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Blockchain and finance in 2019
Goliath vs. Goliath: Facebook's Crypto Chief David Marcus vs. Congress
July 2019 marks a significant moment in crypto market history: never before has this innovative and speculative field been faced with establishments that hold the power to affect its fate so substantially:
- A decade after its invention, the first ever reference to Bitcoin was made from the White House, when US President Donald Trump tweeted about it, aggressively attacking decentralized currencies.
- One day prior, Trump’s nemesis, Federal Reserve Chairman Jerome Powelle, made a statement including a presumably positive reference to Bitcoin as “digital gold.”
- Only one day post-Trump-tweet, US Treasury Secretary Steven Mnuchin labeled the crypto market “a National Security Issue.”
The cause of this unprecedented exposure? Facebook, of course. The largest social network in the world unveiled Libra, its digital currency project secretly developed over the past two years that was disclosed globally in June. Facebook has thrown its full weight into the crypto sphere, using all its powers as a heavyweight company, with a market value of more than half a trillion dollars. Naturally, this concurrently also poked the bears (despite many investors seeing this as a reason to be more bullish on crypto).
Good or Bad News for the Crypto market?
It is still too early to judge whether the heated public debate is beneficial to the crypto market, or whether it is likely to lead to aggressive moves against it. Many crypto industry movers and shakers are adhering to the motto: “we don’t care, as long as they spell our name right” in which they may well be correct.
During the Libra hearing last week, Congressman Patrick McHenry (R-N.C.), said:
“The world that Satoshi Nakamoto 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 that have tried, have already failed”.
Similar quotes were also heard from other legislators, suggesting that the Libra saga may have quite a different positive effect for Bitcoin than initially expected, which was that it would provide tailwind to cryptocurrency usage among wider audiences. While this is still a possible outcome, the possibility for more significant impact also exists, following the thinking of “the enemy of my enemy is my friend.” In comparison to a currency held and operated by a giant global company, regulators are suddenly seeing Bitcoin far more favorably, and could therefore be more prepared to support it.
Facebook vs. Congress – Round II
The Libra project announcement produced harsh and critical reactions from regulators across the globe. Members of the US Congress rushed to invite Facebook representatives to Congressional and Senate hearings, and last Tuesday and Wednesday saw the testimony of Facebook’s crypto chief, David Marcus.
Testimony Resulting in Vagueness and Uncertainty
The bottom line is that even after seven hours of testimony, Facebook’s plans are not yet clear, nor whether the company can realize them, or whether it has the ambition to do so. The biggest question is still why a company worth twice the current value of the entire crypto market should align itself with a highly controversial sector that pulls fire from governments, financial institutions and the majority of economists — and it remains unanswered.
That said, Facebook clearly seems to be embarking on a well-planned battle. Fully aware of the risks and potential of its venture, the company has allocated sufficient resources to manage and finance it. Facebook’s shareholders are apparently also remaining calm about this daring adventure, and stock prices have remained stable despite recent events. It could even be that Facebook want to draw as much fire as possible, and even hoped for a high-profile investigation such as last week’s Congressional hearing, which we will explore further at the end of this article.
Presenting a Calm Face(book)
Either way, the giant company had no trouble sending its representatives to appear on camera in front of Congress, and supplied them with clear and well-worded messages. The team was led by Marcus, also the official head of Facebook’s cryptocurrency subsidiary Calibra; one of the digital wallets slated to use Libra. According to Facebook’s vision, the Libra Association will be one of 100 other companies to take part in the Libra association, and monitor the entire system.
Media headlines described Marcus defendant-like, facing an intimidating row of congressional interrogators, however anyone watching him saw a calm and collected man, clear, explicit and firm in his intention. Despite occasionally being caught off-guard, largely he seemed to enjoy the event, even as the hours wore on. His quiet and confident appearance was especially noticeable in comparison with the pale and trembling countenance a year previous of his boss, Mark Zuckerberg during his testimony to Congress regarding the Facebook’s privacy issues.
The Holes in Facebook’s Plan
The legislators similarly seemed to enjoy engaging in exciting and controversial issues, formulating provocative questions that even incorporated key crypto concepts (including one Congressman who particularly relished using the term “Shitcoin”). However, the distance between the media celebration of the hearings and the actual policy measures is considerable.
Congressman Brad Sherman (D-CA) did not hesitate to claim:
“We are told that innovation is always good. The most innovative thing that has happened this century is when Osama Bin Laden [flew] two airplanes into the towers… [Libra] may do more to endanger America”.
However, he was somewhat more on point and less provocative when he expressed the position of many regulators:
“Zuckerberg has billions but lacks the authority to print more… America’s power comes from the power of the dollar more than the power of our military… This is an attempt to transfer enormous power from America to Facebook and a number of its allies”
When explaining how Facebook or Libra plan to integrate between building a payment service and helping the unbanked billions, while satisfying regulatory demands from around the globe, keeping track of all customer identities, and refraining from providing banking services, Marcus unsurprisingly stumbled. (Yes, the holes in Facebook’s plan are that big.)
When asked whether he would delay the project development until it had full regulatory approval, Marcus unhesitatingly responded: “Absolutely.” As he previously explained:
“Facebook will not offer the Libra digital currency until we have fully addressed regulators’ concerns and received appropriate approvals… The Libra Association will establish the rules of the road and will prioritize privacy and consumer protection, and it will implement safeguards that will require service providers on the Libra network to fight money-laundering, terrorism financing, and other financial crimes.”
Based on what we know now, the future of the Libra project has three possible scenarios:
- At best, the Libra project will be implemented in its full power. Facebook will become one of the most powerful financial organizations in the world, with more than two billion users, combined with its prime role as the leading social network. A somewhat unlikely scenario is if Facebook overpowers the heavy regulatory opposition, it will expand its payments services to include credit and potentially other banking services — either by itself, or together with other companies through the Libra Association.
- A somewhat more realistic scenario is where Facebook has to respond to regulatory pressure and refrain from any banking activity. In this case, it would operate Libra as a payment service only, which Marcus’ testimony in Congress already underlined. This is a necessary move for Facebook, following the implementation of such services with major success by its major Chinese competitors, WeChat and Alipay. The only question here is why Facebook did not develop such services years ago.
Important note: Libra may use Blockchain technology as its white paper suggests (despite it being unclear whether this would be only within a permissioned network or through permissionless Blockchain as well). However, should Facebook determine that the success of the project required withdrawal from the blockchain or crypto sphere, it would not hesitate to do so.
- Even in the worst case scenario, where the Libra project is partly or fully shelved, Facebook has already achieved a huge goal: diverting public fire from its core operation (the social network) into other regions. As was highly apparent during last week’s hearings, Facebook is suffering from severe criticism regarding privacy, trust (regarding its users) and antitrust (regarding its subsidiary companies, such as WhatsApp and Instagram). This benefits Facebook in several ways:
- It presents Facebook as a bold company that does not hesitate to, as Zuckerberg is oft quoted: “move fast and break things”, thus deterring both competitors and regulators.
- It creates interesting linkage between the free flow of money in the crypto market and the free flow of data in the social network. While these subjects differ considerably, Facebook would still like to blur these lines, and secure its bargaining position in preparation for changes in competitive conditions and regulatory requirements.
- This may force the regulators to compromise on at least some of the issues – whether it be privacy and personal data, or payments and banking.