In the ever-evolving landscape of finance, a new disruptor has emerged - FINTECH. With Bitcoin and its ilk gaining traction, the role of traditional central banks faces a formidable test. The ongoing Fintech surge has forced central banks to confront their own inertia in the realm of regulation, revealing a long-standing slumber that threatens the very essence of their monetary authority. They were slow to act in raising interest rates until recently, leaving the QE Quantitative Easing taps running freely too long and allowing inflation to build up in the financial system. This article explores the challenges ahead for the world's central banks within the context of a series of globally financial destabilizing events in 2022 and 2023.
For years, central banks have enjoyed a comfortable position as the guardians of a nation's financial stability. Armed with the power to control money supply, interest rates, and economic cycles, they have been the lighthouses in the tumultuous sea of global finance. Yet, as Cryptocurrencies challenge the established order, these institutions are facing a reckoning - one that exposes their inability to keep pace with innovation.
The rise of Cryptocurrencies is a story of decentralized power and a fresh narrative for the digital age. With blockchain technology underpinning these digital assets, the promise of financial democratization has gained fervent adherents. However, this democratization is not without risks. The very attributes that make Cryptocurrencies appealing - anonymity, cross-border transactions, and limited regulation - are what strike at the heart of traditional central banking.
Central banks have been slow to react to the Fintech phenomenon. Perhaps lulled by the familiarity of their well-trodden path, they've been caught off guard by the speed and scale of the Fintech surge. Their lack of timely response has exposed them to a situation where their control over monetary policy is at risk. The decentralized nature of Cryptocurrencies undermines their ability to influence economic conditions and react to crises. What's more, it challenges the very concept of centralized authority in the financial realm.
This regulatory slumber is not just an oversight; it's a deep-rooted complacency that has been allowed to fester for far too long. The absence of a robust regulatory framework has not only empowered Cryptocurrencies but has also left investors vulnerable to scams, frauds, and wild price fluctuations. While proponents of the Fintech movement argue for minimal intervention, the absence of any oversight can lead to a Wild West scenario where the vulnerable suffer the most.
Adding to the turmoil, the Swiss banking crisis of 2023 sent shockwaves through the global financial ecosystem. Switzerland (home of the BIS Bank for International Settlements), long hailed as the epicenter of both regulation and innovation, stood as a symbol of stability. The crisis in this financial haven not only underscored the vulnerability of even the most reputable institutions but also highlighted the urgent need for regulatory reforms that encompass the ever-evolving landscape of finance.
Saudi Arabia's SNB Saudi National Bank, unfortunate to have a substantial investment in Credit Suisse, felt the repercussions of this crisis acutely. The interconnectedness of the global financial system left no corner untouched, showcasing how crises have a far-reaching impact.
In the aftermath of the Credit Suisse collapse, a subsequent takeover by UBS led to an increase in moral hazard, with banks growing even bigger, raising concerns about the potential of being "too big to save." This dangerous dynamic has further eroded public trust in the financial sector's ability to safeguard the economy, especially as many top executives being appointed by UBS kept previous bonuses. The Swiss central bank, "Schweizerische Nationalbank" (SNB) played a crucial role in providing massive liquidity to ensure this takeover was a success.
Amidst this turmoil, the Bank of England has been actively exploring the implementation of a Stablecoin - a digital currency pegged to traditional assets like the British pound. This potential move signifies a recognition that the digital age demands innovation even from established institutions. It could be a step towards embracing the advantages of Cryptocurrencies while retaining regulatory control.
Furthermore, the HSBC takeover of the remnants of Silicon Valley Bank offers a glimmer of hope amidst the chaos. This strategic acquisition has swiftly provided HSBC with cutting-edge fintech capabilities. In a rapidly evolving landscape, such moves signify an embrace of innovation by traditional financial giants, which can help transfer technology and electronic regulatory interfaces to major central banks like the Bank of England.
Swift increases in interest rates in the past 18 months have not solely been due to higher inflation caused by heightened geopolitical tensions. Rather, they reflect the consequence of poor stewardship by major central banks around the world over the past 25 years. One could argue that this commenced with the Bank of England's decision under the guidance of the Labour Government in the late 1990s to dispose of its gold reserves at rock bottom prices coupled with poor financial regulatory oversight. Nothing was learned of the collapse of Long Term Capital Management (headed up by Nobel Prize winners Scholes and Merton), the Asian Financial Crisis 1997 or the Russian Sovereign Bond collapse of 1998 which set the scene for the Global Tech Crash at the turn of this century, as well as others. This lax approach to monetary policy has undermined the credibility of these institutions. Interest rates were too low for too long after the financial crisis of 2007/2008 which has fueled a bubble across all asset classes which in 2023 is now collapsing spectacularly. We also forget the Commodity Market Chaos of 2016.
In a twist of events, the collapse of FTX, a prominent player in the cryptocurrency space, further underlines the volatility of the financial landscape. On November 11, 2022, FTX announced the resignation of its CEO, Bankman-Fried, and the company's bankruptcy filing, with 101 debtors included in the Chapter 11 bankruptcy filing. By November 17, 2022, FTX officially collapsed, marking another reminder of the fragility of financial institutions in an era of rapid change.