Fintech promotes changes in financial logic.
(1) Backtracking of financial logic
Some people believe that the economic mission of finance is to solve information asymmetry, which can be regarded as the first-order logic of finance. Historically, due to economies of scale, the financial industry chose to operate through setting up institutions, so commercial financial institutions such as banks emerged. After the financial crisis, regulatory agencies followed, and the financial industry entered the stage of institutionalization, which can be seen as the second-order logic of finance.
(2) New financial logic from the macroprudential perspective
In the stage of institutionalization, relevant financial rules are highly institutionalized and systemized, but institutionalized finance will encounter great challenges when coming with digitalization. Taking the Basel Rules as an example, the Financial Stability Institute (FSI) under the Bank for International Settlements is responsible for the daily work of the Basel Committee. Its director and members have written articles in recent years, pointing out from a macroprudential perspective that the development of financial technology has exceeded the management scope of the existing framework of Basel, but itself is also a systemic risk that urgently needs to be included in supervision.
This is because financial digitization puts the full set of businesses that banks and other commercial financial institutions are responsible for under the perspective of information technology development. Financial businesses are deconstructed into functional modules that can be assembled and combined. According to information technology logic, these modules need to be highly reusable to avoid problems such as data inconsistency, inefficiency, and duplication of development. In the financial business after modular deconstruction, it is more and more difficult for us to find an institution and its person in charge to be fully responsible for a certain business as before. Under the traditional financial rules, the institutionalization of banks originally focused on bank employees and organizations, but the digitization was vague and even ignored such themes as bank employees and organizations. This disintegrated the original banking mechanism and the internal organizational boundaries of the bank no longer exist. Clear, responsibilities have also been merged and reorganized. After deconstruction, banks need to seek a new equilibrium. Through financial governance and development, banks continue to endogenize negative externalities, so that marginal costs and marginal benefits can reach a dynamic equilibrium, and finally explore new boundaries and new frontiers in finance. This process of seeking a balance is now generally referred to as the digital transformation of banks. In this way, the second-order logic of finance begins to migrate from institutionalization to digitalization.
Will digitization be the "twilight of the gods" in the financial industry? The answer is not yet known, but the “collapse of the Valhalla Temple” under existing supervision is at least possible in the eyes of FSI. Of course, some people think that fintech is the liberator of finance.
Fintech's shaping of finance in the medium and long term
What might finance in the distant future look like? This is almost unscientific imagination, but we can try to explore a possibility, just like a thought experiment. The first-order logic of finance has not changed, and it still solves the problem of information asymmetry. However, the second-order logic has undergone major changes, from "single and extreme institutionalization" to "simultaneous institutionalization and digitalization". This transformation process can be regarded as digital transformation, and the endpoint of transformation is complete digitization.
(1) Resilience exists in the role of people in finance
Take artificial intelligence and risk control as an example. In the future, risk control is not about employees performing processes, but machines; the rules of risk control are not pre-set, but dynamically evolving. Even after financial technology governance solves ethical issues, the rules of risk control are also real-time, and bank risk control will no longer be a financial control node that may reach equilibrium. Then, who is responsible for the negative financial externalities? If you say whoever designs the machine, whoever is responsible, but these machines are likely to be produced by self-learning based on historical data, and their intellectual property rights do not belong to any human beings but the algorithm itself, then it is necessary to forcibly implant humans to control In order to control the negative externalities of finance, people are generally responsible for the results of financial behaviors.
(2) The future of finance is not terrible
De-institutionalized finance will provide a new level of service to the real economy. Take currency as an example. Digital currencies are in full swing around the world. Last year’s survey by BIS showed that 80% of national central banks are studying their own CBDCs. Although currencies still have to consider sovereignty issues for a long time to come, the executive director of the global financial market center of Duke University has believed that the theory of credit money is no longer valid under the impact of private cryptocurrencies. Then, when currency enters the digital age, people can boldly ask: Can there be no currency in the future? Without currency, will the world be in chaos, and it will really become the "twilight of the gods" in the financial industry, causing the existing financial framework system to collapse like the "Valhalla Temple"?
The father of the "Occupy Wall Street" movement proposed in his book "Debt: The First 5000 Years" that credit was thousands of years before the invention of money. In any form, even intangible, its credit is eternal in the human economic system, because we always need to measure the value of individuals. Therefore, the future of finance will still be finance, but it will become better finance.
