For a long time, the global financial system has been dominated by central banks and commercial banks. The central banks issue money to the commercial banks, who then serve the everyday users. However, the landscape is now rapidly changing.
The emergence of fintech companies, powered by emerging technologies, is revolutionizing the concept of money itself. Additionally, blockchain-based monetary systems are proving to be even more disruptive. How are central banks responding to these developments? Are commercial banks at risk of becoming irrelevant? Maybe not.
During the WEF’s Annual Meeting of the New Champions in China, Sebastián Claro, Professor of Economics at Universidad de los Andes, highlights the struggle of commercial banks to keep up with the disruptive impact of fintech companies in the finance industry. According to Claro, commercial banks lack sufficient motivation to innovate as they face threats from fintech operations.
As previously mentioned, the traditional flow of operations starts with central banks, then moves to commercial banks, and finally reaches everyday users. However, this route is changing more rapidly than ever before. Claro emphasizes that one of the main obstacles preventing commercial banks from innovating is their focus on security and regulations, whereas fintech companies prioritize creating attractive products for users, often placing security and regulation as secondary concerns.
As a result, people pay more attention to the innovative solutions offered by fintech rather than the operational methods employed by commercial banks, due to the user-friendly experience and convenience provided by fintech companies.
He also notes that market trends indicate a correlation between transaction costs and consumer behavior. When transaction costs are high, as is often the case with established commercial institutions, people tend to engage in fewer large transactions.
On the other hand, when transaction costs are low, particularly with fintech companies leading the way, the opposite tends to occur. The professor further suggests that in today’s interconnected financial world, the challenge lies in striking a balance between delivering top-notch services and maintaining robust security measures.
Have a safe money base
According to Jeremy Allaire, the co-founder, and CEO of Circle Internet Financial, the safety of the base layer of money is crucial in today’s world. He believes that central banks should take responsibility for ensuring this safety, which differs from the current practices of commercial banks. Commercial banks create money that doesn’t exist by expanding the funds provided to them by central banks, thereby increasing system risk.
In contrast, Allaire highlights the advantage of stablecoins like USDC, which are pegged to the USD, the most widely accepted currency worldwide. These stablecoins provide a solution that alleviates the innovation challenges faced by central banks, which may lack interest or struggle to keep up with the pace of global financial disruption.
According to him, the purpose of digital money is to eliminate reliance on commercial banks. While he acknowledges the importance of innovation in transforming the financial system, he emphasizes the necessity for all stakeholders to collaborate and implement risk management strategies due to the rapid growth of these digital innovations.
Central banks are losing control
Claro emphasizes that allowing stablecoins and other digital currencies developed by private entities to float can strip commercial banks of control and potentially disrupt the operations of central banks. Hence, he advocates for collaboration between central banks and the private sector to make informed decisions for the global payment system.
Ning Xuanfeng, Senior Partner at King & Wood Mallesons, further highlights the importance of monitoring anti-money laundering activities. Regulators should assist in establishing responsive systems to address customer issues, which are currently lacking in the new-generation payment systems. Additionally, legislators of nations should prioritize customer safety by examining these matters closely.