Behind the scenes, there is a growing discomfort about the degree of disruption these new currencies could have on the banking and payments sectors. During the summer, the Basel Committee on Banking Supervision and the World Economic Forum published detailed reports on the state of play and their concerns.
Central banks must wake up to crypto-currencies.
As the last few weeks have shown, few problems are as worrying for central banks as the fear of losing control of their currencies. Recently, the Chinese central bank recently banned Bitcoin fundraising, leading to a temporary 15% drop in the value of crypto-currencies.
So far, the big winners of technological innovations have been the customers. The innovations introduced by fintech banking seem to have been less disruptive than anticipated, mainly because they have largely failed to change the competitive bases of such a regulated environment. Instead, the technology has significantly improved customer service and lowered transaction costs as said on this Twitter page.
But three major concerns remain, beyond the issue of resilience to cyber attacks.
First of all, will the banks, which have made so much effort to protect themselves against any eventuality, be put at risk by the newcomers?
In other words, will they be exposed to the same level of risk that Amazon is putting other industries at?
Bankers have tended to think that regulation would make financial services less attractive to new entrants, but they now realize that new rivals outside the banking world can attack them on more profitable segments and make traditional, regulated players less profitable.
Second, will banks become less important as more lending moves away from the regulatory framework?
Since 2009, entire sectors of activity have shifted from banks to asset managers. More than $600 billion has been raised to finance private debt, according to Preqin’s data. As a result, political leaders are now focusing their analysis on the non-banking sector.
The growing dependence of banks on large technology companies to manage their infrastructure prompts decision-makers to ask themselves the following question: which players will be more important on a systemic level?
Thirdly, will central banks lose control over payments if the volume of encrypted currencies issued by the private sector increases? Foreign currency issuance is a lucrative business, as central banks pocket the difference between the cost of issuing a coin or banknote and its face value.
Central banks are also concerned about losing their ability to monitor global trade. Given the global fight against terrorism and organized crime, this is a major concern. In an extreme scenario, central banks might even fear losing control of money supply.
Until recently, policy-makers were very concerned about crypto-currencies (cryptomonnaies in French) only to a very limited extent, because they offered few advantages as currencies, except for those who saw them as an opportunity to erase all traces of transactions. They are not a “store of value,” as recent movements linked to China have shown. Nor are they widely enough accepted to be a useful means of exchange. Finally, digital currencies are not as secure as expected, having been successfully hacked several times this year, at considerable scales.
With the increasing volume of crypto-currencies, we should expect that more central bankers will seek to prohibit or curb their use. It will be particularly visible in countries concerned about capital flight and organized crime. This will not stop speculators and enthusiasts but will limit their potential to create powerful network effects that could turn them into usable parallel currencies.