Finance and technology

The evolution of technology in the financial sector has been occurring over the past few decades and has generally been met with favourable regulatory response. The transition to a digital financial industry began years ago and included the rise of the ATM machines. We now have electronic cross-border payment systems such as SWIFT (Society for Worldwide Interbank Financial Telecommunications) and also here in Trinidad and Tobago, the establishment of RTGS (real time gross settlement systems). This process took place through a carefully developed partnership between the major central banks and financial institutions, targeted at both supporting economic and financial globalisation, and reducing the serious risks intrinsic in cross-border payments, predominantly systemic risks.

Crypto-currencies have unfortunately faced more skepticism, and understandably so. In January 2011, an ambitious entrepreneur named Ross Ulbricht produced an online marketplace called Silk Road which was truly unique. Firstly, it was not accessible on the normal Web but it existed in an encrypted and secretive part of the Internet known as the ‘dark Net’. Secondly, it presented a range of illegal merchandise not found on eBay or Amazon, typically drugs, catering to discerning users by proposing customer reviews and vendor ratings. Thirdly, the Silk Road was able to function because it used the new Bitcoin virtual currency that permitted users to stay unknown and carry out transactions with little fear of intervention by law enforcement. While the Silk Road was ultimately shut down and its inventor arrested and convicted, the potential use of the Bitcoin and the prospects for a digital economy assisted in instituting it as tool worth keeping. Bitcoin was really developed in 2008 as a concept by an anonymous developer known by the pseudonym of Satoshi Nakamoto, who posted a paper detailing the currency to a cryptography mailing list. The paper details a decentralised system with no issuing authority that would serve as a means of exchange and also as an anonymous and fully open log of all transactions (known as the blockchain). The currency became fairly popular, but it was not until the establishment of the Silk Road that it was truly noticed. While it is obvious that Bitcoin has some eye-catching characteristics, it also has some grave difficulties that have prevented it from being embraced by the mainstream.

The lack of an issuing body and no central authority responsible for the payment scheme may lead one to believe that it is not even possible to take on any sort of regulatory effort. However, Bitcoin has some practices that suggest some form of regulation is required if it becomes widespread.

We can agree that the use of finance for economic development has long been an important focus for policy-makers seeking to support growth in developing countries. Currently, there is merit in applying technology to address challenges and create opportunities across the financial sector. It should be recognised however that policy-makers and regulators will face the challenge of rapidly transforming financial systems, technological developments and alternative currencies in coming years, since Bitcoins are presently used in transactions by some establishments in Trinidad and Tobago. It is of utmost importance that we build the necessary infrastructure to support their regulation and oversight.