The biggest opportunities and threats in finance these days come from the cyber-sphere. Fintech firms (fintechs) have made big inroads in financial intermediation, and some new companies are valued more than large banks. Blockchain and robo-advice are expected to revolutionise the ways banks interact with their clients and structure operations internally. The use of cryptocurrency has created a big controversy in central banking circles about the creation of a new form of money outside the classic institutions.
But more cyber could also create more threats for operational failures of systems, or huge thefts of data. Fintech is depriving banks of important sources of revenue and raising questions about the adequacy and sustainability of bank business models and their legacy systems. Blockchains may in theory be very secure, but the technology is still immature and they are very energy intensive. Cryptocurrencies facilitate money laundering and reduce financial inclusion, or may be simply Ponzi schemes. Robots store large amounts of private information, but how the data are used and the reasons why certain products are recommended to clients may be very opaque.
In this Policy Insight, CEPS CEO Karel Lannoo assesses the impact of innovation in the cyber-sphere on finance and addresses the central question of whether the policy response, either at the global or European levels, is adequate.