Yesterday the U.S. House of Representatives Committee on Financial Services published a letter addressed to Facebook’s executives requesting a suspension of activities on Libra, the recently announced cryptocurrency. The Committee cited the lack of clear intentions and regulations for the work of the Libra Association, the Swiss organization that will oversee the coin. It also expressed reservations about Facebook’s wallet Calibra, along with privacy and security concerns.
The damning letter was penned by the chair of the Committee on Financial Services as well as the chairs of four financial subcommittees. They are chairwoman Maxine Waters, Carolyn Maloney, Wm. Lacy Clay, Al Green and Stephen Lynch.
Indeed, their letter outlines how they think Libra could disrupt the current financial system and negatively affect investors and consumers. A concern is that Switzerland based Libra Association is backed by 27 financially powerful companies, aiming for more by 2020, without any clear rules on impartiality.
In short, the Committee fears a giant conglomerate-run system “that is too big to fail”.
“If products and services like these are left improperly regulated and without sufficient oversight, they could pose systemic risks that endanger the U.S. and global financial stability,” the letter reads.
“These vulnerabilities could be exploited and obscured by bad actors, as other cryptocurrencies, exchanges, and wallets have been in the past,” it continues.
Without directly criticizing blockchain based currencies in general, Waters and Maloney mention the nearly $1 billion that was stolen from exchanges in the first three quarters of last year, and how Calibra does not offer clear guidelines on how funds will be kept secure. And unlike a conventional bank account, funds would not be covered by Federal Deposit Insurance.
While distributed ledger technology (DLT) provides verifiably secure data storage on its own, third-party wallet and exchange software must be programmed carefully. If a hacker gets their hands on a private key by exploiting a flaw in wallet code, the funds are as good as gone. That’s even if the currency itself is based on a flawlessly set up blockchain.
The Committee’s letter explains that they are wary of trusting Facebook to secure the Calibra software due to previous controversies.
For instance, millions of users had their private data used by Cambridge Analytica in political campaigns, without the users’ consent. Facebook will have to pay up to $5 billion in fines to the U.S. Federal Trade Commission, who previously concluded that the social media platform deceived consumers.
The legislators propose that while Libra’s activities are stopped, they will hold public hearings on how to proceed with cryptocurrencies at a legislative level.
Joining the backlash
The Representatives are not alone. Shortly after the Libra announcement, former policy advisor to the U.S. Senate Budget Committee, Matt Stoller, said the Libra currency is “an absurd idea”. Stoller, of the Open Markets Institute, agrees that the “global currency system managed by a private group of people” could become too powerful; “I can’t tell you how ridiculous it is.”
A few days later, the Governor of the Bank of France, Francois Villeroy de Galhau, stated that Libra must follow anti-money laundering laws. The U.S. representatives echo his advice, as they think the lack of regulations combined with a huge user base “could also provide a […] platform for illicit activity and money laundering.”
More recently Chinese economist Zhu Min said that Libra “will have a big impact on the existing financial system”. Though he spoke of potential problems due to the infancy of the project, rather than going as far the Financial Services Committee to request activities be stopped.
Not everyone is critical of Libra. The Bank of England Governor Mark Carney has said in that the Bank is considering allowing fintechs to deposit cash at the central bank, which only commercial banks are currently allowed to do.
Carney explicitly mentioned Libra’s aim of giving people financial empowerment, and is open-minded about the currency. He also said that it would need to comply with privacy and anti-money laundering laws, but appeared to be more supportive than Min or the House.
Last week we reported on Gartner’s assertion that Libra has brought forth a new age of ‘crypto-politics’. With yesterday’s release by the House’s finance Committee, it’s looking like Gartner may be right.