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Fintech Big Tech and Cryptocurrency: Will New Technology Make Banks Obsolete?



Are we heading towards a monetary system that is fundamentally different from what we have today? Will big tech and cryptocurrencies beat banks and national currencies in a few years? Norges Bank Deputy Governor Ida Wolden Bache recently delivered a speech on these issues, which was compiled by the Financial Technology Research Institute of Renmin University of China. Introduction "No nation can last long without a well-functioning monetary system." These words came from the 1814 Constitutional Convention in Edelsville. At the time, the immediate priority was to restore the monetary system and create our own national currency. Two years later, Norway's first bank, Norges Bank, was born. For many years it was the only bank in the country. Today, more than 200 years later, Norges Bank is the banker's bank, forming the core of a network of large and small banks across the country. But the number of physical carriers is steadily declining, and our national currency — the krona — is mostly numbers on a screen rather than something in hand. If things go as some might think, the financial system of the future will not consist of banks, central banks, and national currencies — but electronic signals that move cryptocurrencies from one digital wallet to another. To quote a prominent Norwegian businessman: "The direction is clear: finance will be disrupted like fossil fuels. The question is not if, but when." I see the possibility of cryptocurrencies making banks and the NOK obsolete in the short term Small, but the financial system changes. Innovative technologies are paving the way for new and improved financial services, while competition among financial service providers is intensifying. In the digital world, location and national borders have become less important. The Norwegian banking system is technologically at the forefront. Cash use is low, with almost four out of five person-to-person payments made using the Vipps mobile payment service. Norway leads Europe in the use of online banking, and bots are performing tasks such as customer contact and loan application processing. Norway's largest bank has the lowest cost-to-income ratio in the European Economic Area. The cost of payment services in Norway is also low compared to other countries. While Norway's banks are well positioned to respond to increasing competition, they are not, and should not be, protected. Increased competition in financial services is a deliberate development. Combined with digitization, this has resulted in better and cheaper banking services for customers, giving more people access to financial services. But new technology and growing competition could also disrupt the key role banks play in the financial system. The registration of the second batch of 4 innovative applications of the Hangzhou Financial Technology Innovation Supervision Pilot has been completed, two of which are related to the blockchain: The Hangzhou Central Branch of the People's Bank of China issued an announcement "About the Second Batch of Innovative Applications Provided by the Hangzhou Financial Technology Innovation Supervision Pilot" Service Announcement". After the publicity review, the second batch of 4 innovative applications of the Hangzhou Financial Technology Innovation Supervision Pilot have passed the review and completed the registration, and will officially provide services to users. Two of them are related to blockchain applications, including: 1. The "Blockchain Technology-Based Rights Protection System" jointly applied by Hangzhou Credit Information Co., Ltd. and China Construction Bank Corporation Hangzhou Branch. 2. "Data Verification System Based on Privacy Computing Technology" jointly applied by China Banknote Credit Card Industry Development Co., Ltd. Hangzhou Blockchain Technology Research Institute and Shanghai Pudong Development Bank Co., Ltd. Hangzhou Branch. [2021/8/20 22:27:26] The changes we have observed lead us to a big question: are we moving towards a monetary system that is fundamentally different from what we have today? Will big tech and cryptocurrencies beat banks and national currencies in a few years? The role of banks in the financial system The financial system is supposed to provide many very basic services. We want to be able to borrow money today to study or buy a house while paying for it with future income. We also want to be able to borrow long term to finance investment projects with high expected returns. In addition, we need a payment method that provides fast, secure and affordable settlement services for domestic and cross-border transactions. The means of payment should also be a saving instrument. A prerequisite is that we have confidence in the currency's current and future value. In today's system, banks play a key role in providing these services. They provide credit, savings products and payment services. Banks are often described as agents that extend credit by taking deposits from depositors and lending some of the funds to borrowers. This characterization of banks is not entirely wrong, but it ignores an important part of the banking industry and a function that distinguishes banks from nonfinancial corporations. The description does not explain the source of the deposit. Deposits placed with one bank can come from another bank. But what about the bank as a whole? The answer is that banks create deposits when they make loans to customers. When a bank makes a loan, money that didn't exist before is credited to the customer's account. Banks don't have to find people who want to save money before lending money. Banks create their own money during the lending process. Banks thus create the money we all use. No other financial company can do this. A non-bank financial institution must hold deposits with a bank in order to be able to pay another party. News | LabCFTC, the financial technology experimental department of CFTC in the United States, hopes to meet with financial technology start-ups in New York: LabCFTC, the financial technology experimental department of the Commodity Futures Trading Commission (CFTC), will open on April 1, asking local companies to ask questions, discuss problems or demonstrate project. The CFTC announced Tuesday that participants can register for office hours by emailing (the subject line of the email should read "NYC Office Hours"). “Office hours provide an opportunity for fintech innovators and entrepreneurs to exchange ideas with LabCFTC, share demos, and gain a better understanding of the CFTC framework,” the statement said. (Coindesk) [2/12/2020] Money We Spend Every Day Almost all deposits created by banks. It is highly unlikely that many clients will withdraw large amounts of funds at the same time. As a result, banks are able to create far more deposits than they can disburse at the same time. But banks cannot make unlimited loans and create deposits. First, it must assess the customer's solvency, that is, credit risk. Second, banks must assess the degree of liquidity risk associated with making long-term loans and creating deposits that customers can withdraw at any time. Third, it must comply with statutory rules. It is a public good that banks are willing to take a certain amount of liquidity risk. Without it, our access to long-term loans and bank deposits would be reduced. On the other hand, excess liquidity risk creates the risk of instability and financial crisis, as we experienced in 2008. Banking regulation implicitly provides a trade-off between these considerations. Another major activity of banks is payment services, a service that we use almost every day. Today, most Norwegians deposit their money directly into their bank accounts. As long as there are payment solutions that allow us to get cheap and easy money, an account is an efficient and secure wallet. But how do bank deposits become money we can use to pay? An important prerequisite is that there is an infrastructure that enables deposits to be efficiently transferred between customers and banks. As the banker's bank, Norges Bank creates the currency that banks use to pay each other, the so-called central bank reserves, which are deposits held by banks at the central bank. There is no friction in the transfer of customer deposits between banks, since corresponding amounts of central bank reserves are transferred between the banks' own accounts at Norges Bank, where the banks have a common and trusted payment and settlement system. This helps to ensure that there is no difference between the currency created by DNB and the currency created by Nordea. Money is interchangeable. For us, it was all NOK. News | China Everbright Bank and Xiongan Group jointly build a digital financial technology laboratory focusing on innovative applications of blockchain: On December 25, the "Digital Financial Technology Laboratory" was jointly established by China Everbright Bank and China Xiongan Group Digital City Company The signing ceremony was held in Xiongan New Area. According to reports, the "Digital Financial Technology Laboratory" will be guided by the guidelines of "setting standards, building platforms, creating products, and cultivating talents", guided by the strategic needs of Xiong'an New Area and the construction of information technology, based on long-term cooperation between the two parties, and committed to Gradually create a highland for blockchain commercial application research, technological innovation and talent training. [2019/12/25] Banks therefore play a key role in providing the services we expect from the financial system, albeit within a framework devised by the Norwegian authorities. The banking industry is more strictly regulated than most sectors of the economy. With the right to create money comes an obligation. Competition from New Players Many services provided by banks can be provided by others. In recent years, new competitors have emerged in the competition to provide financial services. Competition comes both from specialized fintech companies as well as global tech giants such as Amazon, Apple and Facebook. Technological advances are paving the way for new payment methods. Furthermore, payment services have become a competitive arena. It will now be up to customers, not banks, to decide which payment solutions will be linked to their bank accounts. Payment services have become more strategically important for banks and other players. Not only is the competition intensifying in payment methods, but also in the means of payment. Electronic money offered by PayPal is an example. It is a means of payment that can only be used within a closed system and can be converted into bank currency at a fixed rate. E-money often integrates well with other widely used applications and provides efficient payment solutions, such as cross-border payments. Increased use of new means of payment may reduce the stability of bank deposits. If it becomes more attractive to hold large amounts of money in the new currency, the money deposited into our account will be converted sooner and remain in our current account for a shorter period of time. Instead, the deposits will eventually go into the accounts of the e-money platform and become the main depositors of the bank. These large savers may behave differently from the many small savers in aggregate. Banks also face competition from credit intermediaries. Banks have never enjoyed a monopoly in this area. Large companies can obtain credit in the bond market. Finance companies provide leasing services to corporations and auto loans and consumer credit to retail customers, often linked to credit cards. Voice | Lang Xianping: Facebook’s issuance of digital stable currency will trigger a new upsurge in financial technology: Today’s economist Lang Xianping said on his Weibo, “Facebook’s issuance of digital stable currency is worthy of attention, and financial technology will also lead to A new upsurge.” [2019/6/20] The landscape here is also changing. Web-based solutions, greater access to information, and machine learning make it possible to perform standardized credit checks quickly and efficiently, opening up new avenues for credit intermediation. Some of these channels can be said to be complementary to traditional forms of financing. This first applies to digital platforms that channel credit from savers to borrowers, also known as crowdfunding. Many of these crowdfunding platforms provide loans to small and medium-sized enterprises, which are not particularly attractive to traditional financial institutions, often because of the small number of loans. In the US and UK, crowdfunding platforms represent a growing market. In Norway, they are also growing, although for now, credit is minimal. A growing trend is to bundle financial services with other products. Some companies combine payment solutions with securities and cryptocurrency trading. Robin Hood in the United States is an example. Others combine proprietary payment solutions with credit for online purchases of goods and services. In Norway, we have connections between First Company and First Bank, and between Norwegian Air and Norwegian Bank. On the global stage, online retail giant Amazon offers a proprietary payment solution, a credit card in partnership with major international banks and a crowdfunding platform. With their technical expertise and financial muscle, Big Tech has the potential to be a catalyst for sweeping change in the financial industry. They are able to bundle a range of services while using the information customers leave to target each service more directly. By providing financial services, these companies have access to our payment histories - a very valuable commodity. With an already large customer base, their proprietary solutions can quickly gain widespread adoption. Unlike banks, other non-bank service providers cannot finance themselves. As a result, financing costs may be slightly higher than for banks, especially for new players who have not yet established enough trust in the capital market. So it is perhaps not surprising that many players who started out as fintech companies ended up with banking licenses. An example is Klarna, which has many users in Norway. The company already has a banking license in Sweden and has stated goals of becoming a banking Ryanair. In addition, large tech companies that offer credit services on proprietary platforms have so far partnered with existing banks or established their own banks to provide credit services. News | British financial technology company Revolut has entered the Japanese market: According to Nikkei News, the British financial technology company Revolut said it has entered the Japanese market and plans to continue to expand in the region. It is reported that Revolut allows users to track spending and invest in cryptocurrencies and other financial products. Additionally, Revolut announced in July that it plans to launch cryptocurrency apps in the U.S., Canada, Singapore, Hong Kong, Australia, and New Zealand. And announced yesterday that it is applying for an electronic currency license in Luxembourg. [2018/9/26] Fintech companies and big tech companies can gain market share from established banks. This could lead to radical changes in the market structure. But that doesn't mean banks will become obsolete. The services offered by the new players and the new means of payment that I have discussed so far are based on our current monetary system. What will be lent and saved will still be NOK created by regulated banks. Will cryptocurrencies spawn a new financial system? In a more extreme case, cryptocurrencies that are not pegged to the krona play a larger role in the monetary system. Cryptocurrencies are characterized by decentralized settlements that do not require a central counterparty that everyone trusts. Ownership of funds depends on access to keys, not ownership of bank accounts. This technology could make money programmable so that it can be used in so-called "smart contracts". In some cases, like Bitcoin, the system limits the total amount of money that can be created. Bitcoin is a cryptocurrency and has no fixed exchange rate against any other currency, which can lead to large fluctuations against other currencies. But a growing number of "stablecoins" are also being rolled out, intended to form a fixed exchange rate with a country's bank currency. An example is Diem, whose backers include Facebook, and which will have several versions, each pegged to its main currency. If currencies like Bitcoin or Diem dominate in Norway, we will be closer to a new financial system.


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