Reports on the evolving digital political economy
Oral arguments in Missouri v Biden appeal
On August 10 the U.S. Court of Appeals for the 5th Circuit listened to oral arguments related to an injunction that restricts the Biden administration from communicating with social media platforms to request suppression of constitutionally protected content. Some commentators have suggested that one’s position on this case is determined by whether one likes conservatives or the Biden administration. That is a tragically misguided approach to this case. The State of Missouri et al v. Biden is a very important test of the proper bounds of government influence on public discourse on U.S. social media platforms. We have no affinity for the conservative politics of the state Attorney Generals brought the lawsuit, but lean strongly towards the plaintiffs. That’s because this case is not about who was right or wrong about public health policy during Covid; it is about whether Americans can talk about such policies freely, and whether private social media platforms can be manipulated by the government to promote its policy objectives.
The courtroom dialogue showed that the 5th Circuit judges are approaching the case with the right frame of mind. Justice Department lawyer Daniel B.H. Tenny argued that the government’s requests for takedowns were not actually coercing platforms, there was just “a back and forth,” and no specific penalties threatened. Two of the judges pushed back. Noting the constant stream of emails and regular meetings between government officials and the content moderation departments, one judge said, “There’s a very close relationship here, like it’s a supervisor complaining about a worker.” Another Judge noted that a threat can exist without an explicit statement of penalty. “That’s a really nice social media platform you have there,” the judge deadpanned, “it would be a shame if something happened to it.” Following up on this observation, the Plaintiff lawyers invoked the “joint participation doctrine,” which notes that if the state involves itself in private decision making then it can be considered state action. “Federal agencies insinuated themselves into the content moderation decisions of social media platforms,” he said.
The government lawyer claimed that the initial ruling would block legitimate government speech promoting its policies or correcting falsehoods. And it would be a mistake to prevent government agencies from conveying their opinion about false or dangerous messages to the platforms (or the public). Perhaps the most important observation one of the judges made, however, was that most of the governmental pressure on the platforms was made privately. The Judge observed: “It’s OK to call out publicly something false or dangerous – that passes the First Amendment test with flying colors. [But] here it is out of the public eye.” That behind-the-scenes influence operation, in fact, was the most disturbing thing about the evidence uncovered in the case. If the government was engaging in counter-speech against false or dangerous information, it could and should do this openly. The public can see how they are exerting influence and make up their own minds about the correctness of its position. When the influence is under cover, it edges closer to manipulation or interference with the free exercise of expression. There is no reason for these interactions to be private unless the government is trying to suppress speech in ways that are unlawful. The Justice Department lawyer asked the Appeals court to reverse the injunction, but failing that, he asked to extend the stay for 10 days so that it can go to the Supreme Court. A decision should come soon.
China Restricts Facial Recognition
Critics of “surveillance capitalism” are once again in the awkward position of cheering for the Chinese Communist Party’s ability to regulate and control the digital economy. The Cyberspace Administration of China has asked for public comment on a set of draft regulations on the use of facial recognition technology (FRT). If implemented and enforced, the proposed regulations would dramatically alter the common and casual use of FRT that has taken root in China. The regulations would ban the technology from “hotel rooms, public bathrooms, changing rooms, restrooms, and other places that may infringe on the privacy of others.” Building managers such as property service companies are prohibited from using FRT “as the only way to enter and exit property management areas.” Perhaps the most consequential impact would come from the major administrative burdens the regulations would impose. Users of FRT must file a record with the “network information department” at or above the municipal level within 30 working days of installation. They must conduct “Impact Assessments” on an annual basis that cover 6 points, including whether the processing of facial information has a specific purpose and sufficient necessity, and assess “the risk of face information leakage, tampering, loss, damage, or being illegally obtained or used illegally and the possible harm that may occur.” Using FRT on people under the age of 14 requires written consent from parents or guardians. Predictably, the strict regulation of private sector uses do not apply to the government. The regulations would allow the use of face recognition technology in public places and businesses to identify specific natural persons if “necessary to maintain national security, public safety, or protect the life, health and property safety of natural persons in emergency situations,” thus allowing provincial and central authorities to continue their current practice of extensive surveillance.
Contrary to much of the Western reporting on this topic, the regulations are not in force yet. The public can submit comments on the proposed regulations until September 7, 2023. Comments can be sent by email to: shujuju@cac.gov.cn.
Democrats oppose State-licensed stablecoins
On July 27, 2023, the ‘Clarity for Payment Stablecoins Act of 2023’ was considered for mark-up in the House Financial Services Committee. This bill follows 15 months of negotiations and 61 internal versions between staffers on both sides of the aisle. The markup session itself was a four-hour exercise in bickering over procedure, dilatory tactics by House Democrats. Policy substance was barely discussed. The markup session was already delayed to account for last-minute negotiations between the current and former chairs, the Treasury, the Fed, and the White House. Despite opposition from Democrats, the chair of the Financial Services Committee decided to move forward with a vote to report the bill to the House with amendments.
Congressional Democrats and the White House remain strongly against a state-level licensing pathway for stablecoin operators. They raised fears of a “race to the bottom” where lax state regulators issue different licensing requirements, leading operators to shop for the most favorable environment. This is a specious argument. Claiming a moral hazard ignores ongoing winner-takes-all dynamics in the digital economy. Further, the state train has already left the station. The New York Department of Financial Services has been operating a successful state-level regime where Circle and PayPal are already registered (and some like Tether were denied). This state-level regime will soon diffuse as other states are already contemplating the same approach. There are already two statutory backstops: state regulators and the Federal Reserve Board, which can legally crack down. In the worst case scenario, where insider manipulation does exist or state regulators are on the take, the market will naturally consolidate legitimate trades with large incumbents from those gravitating to safe havens, making the Fed’s job all the more simple. Most people sending remittances will use Circle, PayPal USD or any other federally regulated bank or non-bank entity. The state-level experimentation can be carefully scrutinized just like it is in the taxation world and the dual-banking system. With the ongoing debasement of the US dollar, Democrats may be worried users will flock to gold-backed stablecoins once legitimized at the state level, as was contemplated in Texas.
Stablecoin legislation should be a nonpartisan issue given the tremendous benefits to the digital economy and beyond. The US debt will continue to balloon, the dollar will continue to be weaponized and capital flows will be curbed. Global macroeconomic conditions highlight a pressing need for clear rules of the road to encourage US dollar adoption abroad via stablecoins. Inaction, therefore, poses dangers. PayPal’s recent launch of its PayPal USD stablecoin is the latest sign that the industry will move on regardless of what rules are laid out before it. Yet any sense of urgency seems to be lost on some House Democrats.
It was refreshing to see some Democrats (Reps. Torres, Meeks, and others) not toeing the usual party line. And to be fair, the objectives set for high-level digital assets policy have been mostly bipartisan. Everyone wants a stablecoin environment that protects consumers, prevents insider manipulation, and involves transparent and sound reserves. However, there remains fundamental disagreement over institutional design and policy implementation, mostly because Democrats want to retain more centralized government control over digital asset space (and markets in general).
India Passes Digital Personal Data Protection Law
On 12 August, India passed the Digital Personal Data Protection Act (DPDP), 2023. The eagerly awaited data protection legislation arrives several months after the Ministry of Electronics and Information Technology (MeitY) unveiled a preliminary version of the bill in November 2022. The development of this law has spanned more than five years, originating with an initial draft introduced in July 2018 after India’s Supreme Court affirmed the right to privacy as a fundamental principle. The Act provides a legal framework for the processing of personal data, collected both in digital and physical realms (and subsequently digitized), both within and beyond India’s borders. The law recognizes both the rights of the individuals to protect their personal data and the need to process such personal data for lawful and legitimate purposes with the consent of an individual. IGP will publish a detailed analysis of the DPDP later.
The New Israeli Exodus
The Israeli Parliament approved its controversial judicial reform bill in July, which limited the Supreme Court’s ability to overrule the legislative and executive branches. The political turmoil around judicial reform is negatively impacting Israel’s reputation as the “Digital Startup Nation.” On April 30, Israel Innovation Authority published a position paper identifying the growing trend of Israeli digital startups to incorporate in foreign jurisdictions. Until January, approximately 80% of newly established startup ventures in Israel had the corporate structure of an Israeli company. However, the authority reported that more than 50% of newly opened ventures in March chose to become foreign entities due to growing uncertainty and risks within the Israeli business environment. Israel’s Start-Up Nation Central reaffirmed this July that about 70% startup companies have initiated actions such as tapping into cash reserves, shifting their headquarters beyond Israel, transferring employees, and conducting layoffs. The trend gained momentum in March when the judicial reform bill was proposed. If this trajectory continues, it is possible that eventually up to 80% of newly formed digital companies could opt for overseas incorporation. Israel’s high-tech industry employs more than 11% of country’s workforce, constituting 18% of the GDP and over half of it overall exports. The Israeli Ministry of Finance conducted a simulation aimed at gauging the increased risk associated with investing in Israel due to the judicial reform. The outcome projected a potential decrease ranging from 8% to 25% in the workforce employed within Israel’s high-tech industry. Although Prime Minister Netanyahu stated on August 6th that there will be no additional proposals to restrict Judiciary, it remains uncertain to what extent the influence of right-wing nationalists who now dominate Israeli politics can alleviate their impact on the pluralism, diversity, and creativity within the Israeli high-tech industry.
