The fight over Facebook’s digital currency could change the face of banking

“What is a Libra?”

This week, David Marcus, head of Facebook’s digital-currency project, faced an onslaught of critical questions from members of the US Congress. He fielded most of them with calculated and repetitive responses that shed little new light on what exactly Facebook is up to with the currency, called Libra.

But the back-and-forth sparked by this question from Representative Patrick McHenry of North Carolina during Wednesday’s hearing before the House Financial Services Committee did illuminate something important: Facebook won’t be able to tell us exactly what its proposed digital currency is without some help from policymakers. Whatever the answer ends up being will have big implications for the future of digital money and banking.

It’s been a month since Facebook revealed its plan to launch Libra, which it has said can be the basis of a new global financial infrastructure that serves billions of people. But as the two Libra-focused hearings this week showed (the other one happened Tuesday in the Senate Banking Committee), there remains considerable skepticism, uncertainty, and confusion about the project at the highest levels of power.

That’s probably why McHenry, who clearly already had a decent grasp of the relevant concepts himself, began his grilling with the most basic of questions. “What is a Libra?”

Libra, said Marcus, is a “reserve-backed digital currency.”

Before we go further, let’s try to unpack this term. As Facebook has described it, a Libra coin will be a digital asset that runs on a distributed ledger similar to the ones that underlie Bitcoin and other popular digital currencies. Unlike Bitcoin, whose value is notoriously volatile, Libra will be designed to maintain a stable value. To achieve this, says Facebook, it will be “backed” by a “reserve” of fiat currency that will include US dollars, British pounds, euros, and Japanese yen. 

The idea to back a digital currency with a reserve of fiat money is not new. So-called stablecoins are a popular way for cryptocurrency traders to protect their gains from crypto’s characteristic volatility without having to convert the money to fiat currency. But Libra would instead rely on a “basket” of multiple currencies; most others have all settled on one, usually the dollar.

“Is that a security?” McHenry fired back at Marcus. Securities are financial instruments that hold monetary value, like stocks and bonds. Investors often buy them with the hope that they will increase in value. Sellers of securities in the US must comply with extensive regulations imposed by the Securities and Exchange Commission—a burden Facebook wants to avoid. “We don’t believe it is, Congressman,” was the answer.

It doesn’t matter what Facebook believes, however. The SEC makes this call, and according to the Wall Street Journal, the agency is already looking into whether the setup Facebook has proposed for Libra is a type of security called an exchange-traded fund (ETF). Marcus insisted that Libra would not be a security, saying several times that it would instead be a “payment tool.” But he also admitted that he has his own concerns about how best to regulate the management of Libra’s reserve, and pledged to work with policymakers to address all their concerns before launching.

But this is where the conversation drifts into waters that policymakers in the US have thus far left uncharted, and that’s what McHenry was trying to point out with his questioning. What Facebook is proposing is obviously much different from conventional digital payment services like PayPal or Venmo. The most important distinction is that in theory, no single organization will be in charge of Libra. Facebook has created a nonprofit organization, called the Libra Association, to lead the development of the platform, and has signed up 27 organizations as participants, including Visa, Mastercard, PayPal, Uber, and Spotify. 

Some of the biggest questions about Libra that Facebook has left unanswered pertain to this organization, particularly how it will be governed. Countless times this week Marcus reiterated what Facebook been trumpeting all along: that it will not be in charge, that it will be only one of 28 votes, and that it plans to increase the number of organizations to 100 by next year. If we are to believe Facebook, the Libra Association will be a new kind of organization, one with no central authority. Blockchain technology is what makes it possible, the company says.

But there’s a problem with this. The business of taking care of people’s money is heavily regulated in the US. During the two hearings, several members of Congress said something similar to what President Trump tweeted recently: that what Facebook is proposing is actually a bank and should be regulated as such. Banks must follow strict rules meant to combat money laundering. They are also required to protect consumers against theft, and depositors are insured in case the bank loses their money. Should Libra users have those protections too? But if no single entity is really in charge of Libra, who do you regulate? How could it comply with banking-style rules?

Each time this came up, Marcus pushed back. Facebook had no plans to “engage in banking activities,” he said.

What seemed to matter more to Congress, however, was not whether the project meets the technical definition of a bank, but the significance of Facebook’s massive scale and potential to drive adoption of its currency. If billions of people start using it, Libra could have a profound effect on the global financial system, which makes government oversight imperative, said Representative Maxine Waters of California, who chairs the Financial Services Committee. “Ultimately, if Facebook’s plans come to fruition, the company and its partners will wield immense economic power that could destabilize currencies and governments,” said Waters, who has also called for a moratorium on the project so that Congress can study it. 

Wednesday’s House hearing focused heavily on practical concerns about how Libra will work, whereas the prevailing tone of the Senate’s go-round the day before reflected many senators’ distrust of Facebook and its motives. The company’s track record on privacy suggests that it is “dangerous,” said Senator Sherrod Brown of Ohio, adding that it showed “breathtaking” arrogance that it now wants to run its own global bank. “We’d be crazy to give [Facebook] a chance to experiment with people’s bank accounts, and to use powerful tools they don’t understand, like monetary policy, to jeopardize hardworking Americans’ ability to provide for their families,” he said.

But this isn’t just about Facebook. Big Tech is coming for financial services. We already see it in China, where WeChat and Alibaba’s digital payment services are ubiquitous. The Bank of International Settlements, which is known as the central bank for central banks, has warned that these firms and others, including Google and Amazon, could become “dominant” in the area thanks to network effects. In the face of this seemingly inevitable wave of change, policymakers will have to strike the right balance between fostering innovation and protecting consumers. Facebook has just given them a place to start: “What is a Libra?”