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Cryptocurrency News Articles
Big Tech's Power Grab in Finance: 4 Actions Regulators Should Take
Oct 21, 2024 at 07:03 am
The race between traditional banks and Big Tech companies has already started. First, cryptocurrencies promise to eliminate centralized institutions.
The race between traditional banks and Big Tech companies has already begun. First, cryptocurrencies promised to eliminate centralized institutions. Now, tech firms' core technology is underpinning the largest power grab in the history of finance.
Decentralized finance leverages blockchain technology to remove intermediaries like banks and financial service companies. It enables peer-to-peer transactions, empowering individuals to transact directly without relying on centralized institutions.
With the rise of DeFi, tech giants' possibilities have reached a whole new level. All segments of financial services are up for grabs, from the movement of money to credit and investing. But there exists a problem: neither the regulators nor banks are prepared to respond to Big Tech initiatives today. With emerging AI and digital capabilities, the gap is becoming bigger and more problematic.
AI and machine learning are being used for personalized banking experiences, fraud detection and predictive analytics. For example, AI-powered chatbots provide customer service, while ML algorithms help with credit scoring and risk management. Blockchain technology ensures secure and transparent transactions, reducing the need for intermediaries. Cryptocurrencies offer an alternative to traditional banking systems. Companies like Ripple and Ethereum are notable examples.
There are four actions that regulators should do to level the playing field and contain risk in the new FinTech platform.
First, preventing Big Tech from abusing gatekeeper function. For example, the restricted near-field communication chip or mobile operating system should not be abused.
Second, designate Big Tech companies as nonbank systemically important financial institutions (SIFIs). A SIFI refers to a financial institution whose failure could significantly disrupt the entire financial system. There are two regulatory approaches. The entity-based one focuses on the institution as a whole, considering its overall risk profile and ensuring a holistic view of its risks. The activity-based one targets specific activities or functions within the institution and homes in on high-risk activities. The combined approach is advocated by the International Monetary Fund, Financial Stability Board and Bank for International Settlements with the aim of enhancing financial stability by addressing both the institution's overall risk and specific activities.
The third action is implementing tight controls on stablecoins. Big-Tech companies that launch stablecoins pegged to fiat or other traditional financial assets should be regulated. Fiat currency is traditional government-issued money, while stablecoins bridge the gap between cryptocurrencies and everyday transactions by maintaining a stable value.
The fourth thing is liberating licensed banks for fairer competition and greater transparency. Licensed banks should be allowed to engage in the same digital asset and DeFi activities as non-licensed entities.
Banks face the challenge of digitizing customer journeys to meet evolving expectations. Failing to adapt could lead to revenue loss and the demise of less agile organizations. On the other hand, large banks can counter and beat disruptors by launching their own digital offerings. Their capital, resources and expertise allow them to compete in consumer banking, wealth management and specialized services.
Big Tech's reach extends far beyond technology, shaping economies and financial landscapes globally. While their impact is undeniable, it's essential to balance innovation with responsible governance and fair competition.
Dr Jolly Wong is a policy fellow at the Centre for Science and Policy, University of Cambridge
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