Libra: The opening act of a modern regulatory drama
Libra is the unit of measurement for ancient Roman coins minted during a dramatic period of human history. It is also the name given to Facebook’s stablecoin initiative that has created a modern drama in its own right.
Regardless of the diversity of views on the initiative, there is one thing that is certain: the mere announcement of Libra serves as a global wake-up call to market participants and policymakers alike that new technology-driven models will challenge traditional actors and existing regulatory frameworks.
Libra has brought to the foreground important and fundamental policy questions whose answers will set the terms of the future of finance.
First, what does it mean to be a bank today, and what activity do we want to bring into the regulated banking space?
A growing amount of financial activity already occurs outside of direct federal regulatory oversight (albeit potentially subject to state regulation). How banking is defined can either expand or contract that regulatory perimeter.
The Libra initiative, and especially its backers including Facebook, highlight the fast-growing dynamic of innovative nonbank actors — from small fintechs to large technology platforms — looking to compete in areas such as payments, credit and insurance.
Digital platforms’ recently announced financial ambitions, such as Amazon and Uber, further underscore this reality. And there are global examples including WeChat’s offering of, well, essentially everything.
There are important trade-offs to consider when setting the regulatory perimeter for “banking.”
Should broad innovation occur within a dynamic and competitive banking system even if that means potentially introducing novel challenges? And if regulators are willing to bring more activity within the banking fold (as seen with certain specialty federal banking charters) can regulatory requirements be tailored in proportion to the actual risks posed?
Or is it preferable to keep innovation outside of the banking perimeter, where risk of loss is not as directly born by depositors or taxpayers, and where formal oversight may be less uniform?
A second consideration related to core regulatory objectives is whether agencies should focus more on regulating activities as opposed to actors.
Today, a technology firm, bank, telecom company and startup can all compete for the same customers with similar services because the internet and mobile devices provide low barriers to entry, and the ability to scale rapidly. Indeed, Libra would be a competitor to the payment rails established by banks and managed by a range of interchange operators.
But, if regulators focus more on activities rather than actors, how do they tailor regulation to differentiate between the risks posed, including for example, whether an entity holds insured customer deposits versus those that are self-funded or rely on risk capital?
One approach could be to create clearer delineations between prudential and conduct authorities in order to differentiate system safety and soundness concerns from a consumer protection standpoint.
A third key issue is to determine the proper role of government as compared to the private sector when it comes to critical digital infrastructure. Both government and private actors are involved in providing such critical infrastructure components, including in the realm of payments and digital identity verification.
Arguably, the realm of currencies could also be considered critical financial infrastructure.
The Libra development underscores how the private sector could be positioned to potentially set up aspects of this infrastructure in payments, digital identity, and possibly in currency, especially as government lags in keeping pace.
Are there aspects of digital finance infrastructure that should be driven by government versus private actors, and if so, on what grounds? To this end, there should be exploration and articulation of the conditions for public-private partnership models that can help attain desired outcomes, including in the context of Central Bank Digital Currency proposals. There should similarly be an understanding of when dynamic private actors — subject to appropriate guardrails — are best positioned to advance and manage key infrastructure innovation.
Another question is how to create proper privacy guardrails when data will increasingly serve as the backbone of a digital economy?
The promise of an efficient, automated and machine-driven economy lies in the broad sets of data computers will process.
The Libra development brings this to the fore given the potential for involved entities to glean information and insights from the billions of payment transactions that could take place on the Libra network.
Given this development (and the fact that data being used in financial services today goes well beyond mere payment information) policymakers should revisit definitions and regulatory frameworks to ensure that they account for new actors and data applications in the financial services context.
This would include looking at what people expect and understand of their privacy. It would also consider and potentially incentivize creative new ways to empower consumers with privacy information and consumer-centric service offerings.
A final question is how national sovereignty fits in the face of borderless and increasingly automated computing networks?
Today, information — including about ownership and value — can move across the world and territorial jurisdictions in real time, with few intermediaries and at limited cost.
The Libra concept is a step in this direction. It generates a debate on how nations can maintain sovereign control over financial activity in an increasingly internet-driven world. How will this impact law enforcement and sanctions regimes built for today’s rails? It also calls to question whether territorial approaches are effective, or if technology will inevitably challenge the notion of the Westphalian state.
Much as the ancient Romans frequently imagined great and mythological tales, Libra similarly sparks imaginations about the future of finance.
A starting point in developing that future will be to answer the fundamental questions posed. This herculean task should be guided by a vision of a world where new technologies empower people in their daily lives and are anchored in a foundation of fairness, security and transparency.