reasons Marcus gave repeatedly throughout that Facebook should be trusted to do this are:

"Facebook chose to do this not only because it has the resources and capabilities to do it, but also because it believes Libra can be beneficial to the world. Imagine a daughter in another country wants to send money to her mother. Now she has to pay high transfer fees and it takes a long time. Libra allows people to transfer money quickly, securely and at low cost using their mobile phones no matter where they are."

Marcus also believes that digital currency is already a major trend and that the United States has fallen behind in the field of real-time payments. If the United States no longer actively joins and responds, it will risk falling behind in the competition for blockchain technology. Other countries will rise and the United States will continue to lag behind.

The benefits of Libra are not limited to this. Marcus also believes that Libra "can better help the more than 90 million business users on Facebook's existing platform reduce payment costs and thus create more jobs."

Regulation and User Data Protection | "The Libra Foundation's choice to be headquartered in Switzerland is in no way an attempt to evade any responsibility, and certainly not to evade U.S. regulations... While it is indeed registered in Switzerland, it is also registered under the administration of FinCEN (Financial Crimes Enforcement Network)".

As for why the company is registered in Switzerland, Marcus said that Switzerland has "advantages in international finance... The World Trade Organization and the Bank for International Settlements are both in Switzerland.

At the same time, Marcus also emphasized that Libra will not be released before addressing the concerns of US regulators, and the United States should lead the formulation of global digital currency rules.

Will it be used for money laundering or even illegal activities such as drug trafficking ? "Libra is not an anonymous digital currency, and users are not anonymous. To use its digital wallet service, users need to upload government-backed real identity authentication documents. Libra is working with the US FinCEN (Financial Crimes Enforcement Network) to solve this problem."

The Libra Association cannot access consumer users. The Libra system itself will have high standards of security coding, and financial education and consensus principles on how to use digital currency will also be embedded in Libra. Libra's crypto wallet Calibra does not "intentionally" sell or directly monetize user data. If it cooperates with other financial institutions to provide additional financial services, it will require users to agree to use data for this purpose.

Business model and whether it is a monopoly | Libra's revenue will mainly come from two aspects: first, the platform benefits brought by the faster and lower-cost payment chain of more than 90 million business users on Facebook's existing platform; second, the income generated by cooperating with other financial institutions to provide additional financial services.

Although Libra's crypto wallet Calibra competes with other wallets, it will provide users with multiple payment options, including credit and bank cards. Calibra will be interoperable, so users can send funds back and forth with other wallets, and data will be portable, so users can completely switch to competitors.

But Marcus also said that Facebook will only choose to integrate its own Calibra cryptocurrency wallet in Messenger and Whatsapp, and refuse to embed competing wallets in them. Considering the huge user base of Facebook's various applications, this exclusivity can give Calibra an advantage over banks, PayPal, Coinbase or any other potential wallet developers.

Is Facebook still trustworthy?

The point that Silicon Valley Insight felt most deeply after the entire hearing was that members of the U.S. Senate Banking Committee repeatedly harped on the point that “we can no longer trust Facebook.”

CoinDesk, an authoritative blockchain media in the United States, published an article saying that the lawmakers asked more questions about Facebook itself at this hearing, and very few questions about encryption technology and blockchain technology itself. The author of the article believes that this may reflect that lawmakers' distrust of Facebook exceeds their distrust of blockchain technology itself.

Sherrod Brown, who has repeatedly raised the issue of trust, also admitted in a subsequent interview with reporters that it is difficult for Americans to trust a giant company. "Americans do not trust Wall Street, and now they are also listing these big technology companies as 'complices'.

Marcus also tweeted after the hearing to reiterate: " We will not launch Libra until we have fully resolved the concerns of regulators. We also recognize that trust is critical to the Calibra wallet. "

Interestingly, regarding the regulation of Libra, Marcus mentioned that since the Libra Foundation is registered in Switzerland, issues regarding user data privacy will naturally be subject to the supervision of the Swiss Federal Data Protection and Information Commission (FDPIC).

However, FDPIC spokesman Hugo Wyler said in an interview with US media CNBC: "Until today, we have not communicated with the initiators of Libra. We hope that Facebook or other promoters of Libra will provide us with specific and real information when the time is right. Only in this way can we check the extent of our legal advisory and supervisory capabilities."

Silicon Valley Insight consulted some blockchain practitioners in Silicon Valley on the hot topics of the Libra hearing.

A friend who does blockchain node operation services mentioned that from a technical perspective, Libra uses the PoS consensus mechanism, which will bring a decentralized network. Decentralization is achieved by different types of nodes being incentivized to receive economic rewards for participating in maintaining the network and confirming transactions. As for how the rate of return is formulated, whether the rules are decided by voting by all members of the foundation or by giants such as Facebook, it is still unknown.

Other industry insiders have suggested that Libra's compliance costs will only be higher in the future, because any transfer of funds that touches US servers must be regulated - even if both parties to the transaction are outside the United States, unless Libra does not have a node in the United States and the data is isolated from all US data centers.

But from this perspective, if Libra does not charge high fees in the future, it seems that it can only rely on "selling data" to monetize the operation of the support system, which will return to the issue that they are most questioned by society and law enforcement officers.

Libra VS China: The global challenge of digital currency?

At this hearing, Marcus's point of view that "the United States is already lagging behind in real-time payments, and if the United States does not take the initiative, it is likely to fall behind" easily reminds people of the ubiquitous mobile payments in China.

Libra proposed by Facebook is similar to WeChat and Alipay in China in terms of its profit model of facilitating payment for merchants on the service platform and cooperating with third-party financial institutions to provide more services. In terms of real-time payment alone, WeChat is a successful example of "social + payment", but WeChat is dominated by domestic users after all. In the final analysis, it is "payment only, not cross-border", while global social networking is Facebook's greatest advantage.

So, will Libra enter China?

It is possible, but the probability is very low. The only one that can compete with it in China is WeChat. Although it is not international enough and its user base is less than half of Facebook, the application scenarios that WeChat has penetrated are very strong. However, all payments on WeChat must rely on banks and directly use legal currency. The banking system undertakes the two major businesses of identity authentication and transfer settlement for WeChat payment.

It seems that no matter how powerful WeChat’s social networking function is, it has not yet been able to shake the traditional financial model, while Libra poses a direct threat to banks.

Do you think Libra is a good idea? What do you think of this Libra hearing? Welcome to leave a message to discuss!

Thanks to Silicon Valley Insights contributing authors Jin Xia and Susan Wu, as well as industry professionals Xiaohan Zhu and Emily Xu for their contributions to this article.