Barring Big Tech from Financial Services: A Double-Edged Sword?
Should the US government allow big tech companies to get their foot into the finance sector?
Since Facebook announced its planned cryptocurrency “Libra”, the US government has been busily analyzing Libra, asking Facebook to halt its current development until Congress develops regulations. Though the idea of cryptocurrency isn’t new, Libra has drawn a wary response from the US government as Facebook’s massive user base presents a risk of widespread adoption of the currency before proper and effective government regulation.
In addition, the coin is publicly backed by major corporations such as Lyft, Farfetch, Anchorage, Uber, and Spotify under the Libra Association, which will serve as the monetary authority of Libra, meaning they will be in charge of regulating how much of the currency is being minted and distributed. There is a concern for the US government that these major corporations have a significant presence in their industries and, hence, could add to Libra’s quick adoption for a large proportion of the public without sufficient regulation.
Since cryptocurrencies such as Bitcoin have been developed, the US has established several policies to legally define some aspects of cryptocurrencies. For example, the Internal Revenue Service (IRS) has concluded that cryptocurrencies such as Bitcoin are property and should be treated as such, therefore any capital revenue or loss must be registered as a property exchange. However, the reason why the US government has no existing policies to regulate Libra is that Libra will be used for fundamentally different purposes than that of other cryptocurrencies, particularly Bitcoin. Libra is set to become a medium-of-exchange platform for people to keep transactions and send money while Bitcoin is now being coined as a “digital gold”, where people invest in it, knowing it would preserve its value without much decay.
As a result of Libra’s projected function, many lawmakers are skeptical of the project and have voiced concerns over Libra’s potential threat to financial stability in the global finance system. US Treasury Secretary Steve Mnuchin voiced national security concerns over Libra with it being possibly used by “money launderers and terrorist financiers”. This dissatisfaction has led to a proposal from some lawmakers to inhibit large technology companies, defined as a company that operates an online platform service and has $25 billion dollars in yearly revenue, from serving as financial institutions or issuing digital currencies. This policy was introduced as the “Keep Big Tech Out of Finance Act”.
The government’s reluctance to give full support to this crypto-technology stems from their concern over how cryptocurrency would impact the US dollar and central bank monetary policy. This is globally significant as 62 percent of the world’s currency reserves are stored in US dollars and, hence, any change to the Federal Reserve System’s (the central bank) policies will have a strong impact towards domestic and international economies. Therefore, if Libra is adopted by many of Facebook’s 2.4 billion users, it poses as a risk towards both US economic sovereignty and global financial stability.
Though the government fears a loss of economic sovereignty to cryptocurrency, Congress should not move to approve the “Keep Big Tech Out of Finance Act”. By shutting out big technological firms from entering the finance industry, the US may stand to lose the benefits of innovations based on cryptocurrency.
Despite government officials and regulators not having much data on the cryptocurrency and its applications, they should not turn their back on the technology but rather embrace it and sort out regulations once companies have time to experiment and produce products. There have been moments where technology has continued to grow while the regulation has not caught up. In the 1980s, legislators were confused about the legal definition of computer programs and hence the programs were not fully copyright protected. It was not until 1983, in Apple v. Franklin, that a federal court ruled a computer’s operating system was able to be copyrighted, the first court to do so since the prevalence of computer programs. In this case, the US did not turn its back on new and unknown technology, but rather embraced it, allowing the high-tech sector to flourish and establish major firms such as Google, Facebook, Apple, and Amazon. As history repeats itself, current legislators are once again behind in properly regulating the new technology. But instead of viewing the situation pessimistically, legislators should learn from the past and embrace the unknown as there is significant potential in crypto-technology.
Some US lawmakers claim that approving Libra and its association will create a money laundering system for criminals and terrorists on a global scale. Though the fear of Libra’s use for money laundering is valid, the US government could collaborate with Facebook to establish a proper and regulated system to detect illicit activity uses through Libra. Innovation is the key component that drives economic success, so the government should not be stoking tension against companies wanting to pioneer an unknown field. But at the same time, the government should not give companies completely free reign. Instead, the most efficient way to tackle these fears is to work with the companies to analyze the concerns and create a solution that generates a healthy innovative environment in the industry while simultaneously protecting US interests and the safety of its citizens. With Libra, the US government should direct Facebook to implement Financial Intelligence Units (FIUs), which many international banks and payment companies also have, across different time zones to analyze the blockchain transactions and maintain strict legal compliance. This could ensure that criminals would be deterred from using Libra for illicit activities by guaranteeing constant global monitoring of transactions.
With big tech companies’ growing interest in the finance industry, there is much more for markets to gain than to lose. As more companies are entering the financial service, competition would rise and thus create a new requirement for innovation. Innovations that are desperately needed to keep up, such as more accurate risk evaluation and more efficient access to banking services, can be addressed with this newfound competition. New technology could not only benefit current consumers but also attract new users to the market as a direct result of better security and consumer interface, creating a stronger market, not weakening it. If the US does not want to accept this new technology, other countries will certainly pursue and develop it, causing the US to lose its foothold as one of the most technologically innovative countries. As American theoretical physicist Brian Greene once said, “exploring the unknown requires tolerating the uncertainty”.
Therefore, US legislators and the US House Financial Services Committee should take on a collaborative attitude with Facebook to develop Libra. Both parties will need to work together to ensure that the government still retains economic sovereignty while simultaneously providing Libra with not too restrictive regulations. This middle ground would allow Libra to bring beneficial societal outcomes such as financial inclusion of unbanked societies and cost reductions of overseas money transfers.
