Until now, the world’s wealth has largely rested in the hands of banks. But right now, we’re on the precipice of change. That’s largely because of innovations in fintech that have shifted power away from traditional banks into the hands of private companies and crypto currencies.
We’re facing a reality where traditional banking may become obsolete. While this has both upsides and downsides, it has undoubtedly led to action on the part of governments – the establishment of their own digital currencies – govcoins. This, in turn, comes with its own slew of consequences.
One thing is sure – a major shift is coming.
The rise of digital currencies
Technological innovations are changing the landscape of finance. For example, Bitcoin started out as an experiment but is now a $1 trillion asset class.
While there are scores of other coins, there is an entire industry of decentralized finance that is becoming increasingly legitimized, with major investors insisting that crypto is part of any balanced portfolio.
The next logical step is government e-currencies. We’re already seeing some live – the Bahamas have implemented their own, and other initiatives are underway, such as the e-yuan (China), e-dollar (USA), e-euro (EU) to be launched by 2025, and more.
There are many benefits of nationalized e-currencies. By having national, centralized banks directly offering banking to its inhabitants, it can provide a safe, cheap, and accessible currency. By having your money and savings guaranteed by a centralized bank, not a fallible bank, there’s less risk in the case of a crisis. It would cut operating expenses, and make banking accessible to the unbanked. It’s all upside. At least, at first glance it is.
When you look past the upsides, you see the cracks
As emphasized in our TWINO Fintech Talks by various experts, central banks are currently the main power holders. So much power that they can even stave off a financial crisis. That’s what we saw during the pandemic – that by expertly funneling funding where it needed to, we were able to avoid a full-blown financial catastrophe. But if banking moves into the hands of fintechs, central banks will lose control, and that’s what they’re afraid of.
Nevertheless, the process has already begun and banking is increasingly moving into the hands of fintechs. In fact, Stripe has recently launched Stripe Treasury, which lets users create bank accounts through a mobile app. The younger generation, who have spent all of their lives on mobile devices, when given the choice to open a bank account in a bank branch or on a mobile app, will clearly choose the app. And so, traditional banks will start to lose their customer base.
While it’s important to maintain this failsafe and to have a strong central bank that can stabilize the economy when necessary, if national e-currencies become the go-to norm, it can create a host of other challenges:
- By establishing national e-currencies, we run the risk of turning traditional banks obsolete and concentrating all financial power into the hands of the state.
- Governments become financial monopolies – bureaucrats being in charge of deciding who gets to receive loans, or in a scarier version of the future – the government being able to issue immediate fines for citizens’ bad behavior.
- Worst yet – if (and when) corruption enters the national financial power circles. The consequences could be dire.
- At the same time, smaller countries are afraid that their e-currencies could be eaten up by larger e-currencies, thus losing control over their country’s financial and economic stability.
When it comes down to it, the issue won’t be financial security anymore, the big issue will be data privacy. And if all of the data is in the hands of one government, then you can say goodbye to that prospect.
The importance of collaboration
The one opportunity I see here is to emphasize that not all fintechs are becoming banks’ direct competitors. A lot of fintechs work together with banks, to improve their services.
Through this collaboration model we can make sure that traditional banks don’t become entirely obsolete. And through capping digital currencies we can make sure that govcoins don’t become national monopolies.
All in all – we’re living in a time when a major shift in financial systems is taking place, and we have to make sure that the future we’re building doesn’t undermine our well-being in the long term.