How technology disrupts the payments system gives policymakers pause for thought...
Few issues in central banking are more likely to provoke anxiety than the fear of losing control of one’s currency.
The past few days have provided another perfect illustration of this point. On Monday the Chinese central bank banned initial coin offerings of bitcoin-type currencies, leading to a fall in the value of some cryptocurrencies of as much as 20 per cent.
Behind the scenes, there is growing uneasiness about how disruptive technology may be to the banking and payments system. Over the summer both the Basel Committee on Banking Supervision and the World Economic Forum put out lengthy papers on their concerns and the state of play.
So far, the big winners from new technology have been clients.
Fintech innovators in banking appear to have been less disruptive than expected because they have largely failed to change the basis for competition in such a regulated industry, the WEF report argues. Instead, technology has led to a marked improvement in customer service and a sharp fall in the cost of payments.
But, beyond resilience to cyber attacks, there are three broad concerns.
First, will the banks, which they have spent so much time trying to make safe, be weakened by new entrants? Simply put, will banks be “Amazon-ed”? Bankers used to think regulation would make financial services less appealing for new entrants. But now the penny is dropping that non-bank rivals can target more profitable areas and skim the cream, leaving regulated banks less profitable.
Second, will banks become less important as more lending shifts beyond the regulatory perimeter? Since 2009, swaths of business have moved from banks to asset managers. More than $600bn has been raised to fund private debt, according to market data company Preqin. As a result, policymakers are spending more time analysing the non-bank sector. The growing dependence of banks on large technology firms to run their infrastructure is also giving policymakers pause for thought about who is systemically important.
Third, would central banks lose control of payments if privately issued bitcoin currencies were to take off? Issuing currencies is a lucrative business as central banks pocket the difference between the cost of issuing a coin or bank note and its face value.
Central banks also fear their ability to monitor the payment system would fall.
Given the global fight against terrorism and organised crime, this is an acute concern. In an extreme scenario, central banks fear they may even lose control of the money supply.
Until recently, policymakers had not worried too much about cryptocurrencies - they provided few benefits as a currency, apart from to those simply trying to hide their tracks. They are not a “store of value”, as Monday’s move showed. They are not widely enough accepted to be a useful medium of exchange. And digital currencies have failed to be as secure as promoted — they have been successfully hacked several times in the past 12 months.
But as cryptocurrencies grow, we should expect more central bankers to look to outlaw or crimp their use. This will be most acute in markets that are worried about capital flight and organised crime. This will not stop speculators and enthusiasts, but will limit their potential to create the powerful network effects that would make them a useful parallel currency. But perhaps these concerns should prompt central banks to make their own currencies more appealing. Clearly, more efficient protocols for electronic payments would help and there is much to learn from bitcoin technology.
But more profoundly, this is another reason why the European Central Bank, Bank of Japan and others should look to exit their dangerous experiment of negative interest rates sooner than later.