Disruptive Regulators: Are Central Banks Overstepping the Mark?
Concerns are growing that central banks are beginning to roll out products and services that directly compete with the private sector—and critics say this could cause big problems.
Innovations in distributed ledger technology and the Libra proposal, in particular, triggered worldwide research of digital currencies by central banks. The Central Bank Digital Currencies (CBDCs) projects became part of the central banks' regular activities and seemingly altered their role in the banking services domain from passive regulatory to more innovative and research-driven.
The recent CBDC conference in Istanbul showed many examples of banking products and services where central banks were leading the actual development and operations. The presentations highlighted product feature research, user interface, and user experience choices – all activities that we rarely see from regulators.
Central Banks' FinTech Competition
According to our observations, the less developed a country is, the more engaged its central bank is in the actual end-user solutions.
The central banks of the Bahamas, Republic of Georgia, Philippines were proudly displaying their apps like FinTech firms pitch to investors. Things are slightly different in Eurozone – the developers there see the digital euro as a framework, a backend instrument, that will then be passed to the commercial entities.
Nevertheless, that did not keep ECB from negotiating hardware access with mobile phone producers.
Also, the central banks of individual EU members are developing their own projects. The Magyar Nemzeti Bank of Hungary has rolled out a project specifically for children that aims to boost financial awareness.
Geared toward 8 to 14-year-olds, Student Safe allows youngsters to participate in educational quizzes—and put their knowledge about finance and sustainability through its paces.
Passing with flying colors unlocks access to student tallérs, which can be redeemed for real-world items such as toys and sports equipment.
Another novel feature allows users to experiment with savings goals, transferring funds between bank accounts, and making purchases in a safe environment.
Parents can also send pocket money to their children through Student Safe on a regular basis, and supervise how these funds are used.
The concept was explained in detail by MNB's chief digital officer Aniko Szombati at the CBDC Conference in Istanbul, and she has previously written extensive papers about the subject.
CBDC and Risk of Disintermediation
But zooming out, and there's a bigger question to ask—an issue that will become more pertinent as CBDCs launch and risk disintermediating established financial institutions: are central banks in danger of entering into direct competition with the private sector, and potentially overstepping their remit?
Across the European Union and beyond, there's no shortage of payment apps, prepaid cards and bank accounts designed for this age demographic. Many offer additional educational resources, and safeguards to prevent unauthorized purchases.
Intrepid Ventures Principal Eric Grover touched on this in an interesting opinion piece for American Banker, where he accused the likes of the Federal Reserve of competing with Visa and Mastercard, writing:
"Operating payment systems is an unnecessary and harmful distraction for central banks from executing monetary policy, maintaining price stability and avoiding financial crises—missions where their performance has been abysmal. Private payment systems deliver better results, are more innovative, have natural self-correcting market checks, and therefore better serve consumers, businesses and banks."
He went on to warn that central banks who decide to dabble in offering their own products risk creating a conflict of interest, not least because they end up in direct competition with the rivals they're supposed to regulate. This debate will emerge again should CBDC issuers decide to launch their own wallets, rather than rely on existing infrastructure from local banks.
Financial education for the next generation is crucial, no one is disputing that. And you could argue that many education systems worldwide are failing to equip students with the skills they need to manage their money in adulthood.
There's an old saying: "It's better to do one thing well than 10 things poorly." Central banks should think twice before spreading themselves too thin.
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