• Allon Advocacy

On Facebook's Libra, Washington Finds Unfamiliar Ground: Decisive Reaction to Innovation

As it seeks to launch Libra, Facebook finds itself in the unenviable position of being perhaps the first innovative new product to which Washington has an immediate, decisive reaction.

It is not easy to get President Donald Trump and Federal Reserve Chair Jerome Powell to agree on pretty much anything these days, but Facebook appears to have defied the odds and done it. Neither man much likes the social media giant’s plans to develop and offer Libra, a digital currency, to its more than two billion users. The president – who has voiced his discontent regarding what he perceives as Facebook’s social media platform’s left-leaning bias – has said Libra “will have little standing or dependability.” Powell has argued it raises “serious concerns” about “privacy, money laundering, consumer protection, [and] financial stability.”

Powell called for strong oversight of Libra. He said Facebook’s plans “are going to need to be thoroughly and publicly assessed and evaluated.” The International Monetary Fund this week also issued a strong warning about cryptocurrencies. Acting chair David Lipton warned, “Regulators – and the IMF – will need to step up.”

For Washington, anxiety about new technology is entirely expected, but the speed with which much of the policymaking community has either urged Facebook to stymie the rollout of Libra – or abandon it altogether – is atypical for a system of government that has historically been slow to react to innovative new products.

The emergence of the locomotive in the mid-19th century, for example, eventually led to the creation by Congress of the Interstate Commerce Commission (ICC), “the first national industrial regulatory body in the United States.” But it took more than three decades for Congress to create the ICC and for Congress to declare that all freight and passenger rates “shall be reasonable and just,” and to outlaw those rates that the ICC determined were not.

Lawmakers also were concerned about the safety implications of railroads. After train-related deaths mounted in the 1880s, Congress passed the Railroad Safety Appliance Act of 1893, which made air brakes and automatic couplers mandatory on all trains in the United States. But this response, too, was years after railroads became the backbone of the American way of life.

Congress was slower to step in when it came to automobiles, but local lawmakers stepped in with efforts to protect pedestrians. Detroit, for example, was an innovator when it came to traffic safety laws. According to the Detroit News, the city was the first to use the stop sign and to adopt one-way streets.

While these innovations are still used today, other rules were cast aside.

In the late 19th century, local authorities in the United States passed “red flag laws,” which required self-propelled vehicles, including cars, to be led by pedestrians waving a red flag as a warning. If that burden seems ridiculous, consider the regulatory proposals put forth by the Farmers’ Anti-Automobile Society of Pennsylvania in the early 20th century. The group advised:

  • Automobiles traveling on country roads at night should send up a rocket every mile, then wait 10 minutes for the road to clear before proceeding. After that, the driver would have to blow his horn and shoot off Roman candles.

  • If a driver saw a horse approaching, he would have to stop, pull over to the side of the road, and cover the car with a blanket that blends into the scenery.

  • If a horse is unwilling to pass the car, the driver would have to take the automobile apart as rapidly as possible and conceal the parts in the bushes.

These rules were not adopted and “red flag laws” quickly were cast aside, but low speed limits were adopted by state governments in their place. In 1901, Connecticut passed the first statewide traffic law, setting the speed limit at 12 miles per hour in the city and 15 miles per hour on country roads. State governments set speed limits until 1974 – three-quarters of a century after Connecticut first acted – when President Richard Nixon signed the Emergency Energy Conservation Act, which created national speed limits, into law.

U.S. authorities were quicker to intervene in defense of consumers when it came to air travel. In 1915, the U.S. government created the National Advisory Committee for Aeronautics, which conducted aeronautical research. Here, too, the federal government was still a bit slow on the uptake: the Wright brothers had first taken to the sky a full dozen years earlier. An actual federal regulatory regime for air travel wouldn’t come for more than a decade more.

As with planes, trains and automobiles, federal oversight of telecommunications emerged slowly, too.

Alexander Graham Bell invented the telephone in 1876, but it was not until 1910, with the Mann-Elkins Act, that Congress set the first telecommunications regulations. This law gave the ICC jurisdiction over interstate rates charged by "telegraph, telephone, and cable companies.” In 1934, Congress passed the Communications Act, which, according to the Progressive Policy Institute (PPI), “established a framework for telephone regulation that would last for half a century.” The law subjected AT&T’s long distance lines to federal regulation and allowed states to regulate intrastate lines. It also created the Federal Communications Commission.

When the internet emerged in the 1990s, official Washington as PPI explains, took a decidedly hands-off approach. Under the Telecommunications Act of 1996 the Clinton administration “made sure that the governance structure … remained in private hands … rather than being moved to government decision makers.”

What can we take from this brief history? There are two lessons.

First, Washington is typically quite slow to respond, in any meaningful way, to new technologies. Second, while Washington might ultimately react with new laws or regulations, these rules are often not the most oppressive potential outcome for those that offer the new product. Put another way, as the Harvard Business Review concludes, “U.S. policymakers across the political spectrum have nurtured technology-based innovation since the founding of the Republic” by “taking the long view” rather than enacting an “invasive, command-and-control approach.”

This historical context makes Facebook’s Libra proposal an early potential outlier to Washington’s reaction to some of the most important innovations brought to market in America throughout history. While, admittedly, policymakers have yet to actually enact any kind of new restrictions on the ability of Facebook to offer its cryptocurrency – it has only been a couple of weeks since the company released its proposal – the wholesale rejection by regulators and legislators from both parties to the notion of a quick rollout of Libra suggests that Facebook’s experience in the months ahead is very likely to be an aberration from historical precedent.

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