The Money Revolution: Balancing Innovation and Risk in Modern Finance
Three years after Finance & Development highlighted “The Money Revolution,” the transformation of global finance driven by technology and digital assets is fully underway. Innovations are reshaping how money moves, who provides liquidity, and how institutions manage risk, creating both excitement and anxiety across markets.
Stablecoins and Digital Payments
Stablecoins—a form of digital asset backed by currencies or government bonds—have emerged as a major frontier. These assets allow millions of users worldwide to transact across borders 24/7 at low cost, with some dollar-pegged stablecoins serving as financial lifelines in high-inflation economies. New legislation in the U.S. and elsewhere could further accelerate their adoption.
Hélène Rey, London Business School professor, highlights both the benefits and risks of widespread stablecoin use. Advantages include faster, cheaper cross-border payments. Risks involve potential dollarization, volatile capital flows, weakened banking systems, and money laundering or other financial crimes. Rey warns that while stablecoins are promising, they are “likely to create major financial stability risks.”
Yao Zeng of the University of Pennsylvania’s Wharton School frames stablecoins within broader market changes. Nonbanks are increasingly providing liquidity, while lenders rely on AI and big data to speed loan approvals and reduce collateral requirements. “Stablecoins may function well in good times, but they can falter under stress,” he notes, underscoring the importance of robust regulatory frameworks.
Public and Private Innovation
Financial innovation extends beyond stablecoins. Governments and central banks are responding to consumer demand for fast, efficient payments. The IMF highlights India’s Unified Payments Interface, which connects hundreds of banks and apps to process over 19 billion transactions monthly, demonstrating how public-sector initiatives can complement private innovation.
Meanwhile, fintechs, big tech companies, and crypto platforms are challenging traditional banks. Iñaki Aldasoro, Jon Frost, and Vatsala Shreeti of the Bank for International Settlements argue that forward-looking public policies are essential to ensure that competition and innovation generate broad societal benefits.
Preventing Financial Crime
Innovation also introduces new risks. Criminals were early adopters of crypto, prompting regulators to balance privacy, speed, and security. Darrell Duffie and colleagues at Stanford outline practical approaches for preventing tax evasion, money laundering, and terrorism financing while enabling innovation to flourish.
The Path Forward
The key challenge for policymakers is achieving a careful balance: embracing financial innovation, improving efficiency and access, while safeguarding consumers, investors, and financial stability. As stablecoins and other technologies reshape payments and financial markets, clear regulation will be critical to managing risks and unlocking the full potential of the money revolution.
