Coin flip

“Can we agree that a banker should be trustworthy?” Senator John Kennedy of Louisiana put the question to the man from Facebook on Tuesday.^{1US Senate Committee on Banking, Housing, and Urban Affairs, via GovInfoExamining Facebook's Proposed Digital Currency and Data Privacy Considerations (Senate Hearing 116-71)16 Jul 2019} David Marcus, the head of Calibra, the firm’s new digital-wallet unit, could hardly say no. It was not an auspicious start to two days in Congress for Libra, the digital currency that Facebook announced in June.

At the Senate Banking Committee, Sherrod Brown, its senior Democrat, said that “Facebook is dangerous” and that the company “does not deserve our trust”.^{1US Senate Committee on Banking, Housing, and Urban Affairs, via GovInfoExamining Facebook's Proposed Digital Currency and Data Privacy Considerations (Senate Hearing 116-71)16 Jul 2019} Mr Kennedy summed up the proposal as “Facebook now wants to control the money supply. What could possibly go wrong?”^{1US Senate Committee on Banking, Housing, and Urban Affairs, via GovInfoExamining Facebook's Proposed Digital Currency and Data Privacy Considerations (Senate Hearing 116-71)16 Jul 2019} On Wednesday it is the turn of the House Financial Services Committee.^{4CNBCFacebook's head of Libra project responds to Senate Banking Committee9 Jul 2019}

Big enough to worry about. Facebook, total revenue, $bn

	Revenue
2016	27.6
2017	40.7
2018	55.8

Source: Facebook Form 10-K, fiscal 2018

Both the alarm and the hostility are understandable. We think neither is quite the right response. Libra is a plan to move money cheaply on top of a social network, in a world with 1.7bn adults, by the Banking Committee chairman’s count, who lack a bank account.^{1US Senate Committee on Banking, Housing, and Urban Affairs, via GovInfoExamining Facebook's Proposed Digital Currency and Data Privacy Considerations (Senate Hearing 116-71)16 Jul 2019} Mike Crapo, the chairman and a Republican, was fair enough to call Facebook’s stated goals “commendable”.^{1US Senate Committee on Banking, Housing, and Urban Affairs, via GovInfoExamining Facebook's Proposed Digital Currency and Data Privacy Considerations (Senate Hearing 116-71)16 Jul 2019} What is missing from the picture is a reason to trust the firm that is drawing it.

Start with what Libra is meant to be. Mr Marcus told the senators it would be “backed one for one with a reserve”, not a fractional one, and that the Libra Association, which is expected to grow to 100 members, would govern the network and administer the reserve.^{1US Senate Committee on Banking, Housing, and Urban Affairs, via GovInfoExamining Facebook's Proposed Digital Currency and Data Privacy Considerations (Senate Hearing 116-71)16 Jul 2019} Calibra would be the wallet. Facebook would not be the sole owner of the money, merely the loudest member of the club. He also promised that Facebook “will not offer the Libra digital currency until we have fully addressed regulators’ concerns”.^{1US Senate Committee on Banking, Housing, and Urban Affairs, via GovInfoExamining Facebook's Proposed Digital Currency and Data Privacy Considerations (Senate Hearing 116-71)16 Jul 2019} The choice of Switzerland as a base, he insisted, was “not to evade any responsibilities or oversight”.^{1US Senate Committee on Banking, Housing, and Urban Affairs, via GovInfoExamining Facebook's Proposed Digital Currency and Data Privacy Considerations (Senate Hearing 116-71)16 Jul 2019} Senators were not obviously soothed.

They have reasons. Facebook had 2.32bn monthly users at the end of 2018.^{3Facebook, Inc.Facebook Reports Fourth Quarter and Full Year 2018 Results30 Jan 2019} Revenue reached $55.8bn last year, double its level of two years earlier.^{2SECFacebook, Inc. Form 10-K for fiscal year 201831 Jan 2019} The firm is the sort of company that regulators struggle to oversee even when it only sells advertisements. A payments system on that scale would put a lender of unusual size next to a store of unusual data. Any central banker who is not unsettled by that has not been paying attention.

Yet there is a tidy counter-argument, and Pat Toomey, a Republican senator from Pennsylvania, made it. To announce in advance that “we have to strangle this baby in the crib” is, he said, “wildly premature”.^{1US Senate Committee on Banking, Housing, and Urban Affairs, via GovInfoExamining Facebook's Proposed Digital Currency and Data Privacy Considerations (Senate Hearing 116-71)16 Jul 2019} He is right about the timing. Nothing yet exists to ban. Libra has no live users, no tested reserve and no licence. A rule written for a product that has not shipped risks becoming a rule against a product that never will.

The right course lies between the two. Libra should be treated as what it resembles: a payments business holding customers’ money. That points to existing law, not a new regime. Anti-money-laundering rules, consumer-protection law and the licensing that already covers money transmitters should apply from the first day, and the regulators who administer them should say in public what they require. Mr Marcus has pledged to wait for approvals; legislators should take him at his word, and keep the transcript.^{1US Senate Committee on Banking, Housing, and Urban Affairs, via GovInfoExamining Facebook's Proposed Digital Currency and Data Privacy Considerations (Senate Hearing 116-71)16 Jul 2019}

Two further tests matter more than the others. The first is data. A Facebook wallet that mixed payment histories with the social graph would hold a commercial advantage that no bank could match, and rivals would be right to cry foul. Regulators should keep the two apart by rule rather than by promise. The second is the reserve. A reserve that is “one for one” is a fine claim and an easy one to make. It becomes a fact only if someone independent audits it, regularly and in public.

Do these things and Libra might turn out to be a modest, useful addition to the payments business. Skip them and it will deserve every harsh word the senators found. Congress has had the better of this week’s argument, but it should be careful not to confuse a good hearing with a good law.

Facebook asked America to trust it with money. For now, the polite answer is to ask for the paperwork.