This conversation is jointly hosted by the International Monetary Fund and Georgetown University to launch Chapter Three of the IMF 2022 global financial stability report.
The conversation covered in-depth in that chapter is what the implications of the rapid growth of FinTech are for financial stability and cover everything from decentralized finance to super apps and the various risks these new technologies might pose to global financial systems.
This conversation is with the following leader in the industry
- Antonio Garcia Pascual, Deputy Division Chief, International Monetary Fund
- Chris Brummer, Professor of Law, Georgetown Law
- Lily Francus, Director of Quantitative Research Strategy, Moody’s Analytics
- Horacio Liendo, Senior Legal Director, Mercado Libre
- Moderator: Alice Fulwood, Correspondent, The Economist
It is a 50-min long conversation. To make it easier to understand, I have summarized a couple important points below.
Can FinTech, DeFi, and traditional banks co-exist?
- There will be room for banks, neobanks, fintechs, and DeFi to operate together depending on the type of businesses and their competitive advantage.
- When talking about corporate loans on M&A funding, where there is a lot of private information, there is interaction with a client where it will be difficult to beat the traditional banks
- When dealing with big data and managing that data then perhaps I do see where fintech can do better in that space
- DeFi is primarily filling the role of private debt and someone in private equity at this point
What is the best way to regulate DeFi?
- The best strategy to regulate is always to align incentives. If incentives are wrong, most of the time regulation will most probably not be enough.
- Regulation should focus on the entities that are accelerating the rapid growth of DeFi, such as stablecoin issuers and centralized crypto exchanges.
- Supervisory authorities should also encourage robust governance, including industry codes and self-regulatory organizations.
Full Transcript of this conversation: Implications for Financial Stability
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Alice Fulwood: Hello, everyone. I’m delighted to be here today to open this session jointly hosted by the International Monetary Fund and Georgetown University to launch Chapter Three of the IMF 2022 global financial stability report. The topic at hand today and covered in depth in that chapter is what the implications of the rapid growth of FinTech are for financial stability. And we plan to cover everything from decentralized finance to super apps and the various risks these new technologies might pose to global financial systems. I’m delighted to be joined to discuss these ideas live and in person by Antonio Garcia Pascual, who is Deputy Division Chief at the IMF and the lead author of chapter three. Welcome Antonio. I’m also joined in the studio by Chris Brummer, who is a law professor at Georgetown University and the founder of DC’s FinTech Week. Welcome, Chris. I’m no less delighted to be joined virtually from Argentina by Horacio Liendo, who is the Senior Legal FinTech director at Mercado Libre, the South American online marketplace and financial services company, welcome, Horacio. And lastly, but certainly not least from California by Lily Francus, a senior financial analyst at Moody’s, the credit rating agencies, who is an expert in building all kinds of financial models which quantify risks in financial markets, including various DeFi models. Welcome Lily. My name is Alice Fulwood, I am the economist, Wall Street correspondent. So to get started with our exciting event today, I would like to first turn to Antonio who penned the third chapter of the IMF Global financial stability report. Take us through some of the key conclusions of that chapter. What do you think are the most important findings or conclusions from the chapter you’ve just published?
Antonio Garcia Pascual: Thank you Alice. So yes, this is one of the analytical chapters of the global financial stability report. So, we, this chapter focuses on the risk and vulnerabilities of the rapid growth of the FinTech sector. Obviously brings a lot of opportunities, FinTech, it helps reduce costs, it increases efficiency, it broadens the access, but also all of that comes with risk, as it’s been growing really fast. And sometimes circulation has been lagging behind. So in this chapter, we look at three important case studies. First, we look into the case of the digital banking, the new banks. This was truly a deep dive into the sector, we’ll look into across 18 countries, large number of new banks and traditional banks and compare them. And what we found is that these institutions are taking basically riskier clients and riskier loans, they tend to under provision and underpriced some of the credit risks, and they tend to take sort of higher liquidity risks. Okay, so that puts a little bit of pressure on the regulatory side that we will discuss a little bit later. Now, we also look into a second group of FinTech, which is the FinTech in the US market. This is actually where fintechs have been playing an important role for a long time is a level playing field. And what we find is that the fintechs actually exert a lot of pressure on the traditional banks, a lot of downward pressure on the profitability. But we also find is that those banks that actually invest more that are more tech like, like the fintechs, they actually, the profits are stronger. So clearly investment in technology pays off for those institutions. Thirdly, we also look into the exciting topic of decentralized finance, which is really a different tier of sort of deposit taking lending. As you know, this is a system that operates over the crypto ecosystem. It is fully decentralized and it operates over a computer network. Now, it does bring efficiencies, is truly innovative, but it also comes with risks, importantly, anonymity, right that is an issue that makes regulation very difficult and create problems in terms of risk like for AML and CFT. It also the liquidity and lending platforms have important market credit, liquidity and cyber risks, let me give you two examples and I’ll conclude with this. So on the cyber risk, for example, what we find is that every time there is a hack or a cyber incident, what we find is the 30% deposit in some of these liquidity platforms are lost. And in some cases, the whole platform has to shut down. Okay. Obviously, this is an issue, remember in DeFi, there is no such thing as sort of deposit insurance. And the second one, which is very interesting, you will think that in decentralized finance, concentration is less of an issue, it’s not an issue, right? It’s decentralized, you will think that sort of the risk of, sort of not so concentrated, but the reality is that depositors are highly concentrated. So what you have is that in some of these liquidity platforms, less than 10% of depositors account for over 50% of the liquidity, so you can imagine if one of those few depositors pull out the liquidity platform, in some cases may need to sort of shut down or create spillovers for the others. But let me pause here.
Alice Fulwood: That was very comprehensive, a lot to sort of take in there. I think I’ll come to Chris in the studio first. And, you know, there’s a huge amount that Antonio is highlighting here, the sort of pressure that new entrants are putting on banks, the potential higher risks that fintechs are taking, and the sort of new, exciting world of DeFi, which comes with all sorts of potential upsides and downsides. I guess, as someone who you know, has to advise policymakers or think about how to regulate these things, which of those areas seems sort of most pressing to you? What is most likely to keep you up at night?
Chris Brummer: Yeah, I think I just maybe start by just thinking a little bit about this term, FinTech, you know, and I want to applaud the IMF for really, and Antonio for taking this big swing at a very diverse array of actors and trying to think across very different ecosystems, to find common points of threats and pressures, to develop, you know, a 10,000 foot sort of overview of financial risk. And then to think in a second step about what the policy responses in the toolbox could or should look like. You know, as a law professor, you tend to just, number one, look at where failures have happened before in the past. And then you ask yourself, well, you know, are any of those failures replicable in today’s ecosystem? And for sure, a lot of our attention is focused on what happened in 2008. And you look at the shadow banking, as it’s described, and you ask yourself, these very serious questions about whether or not any of those risks are replicating themselves, but in a different guise. I think that that being said, ultimately, fintech is nothing more than the latest chapter in the digitalization of the economy. Right. And so you do have to try to disaggregate, you know, number one, after defining and thinking through what is finTech, you know, is digitalization is frankly being connected to the internet, creating risks that are specific to financial technology to novel financial technologies, or are these risks that are more generic and more pertinent to even large financial institutions. And many of the risks that I, that are in that report are really risks I think regulators are looking at throughout the financial ecosystem. But if I was going to really put my thumb on one issue that keeps me up at night, I think it’s cyber risk, you know, the idea that, you know, you can get all kinds of efficiencies, all kinds of opportunities to diminish risk, potentially, if done well, by implementing different kinds of technology like machine learning, and AI. The fact that you can leverage peer to peer transactions on a blockchain and like, you’re always thinking in the back of your mind, whatever the financial technology being employed, and in whatever vehicle that financial technology is ultimately being employed, what are those cyber risks, and that those cyber risks are not going to be merely addressed, because there may be some kind of deposit insurance regime that there are many kinds of risks that can arise in the cyber context that impact traditional finance as much as you know some of these more newfangled technologies that people have to think through seriously, because they can compromise, not just money, but also data. And when you get into that conversation, I think that’s increasingly you know that this idea of data compromise is increasingly becoming a really important source of risk not just to privacy, but also to financial stability and insecurity.
Alice Fulwood: Horacio, I’d like to come to you next on this, because you’re sort of right in the belly of one of the sort of biggest fintech success stories in South America, could you give us a sense of what the upside of Mercado Libre’s business model is, a little bit about how it works, and also how you think about some of the risks that Chris and Antonia have highlighted, whether that’s cyber risk, or, you know, potential higher credit risks associated with the types of business that Mercado Libre might be doing.
Horacio Liendo: Thanks Alice. Thanks very much. It’s a pleasure to be here sharing our experiences, the approach you described is very interesting. However, I think it’s also interesting to see it from another point of view, which is the point of view of the excluded, the opportunity, though it is maybe a good way to put it, it’s also a business opportunity, is to approach the population that banks do not address. The public interest in this financial inclusion has been up in the agenda and the public agenda for a long time now. And banks don’t address such population for a number of reasons, there’s not much information about them, they lack sometimes the capillarity to promote their services in an efficient way to the broader, broader public. They don’t have the, sometimes the technological infrastructure to scale that sort of business. And they are probably comfortable and profitable as they are. So they don’t have an incentive to expand the financial services to a broader population. So the challenge is to approach the unattendable, the attended in a profitable way and in a secure way. So the solution, as Chris was saying, and Antonio said, is to use technology, to use state of the art technology with data analysis, machine learning, AI, to find onboard communicate well, and get to know the exploding population that can be as secure and as trustworthy as bank clients. I read the report and they said that fintechs address riskier population, but at the same time, the delinquency rates of credits granted by fintechs are similar or lower to one of banks. And I think that’s, that’s the critical problem. The regulation that banks don’t address is not necessarily riskier. But the main problem is how we measure risk. If we use or keep using outdated hard models, if we treat people as numbers, we will most probably get it wrong, fintechs have the ability to get to know the behavior of people in a very profound way. So in short, I think Antonio said just before technology pays off, technology provides a way to reduce costs to reach further into the public and to better assess risk. So I think we should embrace it because it helps lots of people every day.
Alice Fulwood: I’m saying there’s a ton there that people want to come back to. I am going to Lily first, then because I’ll come back, come back to you on some of what Horacio is saying. Lily, I wanted to ask you about, you know, how you in your work at Moody’s sort of helped quantify some of these risks that people are talking about? I know you’ve looked at sort of DeFi risks as well as, as well as some of the other financial risks, why don’t you just talk to us a little bit, you know, people like our ratio, talk about some of the huge benefits that you can get from from service serving different populations, the potential efficiency gains from DeFi, it seems very difficult to then quantify how big the problems might be, what is your take?
Lily Francus: Yeah, so um, you know, I would say DeFi is like the complete other side of the continuum with knowing your customer versus completely not knowing your customer. I think that’s, you know, fundamentally a barrier for further adoption, especially if you look at these industrialized markets, or even, you know, some types of emerging markets where, essentially, you can get these efficiency gains, and you can give out riskier loans, at least by traditional financial metrics, by knowing your customer at a deeper level than what is usually considered by, you know, normal banking standards. But I think, obviously in DeFi because it’s trustless, you don’t know who’s taking a loan. So to this point, we’ve mostly seen the proliferation of over collateralized loaning. Since fundamentally, you know, there is no way to differentiate a good actor from a bad actor, on the blockchain. At Moody’s analytics, you know, I’m currently looking at understanding better the risks of DeFi. I think fundamentally, from a regulatory perspective, there’s not only the consumer aspect of it in the sense of how do you protect consumers between these highly technically specialized platforms, because there’s good actors and also bad actors. But also, how do you think about the linkages between traditional finance and decentralized finance? Because I think fundamentally, there’s a lot of major companies that do not have first order, you know, relationships to these platforms. But when you think about your counterparties, are they doing business with the blockchain? Are they, you know, interacting with the MakerDAO or Maple Finance, or one of these, you know, newer, decentralized financial protocols. And I think it’s, you know, interesting from the consumer perspective, especially because, in DeFi traditionally, the lender and the borrower are the same person. And what you can see is, since there’s no opportunity for recourse, the cyber, as Chris was mentioning, is super, super damaging to these protocols, not only from an individual level in the sense of losing your money. But in general, as your report stated, you’re seeing that 30 to 100% losses in some of these cases, especially in the most, you know, well known impacts. I mean, recently, there was a protocol that lost essentially $600 million, which is an obscene amount of money. And I think it gets back to the root of the question that a lot of these are very technologically advanced protocol designs with a lot of inbuilt financialization. So fundamentally, you know, your code may be audited, it may be bug free, but you may depend on a library that has some bugs that nobody was aware of, in which case, you know, as a consumer, especially as someone who’s looking at these protocols, you don’t have the fixed record systems you would have even with a traditional fintech. So how do you go about selecting a safe protocol for, basically, for your own usage.
Alice Fulwood: Thank you, it’s really remarkable listening to the sort of range of issues we’ve already discussed in the first sort of 15 minutes of this panel, it really is a fascinating time to be thinking about financial innovation. And I do want to give our in-studio panelists a chance to come back to some of the comments that Horacio and Lily have made. Chris, can I can I come to you first, I know, you’re sort of interested in talking about the risk profiles of different kinds of borrowers, perhaps the, you know, if we try to stifle innovation in any way, because we’re worried about risks, you might lose out on some of the benefits that people are discussing. So what do you make of that idea?
Chris Brummer: You know, I just want to say that the conversation in Brazil is, frankly, very similar to the conversation that we’re having in the United States, you know, trying to figure out, you know, where does financial technology fit? And to what degree does it open up opportunities and open up the credit box? And are the ways to open up the credit box in ways that actually end up reducing risk, while extending opportunities for people who’ve been historically underserved and who have historically not had access to core financial services? And I think that’s a really interesting question. It’s an interesting and important question, in part, because most financial regulatory agencies in the United States, you know, don’t necessarily have as part of their mandate, you know, financial inclusion. And so even when you’re going about and depending on data and thinking through the data that’s generated by even US regulatory bodies, you know, it’s useful to just sort of keep in mind that that’s not formally part of what they do, right. And so when you think through financial technology firms, when you think about the market that they’re trying to address, and then when you think about sort of traditional legacy banks, and, frankly, the fact that they haven’t done so well, at least in the United States, and in many other countries in terms of addressing those historically, underserved populations in their countries, you know, the question of risk becomes very interesting. And again, when you deploy new kinds of technology, you have to first ask yourself, you know, what do you mean when you talk about the risk profile? Just as one example, I’m on the board of Fannie Mae, one of the largest sort of backstops and lenders and market participants in the mortgage market here in the United States. And, you know, we introduced, you know, a credit scoring model that’s based on rental data, and not just, you know, do you own a home, right, and this idea that, well, you know, most people don’t want to lose their homes anyway. So if, you know, does repayment history for rental purposes, does that not only unlock opportunities, but you know, does that create a very safe way of assessing risk. And, you know, when you’re looking at a fintech and you’re looking at different kinds of credit models, different kinds of ways of looking at risk. I do think that, you know, you have to be very, very, very careful, not just again, in looking at what the reward and what the upside is, but also making sure that you know, we’re not comparing apples to oranges when we’re thinking about the question of risk.
Alice Fulwood: Antonio, what do you, what do you make of that perspective? I guess, you know, you are tasked with trying to evaluate the risk in all these different kinds of technology. And, you know, the tools that you use to evaluate them 10 years ago, you may not sort of apply in the way that they once did. So how do you, how do you even approach that question? When you’re trying to put together something like, like your report?
Antonio Garcia Pascual: It is a complex question, because some of these technologies are new, as Chris was discussing, or Horacio. So when we look at sort of the main risk metrics with which we judge banks and new banks, what we do see is that the, some of the newer ones, you know, to get new clients tend to go into younger clients, lower income clients, they need to sometimes go into riskier type of loans, non-collateralized, and that generally, what we’ve seen historically, is those eventually bring higher expected losses. Now, we haven’t seen those. That’s the reality. We haven’t seen those. It’s been quite sort of interesting times as well, because we went through the pandemic. So that was a major shock, you would have thought if things would have gone wrong, they would have a match that, but actually, there was a lot of policy support. So it was not the genuine actually shocked either. So as we’re hearing from the fintechs themselves, of course, the new technology means that perhaps the better measuring managing risks. At the same time we know they’re into some would call perhaps riskier borrowers, riskier loans. But the reality is that we haven’t seen those losses. Okay. So I think perhaps a bit the jury’s out in a way that yes, there’s better technologist, there’s no doubt about that. But the past two years, even though that it could have been a massive test, it was not because of the policies. So I think it’s fair to say that, okay, potentially the losses, maybe there because these are riskier businesses, but they also have better technologies. So I think, future in a way we’ll say about this.
Alice Fulwood: Horacio I wanted to come to you on that idea. I mean, the Mercado Libre sort of payments and financial business has grown enormously over the past sort of four or five years. And do you feel like you’ve really experienced a shock, and therefore you feel that the business you’ve built you think is resilient to potentially some of the dynamics that have felt innovative financial businesses in previous crisis? Or do you think that there’s still quite a lot of uncertainty about that internally?
Horacio Liendo: Thanks, Alice. It’s a very good question. I was hearing carefully what Antonia was saying and what Chris was saying, and I agree with both of them. And but I think the previous idea was that younger, lower income, non-collateralized customers are riskier clients. And I agree that that’s the first impression one gets, but it also relates with the amount of the trade and the purpose of the trade and the behavior of that particular client in other aspects of his or her life. So I believe that and in this previous in this Coronavirus crisis that we had in Latin America, we just didn’t have as much help from the public sector, as does in the developed countries. We didn’t find delinquency rates going up. Because I think the model was a good model, and it was made and scaled very carefully. And in my opinion, the best way or the best strategy to regulate is always to align incentives because on the other hand, if incentives are wrong, most of the times regulation will most probably not be enough. Our experience in Latin America has been diverse. And some regulators, Chris pointed out though technology problems that the operational risk from and I agree with him and that’s not a fintech problem, that’s an industry problem. Financial Industry role maybe is broader than finance, and regarding the technology, and it should be carefully assessed. But some regulators have started to regulate financial products in so much detail that they end up endangering the user experience and innovation regulators don’t have the incentives. We think afterwards and have a high NPS, Net Promoter Score. They only, that their goal is to mitigate their perceived risks, which as Antonio said, in the field of fintech have not yet materialized. And they don’t, they are not really concerned with user experience. On the other hand, fintechs have very good incentives. Of course, they want to avoid fraud and lead to clients that will repay their loans. No, no fintech wants to lose money. And they also want to have good conversion rates on cross-sell and excellent UX, high NPS. So they have the incentives to grow in a secure way. So to summarize, I think that good incentives are always the best way to regulate and in the case of fintechs, fintechs that are public companies, which also have the market looking at that with skimming the game and lending, have always built incentives to grow in a secure way.
Alice Fulwood: Let’s turn to that policy question now, then, and you know, Horacio talked about aligning incentives as a good sort of principle for how to regulate financial services providers, Chris, what are some of the sort of first principles you would suggest regulators should think about with these sort of new, when regulating these new financial technologies?
Chris Brummer: Yeah, you know, I just want to just also pick up on what Antonio just mentioned, because I thought it was really interesting and Horacio only really, you know, the points of stress that you’ve seen in the pandemic is, you know, you’ve seen stress and money market funds, you’ve seen certain stresses with family offices, you’ve seen certain kinds of stresses, frankly, in the US Treasury market, right, you know, in those, you know, kinds of stresses, you know, maybe industry operational, right, but when you can think about this larger question of fintech and its growth, you know, again, it’s a little bit, you know, interesting to say the very least, to sort of see what we’re where are the risks developing, are the best tools and risk analytic tools being deployed. And sometimes they may and quite frankly, I agree that the jury is still out. But again, prudence is what’s required not just by the industry, but by the regulators as well. I think regulating innovation is really, really different. I wrote a paper about a trilemma, you know, that ultimately, when you try to regulate innovation, you’re faced with this challenge of providing clear rules, both for the industry and for regulators who are enforcing the rules, creating market integrity, and also enabling innovation. And when you look at the history of financial regulation globally, you can usually only get two of the three goals, you know, between market integrity, clear rules, and innovation. And so part of the challenge as a principles based of thinking through how do you regulate financial technology is to, you know, create a new toolbox for the regulator’s. Now one of the first iterations of the toolbox is for regulators, as everyone probably watching is aware of are these kinds of regulatory sandboxes. But increasingly, particularly when you get to things like DeFi and crypto, I think it would be very useful for people to start looking at crypto not just as, in some of these new kind of financial technology as not just a product, but as a technology. Because then when you start to think about in this particular instance, you know, DeFi, you know, as a technology stack, then you can think about whether or not it’s possible to create crypto native compliance solutions, that actually not only enable a better user experience, but actually further the mandates of the regulators in ways that, frankly, the legacy regulatory technology stack can’t. And, you know, in the securities law world, I’ve talked about things like disclosure NFTs and disclosure DAOs, and whether or not you know, certain kinds of innovations in the space can work better than, you know, regulatory databases that were hacked. Right. But I do think that process of speeding, and enhancing the ability of regulators to do their job will be understanding risk from an economic standpoint, but it’s also going to entail some, you know, deeper understanding and appreciation of what the technology is, and a certain kind of courage to come up with solutions that lean on the opportunities presented by the technology, while being very serious about whatever risks they identify.
Alice Fulwood: Lily, I’d like to come to you on the ideas that Chris has just discussed this, you know, what is the best way to regulate DeFi. The conclusion of the report of Chapter Three of the report is that, you know, you should focus on regulating things like stable coins, which tend to be sort of more traditional centralized entities as a central approach. Chris has talked about sort of approaching it like a technology what is your perspective? How do you think we can best regulate DeFi.
Lily Francus: So it’s interesting, I mean, I think the way that I usually view it is you have crypto space and you have what’s called a fiat space, essentially, and you have these, you know, passages and connection between the two, I think the touch points are, as you mentioned, stable coins, real world assets in general, you could almost consider stable coins as a synthetic, you know, real world asset, this representation of the US dollar. And, of course, fiat on an off-ramp, so I think there’s fundamentally a lot of concern about AML KYC, and the potential for, let’s say, terrorist financing. This is something that, you know, Moody’s Analytics has looked into, especially as you know, this is kind of very auxilary to our current solutions in those areas. But I do think, you know, realistically, DeFi has this potential to not only as people say, bank the unbanked, and you see this adoption and countries that are experiencing monetary instability like Nigeria, Turkey, Russia and Ukraine. But fundamentally, you know, I guess my optimism to it is more on the idea of efficient capital allocation. I think that, you know, the instant settlement and cross border applications are pretty unique versus traditional legacy systems. I think what Chris said, I completely agree with and the idea that there is a lot that’s the same in DeFi, and there’s fundamentally some major differences, even at a core level, like that understanding of custody, or disclosures, or what certain aspects we take for granted, even, you know, personhood, what that means on a trustless anonymous financial system. But I do think that from a regulatory perspective, there needs to be kind of this meeting of the minds with people in the industry, and natural regulators themselves to devise some pretty logical and not too draconian measures to regulate the system, while also being understanding of the potential for systemic risk. Because I think fundamentally, the issue is, you know, crypto space may have high leverage crypto space may have this unique financialization. But what people are fundamentally more concerned of is the connection between crypto space and the real world.
Alice Fulwood: I wanted to come to Antonio, on that idea. It’s in particular, one of the things that sort of struck me when I read the chapter was, you have this excellent sort of chart and analysis of how much more efficient DeFi appears to be non-traditional finance, I think it was, you know, the marginal cost of providing services and DeFi. It was like a third of traditional banks in advanced economies, and a fifth of those in emerging markets. And, you know, as much as we focused on a lot of the risks associated with it. I’ve never seen that kind of analysis before I was kind of struck by, by how powerful it seems. So I mean, do you think, DeFi is the future if we can get any sort of handle on on regulating it? Or what do you make of that idea?
Antonio Garcia Pascual: It’s, I think it’s complex regulation. I mean, the points have been made, anonymity, right. It operates through private keys. We don’t know who the owner the accounts are right? That puts a tremendous complication for regulators. Then you have decentralization, you don’t have a centralized governing body. So how do you go about regulation of that? It’s so traditional regulation is not effective. That is clear. So that’s why as you mentioned Alice we propose as a first step, to focus on the core elements of the crypto ecosystem, stable coins, crypto exchanges, or wallet service providers. But at the same time, I think or perhaps a second stage, you would also expect for DeFi platforms to adopt more robust governance. And I guess this can be done through basically industry codes, or establishing self regulating organizations, as Lily was mentioning. This could be like traditional security markets, that eventually these organizations could be the touch point that the conduit for an effective regulation. Now, to your first point Alice on deficiencies. Now we’ve seen so far in the DeFi platforms, that this is mainly institutional investors players is not individual players, like you and I, that the participant meant is mainly for institutional investors. And of course, once this regulatory framework or approaches are in place, you would expect and then, you know, more participation fees come down. And perhaps it becomes sort of the future of finance, but this is still a long way to go in which regulation and in some cases of regulation complaint portable.
Alice Fulwood: I guess, you know, thinking about the sort of DeFi issues, the sort of, as you say, the big role that it has been it’s useful investors, the sort of limited role it has for for normal people to actually use it. It seems sort of million miles away from what Mercado Libre is doing in Brazil, I guess just to come back to, you know, they’re almost these sort of two different theories of how finance might develop, DeFi sort of coming in from the institutional side, this sort of much more efficient, very technical automated system. And then you have companies like Mercado Libre, who were coming in through sort of day-to-day interaction with sort of retail customers. Could you just talk a little bit about how you think that that sort of approach is potentially sort of going to be the future of finance, rather than DeFi Horacio?
Horacio Liendo: I don’t have the answer. What I can tell you is what I’ve seen in Mercado Libre. Mercado Libre has that complete financial ecosystem. It started offering clients the ability to have a transactional account and a prepaid card, which are these e-money license, which are not bank licenses, it’s sort of our narrow banking approach. So with that, it allowed people to do things they couldn’t do before, they could, they now they could pay online, they could use electronic means of payments in shops, and that grew a lot. The main countries we operate are Brazil, Argentina, Mexico and Chile. But we operate in seven countries. And just to give you a quick number, by the end of last year, Mercado Pago, which is the financial branch you want to go, we had 51.5 million active users, that means people that use either the card or the account to pay, and it grows from there, merchants were offered the ability to collect payments and get credit than it would to consumer loans and personal loans and the ability to make some very basic and secure investments and to purchase insurance. And now even in Brazil, we have the ability through our digital wallet to buy home and sell Bitcoin, Etherium and USDT. So what’s the future of finance, maybe it’s a combination of both. From my point of view, what I see is that the broader public does not use private keys, they need someone to provide a very simple, easy to use, and good product financial interface. And most of the time, that includes intermediaries, and those intermediaries have to comply with all AML regulations and KYC. So broadly, though, I think what I’m getting at as to expand the financial products to the broader probably can promote financial inclusion. Maybe anonymity is not such a big feature that the public is meaning. And we can grow in a more organic way through this kind of financial services.
Alice Fulwood: So I guess if we think about all the things that we’ve covered, in the final few minutes here, you know, there are sort of all of these sort of FinTech entrants into financial services, there’s this nascent DeFi financial system, both of which offer an improvement on the sort of traditional financial system defined, perhaps more efficient Mercado Libre sort of easy to use, offering services to customers, in a sort of much more digital native and also kind of efficient way. Is there a small role for traditional banks in these worlds? And, how do you, I guess, sort of create a safe financial system that has the room for those kinds of ideas to flourish, while also all of the ways in which we’ve regulated traditional banks to keep them safe, can still sort of bear fruit? I mean, that’s, I guess, the sort of broad question I guess, I’d like to put to all of you. In the final minutes, I’ll come to you to Antonio, first. What do you think? How do you get, I guess the sort of best of all of all three of those worlds.
Antonio Garcia Pascua: I guess, you were asking for, I think was Chris that talk about the principles, I think one principle we should keep in mind is sort of same risks, same business, same type of regulatory approach. So that you can set up a level playing field. And then of course, I think there will be room for banks, for neobanks for fintechs and DeFi to operate their, the way it says depending on the type of businesses, you could see that banks may have sort of a competitive advantage, when you talk about corporate loans on M&A funding, where there is a lot of private information, there are interaction with a client where it will be difficult to beat the banks. Whereas you dealing with big data, and managing of that data with these FinTech technologies that Horacio was discussing increase, and then perhaps I do see where fintechs can do better in that space. As well as DeFi, organizing all this and arranging this to public data. So I think there’s a scope for all. Obviously, for banks to survive, as we saw in the clearly in the US mortgage market case study, they need to shape up they need to invest and invest they’re doing you see the big institutions, the biggest expense and expenditure planning is actually on FinTech, on technologies. Right. Sometimes it’s cooperating, sometimes acquiring them, sometimes organically, but that is clearly the name of the game for the progress and for the be able to stay in business.
Alice Fulwood: Chris, do you agree? Banks can stay in business if they shape up?
Chris Brummer: Yeah I mean, you know, what, you know, the really interesting thing, right, particularly that we’re asking you, in the United States, we didn’t talk about it here is, you know, we’re talking about the threat to banks, if one will, or you know from these new technology players. But even you know, in the United States, part of our debate is, well, what happens if our central banks start to become much more involved in banking in the form of a CBDC, and what happens to, you know, whether, you know, a repatriation of assets from our, from banks, to the Fed and the like, right, you know. But I do think that generically, and, you know, the more actors who are in the market competiting, facing the same risks, you know, under the same regulatory regime, you know, when you look at at their business and the risks, and again, you know, actually kicking the tires on what those risks are, which includes a real understanding of both the market and the technology. I, you know, and then you impose, you know, the appropriate regulatory regimes, I think, you have to say that the competition has to be good. We’ve had in the United States, and I think globally, a real conversation about competition in financial services, who’s being served, who’s not being served. And I think that banks can shape up. But, you know, banks have not always been competitive, not just in terms of the operational capacity, but they haven’t always been competitive in terms of, frankly, expanding the addressable market. You know, and I think that what they’re seeing from a lot of these players are folks with good ideas, and sometimes better technology, who understand that there’s an ability to scale while also providing bespoke financial services, a kind of an irony in and of itself. But that’s what’s in effect being done. And I think that banks are going to have to invest in not just the technology, but really changing, you know, an investment in changing their mindset, about their business, and about, frankly, folks that they haven’t always taken it upon themselves to serve effectively. But they can absolutely shape up and banks will always be critical, you know, infrastructure for certainly the US economy.
Alice Fulwood: I’ll go to the two panelists out the studios. I guess, either to sort of come back to what Antonio and Chris have said or and that sort of same idea. Lily, this sort of healthy, DeFi being healthy competition for banks. What do you think?
Lily Francus: Yeah, interesting, I mean, I guess being in the weeds with it, I see DeFi as primarily filling the role of private debt and someone private equity at this point where, you know, fundamentally, when you view the market credit is like the difference between your collateral value and the loan value. I think fundamentally, with traditional recourse, we can have a credit system based on the fact that you can go to jail, if you, you know, are fraudulent or have some basically inability to pay that isn’t, you know, something that’s protected. And I think because of that, the issue with DeFi is, you know, it’s fairly insurmountable, barring some kind of technological advancement, to have a true realistic on chain only credit system, because fundamentally, anybody can create a new address, there’s, you know, their ideas and systems about, you know, trying to get it from a more theoretical approach. But I think right now DeFi fills the role of more private debt. And I do think that the future of it will be in this kind of marriage with traditional finance, both with banks and neobanks, in essentially DeFi axes is a very efficient way to grab liquidity from actors who are looking for higher yields and who may have higher risk tolerances and transform it into some kind of mechanism that they can work with traditional KYC and traditional neo or regular banks, to provide that capital to these you know, new market. So I think that really DeFi’s role in the future will be primarily for helping efficiently allocate capital, rather than a full replacement of traditional banking.
Alice Fulwood: And just lastly to Horacio for the final comment if there’s anything you’d like to add on that idea.
Horacio Liendo: Yeah, going back to the question of banks, I think competition is good. And what financial inclusion needs is more investment, more innovation, and if banks are forced to shape up, that’s good for everyone. And I think there’s room for everyone. And as the addressable market expands, the banks will find the place in this new world. In Mercado Libre, we work with lots of banks, and we, they complement our business in, under synergy is great, and it’s excellent, and it works for everyone. So my take on that is that, yes, banks need to shape up, technology is good, and competition is, will help everyone.
Alice Fulwood: Thank you so much. I think we are just about out of time, it’s been a sort of very sprawling discussion covering lots of different kinds of financial technologies. I’m going to steal an analogy that a central banker at the Bank of England use, but it’s, he described the world of finance that we live in now as essentially a punctuated equilibrium where there are all kinds of new emerging technologies and innovations. And you don’t necessarily know precisely what survived but the hope is that it will be a sort of more efficient and hopefully safer financial system than what we’ve worked with in the past. I’m very grateful to people like Antonio for taking on this very difficult task of trying to quantify and analyze the risks in those new systems. And the third chapter of the Global Financial Stability Report is really excellent. And I recommend that everyone watching goes on and immediately read that. So thank you so much to all of my panelists, for joining us today. Thank you for Georgetown, the IMF for hosting us. I hope you found the discussion, fun and had a good time, even if it was a little, a little broad. But thank you so much for your time.
