Mark Wetjen, DTCC Managing Director and Head of Global Public Policy
If tech companies are to become players in financial markets, they must be subject to the same rules
Digital assets have captured their fair share of headlines over the past year, but Facebook’s plan to launch Libra, a new cryptocurrency, continues to reverberate through policymaking circles around the globe.
Libra has raised many questions among regulators and lawmakers, many relating to features of its design — would it activate laws and licensing related to securities, derivatives and commodities markets?
In the US, the initial reaction from regulatory agencies and Congress has been skeptical and, at times, even hostile towards Libra. Treasury Secretary Steven Mnuchin and Fed chair Jerome Powell have both argued existing laws have to apply to Libra, and recent Congressional hearings have delved into how some of these might apply.
But despite the intense global spotlight, not enough people are asking a critical question of Libra, which is: how robust is its infrastructure and technology?
In regulatory terms, this is known as “operational resilience”. The Bank of England defines it as “the ability of firms and the financial system as a whole to absorb and adapt to shocks, rather than contribute to them”.
But as it stands, Libra is not subject to the same rules as banks, payments systems, clearing counterparties and the rest of the financial architecture on the necessity of keeping their systems secure and resilient from shocks, such as cyberattacks.
This concern is now highly relevant, given the recent announcement that Libra has applied with the Swiss authorities to be a licensed payment system.
Mark Carney, the Governor of the Bank of England, has been the lone regulatory voice on this issue so far. While speaking at a central bankers’ conference over the summer, he said that regulation to ensure Libra’s operational resiliency should be considered.
Yet the issue was not raised during two separate US congressional hearings and it has received scant attention elsewhere since Facebook’s original announcement in June.
This seems odd, because resilience has emerged recently as a priority for regulators in general. They argue financial firms must do more than merely try to prevent disruptions, such as cyber-attacks — they need to accept they may happen, and be prepared to recover from them quickly and continue providing critical business services. That means building redundancies.
Even without crypto assets, the current regulatory framework governing this resilience is inconsistent. Different rules apply in different territories, so firms whose businesses cross borders have a bigger challenge. The complexity of applying different standards across a global business can itself make that business less resilient.
And if rules are applied unevenly to different firms performing similar functions — with one institution facing more stringent rules than another — this could result in an increase in systemic risk in the financial system as a whole.
Libra serves as a reminder of this. Administration of the Libra system would involve the use of government-backed securities to stabilise the value of the digital currency. So long as real-world currencies are used to purchase those assets, and those assets in turn are moving through existing systems to the Libra Foundation’s custody, a link with the broader financial system exists.
And some central bankers have noted that given Libra’s ready access to Facebook’s 2.4 billion users, the currency could quickly become “systemically important”. The potential of a failure of its systems to reverberate through the world’s financial infrastructure could be huge.
The operational resilience of Facebook’s digital currency must therefore be considered.
More broadly, tech companies’ rapid forays into financial services, many offering new forms of digital assets, are accelerating the pace of market change. Policymakers should ensure that if these new firms are providing the same services as established players, they should be subject to the same rules.
This article was originally published in Financial News.