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The overarching mandates for digital transformation require massive interactions among many players. The core plan for digital transformation is unbundling and re-bundling critical components to mesh together with network topology. In reconnecting productive elements, counterparty risks are controllable via the use of collateral. The risk-mitigating role of collateral implies that collateral resource topology determines the magnitude of interactions in a network environment. Against rich collateral resources and capability, interactions can be wide-spread and distributed. In contrast, segmented collateral only allows limited interactions. Better interactions among participants in a more distributed network environment do not require legacy institutions’ dominant position. The prominence of legacy trust institutions’ dominant collateral positions makes interactions around them, delimiting the network effect’s scalability. In practice, the reality is a segmented and jurisdictional use of collateral, which dictates the world’s financial flow to generate capital flow uphill. Digital transformation requires massive participation of the general public worldwide with seamless value transfer by allowing a level playing field among participants without particular attractors that impact interactions. The legacy system cannot deal with necessary changes because of its inherently biased selection process. If this does not change, all digital transformation efforts will result in a more polarized world with greater potential vulnerability. …


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Abstract

The Eurodollar system’s unraveling underscores the need to identify a new collateral foundation for interbank-operated global funding markets. Given the size of the major central bank’s balance sheet and ever-expanding presence of the central bank balance sheet, greasing the global financial system’s wheels requires the utilization of Asian collateral for financial plumbing. To ease the burden on excess demand for safe assets, the international community must review assets of Asia as eligible cross-border collaterals, which would help restore balance in the overstretched global financial system.

Introduction

Ever since the repo market turbulence in 2019, global dollar liquidity situations have remained volatile and provided a background for more proactive policy decisions by the FED. Thanks to their timely interventions, the world is experiencing a stable condition even with lingering uncertainties about the underlying trend. Nevertheless, the Covid-19 shock has shattered the fragile conditions that these underlying uncertainties would remain for quite some time in the future. It remains unknown that even the FED can hardly provide an extra buffer for financial stability if the current situations prolong into the future. Moreover, the world is facing an unprecedented problem in a fragmented governance framework, which would further exacerbate fiscal conditions in most major economies worldwide. The question boils down to the global financial system overhaul and how overly dominated the Eurodollar system can balance the global credit supply system and avoid financial debacles associated with the significant financial plumbing issues. …


Consumers today look for convenient, fast, low-cost, and customized banking services. They hop on and off financial services to find those that best fit their taste, and this is why financial institutions cannot stop pouring out novel services into the market. To smoothly surf on this digital wave — to secure customer loyalty, enhance cost efficiency, streamline procedures, and better manage business — financial institutions are deploying the idea of an “agile system.” Agile is an adjective that describes being quick and easy. The term was first coined in the IT industry, but now it is used all over the financial industry as well. Financial institutions that traditionally optimized for regulatory environment are currently reading the trend of innovation and catching up on digitalization by adopting the agile system to proceed business procedures quickly and easily. However, this kind of transformation is quite a challenge under the current regulatory framework. …


Recently in Korea, there was a public controversy about an authority doing expedited executions. However, these kinds of bold implementations are definitely necessary in some areas in order to make real changes in the world. To gain competitiveness in an entirely new race that has already begun globally, we should confront the fact that our economic individuals’ perceptions and experience are trapped in old legal framework and do something about it.

Resolutions could be myopic and perilous when brought up under a closed decision-making system. …


Leverage of data is the core competitiveness for future growth. Big data and AI obviously have ensconced as indispensable tools for creating new values. But look where we are at now, who have been standing at the forefront of IT powerhouses. People take sides, raising their voice for and against privacy protection, which is perceived to be conflicting with data application. True, we are living in a digital age, but broad consensus on privacy level will never be made if data owners continue to feel insecure. Therefore, we definitely need a set of guidelines and social agreement on how to deal with sensitive information and privacy. However, drawing this up is not easy in Korea due to the fragmented legacy system. Advanced laws and regulation system such as the GDPR (General Data Protection Regulation) should be established, but the existing governance structure are far behind the current paradigm. …


The biggest malady in the current tide of super-connectivity is the fragmented organizational structure and decision-making process of the legacy system. While everything else is all connected, major policies and decisions are still segmented and constrained. Our society is falling into a serious chaos, not being able to expand social consensus and making inappropriate responses to the altering environment. The problem of legacy system is even more profound for us Koreans, who are used to the momentum of rapid growth. Laws and regulations need to be amended to tackle this issue, but it is quite a challenge for someone to voluntarily take the lead. In particular, continental law countries generally respond to social changes too often and much through enforcement ordinances and special acts. That is why despite the ample effort, unpredictability and uncertainty are still casting their shadows over our society. …


Korea in the past took financial support for granted to achieve its goal of growth priority. This led to an inevitable financial constraint, making weak the link between economic activity and domestic investment and employment. This has intensified economic bipolarization as well as increased the cost for financial stability. In the meantime, the credit rating of Korean government bond is high at AA but is currently not recognized as indispensable collateral for cross-border transactions. Although the international credit rating standard has approved its eligibility, it is yet to find general acceptance. …


With the world marching towards the 5G era, even consumers who were content with the secureness of the traditional financial industry started to look for new, but safe and convenient, customized services invented by the global IT companies. However, coming up with novel services could be a huge challenge for businesses if regulations do not stop growing more complicated and burdensome. This is why dynamic communications between adjacent sectors, such as joint work and M&A, have become the essence of survival these days.

Playmakers of the financial industry, who are now pioneers of the digital revolution, are well aware of the synergy of cooperation and are constantly interacting with business partners to achieve better innovations. Banks, for instance, are providing differentiated services by collaborating with adjacent areas instead of hiring new employees. Fintech firms are also seeking for a new scope of collaboration that fits within the current regulatory framework. Enemies of the past often become friends today, setting off a new wave of value creation. Even JP Morgan, a long-standing old guard of the financial industry, has launched its own online-only bank Finn and initiated an online loan service for small businesses in collaboration with the fintech lender OnDeck. JP Morgan is also setting up a system of inter-agency operation based on blockchain technology that utilizes the JPM Coin. Other powerhouses such as the Fidorbank and Bank of America are also joining the march by expanding their scope of business cooperation into areas such as cross-border remittance and infrastructure-related services. Basically, the keys to designing a differentiated service are the open cooperative ecosystem and data-based technologies that enable the discovery of hidden linkage among things. …


Now that the world is in the heart of digital age, even consumers of financial industry who mostly have been relatively conservative are demanding for change in the conventional financial services. They are asking for a broader user experience (UX) that IT firms, such as Google and Apple, and fintech firms provide. To swim along the current tides, many global financial institutions have switched their positions to cooperate with adjacent business sectors.

Cooperation — it is not something elective

The industrial era where companies of huge scale, big organization, and unique competency gained comparative advantage has already faded. To stay ahead of the race nowadays, businesses should be good at cooperating with adequate partners to devise and create innovation. Growing number of companies are entering partnerships with various market participants including the fintech firms by promoting collaboration between adjacent areas, going into M&As and investment, and jointly running programs for digital capability. …


Data-based technology is permeating every aspect of our society, breaking down traditional industry boundaries and accelerating value creation in a super-connected environment. Accordingly, legacy hierarchical system and regulatory framework are continually being re-designed and revised to adapt to the new environment and embrace the transition shock. With all these data super-connected and ever-increasing, Big Data and AI are now shaping a new, exciting, and sometimes inscrutable future that is unimaginable in the “silo era.” As the only viable tool to lessen the newly created uncertainty, comprehensive data analysis and management is the key to creating innovative business opportunity, building social institution and infrastructure, and solving intractable problems in almost all areas. …

Gongpil Choi

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