"The transition from banking may make financial services cheaper and fairer. But it will threaten privacy and sovereignty
NOBODY LIKES banks. Their technology is often primitive. Their users are hit with unpredictable fees. Their functions matter, yet their coverage is incomplete. This can relegate swathes of people in rich countries and entire populations of poor ones to the fringes of society. Many of the biggest make most profits from trading and fees, not providing services to ordinary customers. And worst of all, their failures can cause catastrophic damage for which they bear only a fraction of the costs.
It would seem rational, therefore, to cheer the fierce new competition that is reducing banks' traditional role. As capital markets expand, it is becoming easier to match assets with liabilities that naturally fund them, reducing the risk of bank runs or failures. A proliferation of payment technologies is upending how people and firms conduct their lives, giving millions of underserved customers previously unimaginable access to finance. Data can be used instead of assets to secure loans, making it possible for people and businesses to borrow money against their character, not their collateral. The great promise of finance can be offered to many more people. The great costs are diminished. Better-informed firms should also temper the instability inherent in today's form of credit provision.
But this revolution brings with it new problems. Because they benefit from network effects, payment platforms will tend to concentrate into just one or two giant intermediaries. As more activity migrates away from banks, existing monetary-policy mechanisms may become obsolete.The risk of losing control over the monetary system has lit a fire underneath usually staid central bankers. Projects to accelerate fast payment systems have cropped up worldwide. So have efforts to create central-bank digital currencies, a digital form of paper cash to compete with the digital payments of private giants. In China, where payments firms are most advanced, more than 100,000 people are already using a digital yuan in pilot projects.
The roll-out of what amounts to a new monetary system thus comes with risks. Many of the issues it raises are as tricky as the financial stability and inclusion problems of old. As people move their money into CBDCs they will pull it out of banks, threatening the system developed to foster loans without overt state interference in credit allocation. The digital involvement of the central bank in everyday transactions would not only increase the risk of such interference but also be a gift to those wishing to snoop on citizens. And the concentration of the economy in digital money, whether it is run by private firms or by a central bank, could provide a new route for malicious actors to destabilise systems through cyberwarfare." [1]
As the network effect raises only one or two payment technology companies, the entire fintech system of small Lithuania is doomed to collapse in the competitive struggle.
1. "A brave new world; Money on my mind." The Economist, 8 May 2021, p. 0.12(US).
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