The Bank for International Settlements (BIS) says new public policies are urgently needed to address the growing dominance of large technology firms in financial services.
In a bulletin published on August 2, the Basel-based institution, which is owned by 63 central banks, called for closer cooperation between central banks, competition authorities and data governance regulators in developing new entity-based rules for bigtechs.
Risks of bigtech dominance
According to the BIS, the recent rapid growth of digital versions of fiat currency—called stablecoins—is an area of particular concern for policymakers.
It cited the possibility of a bigtech-dominated, winner-takes-all outcome to the stablecoin race, with negative outcomes for consumers and financial stability.
“Stablecoin projects and other big tech initiatives could be a game changer for the monetary system if their entry leads to closed-loop systems reinforced by network effects from data drawn from social media or e-commerce platforms,” the BIS said.
Such innovations could fundamentally reorder the existing monetary infrastructure, the BIS suggested.
“Strong network effects and the entrenchment of closed networks could lead to a fragmentation of payment infrastructures to the detriment of the public good nature of money,” it said.
Bigtechs’ artificial intelligence algorithms could also inject systematic biases to the financial system, the BIS said, to the detriment of financial stability.
“Stablecoin projects could be a game changer for the monetary system”
According to the BIS, consumers already trust bigtech firms much less than public sector bodies or traditional financial institutions to safeguard their data.
However, data privacy has attributes of a basic right, the BIS said, and data governance is now a key public policy concern.
And, the BIS warned, if large technology firms were to obtain a dominant position in finance, they could impose even higher payment services costs than those already charged by the providers of credit and debit cards.
In its bulletin, the BIS called for entity-based rules to address bigtechs’ growing role in finance, saying that the existing regulatory framework, which is largely based on firms’ activities, is inadequate.
For example, the BIS said, the current licensing requirements on payment service providers, which are aimed at ensuring the fitness of directors and consumer protection, were formulated with small remittance service providers in mind.
“Central banks and financial regulators should invest with urgency in monitoring and understanding these developments”
These rules fall short of addressing the far-reaching challenges associated with dominant big tech platforms, the BIS said.
The BIS cited the European Union’s proposed Digital Markets Act, China’s recent anti-monopoly guidelines for internet platforms and a US House of Representatives report on the anti-competitive behaviour of bigtechs as examples of possible new entity-based regulations for bigtechs in finance.
However, time is of the essence in addressing the public policy challenges posed by technology firms’ growing role in finance, the BIS pointed out.
“The entry of big tech firms into the payment system has underscored how rapidly digital innovation can impinge on central banks’ traditional concerns: sound money and the smooth functioning of the payment system,” the BIS said.
“Given the multi-faceted nature of the public policy challenges that extend to competition and data governance imperatives, central banks and financial regulators should invest with urgency in monitoring and understanding these developments.”
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