Finance services

Alternative finance services ruffle some feathers

First, Amazon has given no signs that it wants to become a full-fledged bank. Why would it be? Banks are systemically important institutions and are therefore very heavily regulated – and rightly so – to protect depositors and the stability of the financial system.

“Although presented as a fundamental departure from traditional finance, the crypto financial system is proving to be susceptible to the same risks that are all too familiar to traditional finance.” – Lael Brainard

However, this prudential supervision comes with costs, both financial and in terms of the pace of innovation and product delivery. And Amazon isn’t about making money from the bank – in CB Insights’ compelling analysis the point expands its market ecosystem.

“Generally, [Amazon’s] product development and investment decisions reveal [it] is not building a traditional bank that serves everyone. Instead, Amazon has taken the core components of a modern banking experience and modified them to suit Amazon customers (both merchants and consumers),” CB Insights said.

“In a sense, Amazon is building a bank for itself — and that may be an even more compelling development than the company launching a depository bank.”

What Amazon is doing is unprecedented in scale, but not that revolutionary. For decades, the central idea of ​​the future of banking has been: “Banking is essential for a modern economy. Banks are not.

Amazon doesn’t have to be a bank to achieve its strategic ambition, but for banks it remains a competitive threat. Its strategy also does not allow banking regulators not to intervene.

Indeed, as the Internet (Webs 1, 2, and 3), Cloud, and now the Metaverse evolves, it behooves regulators to understand the implications and threats to the global economy.

Fortunately, they sought this understanding.

Policy blind spot

The overarching issues are the stability of the financial system, controls over government monetary and fiscal policies, and the protection of depositors and other stakeholders.

In a new newspaper,Big Tech Interdependencies – A Key Political Blind Spot“, the global regulator, the Bank for International Settlements (BIS), noted that “the interdependencies of big technologies carry specific risks, in particular for operational resilience, and may require the development of specific rules based on entities for big tech operations in the financial sector”.

The BIS noted that the authorities are looking for interim solutions to counter potential risks to financial stability. The nature of this crucial interdependence between big tech and financial services is profound.

“Big tech business models are characterized by strong internal and external interdependencies,” the BIS said. “Intra-group dependencies result from the common use by large technology entities of a general payment infrastructure, technology platforms and applications; and the sharing of data and information derived from such data through the services they provide.

“External interconnections arise from partnerships between large technology entities and financial institutions to provide financial services. The financial services industry and regional big tech have come to rely heavily on technology services provided by global big tech, such as data analytics and cloud computing.

Of course, these interdependencies don’t just involve big tech and banks. Fintechs, startups and the whole concept of “decentralized finance” – DeFi – involve new interdependencies and while not all of them are systemically significant, many could be.

For example, concerns have been raised that national fiat currencies could be replaced by cryptocurrencies, which would impact the ability of governments to raise and collect tax revenue.

Additionally, to the extent that central banks use the price of money via official cash rates to manage interest rates, the existence of DeFi currencies and assets potentially blunts and degrades the implementation of monetary policy.

Serious vulnerabilities

US Federal Reserve Governor Lael Brainard spoke about it in a speech titled, “Crypto-assets and decentralized finance with a view to financial stability.” His opening remarks implicitly addressed the challenge of interdependence.

“Recent volatility has exposed serious vulnerabilities in the crypto financial system,” she said.

“Although presented as a fundamental departure from traditional finance, the crypto financial system turns out to be susceptible to the same risks that are all too familiar to traditional finance, such as leverage, settlement, opacity and maturity and liquidity transformation As we work towards the sustainability of our financial stability program, it is important to ensure that the regulatory perimeter encompasses crypto-finance.

Interestingly, few new financiers, but the most libertarian and iconoclastic ones – who often turn out to have more in common with chancellors than genuine revolutionaries – dispute that the bank or financial intermediary of the future must have a lot in common, essentially, with their traditional – TradFi – background.

Yusuf Ozdalga of QED Investors provided a particularly insightful take on this in an altfi newsletter article titled What will the Metaverse Bank look like?

Ozdalga walked through the new areas a bank in the metaverse (BofM) should enter, such as “foreign” exchange of cryptocurrencies with appropriate risk spreads and the ability to collateralize crypto assets. But there are some attributes that even a BofM should have that are common with TradFi.

“In no particular order of importance, a successful BofM should be able to move money, store money, lend money, and invest money,” he said. writing.

“To do all of those things, it would need to have the trust of the consumers who use it, so it would need a strong brand. It would also need regulatory legitimacy, in the long run, so it would need to be on the safe side. of the law, so to speak.

That’s basically the challenge. To challenge the established order, you have to be part of it.

A fact of life

It’s tempting to quote Mephistopheles in Faust on this, where he explains the distinction between Hell being a place or a state of being – there is no escaping the regulations. But perhaps it’s best to paraphrase Cannonball Adderley on the hip side: banking regulation is “not a state of mind, it’s a reality”.

More prosaically, the US Fed’s Brainard put it bluntly.

“If past innovation cycles are any guide, for distributed ledgers, smart contracts, programmability and digital assets to realize their potential to bring competition, efficiency and speed, it will be essential to address fundamental risks that beset all forms of financing,” she said.

“These risks include runs, fire sales, deleveraging, interconnection and contagion, as well as fraud, manipulation and evasion. Additionally, it is important to be on the lookout for the possibility new forms of risk, as many of the technological innovations that underpin the crypto ecosystem are relatively new.

Whether it’s Amazon, Google, Meta, Netflix, Tencent, or any other big tech seeking to participate in borrowing, lending, or wealth transfer, the regulatory response is likely to vary. be if she walks like a bank, beats like a bank, quacks like a bank and paddles in the big pond, it’ll be settled like a bank.

Andrew Cornell is editor of bluenotes