The FCC's proposal to add optical modules to its Covered List is not a national security measure. It is a bureaucratic power grab that misunderstands both the technology and the market it claims to protect.
The Information Technology Industry Council (ITI) has formally opposed the move, and for good reason. This is not about protecting American networks. This is about expanding regulatory authority without legislative mandate. And the consequences will ripple far beyond the federal procurement market.
I have spent years auditing cross-border payment infrastructure and blockchain settlement layers. The same principle applies here: when you regulate a technology category instead of a specific threat, you create systemic vulnerabilities. You do not eliminate them.
Let me break down what is actually happening.
The Legal Foundation Is Shaky
The Secure Equipment Act of 2021 gave the FCC authority to maintain a Covered List of communications equipment that poses a national security threat. The original intent was clear: target specific entities like Huawei and ZTE. The FCC's first Covered List in 2022 followed that logic.
Now the FCC wants to expand the list to include entire product categories. Optical modules are generic components used across the industry. They are not inherently tied to any single adversary. By proposing to ban all foreign-made optical modules, the FCC is exceeding its statutory authority.
The Major Questions Doctrine, established in West Virginia v. EPA (2022), is directly relevant here. When an agency seeks to regulate a matter of great economic and political significance, it must point to clear congressional authorization. The FCC cannot point to that authorization because Congress never intended the Covered List to work this way.
ITI's recommendation is correct: focus on entities with clear ties to foreign adversaries, not entire technology categories from trusted companies. This is not just a policy preference. It is a legal requirement under the Administrative Procedure Act. The FCC's approach risks being struck down as arbitrary and capricious.
The Supply Chain Reality
Optical modules are the backbone of modern data centers and telecommunications networks. They are produced by a global network of manufacturers, with Chinese companies like Innolight and Eoptolink holding over 50% of global market share. American companies like Coherent and Lumentum also produce these components, but they cannot meet domestic demand alone.
If the FCC bans all foreign-made optical modules from federal procurement, the immediate impact is a supply gap. American production capacity is insufficient. The result will be project delays, cost overruns, and ultimately, weakened network infrastructure. This is the opposite of the stated goal.
The compliance costs are equally significant. Large cloud providers like Amazon, Google, and Microsoft will need to build supply chain tracing systems to verify the origin of every optical module in their networks. This is not a simple task. Optical modules are embedded components, often purchased through multi-layer distribution channels. The bill of materials-level tracing required exceeds the capability of traditional ERP systems.
For smaller ISPs, the compliance burden is even more disproportionate. The cost of replacing compliant components could reach 5-10% of their revenue. Many will simply exit the federal market. This reduces competition and increases costs for the government.
The Chilling Effect Is Already Here
Even if the FCC ultimately decides not to add optical modules to the Covered List, the damage is already done. The mere proposal has created a chilling effect. Procurement officers, risk managers, and compliance teams are already adjusting their behavior. They are reducing reliance on Chinese optical modules to avoid future risk.
This is the hidden mechanism of regulatory power. The threat of regulation can achieve the same result as regulation itself. Supply chains are being restructured not because of a final rule, but because of the uncertainty surrounding the rulemaking process.
I have seen this pattern before in the crypto industry. When regulators signal that a certain type of asset or protocol may be restricted, the market responds immediately. Capital moves. Projects pivot. The actual rule, when it arrives, is often anticlimactic because the market has already adjusted.
The same dynamics are at play here. Chinese optical module manufacturers are already shifting production to Southeast Asia. American companies are seeking alternative suppliers. The FCC's proposal is accelerating a supply chain transformation that would have happened anyway, but in a more orderly fashion.
The Decoupling Myth
The broader context is the Biden administration's "small yard, high fence" strategy. The idea is to limit Chinese technology access to sensitive sectors while maintaining broader economic engagement. This strategy has a fundamental flaw: it assumes you can draw a clean line between what is sensitive and what is not.
Optical modules are not like advanced semiconductor manufacturing equipment. They are commodity components with a high degree of standardization. The technology is well understood. The supply chain is global and interconnected. Attempting to ban them entirely is like trying to ban all microprocessors because some are made by Chinese companies.
Moreover, the FCC's approach ignores the reality of the global market. Chinese optical module companies are not just competitors. They are partners in the global supply chain. American companies like Cisco and Juniper rely on these components for their networking equipment. Banning them from federal procurement will force these companies to either redesign their products or source from less competitive suppliers.
The result will not be a more secure supply chain. It will be a less efficient one. And in the long run, a less efficient supply chain is a less secure one. This is the fundamental tension that the FCC's proposal fails to address.
The Path Forward
ITI's opposition is not just a lobbying effort. It is a signal that the industry is willing to fight this in court. The trade association represents the largest technology companies in the world. If the FCC proceeds with its proposal, it will face a legal challenge under the Administrative Procedure Act. The arguments are strong: lack of statutory authority, arbitrary and capricious decision-making, and failure to consider alternatives.
The FCC has options. It could adopt a more targeted approach, listing specific entities rather than entire product categories. It could establish a certification program for trusted suppliers, allowing compliant foreign manufacturers to continue accessing the U.S. market. It could work with industry to develop supply chain transparency standards that address security concerns without disrupting the market.
But the FCC must act quickly. The longer this uncertainty persists, the more damage it does to the supply chain. And the more likely it is that the courts will need to step in and correct the agency's overreach.
The Takeaway
The FCC's proposal to add optical modules to the Covered List is a textbook case of regulatory overreach. It is based on a misunderstanding of both the technology and the market. It will not make American networks more secure. It will make them more expensive, less efficient, and ultimately more vulnerable.
The industry is right to push back. And if the FCC does not listen, the courts will have the final say. 2017 called. It wants its ICO hype back. But this is not about crypto. This is about basic regulatory principles that have been proven over decades: you regulate specific threats, not entire technology categories.
Audits don't prevent failures. They only reveal what is already broken. The FCC should take a hard look at its own proposal before it becomes the thing that needs to be audited. The market will not wait for the agency to get this right. It will move on its own, and the FCC will be left behind.