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Facebook's cryptocurrency plan called "dangerous" in U.S. Senate

Facebook to testfy in Congress
  • Senators of both parties blasted Facebook's plans to create a digital currency, accusing it of competing with the banking system and trying to gather more data on its users.
  • "Like a toddler who's gotten his hands on a book of matches, Facebook has burned the house down over and over and called every time a 'learning experience,'" said Sherrod Brown, the top Democrat on the Senate Banking Committee.
  • Facebook has pledged it will keep data on transactions separate from data on users' social media activity, but many consumer advocates doubt the company will keep that promise.

Senators slammed Facebook's plan to create its own virtual currency on Tuesday, hammering the company's repeated privacy breaches and suggesting it's too big to be venturing into the banking space.

David Marcus, the Facebook executive leading the project, pledged to work with regulators to create a digital money system that protects the privacy of users' data. "We know we need to take the time to get this right," Marcus told the Senate Banking Committee.

But senators weren't buying it. Members of both parties demanded to know why a company with massive market power and a record of scandals should be trusted with such a far-reaching project, given the potential for fraud, abuse and criminal activity. Just last week, the Federal Trade Commission slapped Facebook with a $5 billion fine for allowing the data-mining firm Cambridge Analytica to collect users' data without their consent, something Facebook had earlier promised not to do.

"Facebook is dangerous," said Sen. Sherrod Brown of Ohio, the committee's senior Democrat. 

"Like a toddler who's gotten his hands on a book of matches, Facebook has burned the house down over and over and called every time a 'learning experience,'" he told Marcus. "Do you really think people should trust you with their bank accounts and their money?"

Republican Sen. Martha McSally of Arizona said "the core issue here is trust." Users won't be able to opt out of providing their personal data when joining the new digital wallet for Libra, McSally said. "Arizonans will be more likely to be scammed" using the currency, she said.

The criticism kicks off two days of hearings on the currency planned by Facebook, to be called Libra. It followed a series of negative comments and warnings about the Libra plan in recent days from President Donald Trump, his treasury secretary and Federal Reserve Chairman Jerome Powell.

Marcus stressed repeatedly that Facebook did not intend to combine data on people's social activity with information on how they use the payment system.

"To earn people's trust we will have the highest standards for privacy," he said. "The way we've built this is to separate social and financial data."

However, there is little trust left for Facebook's privacy promises. Its pledge not to use transaction data "means nothing, because they've said the same thing about every launch ever," said Dina Srinivasan, an antitrust scholar and former advertising executive. Antitrust law currently doesn't punish companies for saying one thing and then changing their minds, she noted.

Facebook fined $5 billion for mishandling users' data

Facebook is one of several dozen entities, including PayPal, Uber, Spotify, Visa and MasterCard, that would govern the cryptocurrency. As one among many in the association, Facebook says it won't have any special rights or privileges. It also created a "digital wallet" subsidiary, Calibra, to work on the technology, separately from its main social media business. While Facebook owns and controls Calibra, it won't see financial data from it, the company says.

"Facebook isn't a company; it's a country," said Sen. John Kennedy, a Republican representing Louisiana. Kennedy and other conservative senators took the occasion to air long-standing grievances against Facebook, Twitter and Google for a perceived bias against conservative views.

But some senators emphasized the potential positive benefits of Facebook's plan, meant to bring money transacting at low cost to millions around the globe who don't have bank accounts. Facebook had its strong defenders of the project, too, on the panel.

"To strangle this baby in the crib is wildly premature," said Sen. Pat Toomey, Republican of Pennsylvania.

In that vein, Marcus said Libra "is about developing a safe, secure and low-cost way for people to move money efficiently around the world. We believe that Libra can make real progress toward building a more inclusive financial infrastructure."

The planned digital currency is to be a blend of multiple currencies, so that its value can fluctuate in any given local currency. Because Libra will be backed by a reserve, and because the group of companies managing it will encourage a competitive system of exchanges, the project leaders say, "anyone with Libra has a high degree of assurance they can sell it for local (sovereign) currency based on an exchange rate."

Promising low fees, the new currency system could open online commerce to millions of people around the world who lack access to bank accounts and make it cheaper to send money across borders or simply buy goods. But it also raises concerns over the privacy of users' data and the potential for criminals to use it for money laundering and fraud.

How Facebook's Libra will differ from other cryptocurrencies

President Trump tweeted last week that the new currency, Libra, "will have little standing or dependability." Both Treasury Secretary Steven Mnuchin and Fed Chair Powell have expressed concerns recently that Libra could be used for illicit activity.

The Treasury Department has "very serious concerns that Libra could be misused by money launderers and terrorist financers," Mnuchin told reporters at the White House on Monday. "This is indeed a national security issue."

Facebook has "a lot of work to do before we get to the point where we're comfortable with it," Mnuchin said.

Wall Street is not optimistic that the hearing left regulators feeling any more secure.

"Marcus failed to make the case on why Libra is needed in the United States," Jaret Seiberg, an analyst at Cowen, said in a note. "We are not saying that there is no argument for the stable coin. Our point is that one could leave that hearing with no understanding of why Libra is needed."

-- The Associated Press contributed reporting.

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