WASHINGTON — PayPal's decision to back out of Facebook's cryptocurrency plan is the clearest sign yet that skepticism among members of Congress and regulators may be the biggest obstacle to getting the Libra project off the ground.
The participation of PayPal and the leading credit card networks in the Libra Association — Libra's governing body — lent credibility to the social media giant's financial services venture. But lawmakers and Federal Reserve Board Chairman Jerome Powell
Observers say
Meanwhile, on Wednesday the House Financial Services Committee announced that Facebook CEO Mark Zuckerberg will testify before the panel on Oct. 23 to discuss the company's financial services impact.
“There may no longer be a level of enthusiasm that was there before Congress said, ‘We were going to put a hold on all this and regulate and moderate what Facebook can do,’ ” said Huhnsik Chung, a partner at Stroock & Stroock & Lavan.
Powell's testimony to Congress in July and the Capitol Hill appearance the same month by David Marcus, who heads up the Libra project, revealed worries among policymakers about the cryptocurrency plan's anti-money-laundering and privacy controls, among other things.
Meanwhile, two Democratic members of the Senate Banking Committee sent letters this week to Visa, Mastercard and Stripe — all part of the Libra project — saying that "key questions remain unanswered about the risks the project poses to consumers, regulated financial institutions, and the global financial system."
In the Oct. 8 letters, Sen. Sherrod Brown, D-Ohio, the panel's ranking member, and Sen. Brian Schatz, D-Hawaii, urged the companies to “carefully consider" how they "will manage these risks before proceeding, given that Facebook has not yet demonstrated to Congress, financial regulators—and perhaps not even to your companies—that it is taking these risks seriously.”
“You should be concerned that any weaknesses in Facebook’s risk management systems will become weaknesses in your systems that you may not be able to effectively mitigate,” they wrote.
They accused Facebook of trying to shift regulatory burden to individual members of the association.
"Facebook appears to want the benefits of engaging in financial activities without the responsibility of being regulated as a financial services company," Brown and Schatz wrote. "Facebook is attempting to accomplish that objective by shifting the risks and the need to design new compliance regimes on to regulated members of the Libra Association like your companies."
Analysts say PayPal was likely not the only organization rethinking its involvement as a result of the congressional scrutiny.
“I think PayPal’s announcement is going to be the first of numerous such announcements, and they are due in large part to the regulatory and policy skepticism that we saw in the wake of the" cryptocurrency plan being announced,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading.
Some point out that PayPal's announcement makes clear that Facebook has yet to make enough inroads with Washington since the
“We believe news that PayPal is leaving the parent for Libra is reflective of Facebook's failure to get buy in from Washington for its stable coin,” Jaret Seiberg, an analyst with Cowen Washington Research Group, said in a note this week. “It is why we believe it will be difficult to launch Libra next year without triggering a negative government response.”
Last summer, when reports first emerged about Facebook’s proposed cryptocurrency, the Libra Association’s initial roster of founding members — 28 companies, including giants such as PayPal, Visa, Mastercard, Lyft, Uber, Spotify and Vodafone — was nearly as surprising as the existence of Libra itself. At first glance, the governing body’s makeup constituted a formidable bulwark of corporate support.
But that didn’t stop lawmakers from protesting loudly.
“I don’t know how you could have any less credibility with Washington" than Facebook already has, Boltansky said.
With PayPal becoming the first member to part ways with the association, the path ahead for Libra is as murky as ever.
“There’s still not a clear legal framework for this sort of thing — there’s not even a clear legal framework for cryptocurrency as it already exists,” said Christina Tetreault, senior counsel with Consumer Reports. “Add in the scale of the project, and there’s nothing that's happened since the announcement of Libra that would alleviate any of the concerns everyone has had.”
“Nothing has really changed since June — we still don’t have the framework to talk about what Libra means for monetary policy, market concentration, any of it,” she added. “It all needs the kind of deep-dive analysis that can’t be accomplished in just a few months.”
But Chung said Facebook's woes should not be taken as a signal that policymakers are staunchly opposed to cryptocurrency or even the idea of stablecoins that are “tethered” to fiat currencies.
“Libra is a tethered coin. There are a lot of cryptocoins out there like that and are trying to maintain their value at the dollar equivalent," he said. "The problem is Facebook’s market potential cap — nothing comes close. It could give them a huge amount of control over monetary policy.”
Ultimately, many say, the Libra Association's greatest challenge may be Washington's general criticism of Facebook on issues such as its size and use of customer data.
“They have not earned a lot of trust from regulators, and banking certainly requires more trust than being a social media platform,” said Mehrsa Baradaran, a law professor at the University of California, Irvine.
“If we don't trust Facebook with the basic stuff of data protection, why would be trust them with our money, or with decisions about currency?”
