Financial news

Facebook’s plan for a cryptocurrency is right to set alarm bells ringing

Now that Wimbledon is over, if you’re looking for something interesting to watch, can I suggest heading over to the video of last week’s interrogation by the US Senate committee on banking, housing and urban affairs of Facebook’s David Marcus? Given the astonishing incompetence of the Senate’s inquisition of Marcus’s boss, Mark Zuckerberg, some time ago, my hopes for last week’s hearing were not high. How wrong can you be?

But first a bit of background might be helpful. Facebook, currently the tech world’s most toxic company, has decided to get into the currency business. It proposes to launch a new global cryptocurrency called Libra. Marcus is the guy leading this project. He formerly worked at PayPal and then moved to Facebook, where he ran the company’s Messenger service.

At first sight, Marcus appears to be a Smooth Man from central casting. At second sight, he evokes the “uncanny valley”, defined by Wikipedia as “a hypothesised relationship between the degree of an object’s resemblance to a human being and the emotional response to such an object”. In that respect, he is not unlike his boss.

To be fair, circumstances had put him on a sticky wicket: shortly before he took the stand, the Federal Trade Commission had handed down a $5bn fine to Facebook for breaking a 2012 Consent Decree to protect the privacy of its users. Marcus had tabled some written testimony, in which he described Libra as “a safe, secure, and low-cost way for people to move money efficiently around the world. We believe that Libra can make real progress toward building a more inclusive financial infrastructure. The journey to get there will be a long one and we recognise that ours has just begun.”

In particular, he declared piously, Libra was designed to help émigrés in the rich world to send money to their relatives in the poor world without being ripped off by unscrupulous capitalists. What could be wrong with that? Quite a lot, it seemed.

Prior to the hearing, both the US treasury secretary and the chairman of the Federal Reserve had voiced their concerns about Marcus’s new baby. And it seemed that even Donald Trump didn’t like it, although it’s not clear whether the president would know a cryptocurrency if it bit him on the leg. But all this was kid’s stuff compared with what the ranking member of the committee, Senator Sherrod Brown of Ohio, had to say.

“Like a toddler who has gotten his hands on a book of matches,” he fumed, “Facebook has burned down the house over and over and called every arson a learning experience. We would be crazy to give them a chance to experiment with people’s bank accounts and to use powerful tools they don’t understand, like monetary policy, to jeopardise hardworking Americans’ ability to provide for their families.”

Facebook, continued Brown, “has demonstrated through scandal after scandal that it doesn’t deserve our trust. It should be treated just as the profit-seeking corporation that it is, just like any other company.”

Zuckerberg & co, he said, had “proven over and over that they don’t understand governing or accountability; they’re not running a government, they’re running a for-profit laboratory.” In terms of invective, this was vintage stuff. Marcus sat through it like a cyborg waiting for a hurricane to blow itself out.

But there was some intelligent, forensic interrogation from other members of the committee. How could the Libra Association (the proxy body Facebook has set up to try to deflect fears of its monopolistic control of a global currency) be a not-for-profit organisation that also made fortunes from interest on the huge reserve funds that it will hold? Marcus had no answer.

How could he reconcile the Senate’s desire that all of this crypto stuff should be primarily regulated by the US, when the Libra Association is based in Switzerland and regulated by its authorities? (He couldn’t.) How secure was the Chinese wall that supposedly separates the data of users of Facebook’s Calibra wallet from their activities in Facebook? (It’s “designed” to be secure.)

And so on.

More interesting than the questioning, however, was the general tone of the hearing. It was mysterious at first, but gradually the fog cleared. The significance of the Libra project is that it provides the first example since the East India Company of a corporation that thinks like a state. Facebook currently has 2.4bn users, which, if it were a country, would make it far bigger than China. And one of the things that defines states is that they do currencies.

By launching Libra, Facebook is effectively asserting that it’s a state too. And what the US Senate was saying last week was: oh no you’re not.