Why Libra Could Be a Lightning Rod for Big Tech Regulation
Tags: Facebook, Social Media, Business, Cryptocurrency, Technology

The Keep Big Tech Out of Finance Act would bar tech giants with $25 billion or more in revenue from offering financial and payments services. The draft proposal was released as House and Senate committees prepare for hearings on Facebook’s Libra cryptocurrency.

By Rob Marvin

Ahead of hearings on Capitol Hill this week examining the ramifications of Facebook’s Libra cryptocurrency, a draft bill from House Democrats has been circulating, and its name makes the intent clear: the Keep Big Tech Out of Finance Act.

As calls to regulate the tech industry have ramped up over the past several years, the primary target has been Facebook. Last week, years after the 2016 election and the public fallout of the Cambridge Analytica scandal, it was reported that the social media giant will be hit with a $5 billion FTC fine over privacy violations.

While the actual amount isn’t much of a hit to the company’s bottom line (Facebook reported $15 billion in revenue in Q1 2019 alone), the FTC settlement is also “ expected to include other government restrictions on how Facebook treats user privacy.” The US doesn’t yet have federal data-privacy regulations on the scale of the EU’s GDPR, but the road to get there starts with state regulations and concrete governmental actions to get the ball rolling.

But despite the public focus on data usage and consumer privacy as the primary conduit to tech regulation, Facebook’s ambitious global launch of Libra may vault financial regulations to the front of the line.

There are a host of questions to be asked about the goals, governing structure, financial ripple effects, and underlying blockchain technology of Facebook’s Fiat-backed digital money. This week, Congress will start probing the tech giant on the details. David Marcus, who has headed Facebook’s crypto efforts and now serves as the head of its Calibra wallet app, will appear before the Senate Banking Committee today (July 16) and the House Financial Services Committee on Wednesday (July 17).

Libra hasn’t only drawn the ire of Democrats. In addition to a pointed tweet from President Trump calling for Facebook to comply with banking regulations, Treasury Secretary Steve Mnuchin said in a Monday press conference that he has concerns with Libra and stressed the need for anti-money laundering safeguards with the digital currency.

The Keep Big Tech Out of Finance Act gives us an idea of how lawmakers plan to approach this week’s hearings, and it’s about more than just Libra. Along with the House Financial Services Committee’s hearing memo, the discussion draft draws a line in the sand between large tech companies and financial services, including what could amount to a broad swath of digital-payment products already on the market.

The ‘Keep Big Tech Out of Finance’ Act

First, the act categorizes tech companies as “large platform utilities,” or public services that should be regulated like telecom companies and electric utilities. It’s the same terminology presidential candidate and Senator Elizabeth Warren used in her proposal to break up big tech.

The House Democratic bill states its purpose is “to prohibit large platform utilities from being a financial institution or being affiliated with a person that is a financial institution.” More specifically, a key clause is that “a large platform utility may not establish, maintain, or operate a digital asset that is intended to be widely used as medium of exchange, unit of account, store of value, or any other similar function,” as defined by the US Federal Reserve.

Facebook has positioned Libra as “a simple global currency and financial infrastructure that empowers billions of people” and the Libra blockchain as “a solid foundation for financial services, including a new global currency,” according to its white paper. Libra will be backed by a pool of assets called the “Libra Reserve,” which is pegged 1:1 to a basket of Fiat currencies. So w hen a user exchanges dollars, euros, pounds, Swiss francs, yen, and so on for Libra, new corresponding assets are created. When they pay or cash out, those tokens are destroyed.

While the currency would be controlled by the members of the Libra Association, Facebook’s new Calibra subsidiary will launch a standalone cryptocurrency wallet that also lives within Messenger and WhatsApp, allowing users to send, receive, and store Libra. Calibra is also the big potential moneymaker for Facebook: The company has designs on rolling out a whole suite of financial services that will ultimately make Facebook a bank in and of itself, facilitating global money transfers, loans, credit, commerce, and maybe even Libra banking or investment accounts down the road.

Under the proposed House regulation, Facebook’s aspirations to become a financial services company would hit a brick wall. The Keep Big Tech Out of Finance Act would bar tech companies with $25 billion or more in revenue from offering essentially all of those types of financial services: banking and lending, investments, and operating “alternative trading systems” including ‘’digital assets.” The draft specifically mentions “an asset that is issued and transferred using distributed ledger or blockchain technology, including, so-called ‘virtual currencies,’ ‘coins,’ and ‘tokens.’”

According to the discussion draft, violations would be subject to $1 million in daily fines if pursued by financial regulators.

Facebook’s Marcus responded to questions from the Senate Banking Committee in advance of today’s hearing with a statement that Facebook needs central bank, governmental, and regulatory input to launch Libra on a national and global scale. Yet the broader implications of this week’s hearings have potential far beyond Facebook.

As written, the Keep Big Tech Out of Finance Act would also apply to payments products from other tech giants over the $25 billion threshold, namely Apple, Amazon, and Google, as pointed out by Bloomberg Law reporter Lydia Beyoud:

In what would seem a deliberate backdoor to more sweeping regulation, this week’s Libra hearings may serve as the best indication of how Congress plans to handle the tech giants’ increasing encroachment into banking and financial services. The broader Libra ecosystem and the role of Calibra within it represents a lucrative potential addition to Facebook’s business model.

Apple’s broader push into services includes several payments products, including not only Apple Pay and Apple Pay Cash but also the Apple Card launched in partnership with Goldman Sachs and MasterCard. Google has Google Pay and a massive e-commerce and online shopping operation second only to Amazon, which has a Visa-backed credit card and is dominating the financial world at this very moment as its annual Prime Day takes over the internet.

Big tech regulations are coming soon, in one form or another. Politicians across political aisles have made it a major campaign platform, and Silicon Valley execs have joined the chorus. One side of the regulation will certainly focus on data usage and privacy, but the further tech companies such as Facebook dip into the banking and finance industries (and onto Wall Street’s well-lobbied turf), the swifter the federal hammer will come down. Regulators will always follow the money.

Follow the Senate Banking Committee hearing via livestream today starting at 10 a.m. EST, and catch the House Financial Services Committee hearing starting at 10 a.m. EST on Wednesday.