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The Political Economy of FinTech

Paper Session

Saturday, Jan. 4, 2025 10:15 AM - 12:15 PM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 14 & 15
Hosted By: American Finance Association
  • Francesco D'Acunto, Georgetown University

Shadow Banks on the Rise: Evidence Across Market Segments

Kim Cramer
,
London School of Economics and Political Science
Nishant Vats
,
Washington University in St. Louis
Nirupama Kulkarni
,
Centre for Advanced Financial Research and Learning
Pulak Ghosh
,
Indian Insitute of Management-Bangalore

Abstract

This paper examines the comparative advantages of shadow banks using novel credit bureau data on 653 million formal retail loans in India. Proxying credit demand shocks with weather variation, we show that Fintechs respond more than other lenders in uncollateralized markets. Conversely, non-Fintech shadow banks are more responsive in collateralized markets. Both show stronger responses for borrowers with low credit scores or no credit history. Exploiting the geographic heterogeneity in the adoption of digital payments technology we document the importance of technology for Fintechs. Leveraging four natural experiments across lenders, time, and products, we establish the importance of lax regulation and physical presence for non-Fintech shadow banks. Our results suggest that the dominant comparative advantages of shadow banks differ across market segments.

CBDCs, Payment Firms, and Geopolitics

Tobias Berg
,
Goethe-Universität Frankfurt
Jan Keil
,
Humboldt University of Berlin
Felix Martini
,
Frankfurt School of Finance and Management
Manju Puri
,
Duke University

Abstract

We analyze the effect of a major central bank digital currency (CBDC) – the digital euro – on the payment industry to find remarkably heterogeneous effects. Stock prices of U.S. payment firms decrease, while stock prices of European payment firms increase in response to positive announcements on the digital euro. Bank stocks do not react. We estimate a loss in market capitalization of USD 127 billion for U.S. payment firms, vis-a-vis a gain of USD 23 billion for European payment firms. Our results emphasize the medium-of-exchange function of CBDCs and point to a novel geopolitical dimension of CBDCs: enhanced autonomy in payments.

Inclusion and Democratization Through Web3 and DeFi? Initial Evidence from the Ethereum Ecosystem

Lin William Cong
,
Cornell University
Ke Tang
,
Tsinghua University
Yanxin Wang
,
Xi'an Jiaotong University
Xi Zhao
,
Xi'an Jiaotong University

Abstract

Web3 and DeFi are widely advocated as innovations for greater financial inclusion and democratization. We assemble (and share) the most comprehensive dataset to date about the largest Web3 ecosystem and use one of the largest-scale computing in the economics literature to investigate the claim. We document Ethereum's network structure, time trends, and distributions of transactions, mining, and ownership. Mining income and Ether ownership are concentrated in a few nodes, even after excluding exchange and mining pool wallets, with inequalities more exacerbated than observed in the real economy. Network activities are dominated by large transactions, shifting from peer-to-peer to user-DApps/DeFi interactions, and from Ether-based to ERC-20-token-based. High percentage transaction fees, congestion-induced gas-price fluctuation, suboptimal reserve setting, and large return volatility of tokens disproportionally harm small, unsophisticated, and new nodes, with high failure rates hurting all users. Finally, we present causal evidence that prominent programs such as EIP-1559 base-fee burning mechanism and OmiseGo airdrop promote inclusion and equality through monetary redistribution.

Discussant(s)
Rebecca De Simone
,
London Business School
Sergey Sarkisyan
,
Ohio State University
Anastassia Fedyk
,
University of California-Berkeley
JEL Classifications
  • G2 - Financial Institutions and Services