10 September 2019

Bad money: Inside the shadow payment system

In their 2017 paper on The Shadow Payment System, Oxford professors Dan Awrey and Kristin van Zwieten examined the risks of the shadow market to its customers and to the wider financial community. Now, Dan, who is now at Cornell University, and Kristin are delving deeper into the world of shadow payments with new research commissioned by the SWIFT Institute.

For centuries payment systems have been legally and operationally intertwined with the conventional banking system. Bank regulation provides safeguards that protect the overall banking system, and more specifically, you and I as customers. For those of us over a certain age, the bank payment system was the only option we had to safeguard our money, earn interest, make payments, etc. That, however, is changing.

In recent years we have seen the emergence of a rapidly growing and evolving shadow payment system. Peer-to-peer systems, mobile money platforms, crypto-currency exchanges, amongst others are growing in size and popularity. These shadow payment system platforms perform many of the same functions as conventional banks. In many ways they offer the same services in a more customer friendly way. But is it safer?

The defining feature of shadow payment platforms is that they operate outside the scope of bank regulation. Customers are therefore deprived of deposit guarantee schemes, special resolution regimes, and other legal protections typically enjoyed by customers of conventional banks. So, are my savings at risk if I use them?
The new research Dan and Kristin are undertaking represents the first attempt to map the global shadow payment system. To do this they are focusing on three dimensions:

1. Constructing a taxonomy of different types of shadow payment system platforms
2. Identifying the largest shadow payment system platforms for each type
3. Mapping the legal geography of the shadow payment system (e.g. where platforms are domiciled, the laws governing their customer contracts, regulatory regimes to which they are subject, etc.)

This mapping exercise should enable the researchers to measure the level of consumer protection within the shadow payment system. This is no easy task. There is a great deal of diversity in the business models of the various shadow payment system platforms, as well as significant differences in regulatory regimes that govern them. Different platforms, therefore, may post very different risks.

Their research is nearly finished and will be published in early October. You can get a preview at Sibos 2019 in London where Kristin van Zwieten, Clifford Chance Associate Professor of Law and Finance at the University of Oxford, will present the research findings during the SWIFT Institute’s lunch & learn session on Wednesday 25 September at 12:15pm.


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