Why Washington mobilized so quickly against Facebook's crypto plans
It took less than 24 hours after Facebook announced its foray into cryptocurrency for Washington to mobilize against it.
House Financial Services Committee Chairman Maxine Waters demanded Facebook put its plan on hold until she could examine it. Her Republican counterpart on the panel, Rep. Patrick McHenry of North Carolina, immediately called for hearings.
And the Senate Banking Committee — a panel generally known for deliberation, not speed — went ahead and set a date for its own look into the matter, scheduling it for July 16 (Waters' panel will hold its a day later). By comparison, it took three months for Congress to hold hearings after the 2017 Equifax data breach and two months to act on Wells Fargo's 2016 phony-accounts scandal.
“It is an incredibly quick response,” said Scott Talbott, a senior vice president of government affairs at the Electronic Transactions Association, a trade group of banks, fintech firms and payments companies.
In this case, the speed and the bipartisan nature of the demand for an investigation are telling. Had any other technology giant — Google, Amazon or PayPal — announced something similar, it seems likely Congress would have eventually gotten involved. But Facebook greatly accelerated D.C.’s interest, adding ammunition to those who have warned the crypto business is underregulated and unsafe.
“Anytime that a very large tech provider makes an announcement like this, it’s going to create a lot of questions on what it means and how regulators are going to look at it and how the private sector responds,” said David Cotney, a former Massachusetts banking commissioner who serves on the board of Cross River Bank in Fort Lee, N.J. Cross River provides banking services to the online consumer lender Affirm and the cryptocurrency exchange Coinbase.
Some were surprised at the timing of Facebook’s announcement, given the social media giant is being investigated for failing to police Russia’s involvement in the 2016 presidential election, for anticompetitive advertising practices and for its role in spreading hate speech in Myanmar.
Increased scrutiny of Facebook appears likely to hurt big technology companies trying to enter the crypto or banking space — and ultimately may benefit traditional banks in the process.
Though Facebook has partnered with PayPal, Mastercard, Visa and Stripe, among others, to facilitate payments, banks still play a core role in most cryptocurrencies, because consumers have to have a bank account or debit card to make purchases.
“If you follow the logic, to create an exchange and buy goods outside the U.S., you need an ID and a bank account and digital access,” said Sam Taussig, head of global policy at Kabbage, a small-business lending platform. “And Facebook needs to be able to verify the user.”
Talbott agreed. "I can't buy my groceries in cryptocurrency," he said. "I have to take my money out of the system and get cash, so I have to get into my checking account or use my debit card. The banks are going to be the on-ramps and off-ramps."
Among other things, Facebook is likely to be grilled about how it plans to use its social media platform to validate a consumer's identity, experts said.
Facebook created a subsidiary called Calibra to ensure a separation between a consumer’s financial data and the social media platform. Given the company's history of sharing user data with the political consulting firm Cambridge Analytica, lawmakers will want evidence that Facebook does not tap a user's banking or payments information for targeted advertising.
Facebook is expected to send an executive from Calibra to testify, sources said, which also may not sit well with lawmakers given disclosures that CEO Mark Zuckerberg may have lied in congressional testimony last year.
Beyond privacy concerns, Facebook will have to answer concerns that the social media network, with its billions of consumer users, could effectively bypass the U.S. monetary system with its new digital currency.
"The overarching concern is if crypto became so large, what would its impact be on the money supply and the Fed’s ability to respond?" said Cotney, now a senior adviser at FS Vector, a fintech consulting firm in Washington. "To date, the amount of crypto is a drop in the bucket with no adverse impact on the central bank’s ability to control the money supply."
Federal Reserve Board Chairman Jerome Powell warned last week that while digital currencies are a "long way" from interfering with monetary policy, the central bank was prepared to regulate any cryptocurrencies that gained significant traction.
“There are potential benefits here; there are also potential risks,” Powell said when asked about Facebook's plans. “A currency could potentially have a large application, so I would echo what [Bank of England Gov. Mark] Carney said, which is that we will wind up having quite high expectations from a safety and soundness and regulatory standpoint if they decide to go forward with this.”
After Facebook's announcement last week, central bankers in Britain, France and Germany claimed oversight, telling the social media giant to expect scrutiny because of privacy and money laundering concerns.
The patchwork of state and federal law governing cryptocurrencies in the U.S. also may come under a microscope as a result of Facebook's plans. At the moment, the states have primary oversight over cryptocurrencies. Facebook currently is licensed as a money transmitter in 42 states plus the District of Columbia and Puerto Rico, according to the Conference of State Bank Supervisors.
California and New York also have robust requirements for licensing cryptocurrencies. In April, New York's Department of Financial Services refused to give the cryptocurrency exchange Bittrex a virtual exchange license, because it claimed the company lacked a strong framework of controls for monitoring and reporting suspicious activities and complying with Office of Foreign Assets Control requirements.
DFS examiners found that a large number of transactions for customers in sanctioned countries, including Iran and North Korea, had passed through screening and been processed. Some Bittrex users were using obviously fake names like "Donald Duck" and "abcd," the regulator said. (The firm denied it was still a problem.)
Yet some other states like Wyoming are rolling out the welcome mat for crypto firms.
Facebook and other cryptocurrency platforms must comply with all federal laws that protect consumers from unfair, deceptive, or abusive act or practices, but state law varies considerably on other issues.
"It varies from state to state, so when you look at something as simple as money transmitters, that can be an incredible point of confusion and worry," said Tony Alexis, a partner at Goodwin Procter and the former head of enforcement at the Consumer Financial Protection Bureau.
Facebook's move could also accelerate calls in Congress for a federal privacy standard. California has moved forward with its own, the California Consumer Privacy Act, which takes effect on Jan. 1. The state law regulates the collection and sale of personal data by tech companies that use targeted advertising.
Banks are exempt from that law because of an exception to institutions that already comply with the Gramm-Leach-Bliley Act's rules governing data privacy.
"It gets real squishy what data are or are not collected, and that’s been a big question with respect to CCPA in California with so many different financial services partners," said Taussig. "Does Congress need to update GLBA, and what does it look like for the future?"