Centuries ago, people would not have had paper or paper currency or coins to call their material possessions. There was no formal banking system then. Early humans did not have anything such as money or wealth. The barter system was common until even 200 years ago. Even 30 years ago, we did not have carbon credits or blue economy financing. Even a decade ago, we could not imagine transacting our payments or other financial transactions through mobile phones, without even remembering or thinking of a physical branch office of any of the financial Institutions. How did we start trusting something that was not physically relatable? How did we start trusting mobile-based finance?
Each of the previous three Industrial revolutions have brought newer asset classes, and subsequently the evolution of financial regulations to steer them. In fact, society’s need for storing money or wealth, increased and interlinked global trade, human migrations across nations, political compulsions, and innovations across science, economics and finance have led to newer asset classes. With the outcome of wealth that the first Industrial Revolution created, the financial structures that it posed and the creativity needed for ownership of those entities, came the idea of Company Equity Capital and Company Stock. Similarly a few centuries ago, when governments needed to fund wars they waged, they issued Bonds to raise monies. Thus came Sovereign Bonds as assets to be funded and traded. Political systems realised a need for financing their Climate Action efforts. Thus came about the concepts of Carbon credits, trading mechanisms for the same, and Climate financing. Many asset discoveries or formalisations were initially seen as fads, and many stayed away from them. An example — it took a few centuries before societies accepted debt as a financial asset class.
Centuries ago, people used pottery as materials of daily usage. Is it fair to trade those surviving items today with valuations? Without any moral filters, the private investment market recognises some of those artefacts as of a monetary value, and transactions happen between the willing buyer and seller. As a society, we also see the asset-arbitrage: usage of a particular lower-valued product intended for one purpose, being valued higher by another market for a different end-use purpose. Denims (jeans) were innovated for usage in manual hard labour. Yet today, in the global fashion circuits, denims can be more expensive than, say, a computer.
Up almost until Indian Independence, Sahukars used to lend against mortgages — probably the most common and largely used asset class. Yet until probably in the early 2000s, credit was still seen as poor (human social) behaviour, and the individual credit offtake was low. Once the generational shift and acceptance of credit grew in the next two decades, we have seen credit offtake grow multi-fold, from livelihood-led requirement to current lifestyle-led requirement, thereby causing worries to the regulators (or products like Buy Now Pay Later, etc). So social and cultural shifts also cause financial asset buildup, something that causes regulatory friction if policy development does not take place quickly. If there is sufficient reason to believe that something will create long-term public injury, governments and regulators will have to act against those products or services. But social obligation also demands that they build safety mechanisms to make sure that the specific product is not available underground!
Until recently, the world had only traded in tangible physical materials for financial gains. Or in services that could be priced on the basis of demand vs supply of skill sets. Today, the world has a newer asset class — Digital Assets — something that’s not physical or tangible and not a service in its entirety. This is what creates a challenge for most regulatory frameworks in valuing the asset, if at all it can be called one. Digital assets have emerged as an asset class, or subset of one. The regulatory worry is that if they are even worth a tulip. Of course, contemporary research has also shown how even the propagation of tulip-mania and supposed crash of the Dutch economy has been shown up as a myth! Yet we continue believing in that story.
The evolution of digital technologies offers newer consumer convenience, as we have seen from usage in the payments industry and digital lending. Some of the technologies are even used for building digital public good. Yet the new emerging technologies are also the basis of newer asset classes, and adds to our worries. What the future holds for technological, scientific, and societal progress is unknown. Let us not assume the worst of them, yet. That’s our lessons from human history, that one has to practice “never say never”. The history of finance indicates that the emergence of new asset classes is inevitable. Sometimes it might take a century, and at other times it may only take years.
Many of these could push the boundaries of regulatory sovereignty. This is where one has to accept the regulatory authority for financial stability and fiscal resilience. Regulators have to steer society for long-term stability, yet have to take short-term harsher and unpopular calls. The global financial crisis showed us the hard reality — that the world economy is interconnected, that financial systems are critical to the world, and any slowdown or meltdown there could hurt everything that society stands for.
This is why it’s heavy load lifting for financial regulators globally. After all, institutional resilience is also about balancing the compulsion of being morally virtuous, and to outlast any moral hazarding.
Dr Srinath Sridharan is a corporate adviser and author of Time for Bharat. He tweets @ssmumbai
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