Policy

Ajit Pai formally recommends T-Mobile/Sprint merger approval

Posted by | ajit pai, FCC, M&A, Mobile, Policy, sprint, T-Mobile | No Comments

Ajit Pai has long signaled that he would approve a T-Mobile/Sprint merger, but today the FCC chairman made it official. In spite of widespread opposition suggesting that the combining of the country’s third and fourth largest carriers would reduce competition in the marketplace, Pai takes the stance that such a move would actual promote competition.

“After one of the most exhaustive merger reviews in Commission history, the evidence conclusively demonstrates that this transaction will bring fast 5G wireless service to many more Americans and help close the digital divide in rural areas,” Pai said in a statement. “Moreover, with the conditions included in this draft Order, the merger will promote robust competition in mobile broadband, put critical mid-band spectrum to use, and bring new competition to the fixed broadband market. I thank our transaction team for the thorough and careful analysis reflected in this draft Order and hope that my colleagues will vote to approve it.”

Today, I circulated an order that would approve, subject to conditions, the proposed merger of T-Mobile and Sprint . The deal would advance fast #5G across the country, help close #digitaldivide, and put critical mid-band spectrum to use. My full statement: https://t.co/fBKvLnPgmm pic.twitter.com/21r3Us9cUG

— Ajit Pai (@AjitPaiFCC) August 14, 2019

Pai’s statement echoes that of many conservatives on the topic. While T-Mobile and Sprint are in third and fourth place, respectively, AT&T and Verizon are significantly ahead in terms of subscriber bases. Pai and other have suggested that combining the two under the T-Mobile umbrella would help the carriers get a leg up when it comes to competing on a 5G roll out.

Consumers will directly benefit from improvements in network quality and coverage, which in turn will foster innovation in a wide variety of sectors and services (itself creating significant public interest benefits),” Pai’s team writes.Moreover, the transaction will help to close the digital divide by bringing robust 5G deep into rural areas, with enforceable conditions in the draft Order requiring coverage of at least 99% of Americans within six years.”

Last month, the proposed merger was given the go-ahead by the U.S. Department of Justice on the condition that Sprint sell its prepaid assets (including Boost) to Dish network. A growing number of state attorneys general, meanwhile, have opposed the merger. Oregon joined the lawsuit yesterday, bringing the total up to 15 states and the District of Columbia.

“If left unchallenged, the current plan will result in reduced access to affordable wireless service in Oregon — and higher prices,” Oregon AG Ellen Rosenblum said. “Neither is acceptable.”

Pai noted earlier this year that he planned to approve the $26.5 billion deal, which would knock the country’s premium carriers down to three. No word yet on when the Commission will formally vote on the deal.

FCC Commissioner Jessica Rosenworcel had a different take on things, noting, “The FCC’s draft order approving the largest wireless merger in history just landed in my inbox. I believe we need more competition, not less. I am not convinced that removing a competitor will lead to better outcomes for consumers. But what I am convinced of is that before the FCC votes on this new deal negotiated by Washington, the public should have the opportunity to weigh in and comment. Too much here has been done behind closed doors.”

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Phones, laptops and game consoles get tariff reprieve until December

Posted by | Apple, China, hardware, Mobile, Policy, trump, U.S. China trade war | No Comments

Update: Trump confirmed to reporters that the delay is due to timing for the holiday shopping season. “We’re doing this for the Christmas season,” he said. “Just in case some of the tariffs would have an impact on U.S. customers.”

Electronics manufacturers are no doubt breathing a collective sigh of relief this morning at the news that the United States Trade Representative (USTR) has delayed tariffs on a number of categories.

A long list of exports, including livestock, foodstuff and clothing will have the additional 10% tariff imposed on September 1. Others, including “cell phones, laptop computers, video game consoles, certain toys, computer monitors, and certain items of footwear and clothing” have simply been delayed until December 15.

It seems the fees are an inevitability, but many might be able to scrape through just in time for the holidays.

“Certain products are being removed from the tariff list based on health, safety, national security and other factors and will not face additional tariffs of 10 percent,” the USTR writes. “Further, as part of USTR’s public comment and hearing process, it was determined that the tariff should be delayed to December 15 for certain articles.”

That list includes a wide range of electronics, from “telephones for cellular networks or for other wireless networks” to “telephone answering machines” and “cassette players (non‐recording) designed exclusively for motor‐vehicle installation.”

Stock prices for companies like Apple have already seen a positive bump following the news. The White House is expected to have additional trade talks with China next month in Washington, though President Trump has since cast some doubt.

Asked by reporters whether he might cancel the talks, the president answered, “Maybe. We’ll see what happens.”

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Huawei’s new OS isn’t an Android replacement… yet

Posted by | Android, China, Google, Government, hardware, HarmonyOS, huawei, Mobile, operating system, Policy, Tariffs, Trade war, trump | No Comments

If making an Android alternative was easy, we’d have a lot more of them. Huawei’s HarmonyOS won’t be replacing the mobile operating system for the company anytime soon, and Huawei has made it pretty clear that it would much rather go back to working with Google than go it alone.

Of course, that might not be an option.

The truth is that Huawei and Google were actually getting pretty chummy. They’d worked together plenty, and according to recent rumors, were getting ready to release a smart speaker in a partnership akin to what Google’s been doing with Lenovo in recent years. That was, of course, before Huawei was added to a U.S. “entity list” that ground those plans to a halt.

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Trump administration bans federal agencies from buying Huawei, ZTE tech

Posted by | 5g, Congress, Gadgets, Government, Hikvision, huawei, Hytera, Policy, Security, spokesperson, telecommunications, Trump administration, United States, zte | No Comments

The Trump administration has banned U.S. federal agencies from buying equipment and obtaining services from Huawei and two other companies as part of the government’s latest crackdown on Chinese technology amid national security fears.

Jacob Wood, a spokesperson for the White House’s Office of Management and Budget, was quoted as saying that the administration will “fully comply” with the legislation passed by Congress as part of a defense spending bill passed last year.

CNBC first reported the spokesperson’s remarks.

The new rule will take effect in a week — August 13 — and will also take aim at Chinese tech giants ZTE, Hytera, and Hikvision, amid fears that the companies could spy for the Chinese government. The rule comes in a year before Congress’ mandated deadline of August 2020 for all federal contractors doing business with Huawei, ZTE, Hytera and Hikvision.

The government will grant waivers to contractors on a case-by-case basis so long as their work does not pose a national security threat.

Huawei has long claimed it does not nor can it spy for the Chinese government. Critics, including the government and many lawmakers, say the company’s technology, primarily networking equipment like 5G cell stations, could put Americans’ data at risk of Chinese surveillance or espionage. Huawei has vigorously denied the allegations, despite findings from the U.K. government that gave a damning assessment of the technology’s security.

The company first came to focus in 2012 following a House inquiry, which labeled the company a national security threat.

Huawei spokesperson Chase Skinner said the news was “not unexpected” and that it continues to challenge the ban in court.

“The NDAA law and its implementing provisions will do nothing to ensure the protection of U.S. telecom networks and systems and rather is trade barrier based on country-of-origin, invoking punitive action without any evidence of wrong doing,” he said. “Ultimately, it will be rural citizens across the U.S. that will be most negatively impacted as the networks they use for digital connectivity rely on Huawei.”

ZTE did not respond to a request for comment.

Added statement from Huawei spokesperson.

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A closer look at China’s smartphone market

Posted by | Apple, Asia, China, Government, hardware, huawei, iPhone, Mobile, mobile phone, Policy, Samsung, smartphones, Tariffs, Tim Cook, Trade war | No Comments

In February 2013, China surpassed the United States to become the world’s largest smartphone market. More than half a decade on, it still proves an elusive target for international sellers. A glance at reports from the past several quarters reveals the top spots dominated by homegrown names: Huawei, Vivo, Oppo, Xiaomi.

Combined, the big four made up roughly 84% of the nearly 100 million smartphones shipped last quarter, per new numbers from Canalys. Even international giants like Apple and Samsung have trouble cracking double-digit market share. Of the two, Apple has generally done better, with around 6% of the market — around six times Samsung’s share.

But Apple’s struggles have been very visible nonetheless, as the company has invested a good deal of its own future success into the China market. At the beginning of the year, the company took the rare action of lowering its guidance for Q1, citing China as the primary driver.

“While we anticipated some challenges in key emerging markets, we did not foresee the magnitude of the economic deceleration, particularly in Greater China,” Tim Cook said in a letter to shareholders at the time. “In fact, most of our revenue shortfall to our guidance, and over 100 percent of our year-over-year worldwide revenue decline, occurred in Greater China across iPhone, Mac and iPad.”

When it came time to report, things were disappointing, as expected. The company’s revenue in the area dropped nearly $5 billion, year over year. On the tail of two rough quarters, things picked up a bit for Apple in the country. This week, Tim Cook noted “great improvement” in Greater China.

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Texas joins growing list of AGs looking to block T-Mobile/Sprint merger

Posted by | Mobile, Policy, sprint, T-Mobile | No Comments

Late last week, the DOJ greenlit T-Mobile and Sprint’s $26 billion deal to become the nation’s No. 3 carrier. The deal isn’t officially official just yet, with some prominent opposition facing the merger. A growing list of attorneys general have sued to block the merger, and another big name just came on board.

With the addition of Texas Attorney General Ken Paxton, the number moves to 15, including the District of Columbia. California, Colorado, Connecticut, the District of Columbia, Maryland, Michigan, Mississippi, New York, Virginia and Wisconsin filed the initial suit in June and were soon joined by Hawaii, Massachusetts, Minnesota and Nevada.

Notably, Paxton is one of only two Republicans on the list — probably not surprising, as many conservative lawmakers have suggested that a merger of the third and fourth largest carriers might actually promote competition. Trump-appointed DOJ antitrust chief Makan Delrahim agreed with carrier suggestions that a merger would help a larger T-Mobile accelerate 5G growth.

Paxton disagreed with the sentiments.

“After careful evaluation of the proposed merger and the settlement, we do not anticipate that the proposed new entrant will replace the competitive role of Sprint anytime soon,” Paxton said in a statement provided to TechCrunch. “It is the Attorney General’s responsibility to preserve free market competition, which has proven to result in lower prices and better quality for consumers. The bargain struck by the U.S. Department of Justice is not in the best interest of working Texans, who need affordable mobile wireless telecommunication services that are fit to match the speed and technological innovation demands of Texas’ growing economy.”

T-Mobile has also come under scrutiny for intense lobbying, including $195,000 spent at Trump’s D.C. hotel since last April.

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Huawei reportedly helped North Korea build out 3G network in secret

Posted by | huawei, Mobile, Policy, Security | No Comments

A new report could ultimately prove another bombshell in Huawei’s ongoing conflicts with the U.S. government. New documents obtained by The Washington Post tie the Chinese hardware giant to North Korea’s commercial 3G wireless network.

If proven, the ties would be yet more fodder for the U.S., which has already dinged the company over charges of violating Iran sanctions. The government has also investigated potential ties between Huawei and North Korea for years, though concrete links have apparently remained elusive.

This latest report arrives by way of a former Huawei employee, with confirmation and supporting documents from other sources who have also requested to remain anonymous for fear of retribution. For its part, Huawei has stated that it has “no business presence” in the embattled country.

“Huawei is fully committed to comply with all applicable laws and regulations in the countries and regions where we operate, including all export control and sanction laws and regulations,” it said in a statement offered to the press. Notably, the statements appear to apply primarily to its current business offerings, while declining to comment on the past.

The specifics of the dealings are a touch complicated. According to the documents, Huawei partnered with Panda International Information Technology, a state-owned Chinese communications company. Huawei reportedly used the firm to send networking equipment to the country in order to launch wireless carrier Koryolink over a decade ago.

The company has been under additional scrutiny recently as carriers have begun to roll out 5G networks across the globe. We’ve reached out to Huawei for additional comment.

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Facebook’s regulation dodge: Let us, or China will

Posted by | Apps, blockchain, China, cryptocurrency, David Marcus, eCommerce, Facebook, Facebook Regulation, Finance, Government, Libra, Mark Zuckerberg, Mobile, Nick Clegg, payments, Policy, privacy, Sheryl Sandberg, TC | No Comments

Facebook is leaning on fears of China exporting its authoritarian social values to counter arguments that it should be broken up or slowed down. Its top executives have each claimed that if the U.S. limits its size, blocks its acquisitions or bans its cryptocurrency, Chinese company’s absent these restrictions will win abroad, bringing more power and data to their government. CEO Mark Zuckerberg, COO Sheryl Sandberg and VP of communications Nick Clegg have all expressed this position.

The latest incarnation of this talking point came in today’s and yesterday’s congressional hearings over Libra, the Facebook-spearheaded digital currency it hopes to launch in the first half of 2020. Facebook’s head of its blockchain subsidiary Calibra, David Marcus, wrote in his prepared remarks to the House Financial Services Committee today that (emphasis added):

I believe that if America does not lead innovation in the digital currency and payments area, others will. If we fail to act, we could soon see a digital currency controlled by others whose values are dramatically different.

Senate Banking Committee Holds Hearing On Facebook's Proposed Crypto Currency

WASHINGTON, DC – JULY 16: Head of Facebook’s Calibra David Marcus testifies during a hearing before Senate Banking, Housing and Urban Affairs Committee July 16, 2019 on Capitol Hill in Washington, DC. The committee held the hearing on “Examining Facebook’s Proposed Digital Currency and Data Privacy Considerations.” (Photo by Alex Wong/Getty Images)

Marcus also told the Senate Banking Subcommittee yesterday that “I believe if we stay put we’re going to be in a situation in 10, 15 years where half the world is on a blockchain technology that is out of reach of our national-security apparatus.”.

This argument is designed to counter House-drafted “Keep Big Tech Out of Finance” legislation that Reuters reports would declare that companies like Facebook that earn over $25 billion in annual revenue “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.”

The message Facebook is trying to deliver is that cryptocurrencies are inevitable. Blocking Libra would just open the door to even less scrupulous actors controlling the technology. Facebook’s position here isn’t limited to cryptocurrencies, though.

The concept crystallized exactly a year ago when Zuckerberg said in an interview with Recode’s Kara Swisher, “I think you have this question from a policy perspective, which is, do we want American companies to be exporting across the world?” (emphasis added):

We grew up here, I think we share a lot of values that I think people hold very dear here, and I think it’s generally very good that we’re doing this, both for security reasons and from a values perspective. Because I think that the alternative, frankly, is going to be the Chinese companies. If we adopt a stance which is that, ‘Okay, we’re gonna, as a country, decide that we wanna clip the wings of these companies and make it so that it’s harder for them to operate in different places, where they have to be smaller,’ then there are plenty of other companies out that are willing and able to take the place of the work that we’re doing.

When asked if he specifically meant Chinese companies, Zuckerberg doubled down, saying (emphasis added):

Yeah. And they do not share the values that we have. I think you can bet that if the government hears word that it’s election interference or terrorism, I don’t think Chinese companies are going to wanna cooperate as much and try to aid the national interest there.

WASHINGTON, DC – APRIL 10: Facebook co-founder, Chairman and CEO Mark Zuckerberg testifies before a combined Senate Judiciary and Commerce committee hearing in the Hart Senate Office Building on Capitol Hill April 10, 2018 in Washington, DC. Zuckerberg, 33, was called to testify after it was reported that 87 million Facebook users had their personal information harvested by Cambridge Analytica, a British political consulting firm linked to the Trump campaign. (Photo by Chip Somodevilla/Getty Images)

This April, Zuckerberg went deeper when he described how Facebook would refuse to comply with data localization laws in countries with poor track records on human rights. The CEO explained the risk of data being stored in other countries, which is precisely what might happen if regulators hamper Facebook and innovation happens elsewhere. Zuckerberg told philosopher Yuval Harari that (emphasis added):

When I look towards the future, one of the things that I just get very worried about is the values that I just laid out [for the internet and data] are not values that all countries share. And when you get into some of the more authoritarian countries and their data policies, they’re very different from the kind of regulatory frameworks that across Europe and across a lot of other places, people are talking about or put into place . . . And the most likely alternative to each country adopting something that encodes the freedoms and rights of something like GDPR, in my mind, is the authoritarian model, which is currently being spread, which says every company needs to store everyone’s data locally in data centers and then, if I’m a government, I can send my military there and get access to whatever data I want and take that for surveillance or military.

I just think that that’s a really bad future. And that’s not the direction, as someone who’s building one of these internet services, or just as a citizen of the world, I want to see the world going. If a government can get access to your data, then it can identify who you are and go lock you up and hurt you and your family and cause real physical harm in ways that are just really deep.

facebook logo down glitch

Facebook’s newly hired head of communications, Nick Clegg, told reporters back in January that (emphasis added):

These are of course legitimate questions, but we don’t hear so much about China, which combines astonishing ingenuity with the ability to process data on a vast scale without the legal and regulatory constraints on privacy and data protection that we require on both sides of the Atlantic . . .  [and this data could be] put to more sinister surveillance ends, as we’ve seen with the Chinese government’s controversial social credit system.

In response to Facebook co-founder Chris Hughes’ call that Facebook should be broken up, Clegg wrote in May that “Facebook shouldn’t be broken up — but it does need to be held to account. Anyone worried about the challenges we face in an online world should look at getting the rules of the internet right, not dismantling successful American companies.”

He hammered home the alternative the next month during a speech in Berlin (emphasis added):

If we in Europe and America don’t turn off the white noise and begin to work together, we will sleepwalk into a new era where the internet is no longer a universal space but a series of silos where different countries set their own rules and authoritarian regimes soak up their citizens’ data while restricting their freedom . . . If the West doesn’t engage with this question quickly and emphatically, it may be that it isn’t ours to answer. The common rules created in our hemisphere can become the example the rest of the world follows.

COO Sheryl Sandberg made the point most directly in an interview with CNBC in May (emphasis added):

You could break us up, you could break other tech companies up, but you actually don’t address the underlying issues people are concerned about . . . While people are concerned with the size and power of tech companies, there’s also a concern in the United States about the size and power of Chinese tech companies and the … realization that those companies are not going to be broken up.

WASHINGTON, DC – SEPTEMBER 5: Facebook chief operating officer Sheryl Sandberg testifies during a Senate Intelligence Committee hearing concerning foreign influence operations’ use of social media platforms, on Capitol Hill, September 5, 2018 in Washington, DC. Twitter CEO Jack Dorsey and Facebook chief operating officer Sheryl Sandberg faced questions about how foreign operatives use their platforms in attempts to influence and manipulate public opinion. (Photo by Drew Angerer/Getty Images)

Scared tactics

Indeed, China does not share the United States’ values on individual freedoms and privacy. And yes, breaking up Facebook could weaken its products like WhatsApp, providing more opportunities for apps like Chinese tech giant Tencent’s WeChat to proliferate.

But letting Facebook off the hook won’t solve the problems China’s influence poses to an open and just internet. Framing the issue as “strong regulation lets China win” creates a false dichotomy. There are more constructive approaches if Zuckerberg seriously wants to work with the government on exporting freedom via the web. And the distrust Facebook has accrued through the mistakes it’s made in the absence of proper regulation arguably do plenty to hurt the perception of how American ideals are spread through its tech companies.

Breaking up Facebook may not be the answer, especially if it’s done in retaliation for its wrong-doings instead of as a coherent way to prevent more in the future. To that end, a better approach might be stopping future acquisitions of large or rapidly growing social networks, forcing it to offer true data portability so existing users have the freedom to switch to competitors, applying proper oversight of its privacy policies and requiring a slow rollout of Libra with testing in each phase to ensure it doesn’t screw consumers, enable terrorists or jeopardize the world economy.

Resorting to scare tactics shows that it’s Facebook that’s scared. Years of growth over safety strategy might finally catch up with it. The $5 billion FTC fine is a slap on the wrist for a company that profits more than that per quarter, but a break-up would do real damage. Instead of fear-mongering, Facebook would be better served by working with regulators in good faith while focusing more on preempting abuse. Perhaps it’s politically savvy to invoke the threat of China to stoke the worries of government officials, and it might even be effective. That doesn’t make it right.

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Highlights from Facebook’s Libra Senate hearing

Posted by | Apps, blockchain, cryptocurrency, David Marcus, eCommerce, Education, Facebook, Finance, Government, Libra, Libra Association, Mobile, payments, Policy, privacy, Social, TC, U.S. Senate | No Comments

Facebook will only build its own Calibra cryptocurrency wallet into Messenger and WhatsApp, and will refuse to embed competing wallets, the head of Calibra David Marcus told the Senate Banking Committee today. While some, like Senator Brown, blustered that “Facebook is dangerous!,” others surfaced poignant questions about Libra’s risks.

Calibra will be interoperable, so users can send money back and forth with other wallets, and Marcus committed to data portability so users can switch entirely to a competitor. But solely embedding Facebook’s own wallet into its leading messaging apps could give the company a sizable advantage over banks, PayPal, Coinbase or any other potential wallet developer.

Other highlights from the “Examining Facebook’s Proposed Digital Currency and Data Privacy Considerations” hearing included Marcus saying:

  • The U.S. should “absolutely” lead the world in rule-making for cryptocurrencies
  • The Libra Association chose to be headquartered in Switzerland “not to evade any responsibilities of oversight” but since it’s where international financial groups like the Bank for International Settlements, though Calibra will be regulated by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network
  • “Yes,” Libra will comply with all U.S. regulations and not launch until the U.S. lawmakers’ concerns have been answered
  • “You will not have to trust Facebook” because it’s only one of 28 current and potentially 100 or more Libra Association members and it won’t have special privileges
  • “Yes I would” accept compensation from Facebook in the form of Libra as a show of trust in the currency
  • It is “not the intention at all” for Calibra to sell or directly monetize user data directly, though if it offered additional financial services in partnership with other financial organizations it would ask consent to use their data specifically for those purposes
  • Facebook’s core revenue model around Libra is that more online commerce will lead businesses to spend more on Facebook ads
  • When repeatedly asked why Facebook is pushing Libra to happen, Marcus noted that blockchain technology is inevitable and if the U.S. doesn’t lead in building and regulating it, the tech will come from places “out of reach of our national security apparatus,” raising the spectre of China

But Marcus also didn’t clearly answer some critical questions about Libra and Calibra, and may be asked again when he testifies before the House Financial Services Committee tomorrow.

Unanswered Questions

Chairman Crapo asked if Facebook would collect data about transactions made with Calibra that are made on Facebook, such as when users buy products from businesses they discover through Facebook. Marcus instead merely noted that Facebook would still let users pay with credit cards and other mediums as well as Calibra. That means that even though Facebook might not know how much money is in someone’s Calibra wallet or their other transactions, it might know how much they paid and for what if that transaction happens over their social networks.

Senator Tillis asked how much Facebook has invested in the formation of Libra. TechCrunch has also asked specifically how much Facebook has invested in the Libra Investment Token that will earn it a share of interest earned from the fiat currencies in the Libra Reserve. Marcus said Facebook and Calibra hadn’t determined exactly how much it would invest in the project. Marcus also didn’t clearly answer Senator Toomey’s question of why the Libra Association is considered a not-for-profit organization if it will pay out interest to members.

Senator Menendez asked if the Libra Association would freeze the assets if terrorist organizations were identified. Marcus said that Calibra and other custodial wallets that actually hold users’ Libra could do that, and that regulated off-ramps could block them from converting Libra into fiat. But this answer underscores that there may be no way for the Libra Association to stop transfers between terrorists’ non-custodial wallets, especially if local governments where those terrorists operate don’t step in.

Perhaps the most worrying moment of the hearing was when Senator Sinema brought up TechCrunch’s article citing that “The real risk of Libra is crooked developers.” There I wrote that Facebook’s VP of product Kevin Weil told me that “There are no plans for the Libra Association to take a role in actively vetting [developers],” which I believe leaves the door open to a crypto Cambridge Analytica situation where shady developers steal users money, not just their data.

Senator Sinema asked if an Arizonan was scammed out of their Libra by a Pakistani developer via a Thai exchange and a Spanish wallet, would that U.S. citizen be entitled to protection to recuperate their lost funds. Marcus responded that U.S. citizens would likely use American Libra wallets that are subject to protections and that the Libra Association will work to educate users on how to avoid scams. But Sinema stressed that if Libra is designed to assist the poor who are often less educated, they could be especially vulnerable to scammers.

Here @SenatorSinema cites my article warning that we need protection from Facebook Libra’s unvetted developers https://t.co/gYeYIQVFLj pic.twitter.com/QSqVDztpCU

— Josh Constine (@JoshConstine) July 16, 2019

Crypto openness versus a dangerous Wild West

Overall, the hearing was surprisingly coherent. Many Senators showed strong base knowledge of how Libra worked and asked the right questions. Marcus was generally forthcoming, beyond the topics of how much Facebook has invested in the Libra project and what data it will glean from transactions atop its social network.

Some of the top concerns, such as terrorist money laundering, encompass the entire cryptocurrency ecosystem and can’t be solved even by strong rules around Libra. Little regard was given to how Libra could improve remittance or cut transaction fees that see corporations profit off families and small businesses.

Still, if Libra actually becomes popular and evolves as an open ecosystem full of unvetted developers, the currency could be used to facilitate scams. Precisely because of the lack of trust in Facebook that many Senators harped on, consumers could go seeking Libra wallet alternatives to the company that might push them into the hands of evildoers. The Libra Association may need to shift the balance further toward safety and away from cryptocurrency’s prevailing philosophies from openness. Otherwise, the frontiers of this Wild West could prove dangerous, even if its civilized regions are well-regulated.

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Facebook answers how Libra taxes & anti-fraud will work

Posted by | Apps, blockchain, Calibra, cryptocurrency, donald trump, eCommerce, Facebook, Finance, Government, Libra, Libra Association, Mobile, payments, Policy, TC | No Comments

Facebook provided TechCrunch with new information on how its cryptocurrency will stay legal amidst allegations from President Trump that Libra could facilitate “unlawful behavior.” Facebook and Libra Association executives tell me they expect Libra will incur sales tax and capital gains taxes. They confirmed that Facebook is also in talks with local convenience stores and money exchanges to ensure anti-laundering checks are applied when people cash-in or cash-out Libra for traditional currency, and to let you use a QR code to buy or sell Libra in person.

A Facebook spokesperson said the company wouldn’t respond directly to Trump’s tweets, but noted that the Libra association won’t interact with consumers or operate as a bank, and that Libra is meant to be a complement to the existing financial system.

Trump had tweeted that “Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity. Similarly, Facebook Libra’s ‘virtual currency’ will have little standing or dependability. 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, both National and International.”

For a primer on how Libra works, watch our explainer video below or read our deep dive into everything you need to know:

In a wide-reaching series of interviews this week, the Libra Association’s head of policy Dante Disparte, Facebook’s head economist for blockchain Christian Catalini and Facebook’s blockchain project subsidiary Calibra’s VP of product Kevin Weil answered questions about regulation of Libra. Here’s what we’ve learned (their answers were trimmed for clarity but not edited):

Would Facebook’s Calibra Wallet launch elsewhere even if it’s banned in the USA by regulators?

Calibra’s Kevin Weil: We believe that creating a financial ecosystem that has significantly broader access where all it takes is a phone and lower transaction fees across the board is good for people. And we want to bring it to as many people around the world as we can. But as a custodial wallet we are regulated and will be compliant and we will only operate in markets where we’re allowed.

We want that to be as many markets as possible. That’s why we announced well in advance of actually launching a product — because we’ve been engaging with regulators. We’re continuing to engage with regulators and we can help them understand the effort that we’re taking to make sure that people are safe and also the value that accrues to the people in their countries when there’s broader access to financial services with lower transaction fees across the board.

Facebook Calibra Libra Wallet

TechCrunch: But what if you’re banned in the U.S.?

Weil: I’m hesitant to give a blanket answer. But in general, we believe that Libra is positive for people and we want to launch as broadly as possible. The world where the U.S. does that I think would probably cause other regulatory regimes to also be concerned about it. I think that’s very much a bridge that we’ll cross when we get there. But so far we’re having frank, open and honest discussions with regulators. Obviously, that continues next week with David’s testimony. And I hope it doesn’t come to that, because I think that Libra can do a lot of good for a lot of people.

TechCrunch’s Analysis: The U.S. House subcommittee has already submitted a letter to Facebook requesting that it cease development of Libra and Calibra until regulators can better examine it and take action. It sounds like Facebook believes a U.S. ban on Libra/Calibra would cause a domino effect in other top markets, and therefore make it tough to rationalize still launching. That puts even more pressure on the outcome of July 16th and 17th’s congressional hearings on Libra with the head of Facebook’s head of Calibra, David Marcus.

How will users cash-in and cash-out of Libra in person?

We already know that Facebook’s own Libra wallet called Calibra will be baked into Messenger and WhatsApp plus have its own standalone app. There, those with connected bank accounts and government ID that go through a Know Your Customer (KYC) anti-fraud/laundering check will be able to buy and sell Libra. But a big goal of Libra is to bring the unbanked into the modern financial system. How does that work?

Weil: Because Libra is an open ecosystem, any money exchange business or entrepreneur can begin supporting cash-in/cash-out without needing any permission from anyone associated with the Libra Association or member of the Libra Association. They can just do it. Today in a lot of emerging markets [there’s a service for matching you with someone to exchange cryptocurrency for cash or vice-versa called] LocalBitcoins.com and I think you’ll see that with Libra too.

Second, we can augment that by by working with local exchanges, convenience stores and other cash-in/cash-out providers to make it easy from within Calibra. You could imagine an experience in the Calibra app or within Messenger or WhatsApp, where if you want to cash in or cash out, you’ll pop up a map that highlights physical locations around that allow you to do it. You select one that’s nearby, you select an amount, and you get a QR code that you can take to them and complete the transaction.

I’d imagine that most of these businesses that we work with will support Libra more broadly, so even if we get these deals started it will benefit the whole ecosystem and every Libra wallet, not just Calibra.

Facebook Calibra

TechCrunch: Have you struck relationships with any convenience store operators or money exchangers like Western Union or MoneyGram, or Walgreens, CVS or 7-Eleven? Are you in talks with them yet?

Weil: I probably shouldn’t comment on any specific deals but we’re in conversation with a lot of the folks you might think, because ultimately being able to move between Libra and your local currency is critical to driving adoption and utility in the early days . . . If you’re banked there are easier ways to do that. If you’re not banked and you’re in cash — those are the people we really want to serve with Libra — we’re working very hard to make that process easy for people.

TechCrunch’s analysis: This approach will let Calibra largely avoid the complicated and potentially error-prone process of KYCing people in person or handing out cash by offloading the responsibility and liability to other parties.

How will Libra stop fraud or laundering while offering access to unbanked users without ID?

Weil: There are very important populations that don’t have an ID. People in a refugee camp may not, as an example, and we want Libra to serve them. So this is one example of many of why it’s important that Calibra isn’t the only option for people who want to participate in the Libra ecosystem  . . . Others of these will be run by local providers and they have programs to meet customers face-to-face and other ways to serve people and even KYC them that we may not . . .  We’re not going be the only wallet, we don’t want to be the only wallet.

This is one of the reasons NGOs have been members of the Libra association from the start, because we want to encourage the monetization of identity processes both through working with governments issuing credentials for more people and also making use of new types of information for identity and authentication. We hope this process will hep the last mile problem.

In the case of a non-custodial wallet, the user isn’t trusting anyone. The way the regulations have worked and this is evolving as we speak. The on-ramps and off-ramps to the crypto world are regulated and they have direct customer relationships and it’s their responsibility to KYC people. In our case we’ll be a custodial wallet and we’ll KYC people. There are a number of wallets in the Bitcoin or Ethereum ecosystem — non-custodial wallets that don’t have a direct relationships with the users. . . They have to get that Bitcoin somehow. Usually they’re going through an exchange where usually as part of the process they’re KYC’d.

In a lot of emerging markets you have LocalBitcoins.com where you can find a representative or agent who will meet you in person and exchange cash for bitcoin in whatever market you have to be in. And I believe that they just started making sure that they KYC everyone, but they’re doing it in person. And they have more flexibility in how they do it than you might otherwise. I think there are lots of ways that this will happen and the fact that Libra is an open ecosystem will enable people to be entrepreneurial about it.

There are lots an lots of people who are underserved by today’s financial ecosystem who have government ID. So even with requiring everyone go through a KYC process, we’ll be able to serve many, many people who are not well-served by today’s financial ecosystem. We want to find ways to support people who can’t KYC and the important part is that Calibra will fully interoperate with any other wallet, including ones that people in local markets are using because it’s a better fit for their needs.

TechCrunch: Through that interoperability, if someone with a non-custodial wallet receives Libra and then sends it a Calibra wallet user, does that mean you Libra coming into Calibra from users who weren’t KYC’d and could be laundering money?

Weil: So it’s part of the regulatory situation that’s evolving as we speak. There’s something called the Travel Rule . . . If there’s a transfer above a certain value you have to make sure that you understand both who the sender is, which you do if they’re using a custodial wallet, and who the receiver is. These are evolving regulations, but it’s something that obviously we’re going to make sure that we implement as regulations solidify.

TechCrunch’s Analysis: Calibra appears to be inviting regulation that it can strictly abide by rather than trying to guess at what the best approach is. But given it’s unclear when concrete rules will be established for transfers between non-custodial wallets and custodial wallets, or for in-person cashing, Facebook and Calibra may need to establish their own strong protocols. Otherwise they could be guilty of permitting the “unlawful behavior” Trump describes.

Libra Mission Statement

How will Libra be taxed?

Dante Disparte of Libra: Taxing of digital assets is something that’s being designed at the local level and at the jurisdiction level. Our view of the world is that like with any form of money or any form of payment or banking, the onus in terms of compliance with tax is with the individual user and consumer, and the same would hold true broadly here.

We expect that the many, many wallets and financial services providers building solutions on the Libra blockchain would begin to provide tools that make it much easier than it is today [to calculate and file taxes] for digital assets and cryptocurrencies more generally . . .  There’s plenty of time between now and Libra hitting the market to begin defining this more strictly at the jurisdictional level among providers.

TechCrunch’s Analysis: Again, here Facebook, Calibra and the Libra Association are hoping to avoid shouldering all the responsibility for taxes. Their position is that just as you have to take the initiative of paying your taxes whether or not you use a Visa card or your bank’s checks to transact, it’s on you to pay your Libra taxes.

TechCrunch: Do you think in the United States that it’s reasonable for the government to ask that Libra transactions be taxed?

Disparte: Tax treatments of digital assets broadly hasn’t been entirely clarified in most places around the world. And we hope that this is something that this project and the ecosystem around it helps to clarify.

Tax authorities will see a benefit from Libra at the consumption level and at the household level, while some cryptocurrencies have avoided taxes until the point they tried to cash out. But the nature of it and the lack of speculation and its design we think should give it a light tax treatment the way you would find with traditional currencies.

Calibra Transactions 2

Christian Catalini of Facebook: Cryptocurrencies are taxed right now every time you have a sale on the differences in gains and losses. Because Libra is designed to be a medium of exchange, those gains and losses are likely to be very tiny relative to your local currency . . . Sales tax would likely be implemented the exact same way on Libra as it is today when you pay with a credit card.

At launch giving current regulations, the Calibra wallet will have to track every purchase and sale of Libra for a U.S. user and those differences will have to be reported on tax day. You can think of the losses, albeit they may be very small gains and losses relative to USD, as similar to the what people do today when they have a Coinbase account with Bitcoin.

The sales tax I think could be implemented in the exact same way as it today with any other sort of digital payment, it would be no different. If you’re buying goods or services with Libra you’ll be paying sales tax the same way as if you used a different form of payment. Like today when you see a percentage, that is the sales tax on your total.

Disparte: Maybe the best way to frame how taxes work all over the world is that it’s not up to Libra, Calibra, Facebook or any company to make that determination. It’s up to regulators and authorities.

TechCrunch: Does Calibra already have plans in place for how to handle sales tax?

Weil: That’s also a pretty rapidly evolving part of the regulatory ecosystem right now. It’s really an ongoing discussion. We will do whatever the regulation says we need to do.

TechCrunch’s Analysis: Here we have the firmest answers of our interviews. Facebook, Calibra and the Libra Association believe the proper approach to taxes is that Libra transactions carry a country’s traditional sales tax, and that Libra you hold in your wallet will have to pay taxes based on the Libra stablecoin’s value (that’s pegged to a basket of international currencies) relative to the U.S. dollar.

If the Libra Association recommends all wallets and transactions follow these rules and Calibra builds in protocols to handle these taxes simply, at least the government can’t argue Libra is a method of dodging taxes and everyone paying their fair share.

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