Do Fintech and Cryptocurrency Initiatives Make Banks Less Special?

Banks as a group have traditionally been considered “special” in the sense of meriting the full set of provisions of the financial safety net. The specific motivations for that view have evolved over time, although it owes more to a specific combination of economic functions performed as opposed to any particular function. These functions include offering transaction accounts redeemable in cash on demand, providing liquidity, and serving as conduits for payments and monetary policy transmission. Recent developments suggest however that almost all of the individual economic functions performed by banks can in fact be provided in unbundled form by Fintech initiatives, in some cases more rapidly, at lower fees, and via more streamlined digital interfaces. One important exception remains monetary policy transmission. For the performance of this function, policy makers and central bankers have reserved a privileged role for banks. A radical departure from the current fractional reserve system would be required to unbundle that function and separate money from the banking system, and some private cryptocurrencies have been proposed with the explicit intent to change the nature of money. So far, the present article concludes such initiatives remain marginal, so that banks as a group remain “special”. This observation owes much to the fact that central banks rely on the capacity of the banking system to create money and provide the economy with adequate liquidity and, despite occasional financial crises, have concluded that the efficiency of the current system outweighs the associated costs.