In light of the recent Paytm crisis, one might think of the time when it first came into existence- the time Raghuram Rajan launched a new payment system called the Unified Payments Interface (UPI) and re-emphasised the committment of the RBI to explore new technology within the bounds of regulation. It sparked a debate within economic circles about the ongoing tussle between innovation and regulation.
The premise is the fact that financial markets are constantly coming up with new innovations- blockchain technology, cryptocurrency, CBDCs and several others. However, such new technology often has additional costs attached to it- these can take shape whenever their execution is unregulated by regulatory monetary authorities. These costs are manifold- disproportionate distribution of resources, unbounded profit, leakage of sensitive information or instability in the economy.
One such idea that sprouted in the US securities market was that of 'Securitisation'. It was one of the biggest factors contributing to housing market crash of 2007-08. Under securitisation, people who need cash or liquidity, mortgage out their assets to financial intermediaries who then bundle them into various bundles or tranches, each with varying risk appetites. As as investor, you can choose what risk appetite you have and invest accordingly. The concept of securitisation itself is quite clever and helps asset-owners get easy access to liquidity in the market. But as this concept got popular, lots of people started to mortgage out real-estate. It became the new financial trend- soon people were taking out loans to finance previous loans and the securities on the market got riskier to invest in. Financial rating agencies however, ignored this- they kept on giving highly positive accreditations to investments that were highly risk-ridden. It was the most vicious cycle ever- people in desperate need of cash kept mortgaging out their real estate, and when the time for payments came, they often defaulted. Soon, the market was flooded with real estate, and their prices crashed. Without government regulation, the bubble burst and the economy crashed too.
Soon as activity picked up again, it was time for the government to act swiftly. They immediately introduced legislation like the Dodd-Frank Wall Street Reform and Consumer Protection Act, aimed at regulating financial institutions primarily responsible for the 2007-08 crisis, and educating customers in identifying predatory mortgage loans.
The entire episode links to the larger debate on whether it is feasible, or even acceptable, for the government to lay a check on new technology entering the economy. For example, the Indian government’s recent announcement about putting restrictions on cryptocurrency framework in India has caused stir in the markets, with some opposing and other supporting. The bottom line of the argument begs an essential question- are we willing to accept the delay, or weakening of the power of new technology through regulation, to protect ourselves from the potential risks that its misuse poses?
Perhaps, the final answer is left for the reader to ponder over.
コメント