The Industry


To create its cryptocurrency, Facebook must convince lawmakers it’s not repeating Walmart’s mistake: trying to form a bank.

The Walmart and Facebook logos shaped as piggy banks.
Photo illustration by Slate. Images by Walmart and Facebook.

In the 16 months since the Cambridge Analytica scandal, every move that Facebook has made has elicited one question from lawmakers: OK, but what are you really up to?

This week, a number of legislators were pretty sure Facebook is making a bank. Over the course of two hearings, members of the House and Senate’s financial regulation committees almost unanimously expressed unease around Facebook’s plans to establish a global cryptocurrency called Libra. David Marcus, the head of Facebook’s cryptocurrency team, spent the better part of six hours trying to assure both Republicans and Democrats that the company wouldn’t use the digital token—and the online wallet it plans to operate as a new Facebook subsidiary—to consolidate even more market power, and that the company had learned from past blunders with handling user data.

Even as he tried to assure lawmakers that Libra will have protections against money laundering, data-privacy violations, and volatility, Marcus nimbly avoided making substantive commitments on behalf of Facebook, such as agreeing to a pilot testing phase, and carefully described Libra in a way that would not invite certain types of regulatory oversight. About an hour into the House hearing, New York Rep. Gregory Meeks asked Marcus whether Facebook was establishing a bank, noting, “Do you agree that, defined simply, an organization that holds deposits and makes loans is a bank? Similarly, banks in the past did issue their own currencies or IOUs and cleared their payments.” Marcus replied, “We will not engage in banking services. We will focus on payments.”

Many lawmakers pointed out throughout the hearings that there is a good reason Facebook wants to avoid creating anything that the law defines as a bank—or even giving the impression that it is doing something banklike: Banks must obey lots of rules, and endure a lot more hassle. As President Donald Trump—no fan of Facebook—tweeted earlier this month, “If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks.” What became clear this week was that a major threat to Facebook’s crypto plans is the very notion of the company setting up a bank—even if that’s not what it’s doing.

There’s an interesting, if imperfect, precedent here. Multiple journalists have, in passing, compared Facebook’s Libra initiative to Walmart’s abortive attempts to establish a bank. From 1998 until 2007, Walmart made several bids to obtain a banking charter. The company consistently maintained that its goal would only be to save money by processing credit card transactions in-house. Critics feared, however, that Walmart would eventually expand to accepting deposits and giving out loans for customers, like a retail bank. The Independent Community Bankers of America (or ICBA), a powerful financial trade group, was particularly concerned that Walmart had opted to apply for an industrial loan corporation charter. Such charters are widely regarded as a loophole in financial regulations, because it allows an entity to establish a national bank without having to divest from other commercial activities, such as retail sales. Industrial banks are also generally subject to fewer regulations than traditional banks.

Similar concerns are already dogging Facebook. The ICBA recently sent letters to the House and Senate in support of a “moratorium on the implementation of Libra pending a comprehensive review by Congress and regulators,” which California Rep. Maxine Waters proposed in June. Paul Merski, a group executive vice president at the ICBA, sees parallels between Facebook’s cryptocurrency plans and Walmart’s attempts to move into banking. “It’s large, powerful companies looking to skirt existing rules and regulations that apply to others in the same space,” he says, noting that Facebook can’t just decide to exempt itself from many of the laws that apply to conventional banks. “It’s not innovating if the innovation is just not abiding by the rules.”

While Facebook isn’t applying for an industrial loan corporation charter, it could run into the same problems that Walmart did in mixing banking with commerce, a combination that the U.S. has long prohibited. Whether it’s Facebook’s online ad sales or Walmart’s chain of warehouse stores, commercial activities have the potential to unduly influence how those companies would operate their financial services. “You don’t want the financial decision-making and lending based on the commercial company,” says Merski. “You’d want the allocation of credit to be impartial, so it’s not that Facebook wouldn’t lend to a competitor or wouldn’t provide services if you weren’t a Facebook member.” There is a danger that corporations could use their banks to give themselves loans for their commercial activities, as was the case in Japan, where conglomerate companies have been integrated into the country’s banking system for decades. Faulty loans and investments to these companies with banking ties helped contribute to the Lost Decade, a period between 1991 and 2001 in which growth levels stagnated.

In 2007, Walmart decided to abandon its bid for a charter. “We don’t plan to do this again,” Jane Thompson, then Walmart’s financial services president, told the New York Times. “The bank is behind us.” The company finally gave up its decadelong campaign in the face of resistance from a coalition of unions and interest groups, including the ICBA, along with members of Congress, who were poised to pass legislation barring nonfinancial companies from owning banks. As the American Prospect notes, a similar coalition is now forming in opposition to Libra on a global scale. Merski in fact thinks that Facebook is potentially in for an even thornier trial than Walmart was, because the social media company will have to appease regulators in the U.S. and abroad.

It’s important not to draw too close a comparison between Walmart and Facebook’s financial services proposals, because obtaining a banking charter is obviously different from creating a cryptocurrency. In this case, Facebook says the cryptocurrency will be not be governed solely by the company itself, but rather in conjunction with of dozens of corporate partners that form the nonprofit Libra Association. Yet, as several lawmakers pointed out, it is likely that Facebook will have sway over the decision-making process anyway, because the company picked the founding members of the association in the first place. As Ohio Rep. Anthony Gonzalez quipped during the House hearing, “We’re all politicians in this room. I think if we could hand-select our voters, we’d feel pretty comfortable about our ability to influence whatever decisions are made.”

Whether it’s a traditional bank or the newer, wilder realm of cryptocurrency, the fears over what can happen when consumer-facing companies expand into financial services are potent. As is another worry that once surrounded Walmart and now defines Facebook: that it’s already too big.