Cryptocurrencies Are the Tip of the Iceberg

Endeavor Book Review

Democratizing Finance: The Radical Promise of Fintech

By Marion Laboure and Nicolas Deffrennes

Harvard University Press, 2022

European Central Bank President Christine Lagarde recently stated that private digital currencies are “worth nothing.”

“It is based on nothing,” she said. “There is no underlying asset to act as an anchor of safety.” (Source: https://www.cnbc.com/2022/05/23/ecb-chief-christine-lagarde-crypto-is-worth-nothing.html).

Was she right? On the one hand, private cryptocurrencies might have a “service value,” which means that they can be used for utilitarian purposes, such as for certain financial transfers. But the service value of cryptocurrencies has largely occurred in relation to illegal activities—tax evasion, money laundering, drug trafficking, etc. For average people, cryptocurrencies’ values are too volatile to serve as a store of wealth or means of exchange. Thus, private cryptocurrencies are most often used as highly speculative “assets.”

Dr. Marion Laboure, a senior economist at Deutsche Bank and a Harvard University lecturer, has said that the value of private cryptocurrencies is based on the “Tinkerbell effect.” She’s referring to the endearing fairy in the child’s story Peter Pan. If the kids believed that Tinkerbell existed, then Tinkerbell would exist. If they did not believe, then Tinkerbell would vanish.

In addition, as Laboure points out, cryptocurrencies are also relatively nothing, a mere distraction, in relation to the massive global impact of new financial technologies—payments platforms, mobile banking, digitalization of public services, robo-advisors, etc.

That is the focus of the new book Democratizing Finance, by Dr. Laboure and her co-author Nicolas Deffrennes. The book opens our eyes to how financial technologies are causing tectonic changes in the global economy. If we only focus on the drama of cryptocurrencies, we will miss the bigger story.

“These technologies have a common goal: they are designed to make financial services more accessible to the public,” writes Laboure and Deffrennes. “In summary, modern fintech is democratizing finance.”

In writing the book, the authors took on a massive task. They looked at the influence of all financial technologies on a global scale, showing how fintech is affecting wealthy and underdeveloped nations. They demonstrate, with academic rigor, that fintech is helping millions of people escape poverty, that it is reducing economic inequality between nations, and that it is making governments more efficient in their ability to serve their populations.

In their chapter on “Banking in the Digital Era,” Laboure and Deffrennes describe how fintech has some potential to “replace the traditional banking system” (p. 24). Brick-and-mortar local banks, on a global level, are increasingly obsolete due to online payment systems and other digital financial services. People in developing nations have been “leapfrogging” credit card systems and moving directly to digital wallets managed on cell phones.

Fintech advances in emerging markets are helping millions of impoverished people gain access for the first time to formal banking. Historically, these people have often lacked basic identification, such as a birth certificate or Social Security number, which makes it impossible for them to open a formal bank account. Fintech is changing that on a global scale.

For example, the government of India, seeing that a huge number of its citizens had no formal identification or bank account, implemented a program called Aadhaar. This was the largest biometric identification program in the world. In a few short years, the government managed to provide millions of people with their first official identification. Having that in hand, these people were able to access an array of financial services that allowed them, for the first time, to save money and earn interest, to receive social welfare payments when needed, and to conduct financial transactions without cash—all from their mobile phones.

The same type of transformation is happening across the globe. In Kenya, for example, an online banking and payments platform called M-Pesa can be accessed with a simple mobile phone. Previously, unbanked poor Kenyans who did not receive formal wages (only paid in cash) found it difficult to save money, transfer funds to relatives, or pay bills. Thieves often stole their cash. Through M-Pesa, many Kenyans have leapfrogged debit and credit cards and have moved directly to cellular technology to handle their financial transactions. In Brazil, many street vendors now have bank accounts and a wireless credit card reader that allows them to sell popcorn, bottled water, or candy to commuters stuck in São Paulo traffic jams, without the need for cash.

Due to fintech developments, governments are also finding new efficiencies for back-office accounting functions, tax collection, and distribution of social services. “Fintech can facilitate direct links between government and individuals,” write Laboure and Deffrennes. “Fintech innovations have the potential to help low-income citizens who struggle to understand and properly value public services such as social welfare, pensions, and health care” (p. 135).

After a number of scandals and meltdowns, private cryptocurrencies are coming under more government and judicial scrutiny. Laboure and Deffrennes help readers understand the big-picture trends. Up to now, the US government has allowed private digital currencies to operate without much regulation, but that is changing, they say. One reason is that private cryptocurrencies make it easier for speculators to profit (if they’re lucky) while avoiding taxes. Thus, by not regulating them, governments are essentially subsidizing cryptocurrency speculation, which is unfair for those who invest in traditional investments. In addition, governments will increasingly move to prevent the use of cryptocurrencies for nefarious purposes, including human trafficking and illegal weapons sales. As governments clamp down on cryptocurrencies, it could further suppress their “Tinkerbell” valuations.

In addition to regulation, many governments are developing central bank digital currencies (CBDCs). These currencies, unlike bitcoin and dogecoin, will be digital versions of, say, the US dollar. They will have the full backing of each nation’s GDP, tax base, and government insurances (e.g., FDIC). They will, in fact, have an underlying basis for their values. Having price stability, they will also offer a meaningful service value to average consumers.

Laboure and Deffrennes spend an entire chapter describing the nuts and bolts of CBDCs and their implications for the global economy.

“Each of these [fintech innovations] is already disruptive,” the authors write, “but the combination of them may forever change the world as we know it.”

Democratizing Finance is a must-read for anyone who is curious about what that world might look like.