The Impact of Technology on Money: A New Ebook

Financial systems perform a number of important functions, including the payment of goods and services, the production of information, and the sharing of risks, and the efficient allocation of capital (Merton 1995). Financial systems and banking institutions have faced a number of challenges over the past decade, including a new regulatory environment, the aftermath of the Covid-19 outbreak, and the transformation of their business model into a net zero-carbon economy. These issues have been analyzed in previous reports in the Future of Banking series (Bolton et al. 2019, Carletti et al. 2020, Bolton et al. 2021). Another major challenge is technological change. Financial agents, organizations and markets have historically been quick to embrace new technologies, especially computers and information technology. So it is not surprising that the financial industry has been most disrupted by digitalization and new strategies for processing huge amounts of data. This is evidenced, for example, by the proliferation of new payment or intermediary service provider Fintech (Figure 1 shows the increase in Fintech investment).

Figure 1 FinTech investment growth

Comments: Based on samples from 78 countries from Q1 2010 to Q2 2021. The 2021 data is extrapolated based on the data observed up to Q2 of 2021. The Sample 2 calculated the Harfindal-Hershmann Index (HHI) across all countries.
Formula: Pitchbook Data Inc.; The authors count. BIS Quarterly Review, September 2021

The fourth report in the Future of Banking series (Duffie et al. 2022) contains three broad messages. One of the first ideas from the report is that it is possible and desirable to develop a modern, inter-operative and efficient payment system based on bank deposits. The development of a central bank digital currency (CBDC) technology should be aimed primarily at overcoming market failures and should not be rushed without caution. A second hypothesis is that increasing use of consumer data allows for efficiency gains, but also includes potential risks in terms of privacy issues, reduced competition, and potentially increased income inequality. A third idea is that the securitization of market securities has policy and economic consequences that must be addressed.

Download Technology and finance4th Future of Banking Report, here.

Disruption of payment system

Most of the central banks are now exploring the development of CBDC, with the primary goal of improving the efficiency and inclusion of their financing system. Many are jumping on the bandwagon with other fintech payment methods such as Stablecoin, Neo-Bank, and ‘Quick Payment System’, which are based on real-time gross settlement of bank-railed payments. CBDC has several potential benefits, such as improving the efficiency and competitiveness of payment systems and increasing financial inclusion. However, the report argues that in many countries, particularly the United States, it is premature to promise CBDC deployments. Costs and benefits will remain large and uncertain until revealed by technology and policy exploration. The biggest challenge for CBDC’s design is how to protect privacy while controlling money laundering and illegal activities.

At the same time, policy makers need to regulate the proper role and control of innovative payment systems, increase the reach and interoperability of fast payment systems, and increase greater competition in bank payment systems. Digital currencies can have a disruptive effect on regulated banking institutions, especially to the extent that they affect fund spending and, potentially, damage credit provisions. However, it is too early to jump to conclusions here. The design of CBDCs is not disposed of. Furthermore, there is an international dimension to the implementation of a CBDC that could disrupt the domestic monetary system. It has been argued that with the widespread use of CBDCs, any national currency would be easier to use as any other form of cross-border financing and that this could erode the dominance of the US dollar and reduce transaction costs. However, if CBDCs are not directly interoperable, multi-CBDC bridge arrangements will be required (Auer et al. 2021).

Data measurement and data evaluation

Data is another policy issue specific to technology-based financial services provision and one that calls for specific evaluations and policy recommendations. With the advancement of artificial intelligence (such as machine and deep learning) the increase in the amount and variety of information is significantly reducing the cost of acquiring information (Goldfarb and Tucker 2019). The report analyzes how data-driven decision-making and new data technologies promise extraordinary expertise, but also threaten our economic and social order. Data inconsistencies can eliminate problems that lead to poor perceptions of money, resources are stored where they are not needed, and products are sold to consumers that add value to other products. Resolving such discrepancies can increase a strong productivity. However, firms ‘use of data also risks compromising customers’ privacy, putting them at risk for manipulation; It is the risk of exclusive energy fuels, which consume consumer surplus; And it exacerbates income inequality, which can weaken support for liberal democracy.

There is no simple answer to these trade-offs. However, any thoughtful approach must be the basis of measurement. Measuring data is not an easy task. We propose a variety of data measurement methods that can be employed by modern firms to measure the amount of data usage, personal value and social welfare costs and benefits.

Trading in the technology, information, and securities markets

Advances in information technology have changed the way security markets share risk and discover asset value. In particular, securities trading is taking place on electronic platforms operated by increasingly for-profit companies that, like other FinTech companies, use algorithms to match buyers and sellers, develop innovative pricing schemes, develop trading and trade-offs. Their platform. Overall, this evolution has intensified competition between trading platforms and securities dealers, resulting in lower trading costs for investors. The report identifies four areas that deserve the attention of policymakers.

First, investors need quick access to market data and a unified view of the market data across the trading venue in order to deal with market segmentation. However, market data prices have been rising in recent years, raising concerns about their market capability on the data of trading platforms. Moreover, in stark contrast to the United States, there is still no consolidated tape on the EU capital market, despite the provisions in the recent regulatory text. A second, related concern is ‘latency arbitrage’. Due to the high-frequency trade, investors may use the data before it is reflected in the price, which makes the unfavorable selection worse for slow traders. Reducing this negative externality is not easy because quick access to market data allows latency arbitrageurs to provide liquidity when needed. Third, the increasing amount of dark trading can undermine liquidity and price discovery in an enlightened market. To address this issue, EU regulators have limited the amount of dark business in the dark pool. However, this cap does not address the increase in internalization (off-exchange trade between dealers and investors, which is subject to less stringent transparency rules than what happens on the exchange). It calls for more regulatory attention to internalization. Finally, electrification raises new risks for financial stability, as exemplified by extreme price changes in a very short period of time (‘flash crash’). The report analyzes the reasons behind this phenomenon and offers a protection: a better combination of circuit-breaker processes across the market.


Auer, R, P Haene, and H Holden (2021), “The Future of Multi-CBDC System and Cross-Border Payments”, BIS Papers No. 115, Bank for International Settlement.

Bolton, P., S. Chechetti, J.P. Dantine and X. Vives (2019), Sound at last? A Decade of Financial ControlThe Future of Banking 1, CEPR Press.

Bolton, P. H. Hong, M. Kakparsic, and X. Vives (2021), The resilience of the financial system to natural disastersThe Future of Banking 3, CEPR Press.

Carletti, E, S Claessens, A Fatas, and X Vives (2020), Bank business model in the post-Covid-19 worldThe Future of Banking 2, CEPR Press.

Duffy, D. T. Foucault, L. Weldcamp and XVives (2022), Technology and financeThe Future of Banking 4, CEPR Press.

Goldfarb, A and C Tucker (2019), “Digital Economics”, Journal of Economic Literature 57 (1): 3-43.

Merton, RC (1995), “An Effective Approach to Financial Intermediation”, Financial management 24: 23-41.

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