Blockchain and new trends in money


(Part 1)

For 2020, our overall economic freedom index, as monitored by Canada’s Fraser Institute, dropped three places from 2019’s 7.34 to 2020’s 7.09. Five aspects were assessed as markers of our economic freedom, namely, sound money, size of government, legal system and property rights, freedom to trade internationally, and regulations. The Philippines managed to rank 66th out of 165 countries covered in the survey. In the ASEAN, the country shared the 66th spot with Indonesia, surpassing only Thailand, Vietnam, and Myanmar. The remaining six ASEAN countries topped the Philippines.

Except for sound money, a tribute to the Bangko Sentral ng Pilipinas (BSP) and the banking system, all the other four components declined from 2019 to 2020.

For sound money, the Philippines scored higher, from the previous 9.56 to 9.58, reflecting appropriate money growth, stable inflation, and more freedom to open and maintain foreign currency bank accounts.

But for the next two years, based on the most recent inflationary trends, this aspect of economic freedom might likely slide down. Yet to peak, inflation had reached its highest point in four years. Unless there are some compensating improvements in right sizing the government and public spending, upholding the rule of law and fighting corruption, further liberalizing international trade, and sensibly regulating the system, we are likely to suffer another downgrade in economic freedom next year.

But these aspects of sound money condition in the Philippines are now actually challenged by how the monetary regulators would respond to the proliferation of global crypto assets. We are seeing the new trends in money.

A large part of the BSP’s view on crypto assets derives from its current understanding about the pros and cons of using virtual currencies, that they are easy to set up, anonymous, transparent, and fast in settling transactions. But virtual currencies are said to be volatile, that issues of securities cannot be ignored, and they can be used for illegal activities. Virtual currencies running on blockchain technology are potent in innovating remittances, payments, exchange, investment, and fund-raising exercises.

BSP’s involvement at present with crypto assets is limited to registering virtual currency exchanges, imposing transactional limits to the use of crypto assets, prescribing controls in operation, technology use, consumer protection, wallet management, and compliance with anti-money laundering rules. Reportorial requirements are also imposed for those registered with the BSP which is authorized to sanction them for certain violations.

It will also be useful to know where the BSP stands with respect to some myths about crypto assets. In its public communication, the BSP believes that crypto assets are not legal tender, it is something that is not backed by any legal authority in contrast to fiat money. It is not true that the BSP thinks that crypto assets are bad, they are just neutral like fiat money. Therefore, the BSP has clarified that it does not endorse crypto assets but is prepared to address their risks as they converge with financial institutions at some point.

Instead, what the BSP has been doing in the last few years is to ensure that an enabling environment for crypto assets is put in place. Crypto education is critical in the public’s better understanding of the emerging medium of exchange and perhaps in the future, store of value. The overriding interest of the regulator is the virtual assets’ potential in improving the delivery of financial services given its quicker and cheaper fund transfer both here and abroad.

Five years ago, Allyze McGrath and Dennis Ferenzy of the Center for Financial Inclusion argued that “contrary to popular rhetoric, banks do not view FinTechs optimally as competitors. Increasingly, they seek them as partners.” And since then, this has been the trend in many emerging markets including the Philippines. The relationship has become what they called symbiotic rather than combative. Partnering together, FinTechs are able to scale their technology and access capital while financial institutions acquire some help to improve their product lines, boost efficiency and reduce costs.

As it turned out, such convergence of interests serves the cause of financial inclusion with the added benefit of enhanced risk mitigation and a wider scope of financial products and services that are no less than innovative and catering to their clientele. If there are more adjustments to be made, it is the banks that may have to do it. Their internal processes may need some innovation, some are divorced from IT and the information it could offer. What they need in order to further move forward is to develop mutual trust, especially on the part of the banks. They should be more open to what FinTechs could do for them in leveraging data, evaluating risks and even pursuing customer relationships.

There is concrete proof that this partnership is producing some positive results.

In Kenya and Argentina — as Cecilia Chapiro of UNICEF Innovation Fund narrated in the Stanford Innovation Review on Nov. 24, 2021 — crypto asset’s blockchain technology platform, one that is digitally distributed and devolved across a network, is building more resilient and prosperous lives through greater access to financial services. While credit cards and bank accounts have made payment and settlement of business transactions possible, many of the world’s population remains beyond the reach of financial services. Chapiro cited the World Bank’s estimates that some 1.7 billion people or 31% of all adults are “unbanked.” In developing economies, the proportion could be as high as 61%.

These were the segments of the population that the traditional banking system has left behind. Chapiro called them economically challenged since they have limited modes of sending or receiving money, opening and maintaining bank deposits, gaining access to credit or obtaining insurance cover.

It was blockchain technology that literally broke the barrier and effectively expanded financial inclusion to more people of the world. More and more people should be brought to the mainstream. A novel way of organizing transactions between untrusted parties without the need of a middleman, like a bank, all transactions are supposed to be “immutable, transparent and encrypted.”

We don’t have to go far to check how it evolved.

In the Philippines, the starting point has been the broad concept of financial education and inclusion. Digital transformation upped the ante, and recently, financial institutions have increasingly collaborated with FinTech with the end in view of possibly deploying artificial intelligence (AI) and robotics. Still early in the game, but what is perhaps being envisioned is a financial setting with instant payment, the so-called “anytime, anywhere” services, dedicated products, and, of course, virtual currencies or crypto assets. Some visionaries would even think of doing all these financial services by invisible banks.

We are witnessing some of the emerging trends.

Digital banks have risen after branch-lite banking became modal. Self-service digital channels like e-banking have become more popular among tech-savvy youngsters and young professionals. The enablers have also risen. Internet providers have mushroomed including the telcos. Smart phones and other digital gadgets have made it more convenient to transact business even when mobile.

Hence, partnering with FinTech companies has made it possible for banks to reinvent themselves. Their financial services have been innovated, more products on digital platforms have multiplied including those made available to previously unbanked individuals and families.

Employing AI and robots should become more imperative for bank-FinTech partnerships to economize. Compliance with new laws and regulations on data protection and consumer protection further imposes strain on their bottom lines. The demand for tech-savvy staff is almost unstoppable but there would be collateral harm to the other staff due to redundancy.

What other trends do we see?

As of the third quarter 2021, the number of head offices of banks has grown, but ATM growth was greater. More branch-lite units have risen. The so-called bank access points increased by nearly 85%. From only 34, banks with digital on-boarding capability are now 49. Both the number of depositors and amount of deposits also rose from 2020 to the third quarter of 2021.

Most important, digital payments grew by leaps and bounds. PESONet transactions, which are settled in batches at the end of the day, expanded by more than 141% in volume and nearly 73% in value. InstaPay transactions, which clear in real time, soared by 120% in volume and 144% in value. Such digital patronage brought the share of digital payments to total payments from 14% to 20% in volume and from 24% to 27% in value in a year’s time.

But perhaps, the most disruptive dimension of digital transformation is the impact of blockchain technology on banking services and, more fundamentally, on the concept of money. Bitcoins, Ethereum and Ripple are getting more adherents than ever before. Challenging fiat money is the next game in town.

(To be continued.)

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.

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