I’m not sure if you’re enjoying reading this, but I’m enjoying writing about the politics of monopoly and learning from you all. So I’ll keep doing it for now. This issue will be about Facebook’s plan to create its own currency - Libra - along with a council of corporate allies, and how regulators might think of it. First, two updates.
State Attorneys General versus the Feds: In my very first issue of Big I talked about the pressure that state-level enforcers are putting on Makan Delrahim, Trump’s antitrust chief. They are doing this by actually bringing cases and blocking mergers when Delrahim won’t, despite the DOJ’s more substantial resources and expertise. Well this is also true for the other Federal enforcer, the Federal Trade Commission.
The FTC under Chair Joe Simons has been a model of irrelevance (with one exception, a case against Qualcomm filed a few years ago). Recently, the FTC chose to allow an egregious merger of a large insurance company UnitedHealth, and a big physician’s group corporation DaVita. Health care is super concentrated and complex, which is why Americans pay twice what everyone else does and get worse outcomes.
In terms of the politics, I found this fascinating. Democratic FTC Commissioner Rohit Chopra is criticizing his own agency and praising recently elected Colorado Attorney General Phil Weiser for intervening to get more concessions from UnitedHealth than the FTC was willing to negotiate. I’ll be covering state AGs a lot, because that’s where much of the action is going to be. I’ll also be mocking Federal enforcers a lot, because they deserve it.
Phil Weiser @pweiserAs @COAttnyGeneral, I am charged with enforcing the antitrust laws and protecting Colorado consumers, a responsibility I take very seriously. Today, we filed an action in the Davita/United merger case, acting on our own in an unprecedented step. https://t.co/s1tHo9STnk
A Coming Investor Revolt Against Big Tech? I wrote a piece yesterday on whether break-ups help stock prices. An activist group SumOfUs tried to get Google to preemptively break itself up before regulators do. This attempt looks fruitless because Larry Page and Sergey Brin control the stock, and I imagine investors are pretty happy right now. But it’s not going to be the last attempt to have Google split itself up.
The company has aggressively raised prices on Maps for those who license the product, and from what I hear, after the last somewhat disappointing quarter, Google is beginning to amp up the pressure on ad buyers to up their spend. So eventually it won’t be lefty activist groups who want the company broken up but shareholders who just want the stock price to go up.
Facebook’s Terrible, Horrible, No Good, Very Bad Power Grab
Two days ago, Facebook announced that it will be leading the creation of a new private global currency. I’m going to talk about the politics of this endeavor, but my basic problem here is that I don’t know why the company is doing it. There’s a whole lot of chatter about helping the billion plus people in the developing world that don’t have access to banks. That’s obvious nonsense; some of the most exciting experiments in mobile payments are happening in Africa, precisely because the technology is just not that hard and people in those countries can build what they need consistent with their own cultures.
Imposing a global currency from Palo Alto on developing countries is a strange rationale for such a plan. And I don’t think helping the unbanked in Africa is why Facebook is upsetting and annoying every single banking regulator in the entire world. More likely this is “WeChat” envy; WeChat is the ubiquitous Chinese payments and social app that dominates commerce in that country. It’s likely that FB just wants to be the non-China global platform for commerce and finance, in a sense leveraging its platform dominance in social networking into payments.
Yesterday, I wrote an opinion piece in the New York Times (ooh aren’t I fancy?!?) on why this project is fundamentally a dangerous assertion of sovereign power. My specific objections are (a) the company is bad at managing compliance risks necessary to a payments system (b) running a payments system and a social network is anti-competitive (c) such a new system introduces the need for possible bailouts and (d) Libra would undermine sanctions regimes and other core elements of statecraft.
This Facebook announcement is actually two different things. Here’s my piece yesterday.
As far as I can tell, Facebook aims to build a new payments and currency system using blockchain technology. Facebook is starting a subsidiary, Calibra, to “provide financial services” to individuals and businesses, including saving, spending and sending money. The actual standards for the currency will be managed by a nonprofit in Switzerland called the Libra Association. The currency will have its own central bank known as the Libra Reserve, and the board will be the committee of corporations that helped set it up.
So Calibra is a new global bank owned by Facebook, while Libra is a private currency Facebook, Uber, Spotify, and a whole bunch of others established whose currency that bank will use. I have a hard time believing that Sheryl Sandberg thinks Libra is a good idea, considering she used to work at Treasury as the chief of staff for Larry Summers and she would understand all the toes this idea steps on. But maybe she’s bought into the ‘move fast and break things’ ideology, or simply thinks the political system is so weak it can’t stop a power grab this audacious. Or maybe she doesn’t have the power internally to stop this, or doesn’t care enough to do so. At any rate, now the question goes to regulators and lawmakers, globally.
We’ll start with Mark Carney, the Governor of the Bank of England.
“Anything that works in this world will become instantly systemic and will have to be subject to the highest standards of regulation,” Carney said. “We will look at it very closely and in a coordinated fashion at the level of the G-7, the BIS, the FSB and the IMF. So open mind, but not open door.”
Instantly systemic means that Facebook will have to prove to financial regulators in every country in which it seeks to operate that it will not destroy the world economy with its new toy money. Carney’s statement is consistent with comments from France’s Finance Minister Bruno Le Maire, Australia’s central bank, and Indonesia’s central bank. There’s a G7 working group to examine systemic risk, consumer protection, surveillance, and the effect of such currencies on monetary policy.
Then, there’s House Financial Services Committee Chair Maxine Waters, who has already asked Facebook to halt the creation of this currency. The top Republican on that committee Patrick McHenry has already asked for a hearing. Yay, bipartisanship in hating on Zuckerberg!
The Senate Banking Committee has already set a hearing, and the top Democrat on that committee, Sherrod Brown, is also making the obvious points.
Again, this is not a partisan thing. Last October Idaho Senator Mike Crapo and Cornell Law Professor Saule Omarova went back and forth at a Banking Committee hearing (see minute 46) on the risks of big tech entering banking. The reality here is that there are regulators at every level, from states to the Fed to international to central banks to national security types, who are going to have questions.
There is one bright spot for Facebook. The report in which Crapo and Omarova discussed big data and big tech was a response to a little noticed report the Trump administration released, which was its broad policy goals on the intersection between technology and finance. I’m still digging into the report, but generally speaking, the Trump Treasury strikes me as permissive. Specifically, when discussing blockchain (which is the underlying technology for Libra), the report says “it would be beneficial for regulators to permit meaningful experimentation in the real world, subject to appropriate limitations.” Which is code for ‘go ahead, Facebook, we won’t stop you.’ Facebook was one of the companies consulted by Treasury in putting together its report. Meanwhile other Federal regulators, like the Commodity Futures Trading Commission, haven’t done much to stop existing crypto systems, so there is some hope for people who want to ruin the world with new global money.
Whither the Federal Trade Commission?
There are other regulators. Remember Cambridge Analytica, the massive privacy breech where Facebook allowed third parties to use data without permission from users. The Federal Trade Commission is hoping you don’t. FTC Chair Joe Simons is desperately trying to get a weak settlement through the commission with a 5-0 or 4-1 vote, so that he can share the blame for Facebook’s malfeasance with Democrats.
But FTC Commissioners Rohit Chopra and Becca Kelly Slaughter are playing hardball; they are not stupid, and they understand that Facebook has caused genuine problems that need to be addressed by the commission. Simons wants to issue a large fine, but no meaningful behavioral remedies on Facebook. But given the massive privacy problems that Facebook has caused, it seems pretty clear that one obvious remedy is to stop Facebook from going into payments, banking, or any financial area that involves sensitive information. In fact, in a memo in May, 2018, Chopra had thoughts on the FTC’s legal authority vis-a-vis recidivists like Facebook. Here’s what he wrote.
Thus, in addition to changing incentives by seeking monetary remedies, the Commission should seek to correct both the miscalibrated incentives and the management deficiencies through structural remedies, including the dismissal of senior management and board directors, changes to executive compensation, outright bans on adjacent business practices, and closure of appropriate business lines
So the FTC can stop Facebook from entering “adjacent business practices.” Payments is certainly an adjacent business practice.
Thanks for reading. And if you have questions or thoughts, let me know.