fintech and financial services: initial considerations...mcm’s current work: fintech and central...

Fintech and Financial Services: Initial Considerations

B

BB

PFTAC Steering Committee Meeting, March 2018Naomi Griffin, MCM TA Deputy Division Chief

IMF’s Work on FintechIMF’s interest in Fintech stems from its mandate to “promote the stability of the international monetary system”.

2

Agenda

• Fintech innovations

• Cryptocurrency/Crypto-assets

• Implications for cross-border payments

• Regulation and financial stability

• MCM’s current work on fintech

1

3

2

4

3

5

Exponential pace of financial innovation

Everything else FinTech

4

Investment and spike in Fintech interest

0

20

40

60

80

100

2007-0

5

2008-0

5

2009-0

5

2010-0

5

2011-0

5

2012-0

5

2013-0

5

2014-0

5

2015-0

5

2016-0

5

2017-0

5

Artificial intelligence Machine learning

Distributed ledger Big data

Accelerating interest in various building blocks of Fintech

(Google Interest Index, 100 reflects peak popularity)

Source: Google Source: KPMG

0

4

8

12

16

20

0

200

400

600

800

1000

2010 2011 2012 2013 2014 2015 2016

Capital Invested (RHS) Volume (LHS)

Investors double down on fintech businesses

(number of deals and capital invested in USD bn, respectively)

5

Fintech innovations are far reaching

Machine learning

Predictive analytics

Distributed ledger (Blockchain)

Smart contracts

Biometrics

APIs

Digital wallets

Foundations Innovations Pay Get AdviceSave Borrow Manage

Risks

Investment advice (robots)

Technology Financial Services

Credit decisions

Regtech, fraud detection

Asset trading

Settle payments

B2B

Back-office and recording

Digital currencies

Identity protection

Automatic transactions

Security

Easy to use digital wallets; Finance dashboards; P2P

Crowd-funding

Inter-operability and expandability

AIBig Data

Distributed Computing

Cryptography

Mobile Access Internet

Machine learning



Smart contracts

Biometrics

APIs

Digital wallets


Risks



Credit decisions


Asset trading

Settle payments

B2B


Digital currencies

Identity protection


Security


Crowd-funding


AIBig Data


Cryptography


Machine learning



Smart contracts

Biometrics

APIs

Digital wallets


Risks



Credit decisions


Asset trading

Settle payments

B2B


Digital currencies

Identity protection


Security


Crowd-funding


AIBig Data


Cryptography


Machine learning



Smart contracts

Biometrics

APIs

Digital wallets


Risks



Credit decisions


Asset trading

Settle payments

B2B


Digital currencies

Identity protection


Security


Crowd-funding


AIBig Data


Cryptography


Machine learning



Smart contracts

Biometrics

APIs

Digital wallets


Risks



Credit decisions


Asset trading

Settle payments

B2B


Digital currencies

Identity protection


Security


Crowd-funding


AIBig Data


Cryptography


6

Distributed Ledger Technology (DLT): a network recording ownership through a shared registry

Centralized ledger

Clearing house

DLT uses cryptography to allow participants on the network to record new transactions on

the ledger in a secure way, without the need for a central certifying authority.

Ledger

Distributed ledger

Ledger

Ledger

Ledger

Ledger

7

Agenda






2

1

3

4

8

5

What is money?

Central bank money: The value is backed by creditworthiness of the central bank and the government. Supply should increase in line with non-inflationary demand.

Private money: The value of privately issued currencies has historically been supported by the private issuer’s credibility and assets, such as commodity reserves.

Cryptocurrency (e.g. Bitcoin): The value of cryptocurrencies does not have any backing from any source. They derive value solely from the expectation that others would also value and use them. Supply is not linked to a real asset or demand.

9

Are cryptocurrencies money? They do not yet completely fulfill the economic roles of money

Store of value

• High price volatility

• No intrinsic value

• No national or private backing

• Inflexible supply

• Unpredictable demand associated with speculative hoarding

• No lender of last resort

Medium of exchange

• Small size

• Total market value: US$ 7 billion

• US currency in circulation: US$ 1.5 trillion

• Limited acceptance (not legal tender)

Unit of account

• Still limited use; the value is captured by the exchange rage vis-à-vis fiat currency.

10

High price volatility of Bitcoin

11

0

10

20

30

40

50

60

70

Bitcoin/$ Brazil

real/$

Mexico

peso/$

South

Africa

rand/$

Euro/$ Yen/$ Oil Gold S&P500

Volatility of Bitcoin and Selected Currencies and Assets, 2015

(Standard deviation of daily price changes, annualized in percent)

Could privately issued cryptocurrencies substitute for national currencies?

➢There is a welfare-improving role of central bank money—active monetary policy can smooth fluctuations over business cycles

➢The private provision of money is not optimal when an economy face system-wide liquidity shortages (i.e., cryptocurrency scheme lacks the LOLR function).

Absent regulatory measures, cryptocurrencies will likely be more widely adopted in country with less credible monetary policies and/or with weak payment systems.

12

Introduction of central bank digital currencies

• Balance of benefits and costs is still being analyzed

• Resolving coordination problems between private networks

• Reducing the risk of single point of failures

• Retaining control of monetary policy

Central Bank

Payment System

Participant 2 Participant 3Participant 1 Participant 4

DLT-based representation of fiat

money as a new means of payment and

store of value

1313

Agenda






3

1

2

4

14

5

Payment systems are based on accounts held with central parties

➢ Interbank payment from

A to B

➢ Central record (ledger)

of interbank transactions

Role of Central bank

Central Bank

Bank B

Client

A2

Settlement accounts of

banks at a central bank

Bank AClient

A1

Client

B1

Client

B2

TRUST is key

15

Evolving landscape for cross-border payments

Country A

Central Bank

Domestic

Payment System

Bank

Nonbank

Bank

Nonbank

Country B

Central Bank

Domestic

Payment System

Bank

Nonbank

Bank

Nonbank

Route 1: Correspondent Banking

Route 2: Payment System Link

Payor Payee

Current Future?

Account-based

✓ Choice of account-based and token-based systems

✓ Less reliance on correspondent banks

New networks and means of payments

B

A

Ledger

Ledger

LedgerLedger

Ledger

Ledger

Ledger

Ledger

Ledger

16

Ripe opportunities to improve payment chain

Demand Supply

Capturing

(Banks,

MTOs,

Postals,

Digitals,

Telecoms,

Agents,

Payment

Cards)

Messaging

(SWIFT,

proprietary

and public

networks)

Settlement

(Central

banks,

Commercial

banks)

Disbursing

(Banks,

MTOs,

Postals,

Digitals,

Telecoms,

Agents)

Shortcomings: costly, cumbersome, slow, and opaque

The whole process could take between 3 to 5 days.

17

How could Fintech reshape the landscape?

Back-end processes

• Efficiency gains

from payments

tracking, accounts

reconciliation, and

liquidity optimization

• Small impact

(barriers in

correspondent

banking)

Compliance

• Large savings from

compliance costs

with information

sharing (KYC

utilities and digital

identities)

• Some impact with

new entrants

Means of payment

• (i) New networks

enable faster,

traceable, and low-

cost payments, and

(ii) CBDCs bring

trust, stable FX

rates, and

interoperability

• Significant impact

Potential disruption

1 2 3

Three DLT-based scenarios

Se

rvic

e

att

rib

ute

s

Ma

rke

t

str

uctu

re

18

New global networks using virtual currencies

Three important caveats remain:

• Volatility in exchange rates

• Lack of trust

• Network interoperability

Such networks have been explored by

Circle, Ripple, Chain, and Visa

The whole process could take 4 seconds (Ripple).

1919

Agenda






4

1

2

3

20

5

Technology and Financial Regulation

Technological

innovationsRegulation

How should regulation respond to new challenges?

How will regulation impact development and adoption?

21

Market failures

Protect consumers

Address externalities

Prevent oligopolistic

behavior

Flexible Perimeters

Objectives and Principles of Financial Regulation

Proportional to risk

22

The Role of Regulation in Supporting Trust

How can trust be established and maintained in the

financial system?

Legal certainty

Long-term relationship

Regulation of market

participants

Public track record

✓ Ensures financial soundness and

appropriate risk management23

Regulatory challenges

• Legal status of digital tokens

• Settlement finality

• How to achieve in an open network?

• Self governance vs. regulation

• More focus on activities-based?

Entities-based vs. Activities-

based

Algorithmic governance

Ownership and

contractual rights

Privacy vs. transparency

24 24

International cooperation

Need for greater harmonization between regulatory frameworks

✓ Level playing field

✓ Facilitate global adoption of technologies

Efforts are underway

✓ Bilateral cooperative arrangements

✓ Efforts of international standard setting bodies

✓ The IMF is well placed to play a role

25

Agenda





• MCM’s current work on fintech5

1

2

3

26

4

Fintech: Impact on our work

TA

FSAP

Policy

Surveillance

Helping members adapt and apply

regulatory frameworks and supervisory

approaches

Assessing the impact on risk vulnerability

Engaging with global standard-setting

bodies and policymakers

Identifying policy issues related to the

emergence of fintech for the member

countries

MCM’s current work: Fintech and Central Banking

• Government-issued (“central bank digital currencies”) and

non-government issued (e.g. Bitcoin, Ether, XRP)

• Effect on payment systems and monetary policy

Machine Learning

and Big Data

Virtual Currencies

• Outsourcing and legal risks

• Cross-selling, predictive power in insurance/loan issuance

• Better KYC (financial institutions)

• Risk and economic data analysis (central banks and

supervisors)

Cloud Computing

Cyber Risk• Different technologies could represent different manifestation

of risks

MCM’s current work: Regulation and Supervision

Regulatory

Framework

Impact on

Business Models

Operational Risk

Capacity Building

• Developing training on regulatory and supervisory frameworks

for fintech

• Studying current trends in fintech and practical implementation

issues to develop analytical approaches

• Allocated more resources – Established internal team

• Future work (e.g. supervisory data gathering, regulatory

sandboxes, wallets, framework)

• Profitability of incumbents (mostly banking sector, though this

might change)

• Unbundling of services

• Outsourcing risk

• Cyber risk

Thank You

30

fintech and financial services: initial considerations...mcm’s current work: fintech and central...

Documents