FinTech Notes
2021
August 24, 2021
The Impact of Fintech on Central Bank Governance: Key Legal Issues
Description: Fintech presents unique opportunities for central banks. The rapid changes in technology that are transforming the financial system will allow central banks to enhance the execution of various of their core functions, such as currency issuance and payment systems. But some aspects of fintech pose major challenges. Central banks have always been at the cutting edge of financial technology and innovation. In the past, the invention of the banknote, the processing of payments through debits and credits in book-entry accounts, and the successive transitions of interbank payment systems from the telegraph to internet protocols were all transformative innovations. Today, central banks are facing new and unprecedented challenges: distributed ledger technology, new data analytics (artificial intelligence [AI] and machine learning), and cloud computing, along with a wider spread of mobile access and increased internet speed and bandwidth. The purpose of this note is to discuss the authors’ preliminary views on how, from a legal perspective, central banks can best deal with the impact of fintech on their governance. These preliminary views are based on a review of central banks’ reaction thus far to the challenges posed by fintech to the legal foundations of their governance.
2020
June 24, 2020
Distributed Ledger Technology Experiments in Payments and Settlements
Description: Major transformations in payment and settlements have occurred in generations. The first generation was paper-based. Delivery times for payment instruments took several days domestically and weeks internationally. The second generation involved computerization with batch processing. Links between payment systems were made through manual or file-based interfaces. The change-over period between technologies was long and still some paper-based instruments like checks and cash remain in use. The third generation, which has been emerging, involves electronic and mobile payment schemes that enable integrated, immediate, and end-to-end payment and settlement transfers. For example, real-time gross settlement systems have been available in almost all countries. DLT has been viewed as a potential platform for the next generation of payment systems, enhancing the integration and the reconciliation of settlement accounts and their ledgers. So far, experiments with DLT experimentations point to the potential for financial infrastructures to move towards real-time settlement, flatter structures, continuous operations, and global reach. Testing in large-value payments and securities settlement systems have partly demonstrated the technical feasibility of DLT for this new environment. The projects examined analyzed issues associated with operational capacity, resiliency, liquidity savings, settlement finality, and privacy. DLT-based solutions can also facilitate delivery versus payment of securities, payment versus payment of foreign exchange transactions, and efficient cross-border payments.
January 10, 2020
Institutional Arrangements for Fintech Regulation and Supervision
Description: Fintech developments are shaking up mandates within the existing regulatory architecture. It is not uncommon for financial sector agencies to have multiple policy objectives. Most often the policy objectives for these agencies reflect prudential, conduct and financial stability policy objectives. In some cases, financial sector agencies are also allocated responsibility for enhancing competition and innovation. When it comes to fintech, countries differ to some extent in the manner they balance the objectives of promoting the development of fintech and regulating it. Countries see fintech as a means of achieving multiple policy objectives sometimes with lesser or greater degrees of emphasis, such as accelerating development and spurring financial inclusion, while others may support innovation with the objective of promoting competition and efficiency in the provision of financial services. This difference in emphasis may impact institutional structures, including the allocation of staff resources. Conflicts of interest arising from dual roles are sometimes managed through legally established prioritization of objectives or establishment of separate internal reporting lines for supervision and development.
January 10, 2020
Regulation of Crypto Assets
Description: The rapid growth of crypto assets has raised questions about the appropriate regulatory perimeter and the ability of the existing regulatory architecture to adapt to changing conditions. Effective regulation of financial services promotes long- term economic stability and minimizes the social costs and negative externalities from financial instability. The same underlying principles for regulation should apply to nascent products and services based on innovative technologies, notwithstanding design challenges.
2019
July 15, 2019
The Rise of Digital Money
Description: This paper marks the launch of a new IMF series, Fintech Notes. Building on years of IMF staff work, it will explore pressing topics in the digital economy and be issued periodically. The series will carry work by IMF staff and will seek to provide insight into the intersection of technology and the global economy. The Rise of Digital Money analyses how technology companies are stepping up competition to large banks and credit card companies. Digital forms of money are increasingly in the wallets of consumers as well as in the minds of policymakers. Cash and bank deposits are battling with so-called e-money, electronically stored monetary value denominated in, and pegged to, a currency like the euro or the dollar. This paper identifies the benefits and risks and highlights regulatory issues that are likely to emerge with a broader adoption of stablecoins. The paper also highlights the risks associated with e-money: potential creation of new monopolies; threats to weaker currencies; concerns about consumer protection and financial stability; and the risk of fostering illegal activities, among others.