When Tech Giants Want to Play Banker | The Regulatory Review

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In financially uncertain times, regulators should be attentive to Facebook’s plan to issue a cryptocurrency.

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Brace yourself: A new financial crisis is on the way. In addition to the economic effects of the novel coronavirus pandemic, economic experts predict that other financial troubles will arrive sooner rather than later as the world economy, struggling to get out of the 2008 recession danger zone, is now stuck in a deep low-growth curve. Financial regulators should be more cautious with local and global markets’ behavior and act before time runs out.

In 2019, China signaled the acceleration of its efforts to create a national cryptocurrency in response to Facebook’s endeavors to issue its own digital currency, Libra. Facebook announced a goal to “reinvent money for the internet age,” creating a global financial system based on its own cryptocurrency.

Although the media mainly expressed concerns over data collection practices within this race, I assert that regulators must also address serious and urgent financial regulation issues when considering the current worldwide financial instability, especially with the growing importance of digital payment methods and currencies due to social distancing practices.

This urgency arises from the fact that China, the world’s second economic power, is still rushing to keep up with Facebook’s effort over the issuance of a cryptocurrency as if Libra were a threat.  If Libra is in fact a menace to China’s power, then regulators should acknowledge this peril and respond efficiently to avoid dragging the economic growth curve deeper in depression.

More objective issues, however, should prompt U.S. monetary and financial regulators overseeing Facebook’s activity, such as the Federal Reserve System, to take action on the Libra project. To appreciate basic insights on how a cryptocurrency can jeopardize economic stability, compare the Libra plan to Bitcoin’s growth as an important cryptocurrency in the past decade. The Libra may become too powerful and economically unpredictable if issued.

Considering Bitcoin’s market strength, Libra may become “too big to fail.” Currently, the market capitalization of Bitcoin is around $190 billion, and the value of the 30 most valuable traded cryptocurrencies exceeds one-third of the market capitalization of Facebook. Moreover, around 5 percent of Americans invest in Bitcoins. If Bitcoin failed or suddenly became regulated in a way that limits its operation, it would undoubtedly have a substantial impact in the local financial system.

Facebook has over 2 billion monthly active users, while Bitcoin has only about 7 million active users. If only 1 percent of Facebook’s active monthly users invest in Libra, it will already surpass the number of Bitcoin investors. Hence, if users already consider the Bitcoin system too big to fail, with a 2008 bailout-like call for the former largest Bitcoin exchange that faced bankruptcy in 2014, the hypothetical failure of an even larger Libra could shake the global economy.

For this reason, senators at a U.S. Senate Committee on Banking, Housing and Urban Affairs hearing in July 2019 questioned Facebook executives over the plan to create Libra. Although the hearing centered on the illicit possibilities of digital currencies, senators expressed the concern that Facebook could become the largest banking institution overnight. As several senators suggested, the major problem is that the company would shift its business’s main objective to currency provision, thus shifting the existing too-big-to-fail concern from the core of the financial sector to the tech area.

Although Facebook walked back plans for Libra in April 2020 in response to stakeholder pressure, opting instead for Libra to act more like a digital payment than a global monetary alternative, concerns remain about the project’s scope.

Taking into account the Bitcoin outcome, Libra has real potential to reshape the financial system in an unpredictable way. The emergence of Bitcoin has already hindered central banks’ ability to regulate the financial system, due to a new technological system that regulation can hardly reach—the blockchain. Also, businesses, industries, and services beginning to accept cryptocurrencies as a payment method has hampered central banks’ abilities to regulate their national currency.

In addition, if the other three big tech companies decide to stand in competition against Libra, what could happen to the U.S. financial system? The four major U.S. tech companies together have a market capitalization of around one-fourth of China’s GDP. Considering such values, such a worst-case scenario could change the global economy beyond modern predictions or expectations.

Accordingly, in a U.S. House Committee on Financial Services hearing last year, Federal Reserve Chair Jerome Powell reportedly expressed the same concerns when addressing the Libra plan. Powell signaled consternation about financial stability and consumer protection, considering the size of Facebook and the unforeseeable effects of the currency’s issuance on the market.

Crypto-asset advocates, on the other hand, claim that Bitcoin could actually be a way out during financial crisis, as Bitcoin’s system exists unbound by any particular national economic system. Bitcoin might function as a safe haven for investors in unstable market environments. At the same time, Libra developers advertise that the project’s mission is to promote economic empowerment and financial inclusion, ultimately leading to financial stability by increasing consumer welfare and strengthening national economies.

In any case, innovation should be welcomed and viewed with optimism. Prudence, however, is a virtue that regulators should fully exercise, especially in times of uncertainty.

If now is a time for economic awareness to endure a long financial winter that may arrive, it is also time for regulators to focus maximum attention on initiatives that may destabilize the financial system. In addition, regulators must follow up and understand quickly adjustments to these technological innovations, such as Facebook’s recent pivot on its vision for Libra, to achieve proactive oversight of substantial financial ventures before it is too late.

Gustavo Costa

Gustavo Costa is a 2020 LLM graduate of the University of Pennsylvania Law School.

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