Framing the Debate on Fintech: Current Trends and Continuing Policy Concerns
IMF News, April 1, 2019
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- Published: April 1, 2019
Overview and context
- Remarks by Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department, IMF at the IMF Fintech Roundtable, Washington, D.C
- Date: April 1, 2019
- Summit purpose: share insights about the future of financial technologies and the policy issues they raise; follow up on the launch of the “Bali Fintech Agenda.”
- High-level message:
- Authorities should welcome Fintech for its potential to increase inclusion and efficiency.
- Successful adoption requires building skills and expertise, educating consumers and investors, and creating enabling foundational infrastructure.
- Continuous monitoring and active dialogue with industry and international peers are essential to assess emerging risks and form timely policy responses.
Recent developments highlighted (March headlines and examples)
- Legal and regulatory actions:
- China’s central bank: “gradually set up a system of rules for the regulation of Fintech… and create a favorable policy environment for Fintech development."
- Japan: cabinet approved draft amendments to financial instruments and payment services laws to cap leverage in virtual currency margin trading.
- Mexico: central bank proposed regulations under a new Fintech law to limit cryptocurrency exchanges.
- Switzerland: Federal Council initiated a consultation to adapt federal law to Distributed Ledger Technology (DLT).
- Hong Kong: issued its first batch of on-line banking licenses; virtual banks to face the same supervisory requirements as conventional banks.
- Central bank digital currencies (CBDCs):
- Two central banks — the Eastern Caribbean Central Bank and the Central Bank of the Bahamas — advanced plans to conduct blockchain-based CBDC pilots.
- The Riksbank of Sweden moved forward with its second interim report into the e-krona.
- The Bank for International Settlements expressed concerns about potential impact on monetary policy and possible “run risk.”
- Cross-border payments and transfers:
- Six international banks announced plans to issue “stablecoins” on IBM’s World Wire to enable faster, cheaper remittances/FX transfers for regulated institutions.
- Western Union partnered with Thunes to enable direct transfers to mobile wallets globally using blockchain technology.
- Payments and Financial Market Infrastructures (FMIs):
- Deutsche Bundesbank and Deutsche Börse completed performance tests of blockchain-based securities settlement prototypes.
- Swiss operator SIX Group selected R3’s Corda Enterprise for its digital asset trading, settlement, and custody service.
Policy implications and recommendations
- Enable and prepare:
- Build foundational infrastructure: broadband internet, mobile data services.
- Promote digitization across government and broader service economy.
- Encourage more efficient payments systems and open, contestable markets to support competition.
- Promote financial inclusion and development.
- Monitor, engage, and adapt:
- Maintain ongoing dialogue with industry (innovators and incumbents).
- Continuously monitor developments to assess risks and enable timely policy responses.
- Adapt legal and regulatory frameworks to ensure robustness while allowing beneficial innovation.
- Address gaps and emerging risks:
- Many risks can be addressed by existing frameworks, but new players (non-banks, ICT providers) and cross-sectoral products require adapting prudential regimes and modernizing legal frameworks.
- Some Fintech business models or products (crowdfunding platforms, e-money, pre-paid cards, crypto assets) could enable circumvention of current controls or be used for criminal purposes, posing threats to financial integrity.
- Fintech reshapes market segments that transmit monetary policy — central banks and supervisors must assess implications for monetary policy and financial stability.
- Data and operational resilience:
- Develop robust financial and data infrastructure to support operational resilience and preserve confidence.
- Address issues: data ownership and privacy, cyber security, operational and concentration risks, business continuity, consumer protection.
- International cooperation:
- Deepen international dialogue to exchange information and share experiences.
- IMF and World Bank can assist collective surveillance and capacity building, collaborating with other international bodies to promote global growth and financial stability.
Regulatory approaches and innovation tools
- Sandboxes and alternatives:
- About 33 sandboxes exist in advanced economies and Emerging Market and Developing Economies; a few multi-jurisdictional sandboxes aim to promote cross-border harmonization.
- Growing consensus: sandboxes are not a panacea; it is too early to determine their success.
- Use of alternative tools is increasing: single points of contact, accelerators, innovation hubs.
- Key regulatory questions posed:
- How will Fintech regulations evolve?
- How successful have sandboxes been so far?
- Where did sandboxes succeed and fail?
- How useful are sandboxes compared to other instruments?
Central Bank Digital Currencies (CBDCs)
- Current engagement:
- “Less than one-quarter of central banks around the world are now actively exploring the possibility of issuing CBDCs, and only four pilots have been reported.”
- Core policy questions:
- Why consider issuing CBDCs, and under what circumstances should they be issued?
- What are the design options and their impact?
- What are the risks to central banks?
- Research sharing:
- Session planned to present conclusions of in-depth research from three countries that have invested heavily in exploring CBDC issues.
Payments, DLT, and FMIs — experiments and questions
- Observed trends in retail payments: move toward real-time settlements, flatter structures, continuous operations, and global reach.
- DLT experimentation across FMIs: examples include Jasper I & II (Canada), Khokha (South Africa), Stella I (Euro area and Japan); DLT prototypes for securities settlement and other FMIs.
- Key questions for assessment:
- What is the scope of current or upcoming DLT for broad adoption?
- How do DLT systems compare to newer, real-time centralized payments systems (using a cost-benefits analysis)?
- What are the potential risks?
Legal frameworks and gaps
- Status:
- Existing legal frameworks inadequately address many Fintech aspects; diversity in progress and approach to legal reform.
- Some adaptation achieved for crypto assets and mobile money; less progress on financial-sector private law (payments and securities transfer law, solvency, other concerns).
- Legal questions to be examined:
- Legal status of novel Fintech concepts (e.g., smart contracts; claims on non-bank entities such as telecom companies providing mobile-initiated value-transfer services).
- Legal basis for activities tied to technological change (e.g., treatment of crypto-asset balances in a custody service provider’s bankruptcy).
- Allocation of risk of loss under applicable law (e.g., treatment of operational vulnerabilities in underlying technology).
Data governance and cybersecurity
- Challenges:
- Proliferation of data increases its value and raises implications for efficiency, stability, inclusion, and rights.
- Significant diversity in approaches to data governance: data rights, localization, privacy, international coordination.
- Recent data breaches highlight cybersecurity risks and common gaps in mapping cyber risks in the financial sector.
- Session focal points:
- Implications of different data-governance frameworks for market efficiency, access, financial stability, rights to data, portability, interoperability, and protection.
- How to strengthen cybersecurity to increase resilience of financial systems.
Roundtable structure and priorities
- Agenda themes for the meeting:
- The regulatory approach to Fintech
- Central Bank Digital Currencies
- Payments and settlement systems
- Legal frameworks
- Data governance
- Expected outcomes:
- Peer-to-peer, in-depth dialogue and information-sharing among IMF member countries.
- Share national experiences and discuss policy responses in line with the Bali Fintech Agenda.
Remarks by Tobias Adrian, IMF Fintech Roundtable, April 1, 2019.