Fintech - How are Regulators Responding to Innovation

foreign [Music] thank you so much and I would just like to say we've been regulated in the 20 minutes so uh we'll try to get through all the points quickly and I'm very happy to have our esteemed guests represented from across the globe speaking about this very important topic especially at this time so let's get right into it and I'd like to um to talk about since we have representation from different parts of the globe could you talk about what the process of legislation is of adopting new Innovations into the finance space what is your approach and how long does it usually take um we'll start with Giuseppe thank you thank you for for inviting me and also for giving me the opportunity to set the scene as a first Speaker as you know we we really follow the the European process which is quite complex and quite long because we need to find an agreement across 27 countries and also to ensure consistency with the Basel standards where needed but it is also important because it allows us to incorporate our lesson drawn from supervisory experience and also from our contract with the market given also our you know Innovative channels that we have developed for example regulatory sandbox maybe I would give you a few hints really to to set up the to set the scene first what we see in the market is that of course most banks have started their digitalization transformation and then we see not only just a new fintech companies entering the market but also join strategic partnership which is a very important development because then you have a much faster developments in the market the second one relates to the challenges and constraints to this development which relates first to the costs even though banks are supposed to invest a huge amount of money into this then if you look at the overall cost that it has been put so far maybe it's not enough second second challenge is indeed that there is not enough Investments to address the legal the Legacy system which is as you well-known pre-presented constraints to for the Innovation and also to ensure proper data aggregation and Reporting third it goes without saying relates to the lack of talent and people not only a technical level but also adequate competencies at the board level my third Point relates to the what we are seeing in terms of the impact on of the overall business model the the current Innovation is uh is significant and then we have this type of platformization of the financial system which allows the new entering of the new players in the system which raises challenges both in Regulatory and supervisory perspective but this is good because these ensures are improved the biodiversity in the in the market but also raise its challenges because maybe we we are not able to use our fully fledged supervisory regulatory toolkit which is maybe one of the challenge this leads to my last point because if we have constraints challenges and opportunities on the other hand we also need to look at risks and he goes without saying that we see a significant increase of I.T related risk data integrity and fiber related risk which indeed deserves further consideration in the both Regulatory and supervisory space I will stop here amazing thank you for those insights and um in the light of recent news with FTX collapsing you know as a example of a crypto company especially in a high risk and the world is still trying to understanding about how to regulate crypto and do it properly so I'd like to go to why to speak about how do you encourage confidence and Agility while you have you know something like this taking place do you have an approach to that and uh do you see it's still worth the risk of you know being one of the first uh to really bring in regulation into this new innovation right that's a pretty tough question um I think the term agile regulator seems like an oxymoron and it's always a challenge for us to manage as a regulator but I don't think it needs to be self-contradictory right um as a regulator if our rules and regulations are not agile enough not fast enough to reflect Market realities then we lose our relevance we have we will have difficulty retaining talent and recruiting Talent um but on the other hand we cannot do away with our institutional character as a regulator because we lose the credibility right so how do we find the balance and to do that right we have to get a few things right I think first and foremost a lot of this appreciation of risks comes with good judgment comes with experience right and of course as a regulator um the best way for us to find the kind of expertise out there is to recruit but the reality is to get someone with knowledge of Finance technology and risks it's very difficult right so we need to have the right tools and governance so our approach to that is in terms of the right tools is that we of course have the refugee sandbox uh which is an opportunity for us to get up and close with the fintechs to understand the risks they are associated models and to make a call as to how we want to regulate them so that's important too for us over time we got more substituted understanding the risk so I think if FTX were to come to us today right you probably go through that process we launched our regulatory framework for virtual Assets in 2018 and Truth we told for us to reach that journey in 2018 we started in 2016 with the sandbox and back then we're already interacting with a few of these crypto players right so that gives us some insights as to how to regulate but that said having the tools one thing but having the governance within our regulator is also important you need to have the right checks and balances I think with trust in each other that we have the right expertise the right people to form that committee or wise man right so I think together you're quite glad quite happy to be able to recruit a diverse Talent of regulators and I think finally having that committee or wise man is not going to be enough at another day how much do we know compared to the industry uh and the plug that gave the only way to do so is to work very closely with the industry so collaboration at the end of this is key right so I think those three points are tools governance and collaboration with the industry that would might take yeah that's exactly I like what you said in terms you can't predict what's going to happen but you can do what you can to mitigate you know the risk that's involved and uh Caroline I can extend it to you as well I mean I know that the US you know put out legislation recently in June and has been discussing you know whether has has had a lot of discussion about this whether it's a commodity or security when speaking about crypto and it's been an extended conversation can you describe that process and say for example like in this case you know with FTX you know what are the things that they're keeping an eye out for uh and is it affecting you know the decision making that's taking place at the moment so I have to give my quick disclaimer which is that the views I'm sharing today are just those of my own as a commissioner you know when we look at what's happening I think it just makes this more imperative than ever that there must be a focus on risk management and risk management must be at the core of the business and besides that we have to ensure that these crypto Financial activities are brought within the regulatory perimeter so that they are held to the same standards as other Financial firms this is I think a critical point it's something that's been widely recognized at the international level and so I look forward to the U.S continuing to make progress at adopting and adhering to that same standard because when we are in a framework of global markets the risk cannot be contained within any one particular jurisdiction and that's why it's more imperative than ever that there are no gaps thank you and um I'd like to bring this question to the UK as well because as we know India you know hasn't really uh made crypto legal tender in the country but can you give us what India's approach has been you know through crypto and maybe there are other priorities um you know in The Innovation space when it comes to finance that you're dealing with and as we speak here today uh the G20 meeting is is on in Bali so let us look at what is the political mandate to All The Regulators so far as fintech is concerned and the G20 mandate is very clear that they have to serve the real economy Regulators have to ensure that fintech serves the real economy it helps in channelizing money all the savings and Investments and it's there is a fair and Equitable access to it if we look at all this then realize that fintech is not a means in itself fintech is sorry fintech is not an end in itself it is a means to the larger end and keeping all this in mind in India two three things have been guiding The Regulators both The Reserve Bank of India and sebi number one is that the innovation has to reach to the largest section of the society who do not have access to financial services and there are some great stories which have which have developed in the last seven years or last eight years we can talk about that as we go along but so far as crypto assets are concerned or so far as the virtual assets are concerned uh there is a taxation now so if somebody has a gain on the on the capital gain side on the on the sale of virtual assets that is taxed uh people are allowed to do trading or or or have a deal but uh the banks have not been permitted as of now to deal with the crypto assets so we are somewhere in between and I think the approach of the regulator is to wait how things develop how the regulatory framework is a strengthened and maybe going forward I'm in no position to to say when it will happen but maybe we'll be making some move and obviously the regulator will also learn from some of the mishaps which have taken place recently or are likely to take place so keeping all that in mind there will be thank you and uh nothing I think that's what's very interesting the different approaches the same matter of like something more conservative approach somewhat will take the high risk you know to be able to adopt The Innovation early and uh you know as it develops and I'm curious as well if you don't mind elaborating on what are the other Financial technologies that you're incorporating in India because crypto isn't the only thing that exists and what else is necessary to really move especially a larger population forward when it comes to the fintech space okay I'll I'll talk about something which is called the India stack and India stacked uh the basic infrastructure has been provided as a public good so government and the public sector have provided that basic infrastructure and it is modular in nature it is something which even a small person can access it is something which can be accessed by the larger companies without any discrimination it is available 24x7 and based on this stack other facilities can write for example your identity track your your your services track transfer of goods track all that is developing and this has had a huge huge success in the last seven or eight years and this has been developed by The Reserve Bank of India and it's affiliates with the cooperation of the banking system so that's one thing which I would like to talk about and the numbers are huge so I don't have to talk about it the second is about access to credit in that area also some Innovations have taken place and I like to mention that is called account aggregator so account aggregator is a is a fiduciary it's a data fiduciary and uh while they can pass on the data they can transfer the data they have no right over the data they can't even see the data they can't even store the data and based on that uh how credit can be given and in India and maybe in other parts of the world there are issues about providing credit to a small and medium Enterprises so here it what it does is that based on the account aggregator which can access data for example from the goods and services stack agency from the direct tax agency from electricity bills and whatever you have and based on that you can go to a setup to the account aggregator who will pass on your request to a set of Bankers who are already registered there and you will be surprised to hear that an amount for example as low as 25 dollars that can be provided and that can be provided in a span of 10 minutes and another thing is that you as an intending borrower provided you have given your consent for that data to be shared with the bankers you are not approaching Bankers you are approaching a platform where those Bankers are are there and then based on how they evaluate you they will be offering rates and the lender has the sorry the borrower has the choice which bank to go if there are four Banks and there is a differential he can choose any one of them and the regulatory framework says that you don't have to go to your own Banker you may be having banking relation with one particular bank but you can go to any of these Bankers which are registered on the platform so this is the type of innovation which is happening so very interesting points and going back to the process of legislation around for regulation you know on new Innovations in the finance sector I'll direct this to Caroline enter Giuseppe how especially since you're both in reasons where the conversation uh in Europe as well it's uh between the EU has been an ongoing discussion and it takes a while to get consensus amongst different groups in the U.S you know between different parties you find that process AIDS or gets in the way of reaching consensus and moving forward robust political system and of course in an election year there is a lot of debate and discussion but what I think is important is under the U.S system The Regulators have been delegated and authorized with significant authorities and tools to address their respective markets so the cfdc is an activities-based regulator with the two-fold mission to ensure Market integrity and to prevent Market abuse and so there are a number of tools and authorities that not only the cftc but the SEC and the bank Regulators have to ensure that they are upholding the safety and soundness of the financial system I think that the United States approach has you know clearly unlocked American innovation if you think about fintech more broadly we have also the deepest and most liquid Equity markets in the world so I do think that the U.

S system works but in an election year there's always a lot of debate of course okay as I said in in the EU indeed we have a very long and complex process which involves a lot of different stakeholders and takes time but I think that we we should not forget that we are fully involved also in the definition discussion International level and G20 and I think it's important always to ensure consistency between on the one hand the the G20 developments on the other hand some European specificities I think that if you look at also at what's happening now that with respect to Innovation Innovation is a good thing there is no discussion about that we should promote Innovation even ATM in the past was a significant Innovation so Innovation helps out grows Health make the process much more efficient but we should never forget about the risks so in the end the regulation is just a way of implementing principles that should be adopted by firms in the first place when we talk from a Prudential perspective of informed governance of risk this means that at the border at the top of the firm that should look I understand that risk then you should have fully integrated that aggregation and reporting to the board and also a lot of skills and competencies we have not discussed about data Maybe we do not have time but in order to ensure some type of consistency at the global level in order to tackle use the global challenges it's true that we need some data because without data we might take the risk of regulating the wrong development with the wrong tool so I think that if you receive a request for data it's not just a sort of bureaucracy but also a way to better understand what's going on in the industry and the market I think it's also in the industry interest to together like it was said before because I think that we share the mutual objective to try to to develop a much better market and good practices and just to add on to that I mean the cftc is unique among U.S regulators and that it also has the mandate to promote responsible Innovation and Fair competition and part of that is because the cftc's roots go back to a wholesale Market where you had uh dealers and other Financial intermediaries exchanges clearinghouses and so on so the pace of innovation oftentimes outpaces the speed of legislation or regulation and so that's why the cfdc has a principles-based uh regulatory approach which can adapt and anticipate new changes and new risks to Market structure more quickly definitely and that's uh you know I think we're trying to go with that and that was a very very good answer uh in terms of you know with Innovation it's something you can't anticipate but you still have to act but at the same time create the regulation so to protect the market and why I'll extend this to you while addressing as well um what UK had about you know what are other innovations that are entering the Innovation Finance space and how do you address that I mean the UAE has had in Abu Dhabi has had a very short uh has really acted quickly sorry I should say in um creating regulation to bring in the Innovation and to be one of the first to um to implement it so how do you act when for example you have something that that's new that's that new uh within if you don't mind giving an example of like say another Innovation that's coming into play and how you're addressing that in the short term um the kind of innovation that we're seeing in this region uh might not be um but other jurisdictions see right so when I speak about the Innovation they're seeing is very much probably peculiar to our region here and I think we have made a strong start at least in the DLT space and then that's a combination of essentially the government Vision as well as enabling regulations so that trajectory seems to be still going forward very strong despite the recent uh turbulence in the sector and one of the latest things that we are seeing is actually in the area of um institutional grade solutions that have programmable capabilities using smart contracts to move issue and store digital assets right and that's a very mouthful right but I think just a subset of that I think D5 is essentially something which we are seeing coming our way a lot of queries coming our way and partly because we see the potential of defy the compostability of D5 in where you take the output of one smart contract to fit into the input of another smart contract and in a way you string the various bits together allowing the possibility of various modules to be automated in one transaction to us that is very powerful so we see that as likely to be the future of at least in the financial sector within the region which is why in April we launch a discussion paper where we share our thoughts and views of how we could potentially regulate this space and it's essentially we don't exactly know how to regulate but we want to pull uh the views of the industry and to put in views of the industry we decided to go out first with what we think could be a possible model uh and um the idea is to work with the global Community to evolve a rectory framework that we can potentially regulate right so and of course as part of that Journey we also recruit um invite the D5 players from around the world to join our rectory sandbox to work with us right so the crypto winter has somewhat dented a bit of the appetite but at least from what we are seeing in the early waves right uh actually institutional players doubling down on cryptos to provide institutional grade solutions for example custody right there are players in the gaming industry looking at um moving into the financial sector or financial services space and you know gaming industry they always use their native tokens and traditionally it's within their own ecosystem but increasingly we're seeing them having solutions that actually go beyond their ecosystem where they allow tokens to be swapped with the larger virtual asset space so that is something which we are seeing and we are now trying to see or raise with the industry to see how fast we can come up with something that will be able to cater to The Innovation and regulate them in a responsible manner definitely no that sounds fascinating I think it just shows that anytime we think we've reached you know the limit or of innovation then there's something else providing a new solution and also how important it is to manage the relationship between innovative solutions to move us forward but also security with regulation and traditional institutions to work together so unfortunately that's all we have time for but thank you so much for your insightful views and uh we hope to continue the conversation thank you [Applause]