The Senate Libra hearing
The Senate Banking Committee spent about two hours questioning David Marcus, the fintech entrepreneur Facebook has tasked with heading its Libra payment network. A few takeaways:
What happens when validators operating under different compliance frameworks disagree?
Financial regulation today centers on banks, who are responsible for both how and whether we ship money around. Put differently, banks have to build both technology and compliance infrastructure. Compliance mostly happens at the level of national and local laws – true "international law" is pretty limited.
One of Bitcoin's major innovations was separating these two concerns and only answering the "how." This is a great idea for a global medium of exchange. Crypto networks are basic infrastructure, like the internet, so it's a good idea for them to be content-neutral.
TCP is a good example of handling content neutrally. It describes an agreed-upon way for any computer to ship any bits around. Different countries enforce different content regimes on top of TCP, which works really well. But implementing local rules at the network layer would break the system and make it local, not global.
It's hard for a centralized company today to argue that it should look a lot like a bank – even holding lots of customer funds! – but not be responsible for compliance. Libra needs to make that argument, and then tell a compelling story about who will handle compliance. It hasn't. Trying to handle both pieces yourself doesn't work in a global network with a bunch of overlapping and sometimes contradictory laws at play.
But all Libra Association members have to agree that the same transactions are OK, because blockchain. Yikes! Coin Center's Peter Van Valkenburgh illustrates why:
My one question to ask in the Libra hearing would be: "Would you leave the Libra Association if another member added transactions to the ledger that violated US sanctions laws?"— Peter Van Valkenburgh (@valkenburgh) July 16, 2019
If that sounds scary, here's the same question put differently: if a Libra node in China refused to process a transaction to an American religious organization, would you leave the Libra Association?
Marcus eventually got to the right answer on this: enforcement of local laws happens at the edges, at locally-regulated banks and exchanges, just like the rest of the financial system. But he also went on a scary tangent about how Libra might be able to police payments for regulated goods like Facebook currently restricts posts and ads.
Explaining that this type of content restriction shouldn't be part of a crypto network is delicate work, and might be impossible for Facebook given their trust deficit. But I don't think Libra can succeed if they get this wrong.
There's bipartisan support for open source crypto networks
There was lots of praise, and almost no criticism, of crypto networks generally. Both Democrats and Republicans understand that efficient payment networks are a competitive advantage and that cryptocurrencies can play a huge role.
Marcus played a little fast and loose with his description of Libra as "open source software developed by users." This can't be generally true for an asset-backed digital asset. Open source is not just about reading source code – the ability to contribute, and to fork if needed, is critical. That's hard to do if someone else controls the underlying assets. User choice will be severely limited under Libra's model.
Senators were right on top of attempts to conflate Libra with permissionless networks. One senator pushed back on Marcus, saying "you're making an argument for cryptocurrencies, not Libra." This is amazing, and leads to my next takeaway:
Senators have quickly gotten smart on cryptocurrency
The quality of questions at this hearing was high. The issues are dense, but I don't remember any cryptocurrency-related questions that were way off base. Kudos to the senators and their staff for being well-prepared.
The House will have two hearings tomorrow – first with Marcus, then with a panel of industry experts and academics – starting at 10AM Eastern. Expect more fireworks, and a lot more Facebook bashing, in the Democratic-led House.