Central banks are keeping an eye on the influence of technological giants on finance. And it’s not always a good thing. It has already been demonstrated twice rather than once that cryptocurrencies cannot present themselves as a substitute, or even a complement to fiat money as a means of payment, if only because of the excessive volatility of their classes.
Even the segment “ stablecoins » quickly showed its limits, with stability relying essentially on algorithms and protocols. Additionally, they are vulnerable to rushes, as evidenced by the collapse of Terra in May 2022, which at the time was the fourth stablecoin in importance. Another example occurred in March 2023, following the collapse of Silicon Valley Bank, by investors flocking to USD Coin — the second stablecoinrecalled Constantinos Herodotou, governor of the Central Bank of Cyprus last December.
In his view, “there is no doubt that payments are being challenged by disruptive transformations and the emergence of private actors, which could lead to instability and confusion about what is money and what is not.”
In a working paper published in November, the Bank for International Settlements (BIS) cites the findings of a study of 68 stablecoins demonstrating that none of them was able to maintain parity with their anchor at all times. And this, regardless of their size or type of support. Furthermore, “we affirm that there is currently no guarantee that issuers will be able to repurchase the stablecoins users in their entirety and on demand,” emphasizes the author, Anneke Kosse.
For his part, and in a broader sense, the Governor of the Central Bank of Cyprus added that “as the big tech are further developing in digital finance, risks exist for our payment system, as well as for our monetary and financial stability, in particular due to the potential issuance of their own currency. Among these entries, the governor gives as an illustration Apple’s new savings account linked to its payment solutions, which offers interest more than 10 times higher than the average American rate, which has attracted more than 10 billion dollars in user deposits since its launch in April 2023. Additionally, Amazon offers pay-as-you-go shopping services to its customers around the world, while social network financial and payment services.
Added to these trends of offering in-house payment methods and e-money wallets is the trend, becoming more common, of payment companies partnering with other financial service providers to offer a combined payment and credit approach.
Monetary policy disrupted
The governor recalls that it is not part of the mission or mandate of technology giants to avoid disruptions to financial intermediation, or to worry about the impact on the liquidity of the financial sector. Nor to ensure a balanced remuneration model for all the stakeholders involved, namely intermediaries, acquirers and traders.
In terms of monetary policy, a working paper from BIS analysts published shortly before Christmas looked at the credit response of fintechs (fintech) to changes in monetary policy. “Our main conclusion reveals that credit fintech exhibits less (and statistically insignificant) responsiveness to monetary policy shocks compared to traditional bank credit. This result is consistent with a substitution effect of bank credit by credit fintech in response to monetary tightening. […] Concerning its current macroeconomic importance, we demonstrate that credit fintech contributes less than 2% of the variability of real GDP. On the other hand, bank credit explains around a quarter of this variability. »
Without forgetting the importance of giving priority to the public interest, while broader risks relate to cybersecurity, data protection or market concentration.
An essential step forward
However, the rise of technological giants in finance, and their gains in market share, will be as rapid as the advance of digital technology powered by artificial intelligence. Didn’t Agustín Carstens, director general of the BIS, say on November 23 that, simply in terms of artificial intelligence, “progress is measured today in months, if not in weeks, whereas in the financial system, this takes years, even decades”?
He noted the persistence of fundamental problems confronting financial systems, both in advanced economies and in those that are emerging and developing. As a result, many sections of society still remain unbanked, without adequate payment, savings or credit services. This is compounded by underutilization of financial services due to slow and costly transactions and poor connectivity, particularly for cross-border transactions.
“These issues affect the economy and our daily lives in many ways. They slow down economic growth and hamper the allocation of credit, while worsening income inequalities and encouraging financial activity to migrate to unregulated “ghost” intermediaries,” he lamented.