A Former Broker’s Perspective on Facebook’s Libra

I’ve been particularly interested in the Libra situation since Facebook’s announcement in June. My view is shaped by my personal experience as a user of Facebook products, including its advertising toolkit, and my professional experience as a registered representative working for Charles Schwab for a short, but extremely relevant period of time.[1]

It’s not that I want to see Facebook fail. I’ve seen firsthand the role that Facebook can play in a political campaign. As an undergraduate at Arizona State University, where enrollment was over 45,000 at the time, I was our school’s first candidate to be elected to student government after having used Facebook advertising in a campaign. Previous candidates had used Facebook’s free tools prior to my 2010 student campaign, but to the best of my knowledge, none had ever run Facebook ads. Ultimately, my campaign was successful, and by the time polls closed, the campaign ad had reached nearly 400,000 impressions for a cost of $19.35 (I still have the invoice). The ads were no substitute for voter outreach, but all of this is to say that I appreciate the many Facebook products and tools that I’ve been able to put to use over the years.

But as a former stockbroker, I prefer not to imagine what would result from adding every Facebook-related scandal and catastrophe on top of the already turbulent waters that can trouble the financial services industry. I spoke with retail clients over the phone the night news of the Brexit decision broke in the US, as well as during the weeks following the 2016 US general election and 2017 inauguration of President Trump. With each of these events, our firm experienced an influx of support calls and messages from clients expressing sincere concerns about the future of their retirement accounts and investment portfolios. These weren’t wealthy people calling just to check on the status of their millions. These were everyday Americans hoping to share in the economic prosperity made possible by investing in the public markets, and when anxiety about world events ran high, they called for support.

Cryptocurrency was starting to be seen as a legitimate asset class by many investors during this time as well. By December 17, 2017, a single bitcoin traded for nearly $20,000. The number of support calls from clients curious to learn more also increased, even though cryptocurrency was not traded or held in custody at our firm. None of this is not to say that I’m an expert on cryptocurrency, but rather that I’ve seen the extent to which everyday American investors are also starting from square one regarding the topic.

The investors I spoke to on a daily basis were protected by American financial regulations, but the underbanked populations Facebook presumably seeks to serve with Libra lack access to comparable consumer protection regulations as much as they lack low-cost, secure and convenient financial services. In short, the underbanked are likely to be even more vulnerable to financial and data exploitation than the American people.

And that’s why this is also about so much more than establishing the right rules and then simply holding Facebook accountable when they fail to comply with the regulations set by Congress or the Fed. Facebook has already shown an inability to effectively police the use of its own platform, at times with disastrous consequences. As Senator Sherrod Brown (D-OH) put it in July, the last thing regulators should grant Facebook at this point is a green light to “experiment with people’s bank accounts.” It is true that the underbanked need access to secure, convenient, low-cost financial services, but in my opinion, Facebook’s sordid past speaks for itself. It would be irresponsible for regulators to allow Facebook to proceed with the creation of a digital currency.

[1] I worked as a Series 7 and Series 63 licensed stockbroker, authorized to buy and sell securities including stocks, exchange-traded funds (ETFs), mutual funds, and certain options contracts for the accounts of the firm’s clients. My previous registration can be verified on BrokerCheck.org, CRD#: 6598388. I worked at the firm for two years, 18 months of which was as a broker.

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Perspectives on Libra: Facebook’s Digital Currency Initiative

  1. The Digital Currency Solution
  2. The Institutional Trust Objection
  3. The Rules of the Road Exception
  4. Facebook Should Not Be Permitted to Proceed with the Creation of Libra
  5. A Former Broker’s Perspective on Facebook’s Libra

Facebook Should Not Be Permitted to Proceed with the Creation of Libra

Yesterday, a bipartisan group of United States House Representatives introduced the “Managed Stablecoins are Securities Act of 2019.”

The bill would clarify existing financial sector rules by definitively classifying stablecoins as securities, which are regulated by the Securities Act of 1933, the Investment Advisers Act of 1940, and the SEC more broadly. The bill defines the terms “managed stablecoin” and “digital asset,” then adds those definitions to the existing Acts mentioned above. “Bringing clarity to the regulatory structure of these digital assets protects consumers and ensures proper government oversight going forward,” Representative Sylvia Garcia (D-TX) said in a statement according to CNBC’s Lauren Feiner. 

This is good news. The introduction of the bill marks the first step in reining in Facebook’s vision for Libra, a digital currency set to launch early next year. If passed into law, the legislation would send a strong message. Facebook has taken to describing Libra as though it doesn’t fit within any existing classification, and would thus be able to sidestep securities regulation.

Despite this effort to update rules and provide regulatory clarity, I remain convinced that Facebook must not be able to proceed with the creation of Libra at all. Further, it is incumbent upon legislators from both sides of the aisle to do much more than simply provide the right rules of the road, hoping to hold Facebook in compliance even as it repeatedly collides with the guardrails.

In this series, I’ll present my perspective on the situation, and argue that because Facebook has repeatedly failed to police its own platform, it should not be permitted to proceed with the creation of Libra. 

Facebook’s Many Existing Deficiencies

When Facebook unveiled its plans to create a new digital currency called Libra in June, reactions were mixed. Despite the excitement surrounding cryptocurrency and blockchain that has become common in recent years among technology enthusiasts, what reasonable person could ignore the checkered past of Libra’s corporate creator? Clearly banking on the potential for lawmakers to divorce themselves from the lessons of recent history, Facebook now continues to seek the requisite regulatory approval from officials on Capitol Hill. Although the social networking giant revised its infamous motto of “Move fast and break things” in 2014, the planned launch date for Libra of early 2020 has some wondering if anything has really changed at Facebook in the years since a few enterprising Harvard students started the company in 2004.

When Facebook CEO Mark Zuckerberg testified before the House Financial Services Committee on October 23, Committee Chair Maxine Waters (D-CA) delivered her assessment of the Libra situation. Citing insufficient gender representation in the upper management of Facebook, Facebook’s role in the 2016 US election and the recent decision not to fact check political ads for 2020 among other examples, Representative Waters came to the “conclusion that it would be beneficial for all if Facebook concentrates on addressing its many existing deficiencies and failures before proceeding further on the Libra project.”

Facebook’s Vision for Libra: A Plea for the Underbanked

Perhaps Rep. Waters’ conclusion is too harsh. After all, Facebook and advocates of Libra say that the world’s underbanked are in dire need of access to financial services. When Facebook’s Head of Calibra, David Marcus testified before the US Senate Banking Committee in July, he urged legislators to act, claiming that the crises of the underbanked has left millions of people around the world without access to basic financial services at a reasonable cost.

“The status quo is not working for many,” Marcus argued. “It is too expensive for people around the world to use and transfer their money. We believe Libra can offer a more efficient, low-cost, and secure alternative.” Libra’s appeal then, is its aid to the underbanked. For some, access to Facebook and a smartphone is easier to come by than it is to establish a traditional bank account—something most of us take for granted. Facebook says Libra would provide the underbanked with access to secure, convenient, and low-cost financial services. As David Marcus argued in July, Libra’s “first goal is to create utility and adoption, enabling people around the world—especially the unbanked and underbanked—to take part in the financial system.”

Facebook has connected over 2.4 billion people worldwide, and the platform includes pages for many brands and small businesses, as well as political, educational, and non-profit groups. Facebook launched Facebook Pay earlier this month, and if allowed to proceed with Libra, it will further enrich its trove of messaging, social networking, and users’ private financial data by integrating the digital currency across the breadth of its platform. In the next post I’ll describe my perspective on the Libra situation and tell why my experience has led me to conclude that permitting Facebook to proceed with the creation of Libra would be an irresponsible move for regulators.

Sources for this post

Perspectives on Libra: Facebook’s Digital Currency Initiative

  1. The Digital Currency Solution
  2. The Institutional Trust Objection
  3. The Rules of the Road Exception
  4. Facebook Should Not Be Permitted to Proceed with the Creation of Libra
  5. A Former Broker’s Perspective on Facebook’s Libra

The Rules of the Road Exception for Facebook’s Libra

Facebook should not be prohibited from proceeding with the creation of Libra if they comply with applicable regulatory frameworks and continue to engage with regulators to establish “clear rules of the road” moving forward.

Another Senator present at the July 16 Senate hearing was Mike Crapo, Chair of the US Senate Committee on Banking, Housing, and Urban Affairs itself. Crapo has also served on a number of other committees during his tenure in the Senate: Budget, Finance, Judiciary, and Indian Affairs. In contrast to his Democratic colleague and fellow committee member Sherrod Brown, Senator Crapo argues less antagonistically toward David Marcus. Rather than emphasizing a mistrust of Facebook due to its past transgressions, Crapo takes an action-orientated stance and expresses concern for the privacy and data rights of consumers.

Senator Crapo argues that the creation of Libra is an event that should spur Congress to establish the “rules of the road” for digital currencies in a manner that respects the rights of consumers. Crapo leans heavily into the claim that “Congress needs to act to give individuals real control over data” because of the vast amounts of user data generated by both social media and financial activity. According to Crapo, if Facebook and the Libra Association are permitted to proceed, they must do so with an understanding of the following three premises:

  1. Individuals are the rightful owners of their data;
  2. Individuals should be granted privacy rights which must in turn be protected through avenues of informed consent;
  3. Individuals are entitled to know what data is being gathered and how it is being used.

Senator Crapo’s stance shares commonalities with the view of Benoit Coeure, Executive Board Member of the ECB. In the past, Coeure worked as the Deputy Director General of the French Treasury, and he has held numerous other posts at the French Treasury between 1997 and 2011. On September 17, 2019, Coeure delivered a speech called “Digital challenges to the international monetary and financial system” at the Central Bank of Luxembourg-Toulouse School of Economics conference. In short, he sees the potential of digital currencies to transform the market, so long as the private actors creating these currencies “conform to international anti-money laundering and know-your-customer regulation.”

Unlike his ECB colleague Yves Mersch, Coeure is much less suspicious of digital currencies, and speaks of the need to meet the changing demands and expectations of consumers in the digital era. Coeure is open to the potential benefits of “stablecoins” in particular, and argues that the possibility of “something special about these currencies that could allow them to compete more effectively with the US dollar” is worth entertaining, but only with the understanding that proper regulatory frameworks must be enforced. For as Coeure states, “regulatory hurdles will be set very high for these initiatives to get off the ground.”

As Coeure’s speech concludes, his view again diverges from his colleague Yves Mersch. Coeure reminds his audience that rather than disallowing the creation of private currencies, one course of action available to policy makers is to ensure “that private systems will thrive in a space that respects our common global policy priorities.” For Coeure, such an environment will allow “market-based and public payment systems [to] effectively complement each other,” therefore addressing the changing demands of modern consumers and the necessity to comply with established and emerging financial regulation.

Today, more than four months after Facebook’s Libra announcement, the fate of the digital currency remains uncertain. Reactions from the general public to Facebook’s plan have been mixed at best, trending from skeptical unease to incredulous outrage. Additionally, the combination of regulatory uncertainty and heightened scrutiny from policy makers has caused a number of Facebook’s prominent corporate partners to revoke their initial support for the initiative, canceling plans to join the Libra Association. The Verge reports that as of October 11, PayPal, Visa, Mastercard, eBay, and Stripe have all officially exited the nascent corporate coalition, giving rise to increased skepticism of Facebook’s capacity to act as a successful shepherd of Libra from day one. 

Despite the lonely road ahead, Congressional hearings are set to continue, and Facebook CEO Mark Zuckerberg is scheduled to testify before the House Financial Services Committee on October 23, 2019. While the Facebook founder’s strategy for the upcoming hearing remains unknown, if recent attrition at the Libra Association is any indication, Zuckerberg would do well to speak directly to his allies in the private sphere and make the case for Facebook as a competent and responsible partner, even if government officials and central bankers are unlikely to agree.

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The Institutional Trust Objection to Facebook’s Libra

Facebook should not be permitted to proceed with the creation of Libra. Facebook cannot be trusted when it comes to financial services. Libra will damage the integrity of the global financial system by eroding public trust in the institutions that back our money.

One of the committee members present to make an official statement at the July 16 Senate hearing was Ohio Senator Sherrod Brown, who was elected to the Senate in 2006 and has served as the ranking member of the US Senate Committee on Banking, Housing and Urban Affairs since 2015. In the hearing mentioned above, Sen. Brown criticized Facebook and its executive team, comparing them to child arsonists who view every burned-down house as merely another learning opportunity. As the Senator’s official statement from the hearing claims, “Facebook has demonstrated, through scandal after scandal, that it does not deserve our trust, and that it should be treated like the profit-seeking corporation it is, just like any other company.”

To support his claim of Facebook’s untrustworthiness, the Senator cites several troubling incidents from Facebook’s recent past. He speaks to the ways in which Facebook has disrupted the newspaper industry and consequently redirected profits away from real journalists and into its own coffers. Senator Brown also cites past psychological experiments Facebook has run on its users in order to ascertain new ways of increasing engagement across the platform. Finally, and perhaps most distressingly, the Senator cites a UN report detailing the ways in which the Facebook platform was used to spread hate, incite violence, and fuel a genocide against the Rohingya people in Myanmar beginning in late 2016. According to Sen. Brown, Facebook and its executive team have “proven over and over that they don’t understand governing or accountability.” Senator Brown concludes his statement by arguing that “this is a recipe for more corporate power over markets and consumers, and fewer protections for ordinary people.”

Meanwhile, the central bankers of Europe have not been bashful about their skeptical stance toward Libra. Yves Mersch, Executive Board Member of the European Central Bank, delivered a speech entitled “Money and private currencies: reflections on Libra,”on September 2, 2019 at the ECB Legal Conference in Frankfurt, Germany. Echoing Sherrod Brown’s emphasis on the role of trust with regard to monetary policy, Mersch argues that trust is an essential element to money’s ability to perform its function. Further, trust in money is derived from the independent institutions that maintain the stability and reliability of the financial system more broadly, e.g. the ECB and Federal Reserve. As Mersch states, “Only an independent central bank with a strong mandate can provide the institutional backing necessary to issue reliable forms of money and rigorously preserve public trust in them.”

Returning specifically to the context of Facebook, which has “a questionable track record in matters of trust,” according to Mersch, the Libra ecosystem is not only complex, but “cartel-like.” In other words, Mersch’s view is that the governance system proposed by Facebook (the Libra Association) lacks the fundamental underpinnings of institutional trust that support traditional sovereign currencies. Such a system will place control of the Libra money supply in the hands of private corporate actors who are “only accountable to their shareholders” and who have “privileged access to private data that they can abusively monetize.” In sum, Mersch argues that Libra’s promise is a tempting “siren’s call,” that leads only to disaster because it entails abandoning “the safety and soundness of established payment solutions and channels.”

Senator Brown argues that because of its history of far-reaching transgressions, Facebook is not to be trusted. In the words of the Senator, “We would be crazy to give them [Facebook] a chance to experiment with people’s bank accounts.” For both Brown and Mersch, the emphasis on trust marking the standard by which Facebook should be judged is key. As argued by Yves Mersch, this is because trust in money is derived from trust in the institutions that back the money. In this case, these policy makers claim, because we cannot trust in Facebook, we cannot trust Libra.

In part three of this series, I will explore the perspective of policy makers who argue that while misgivings over Facebook’s past transgressions may be warranted, misgivings alone are insufficient grounds for liberal-democratic institutions to place overly cautious prohibitions or needlessly strict regulations on one of the United States’ largest technology firms and most powerful corporations. Again taken from the US Senate and ECB, these policy makers see the current state of open communication and engagement with regulators as an opportunity to establish a framework that protects consumers and holds Facebook accountable to financial regulations.

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Solution, Objection, Exception: Perspectives on Facebook’s Libra

This is part one of a three part series exploring Libra, a digital currency Facebook and its partners plan to launch in 2020. Parts two and three will be posted over the next few days leading up to Facebook CEO Mark Zuckerberg’s scheduled appearance before the United States House of Representatives’ Financial Services Committee on October 23, 2019.

On June 18, 2019, Facebook announced that it would begin moving forward with plans to launch Libra, its global digital currency initiative. Facebook envisions a future where Libra encourages greater economic participation for its 2.4 billion users as they pay fewer fees over time and engage in financial transactions with greater security. Such a complex undertaking will not only require support from Facebook’s global corporate partners, but regulatory approval from policy makers around the world as well. Should Facebook be permitted to proceed with the creation of Libra? In this series, I will explore three prospective answers to this question.

First, I’ll explore the view of Facebook and other digital asset advocates as delivered via written testimony to the United States Senate by David Marcus, Facebook’s head of Calibra, and Jeremy Allaire, CEO of Circle, a financial services company specializing in digital assets. They have positioned the digital currency as a solution: a low-cost, secure, and efficient way to make financial transactions and send peer-to-peer payments by utilizing Facebook’s platform and blockchain technology.

Representing a second perspective, I will discuss arguments from United States Senator Sherrod Brown and European Central Bank (ECB) Executive Board Member Yves Mersch. These objectors share a common concern over the potential consequences of trusting the money supply to a corporation with a past as sordid as Facebook’s. These policy makers argue that because we cannot trust Facebook, we should not trust Libra.

The final perspective explored is represented by Senator Mike Crapo and ECB Executive Board Member Benoit Coeure. Being less suspicious of Facebook’s ability to act as a responsible steward for Libra, they argue that if the right set of rules can be worked out, a blanket prohibition against the creation of Libra may not be the most prudent course of action.

Given the scale of the global financial system and the number of Facebook users worldwide, stakes are high. The risk of enacting nearsighted policy prior to properly understanding the complexities of the issue looms darkly over the heads of central bankers and Federal regulators, all of whom continue to monitor Facebook’s movement on Libra with rapt attention.

The Digital Currency Solution

Facebook should be permitted to proceed with the creation of Libra because while the status quo leaves many underbanked and subject to excessive fees, Libra offers 2.4 billion users with “a more efficient, low-cost, and secure alternative” to use and send money across borders.

In a US Senate hearing held on July 16, 2019 before the Committee on Banking, Housing, and Urban Affairs, Facebook’s former Vice President of Messaging David Marcus provided testimony about Facebook’s plan for Libra. Marcus, who is also the former president of PayPal, recently transitioned to a new role within Facebook as he took the reins of Calibra: Facebook’s upcoming virtual wallet app designed to hold Libra tokens and facilitate digital payments. Marcus was the sole witness at the Senate hearing, which was fittingly called Examining Facebook’s Proposed Digital Currency and Data Privacy Considerations.

Two weeks after David Marcus delivered his remarks and answered questions from Senators, the Committee held another hearing on July 30, 2019. With a total of four witnesses called to testify, this hearing was wider-reaching and called Examining Regulatory Frameworks for Digital Currencies and Blockchain. Jeremy Allaire, CEO of Circle Internet Financial, a digital asset services firm, was the first witness to testify. By contemplating Marcus’s July 16 remarks along with the testimony of Jeremy Allaire on July 30, the Digital Currency Solution perspective is reified.

As Marcus states, “The goal of Libra is straightforward: A digital currency built on a secure and stable open-source blockchain, backed by a reserve of real assets, and governed by an independent association.” By establishing the 100-member Libra Association based in Switzerland, Facebook claims that it will not exert undue influence over the currency as it is minted because Facebook’s single seat in the Libra Association will prevent it from doing so. Additionally, there are a host of technical benefits to embracing blockchain as the underlying technology upon which to build the Libra ecosystem. As attested to by Allaire, digital currencies built on blockchain “can be easily stored, transferred, traded, and exchanged, while providing utility to users and benefits to businesses, all within a public infrastructure that is highly secure, tamper-proof, open, and interoperable.”

But the potential of an emerging technology is far from the only reason Marcus utilizes as grounds for creating Libra. The global financial system, Marcus argues, is currently facing a crisis of the underbanked, a term used to describe millions of people around the world who lack access to basic financial services at a reasonable cost. “The status quo is not working for many,” Marcus argues. “It is too expensive for people around the world to use and transfer their money. We believe Libra can offer a more efficient, low-cost, and secure alternative.”

Statements from David Marcus and Jeremy Allaire aside, not everyone is as optimistic about the possibility of our global financial system becoming another piece of the puzzle that is Facebook’s already bloated private-sector portfolio. As we will see in the next part of this series, at least one group of policy makers from the United States and European Union’s Central Bank strongly object to permitting Facebook to proceed with the creation of Libra.

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