'Mapping the Shadow Payment System' (SWIFT Institute Working Paper No. 2019-001 and Oxford Legal Studies Research Paper No. 55/2019) by Dan Awrey and Kristin van Zwieten
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Recent years have witnessed the emergence and rapid growth of a large, diverse, and constantly evolving shadow payment system. The shadow payment platforms (SPPs) that populate this system perform many of the same core payment functions as conventional deposit-taking banks: including custody, funds transfer, and liquidity. The crucial difference is that SPPs operate outside the perimeter of bank regulation, thereby depriving customers of the deposit guarantee schemes, lender of last resort facilities, special resolution regimes, and other legal protections typically enjoyed by bank depositors. This paper represents the first attempt to map the global shadow payment system and identify what mechanisms, if any, SPPs use to protect their customers. Examining the business models and customer contracts of over 100 SPPs, we find that it is often difficult to ascertain information essential to evaluating levels of customer protection and, where such information is available, that customers generally enjoy relatively limited structural, contractual, or other private legal protections. This puts enormous pressure on public regulatory frameworks to ensure a sufficient level of consumer protection. Regrettably, we also find that the applicable regulatory frameworks in several key jurisdictions often provide a level of protection that is far below that enjoyed by bank depositors. These findings suggest that, at least from a consumer protection perspective, SPPs are currently not an effective substitute for bank-based payment systems.
'The Dark Side of Digital Financial Transformation: The New Risks of FinTech and the Rise of TechRisk' by Ross P. Buckley, Douglas W. Arner, Dirk A. Zetzsche and Eriks Selga
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Over the past decade a long-term process of digitization of finance has increasingly combined with datafication and new technologies including cloud computing, blockchain, big data and artificial intelligence in a new era of FinTech (“financial technology”). This process of digitization and datafication combined with new technologies is taking place in developed global markets and at times even faster in emerging and developing markets. The result: cybersecurity and technological risks are now evolving into major threats to financial stability and national security. In addition, the entry of major technology firms into finance – TechFins – brings two new issues. The first arises in the context of new forms of potentially systemically important infrastructure (such as data and cloud services providers). The second arises because data – like finance – benefits from economies of scope and scale and from network effects and – even more than finance – tends towards monopolistic or oligopolistic outcomes, resulting in the potential for systemic risk from new forms of “Too Big to Fail” and “Too Connected to Fail” phenomena. To conclude, we suggest some basic principles about how such risks can be monitored and addressed, focusing in particular on the role of regulatory technology (“RegTech”).
'Libra: Is Is Really About Money?' by Valerie Khan and Geoffrey Goodell
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The announcement by Facebook that Libra will "deliver on the promise of 'the internet of money'" has drawn the attention of the financial world. Regulators, institutions, and users of financial products have all been prompted to react and, so far, no one managed to convince the association behind Libra to apply the brakes or to convince regulators to stop the project altogether. In this article, we propose that Libra might be best seen not as a financial newcomer, but as a critical enabler for Facebook to acquire a new source of personal data. By working with financial regulators seeking to address concerns with money laundering and terrorism, Facebook can position itself for privileged access to high-assurance digital identity information. For this reason, Libra merits the attention of not only financial regulators, but also the state actors that are concerned with reputational risks, the rule of law, public safety, and national defence.
The authors argue
These days we are often too impatient to read a book or an article from beginning to end. But in today’s short attention-span culture, it might be ever more important to ensure you don’t miss out on the final message – or maybe something that was intentionally buried in a document to be hidden. In movies, this would be called a prolepsis: a scene that temporarily jumps the narrative forward in time.
In the case of Libra, the prolepsis can be found in Section 5: “An additional goal of the association is to develop and promote an open identity standard. We believe that decentralized and portable digital identity is a prerequisite to financial inclusion and competition.”
That is not to say that launching an association of members that aims to create “a reliable digital currency and infrastructure that together can deliver on the promise of ‘the internet of money’” is not a massive statement. It is! But it also keeps us busy trying to think about the reaction of regulators and banks: how will China respond and how will central banks deal with the accumulation of assets to guarantee a stable value for their coin-to-be? Will it still be possible to tax a transaction? These are all important questions. But what if this is a decoy?
What if there is something more? What if Libra is actually aiming to own the solution to the even bigger and older problem of digital identity? As the classic “New Yorker” cartoon put it, “on the internet, nobody knows you’re a dog”.
Analysing this question will unfold the massive potential of this space, and its specific interest for an advertising company like Facebook. Allowing Facebook to become a crucial player in digital identity for the financial sector will enable it to tighten the knot on the ‘transparent citizen’ by accessing a strong bastion of meaningful data. It will also allow everyone else to purchase the means to manipulate Facebook users, perhaps in pursuit of their respective advertising ideas – some harmless, some of corrupting influence. By dressing this up as a financial inclusion project, Facebook manages to draw financial services regulators to the table. Yet, this should also call everyone who is looking at reputational risks, the rule of law, public safety, and national defence. Otherwise, states and societies might just be designing their Maginot Line.
