DEBATE: Are technology companies a threat to central banks?
Are technology companies a threat to central banks?
Bhavin Patel, head of fintech research at OMFIF, says YES.
Tech companies are rapidly developing solutions to overcome shortfalls in the monetary system and proving flexible in tailoring their services to converge with consumer trends. Wide-scale adoption of privately-issued digital coins is growing more probable, particularly in emerging economies. Central bank autonomy would suffer, and monetary sovereignty could be threatened.
Financial stability risk could arise through fragmentation in the monetary system from the widespread issuance of non-fungible digital currencies. In such cases, national central banks could lose control over the money supply. This would result in a severe weakening of their monetary policy-making tools.
If a large enough fraction of the population adopted and stored value in another currency, monetary transmission pass-through via traditional channels would be affected. This would be an especially grave concern for countries with tighter capital controls.
However, in the long term, a private digital currency is unlikely to replace cash. We will probably see the launch of a central bank-issued digital currency (as a complement to physical fiat currency) this year, countering the alternatives offered by major tech companies.
Richard Brown, chief technology officer at R3, says NO.
Central banks play a vital role in safeguarding the global financial system — and technology doesn’t change that core function. At its best, it should work to enhance and improve it.
The relationship between technology and central banks should be cooperative, particularly where tech firms can address challenges like anti-money laundering and Know Your Customer processes. Smart fintech firms engage and work with central banks and regulators right from the start, in a constructive partnership, to improve existing processes and infrastructures.
It has been argued that so-called anarchic cryptocurrencies like bitcoin could become threats to central banks. But this would only be a risk because there is no identifiable firm behind any of these currencies that governments could shut down or regulators could control. If prominent tech firms worked with central banks, this would be less of an issue.
The financial services industry as a whole, including the central banks, should now look at tech firms with the same open mind that the industry took to electronification in the 2000s.
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