The Bank for International Settlements ("BIS") urged regulators to implement policies and regulations that address the emergence of big technology ("big tech") firms in financial markets.

In its Annual Economic Report, BIS advised regulators to address the potential threat to financial stability, competition and data protection posed by the emerging big techs (e.g., Alibaba, Amazon, Facebook, Google and Tencent). The report says regulators should aim to close regulatory gaps between big techs and other financial institutions. BIS encouraged regulators to extend applicable existing banking regulation to big techs using the "basic principle" of "same activity, same regulation."

However, in cases where big techs have "wrought structural changes . . . outside the scope of existing financial regulations," BIS advocated for the creation of new rules. BIS stated that different firms may require different approaches, noting that facilitating the entry of big techs into financial services may in some cases be conducive to greater competition and, in other cases, to less.

The report considers areas where big techs may have long-term competitive advantages over traditional financial services firms. It also considers the entry of technology firms into a variety of financial service businesses, including payments, and consumer and small-business lending and insurance. Finally, a significant portion of the report is taken up by raising privacy concerns and other issues as to how data may be used or misused.

To navigate potential policy choices, BIS created a "regulatory compass" to help regulators. The compass is broken down by:

  • North, which encourages new entry;
  • South, which restricts the entry of big techs;
  • East, which endows customers with property rights over their data; and
  • West, which limits big techs' use of customer data.

Commentary / Steven Lofchie

To boil down this report to a single sentence: In a competitive battle between big tech and big finance, big tech is going to be the winner.

According to the report, big tech's superior access to data, superior usage of that data, greater size, larger customer base, and more diverse range of product offerings makes it the overwhelming long-term favorite in a competitive battle with traditional financial service firms. The report finds this both potentially good (lower costs to consumers as prices are brought down by more efficient competitors) and potentially bad (higher costs to consumers as competition is reduced or eliminated; loss of privacy as data is analyzed with increasing accuracy).

One of the more interesting aspects of the report is how little of its significant discussion is about traditional financial regulation. The first paragraph launches immediately into concerns with competition; i.e., the ability of technology firms to "offer a range of services that exploit natural network effects." Unsurprisingly, another significant aspect of the report deals with privacy and data usage.

The conclusion of the report is, appropriately, non-prescriptive as to what regulators should do next given the complexity of the issues. The report is a good read.

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