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As Big Tech wades deeper into financial markets, Western policymakers are looking to an unlikely regulatory guide: China.

It’s not often that the West looks to Beijing for policy solutions, especially since diplomatic ties have soured amid alleged human rights abuses among China’s Uyghur Muslims, trade dumping and a military build-up in the South China Sea. But a looming monetary crisis at the hands of Big Tech has made strange bedfellows.

At issue is growing wariness in economic circles over the digital giants’ plans for the financial sector ever since Facebook announced a joint project two years ago with 25 other companies to launch a virtual currency called Diem.

These policymakers share one key concern: size. Facebook has almost three billion users across the world, and Diem would eventually be available to all of them, diminishing the most basic service a central bank can offer society — money.

Losing control of the money supply would weaken policymakers’ ability to pull an economy out of the fire, and render them powerless to help citizens who put their money into Diem if it goes bust.

There’s also the risk of market abuse.

“Big Tech’s large networks could lead to a rapid and large-scale adoption,” warned Agustín Carstens, head of the Bank for International Settlements, at a conference last week in a speech that referenced Facebook and Diem by name. “This could further concentrate market power in the hands of a few, and threaten financial stability, fair competition and data governance.”

In this respect, China is ahead of the West by already stepping in to mitigate the risks.

Beijing has developed a new playbook to scrutinize its own digital giants, Tencent and Alipay, which have swallowed up around 94 percent of Chinese online payments. Their exponential growth over just a few years has forced Chinese authorities to intervene in an effort to curb unfair competition, given the firms’ unfettered access to consumer data and a lightly regulated status that banks could only dream of.

Those days are over. Now, China’s mantra for digital giants is: same business, same rules.

Big tech companies are “required to set up a financial holding company and to bring all subsidiaries engaged in the financial activities under the umbrella,” noted Yi Gang, the governor of the People’s Bank of China, at the same conference. “This would help separate financial business from technology services, in some sense also cutting the direct link [to the rest of their business].”

“Going forward, we ask the financial holding company to consolidate their balance sheet and strengthen prudential regulation,” he continued. “Financial business must be conducted by licensed entities.”

China’s big tech crackdown made headlines in 2020, when Beijing introduced new rules for online lending that upended the plans of Ant Group, the parent company of Alipay, to raise $37 billion on the stock exchanges of Shanghai and Hong Kong. Chinese authorities have since introduced more red tape for payments and set guidelines for preventing big tech companies from developing finance monopolies — a campaign that China’s state media has said will prevent the “disorderly expansion of capital.”

The crackdown also brought Ant Group’s co-founder, Jack Ma, in line after he criticized Beijing in a speech last year for regulating digital finance like a “railway station” rather than “an airport.” He also described Chinese banks of harboring a “pawn-shop mentality,” angering many of the incumbents. Ma then disappeared from public view. Reuters, citing unnamed sources, reported Tuesday that he’s in Hong Kong.

Among the G7 countries, by contrast, policymakers are still considering their regulatory options. But on Wednesday, as G7 finance ministers and central bank governors gathered in Washington, they reiterated that no global stablecoin — the digital asset underpinning Diem — should launch before they’re ready for it.

That means “relevant legal, regulatory and oversight requirements” that need addressing “through appropriate design and by adhering to applicable standards,” their communique read.

Diem is set to clear those hurdles this year, which is forcing the West to look for new supervisory techniques that can scrutinize Big Tech’s activities in financial markets and ensure they’re held accountable for any infractions. So far, the European Commission has proposed bills that, generally speaking, target monopolistic behavior. EU legislators are also developing safeguards for investors who buy digital assets and stablecoins.

These safeguards, which came after news of Diem emerged, include anti-money laundering checks, redemption rights and disclosure demands — all directed at establishing a safe crypto market. These measures, and the political backlash against Facebook’s payment plan, have slowed Diem’s rollout but have not stopped it, leaving the question of financial supervision open.

Entities and activities

The Chinese playbook is attractive because it carves an entity out of big tech firms that financial watchdogs can demand information from — and fine, if necessary. By contrast, supervising the activities of Big Tech in the market alone can’t prevent them from pooling all the data they hold on people and using that to gain a big advantage over competitors.

“Many Big Techs don’t have anything to do with finance,” France’s central bank governor, François Villeroy de Galhau, pointed out during a panel debate at the BIS conference with Dutch counterpart Klaas Knot. “But it’s very difficult [for supervision] to be purely activity-based.”

“If you look at the business model, there are strong internal relations,” Villeroy de Galhau added, referring to the data that Big Tech keeps in-house on their customers from other sectors. Policymakers should consider using “a mix of activity-based and entity-based” in their supervision to ensure digital giants play by market rules without taking advantage of their deep data pockets, which smaller companies have no access to.

The Frenchman argued that in cases when the companies are “systemic” in their payments activity — as Diem will try to be — and when their volume of data and financial spillover effects are considerable, regulators need to step up.

“We could consider organizing a specific legal entity within Big Tech to regroup all financial activities, and this specific legal entity would be subject to financial regulation, financial rules, and financial supervision,” the Frenchman continued.

Knot agreed, saying that “you can’t fine an activity, you can only fine an entity.”

Knot’s view carries weight: He’s in line to become the next chairman of a global body that emerged after the 2008 recession, the Financial Stability Board, which monitors and recommends standards to keep the market in check.

China has a seat at the FSB, which is already developing standards for global stablecoins like Diem. Knot wants to go further and make the body a platform for data, antitrust and financial watchdogs to debate and develop a policy for Big Tech entering the finance industry.

For their part, G20 finance ministers and central banks reiterated their support for the FSB’s work, urging the body to consider whether any changes to stablecoin standards or guidance are needed. A review of the FSB’s recommendations is due in 2023. By then, policymakers will have had time to consider options that go well beyond stopping Big Tech from swallowing up their payments system.

China’s central banker is ready, if anyone has questions.

“We are willing to participate in international rule-making relating to digitalization,” Yi said.

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