Digital Feds

“Digital currency is inevitable,” I told a federal reserve researcher recently.

“You mean fiat currency? Issued by the Fed?” She was a bit taken aback by my certainty.

“Yes, it’s inevitable. I’m not saying when or how or what, but that’s where the market is moving.”

I recalled that conversation when reading Michael S. Derby’s report
“The Fed Should Consider Its Own Digital Currency, Prominent Academics Say” in the Wall Street Journal Pro (paywall). A digital currency could make it easier for the Fed to influence the economy while eventually eliminating the need for cash. “They also say ease-of-use and ubiquity would ensure the interest rate paid on the digital accounts would be the benchmark short-term interest rate for the broader economy,” Derby writes in covering a presentation at the Hoover Institution by economists Andrew Levin of Dartmouth University and Michael Bordo of Rutgers University.

Meanwhile, another United States federal agency firms up FinTech observation or oversight or support―it’s difficult to say―as the Commodities Futures Trading Commission (CFTC) announces its innovation office,
LabCFTC. The CFTC office seeks to both provide greater certainty to emerging FinTech firms and to enable the CFTC to better regulate commodity markets, report Kari Larsen and Michael Selig in FinTech Update.

The CFTC joins federal regulatory initiatives by the U.S. Consumer Finance Protection Bureau, the U.S. Office of the Comptroller of the Currency, and several others in seeking to
help and regulate FinTech firms.

Not to be left behind in the trend of regulatory agencies staking out FinTech and innovation regulatory territory, FINRA announced last week its own “innovation outreach” initiative. The Financial Industry Regulatory Authority is the self-regulatory body of the securities trading industry and plans to look at
innovations in financial cloud and blockchain technologies.

This week’s links include a lot of new white papers:

The “platformification” of banking

It’s an awful word that describes a wonderful concept for the next evolution of digital banking and its vendors. “Over the next 10 years, a new banking business model will emerge: the banking platform. In this context, a platform is: “A plug-and-play business model that allows multiple participants (producers and consumers) to connect to it, interact with each other, and create and exchange value,” writes Ron Shevlin, who leads research at Cornerstone Advisors. Platform service providers are emerging to create the next-generation digital infrastructure, just as internet and online vendors did to make online banking a reality. “Successful platforms attract both producers and consumers, match producers with consumers, and provide seamless integration among participants.” Get the rest in the white paper.

The next big wave: How financial institutions can stay ahead of the AI revolution

Finextra released new research on the next big thing that banks must get on board with: artificial intelligence. “AI will become the most defining technology of the new banking and financial services of the future,” says Roberto Ferrari, managing director, CheBanca!, in the paper. Expect difficulties, especially in getting the right data. As Julia Krauwer, AI expert at ABN AMRO, points out, “One should keep in mind that AI is not a plug-and-play solution. For most bank-specific purposes, you will need large quantities of data and a great amount of effort to train the models that lead to intelligence.” Download the paper here.

Moving financial market infrastructure to the cloud

The other next big wave is securities applications and data in the cloud. The Depository Trust Clearing Corporation (DTCC) released a white paper giving its perspective on cloud infrastructure. In short, cloud computing is at the tipping point in capital market infrastructure, and DTCC is on board “to strategically expand the leverage of cloud technology across a much greater range of its services and applications over the next 3-5 years.” You won’t find out much more detail on that, but you will get an overview of the benefits and regulatory environment.

FinTech alternatives to short-term small-dollar credit (STSDC)

FinTech has great potential in helping low-income working families “escape the high-cost lending trap” of payday loans, overdraft fees, and other high-cost means of making ends meet, argues Todd H. Baker in a Harvard Kennedy School working paper. Banks are not likely to play a role in this market. Private-sector employers will provide the best way to disseminate FinTech products to low-income working families. Employers have the “potential to reach very large numbers of workers quickly with effective—and sometimes subsidized—liquidity and financial management solutions,” he writes. The benefit to employers could be “reduced employee financial stress, improved employee engagement and satisfaction, lower turnover, and lower absenteeism.” Download the paper here.

Household debt makes a comeback in the U.S.

“It took nearly a decade, but debt has made a comeback,” reports the New York Times. “Americans have now borrowed more money than they had at the height of the credit bubble in 2008, just as the global financial system began to collapse.” Household debt now totals more than $12.7 trillion, according to the Federal Reserve Bank of New York. Hailed as a milestone in the “long, slow U.S. recovery” that speaks the American consumer’s ability and willingness to borrow as a way to “fuel consumer spending” regardless of “the potential new risks” in student loans and auto lending. I think we’ve read this story before, and I don’t remember a happy ending.