Facebook As Your Debt Collector, and the Prospects for Libra
Welcome to Big, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here.
I got a lot of great feedback from the last issue, on consolidation in Hollywood. I discussed the plot of Back to the Future, noting that the movie revolved around a time machine developed by a disgraced nuclear physicist who got weapons-grade uranium from a terrorist group. One quick correction, from contributor “efa” at the Hacker News Forum:
“The terrorists in Back to the Future gave Doc Brown weapons-grade plutonium, not uranium!”
Next week is shaping up to be a bit rough for big tech. On Tuesday, Senate Banking will hold a hearing on ZuckBucks, Facebook’s plan for its own currency known as Libra. The next day, the House Financial Services, will host its own hearing.
Also on Tuesday, the House Antitrust Subcommittee will have mid-level representatives from Amazon, Facebook, and Google testifying as part of Congressman David Cicilline’s wide-ranging investigation on concentration in the tech industry. The members are getting more comfortable in the language of commerce and antitrust. That’s going to be one of the themes in this newsletter, public officials getting smarter in the rhetoric of commercial justice.
Facebook As a Debt Collector? And Other Problems…
My thesis about Facebook going into the currency game is that it is a political misstep for the company, and it may be the place where the public draws the line and starts pushing Zuck back.
At first blush, this isn’t obvious. Payments and currency sound like a natural place for Facebook to get into. It’s a network game, and money can in some ways narrowly be understood as just information transmitted among people and businesses, rooted in data held in ledgers. Who is better at organizing a large network of people and businesses who communicate with one another, along with the data infrastructure to manage it? Not only that, but most of this infrastructure already exists, and it’s called Facebook, WhatsApp, and Instagram. A payments app is just another feature in already existing products. Right?
I’m not so sure. Credit and money is something over which we’ve fought wars and had depressions, with implications Facebook is ill-equipped to handle. And Facebook isn’t just trying to go into payments with Libra, it’s also trying to go into banking with its own subsidiary, Calibra. So consider this speech from Bank of International Settlements official Hyun Song Shin last month. Shin is discussing what it means to pull friction out of the credit system.
As well as the cost of screening borrowers, another impediment to credit is the cost of monitoring and enforcement of loans. Banks usually require borrowers to pledge collateral to deal with the risk of default. Big techs can address issues of monitoring and enforcement in a different way. For example, it may be relatively easy for a big tech to deduct the (monthly) payments on sales revenues that flow through its payment account. Also, if the big tech is dominant, the simple threat of a downgrade or an exclusion from its ecosystem will be a powerful sanction against the borrower.
So Facebook’s Calibra could kill your business or deny you access to your accounts if you don’t pay your debts. That sounds like something that will generate political blowback. And traditionally, such actions have. Contesting rights over credit is something that goes back hundreds of years, and is in many ways foundational to American politics. Usury laws were some of the first laws passed by colonies and then states.
Our modern legal infrastructure comes from a set of laws passed in the 1970s, which bar discrimination on credit scoring by race and gender, as well as place limits on unsavory acts by debt collectors. Debt collectors are not, for instance, allowed to broadcast your indebtedness to the public at large to embarrass you into paying, something Facebook could easily do since it knows your entire social network. They cannot reduce your credit score based on your friend’s inability to pay his or her debt, which would be another subtle means of enabling racial or ethnic discrimination.
But while such limits exist in the United States, and in some other countries, they are not global.
What about countries without developed credit systems, where such debt collection practices would be legal? Would, say, Indonesians enjoy having their debts broadcast to all their friends? Would countries tolerate Facebook accidentally mediating credit choices via ethnic groups? It’s not like Facebook has a great track record on ethnic divisiveness…
And even in the U.S. this presents big problems. What if a few years into its new banking, Facebook pretends that debt collection is covered under Section 230 of the Communications Decency Act, which provides a liability shield to electronic exchanges? Or what if Facebook argues that debt collection is a protected free speech activity to a Supreme Court whose most recently appointed justice celebrated his confirmation at the home of a top Facebook executive?
The Consumer Financial Protection Bureau just this year gave sanction to debt collectors to do all sorts of new nasty things under the rationale that the law was written forty years ago and needs updating in the digital world. Worrying about what Facebook can do in terms of creatively vicious things around debt collection is not just a thought experiment. We can already see the writing on the wall.
There are an endless number of these kinds of questions. And debt collection is just one, and not the most important, risk involved in creating a new worldwide currency and banking system.
Fed Chair Jerome Powell Criticizes Libra
When Libra was announced, almost immediately central bankers were negative on the currency. Mark Carney, the Governor of the Bank of England, said the venture was “instantly systemic.” He was followed by France’s Finance Minister, Australia’s central bank, and Indonesia’s central bank. India is considering a straightforward ban, by blocking regulated banks from using non-sovereign currencies.
And this week, Fed Chair Jerome Powell weighed in.
“Libra raises many serious concerns regarding privacy, money laundering, consumer protection and financial stability,” Powell told lawmakers at a House Financial Services Committee hearing in Washington. “These are concerns that should be thoroughly and publicly addressed before proceeding.”
This is the head of the Federal Reserve, in charge of organizing and protecting the stability of the dollar and the banking system. Powell is a conservative, and is not the kind of regulator inclined to dismiss new and innovative techniques to get around banking restrictions. Yet here he is, giving a thumbs down to Libra. That’s very bad.
Normally, a company frustrated with the Fed could go to Congress, since the Fed technically works for the legislative branch. Well even there, Facebook’s lobbying campaign isn’t working.
Amid the public backlash, there are signs that Facebook's behind-the-scenes lobbying push is falling flat. Congressional aides told POLITICO that the company seems unprepared for the attacks it is about to receive and that it's failing to address key questions in briefings ahead of hearings scheduled for July 16-17 in the Senate Banking and House Financial Services Committees.
Politicians and regulators defer to Facebook when it comes to technology in social networking. The thinking goes, who knows more about Facebook than Mark Zuckerberg? And besides, Zuckerberg already in charge of Facebook, and it’s a lot of work to take something from somebody who already has it. But this doesn’t apply to Facebook doing financial services. Libra doesn’t exist yet, so it’s not hard to stop. And why should anyone defer to techbros on banking? Mark Zuckerberg doesn’t know how to run a bank and he didn’t manage the financial crisis; bankers, regulators and people in Congress did.
To that point, one of the more interesting observations about new Libra venture comes from ex-FDIC Chair Sheila Bair. During the crisis she was one of the few regulators who took a hard line against big banks. Today, she is a proponent of crypto-currencies, but is a modest skeptic on Libra. Here’s what she said:
In essence, Libra proposes the failed business model used by money market funds prior to the financial crisis. It wants you to buy Libra on the promise that the coin will maintain stable value, but there will be no regulatory oversight of what Libra actually does with your money and no capital and liquidity requirements that you would typically find with a bank. That structure proved disastrous during the 2008 crisis, when the Reserve Fund, a money market fund that heavily invested in Lehman Bros debt, “broke the buck” and prompted widespread runs on other money market funds.
There’s a lot more in her piece, which I recommend reading, but this observation about money market funds - who were the heart of the bank run in 2008 - is not a hard one to make. It’s such a massive and obvious conceptual flaw that it demonstrates Libra creators just don’t know what they are doing, which speaks to their basic political problem. Facebook people aren’t comfortable talking banking and payments, it’s just not their native territory. And a lot of policymakers and banks are perfectly comfortable talking payments and currencies, because it is what they do.
Anyway, none of this is to say that Libra can’t get through the regulatory gauntlet. I am a skeptic, but our political order makes a lot of bad decisions. The best case scenario is that Libra will push central bankers to do what they should have done a long time ago, and just establish their own digital currencies or public payment set-ups to route around the massive fees financial institutions charge for trivial services like wire transfers and credit card network charges.
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If you’re interested in what I’d do about Libra, you can read below the signature line. It gets a bit technical and wonky, so be aware.
Policy Recommendations on Libra
My view is that the best policy choice for Congress or the Fed would be to block the creation of all non-sovereign parallel currencies, which are inherently dangerous. I don’t mean things like JPM Coin, which are a one-to-one dollar match, I mean currencies which float. I would also impose a structural separation between all payment systems and non-financial services, especially big tech. Running a banking/payments system while also running a non-financial technology platform enables anti-competitive behavior.
Imposing these barriers would involve four planks.
1) No federally (or state) licensed financial institution can hold or make transactions using any currency not issued by a sovereign nation.
(2) No Convertible Virtual Currency is eligible for use in paying taxes or other government accounts.
(3) Any technology platform that could be used as a substitute for regulated payments systems will be subject to the same Bank Secrecy Act/Anti-Money Laundering standards that are applicable to participants of regulated systems.
(4) Payments is part of the business of banking, and technology platforms with non-financial core businesses are barred from the business of banking.
So that’s it. Now, it’s clear the payments system should be updated with new technology, possibly including blockchain but not necessarily so. There have been a bunch of mergers in the payments space, so there are plenty of needless rent charges to eliminate.
Such a set-up would be consistent with what Ganesh Sitaraman and Anne L. Alstott are putting forward in their book The Public Option, a book likely to be influential in political circles.