Regulating the Way Forward: From Open Finance to Digital Assets

[Music] right welcome everybody a great morning in Abu Dhabi it is an incredible pleasure to be here with such a fantastic panel thank you Abu Dhabi Finance week for inviting us my name is Dr Ruth vuer and I have the pleasure of moderating this session from open finance to digital assets um I'd like to hand over to the first panelist just to give a very brief introduction of yourself and your background to this topic Paul thanks sure thank you very much and uh my name is Paul Kus I look after the fintech office at the Central Bank of the UAE basically you know the fintech office is responsible for all the fintech initiatives and from open finance to digital assets buy now pay later and anything within the payment or critical Financial Market infrastructure and this is where we trying to do to position the U as a top five fch Hub in the world excellent Peter I'm Peter Kon from the European commission's financial services department and I guess that my claim to fame is that I chair the European commission's fintech task force which led to our digital Finance strategy which is regory Frameworks like the markets and crypto assets regulation the digital operational resilience act or the financial uh data act which is currently going through the process F thank you so um my name is Brian Baba and I had the fintech team with within the fsra my role is really been and continues to be wearing two hats one is very much regulation focused enhancing the rules that we have in the center so we'll talk about some of the uh enhancements that we've been making uh more recently uh also supporting the authorization and Licensing activities of firms that are coming in from a technology perspective infrastructure assessments and supervising firms that are in the center the other aspect is really very much Innovation and that's really listening into the industry and tapping into that pulse of what is changing where is the uh you know where's the tide going how are the kind of conversations coming into new business models and that's what I distill internally thank you excellent right to set a little bit the background here um it all started many years ago with open banking didn't it and I recall those days many years ago we built in Europe the single Euro payments area we created a type of faster payment in the UK and now rolled out across Europe and then we said we need more competition in the payments World initially which was dominated by Banks so we had the first regulatory regime around payment services I remember negotiating psd1 in 2005 as long ago as that but all of this accelerated over the years with fintech Innovation coming to the four after the financial crisis lots more competition from the non-bank sector and I think we are at a point where having introduced open banking particularly in Europe with the regulatory regime to drive the innovation we still see that it's slow in the uptake even though payments should be a no-brainer moving away from cards to account to account transactions enabling data sharing across the economy to get more competition in other services initially financial services at large but frankly being able to share any data for any particular purpose potentially via your bank or payment provider is sort of the dream of open Banking and we haven't realized that dream yet now we're talking here about open finance potentially moving to digital assets we see a lot of innovation acceleration and particularly here in the UAE we see that potential of creating it with the dynamic of fintech innovation plus regulation but maybe just going first to Peter around our Old World Experience open banking hasn't really taken off yet but we have some enabling pieces again also with regulation going forward what is your prediction to actually get this more off the ground first well much to my and our surprise it looks like we have to force we really have to nudge the industry into open finance and when when I talk about open finance it's really expanding the ideas from payments to all Financial vertical Insurance Securities whatever and the this is based on the idea that in the current day and age well no let me let me take a step back Finance used to be about money historically Finance was all about money but in the current day and age Finance is more about data and Technology than it is about money if you do not have data you can't compete you can't provide services what we see is that incumbent financial institutions are sitting on vast amounts of data their customer data which they don't really use this data is the customers one of the customers most important assets and we want the customer to be in control of their own data so they can have their data shared with other providers who need that data innovators who need that data in order to provide Innovative services but if you look as a financial institution at data sharing as a compliance issue it's a losing proposition there's nothing in it for you but if you look at data sharing as an opportunity a business opportunity you create you think of a new ecosystem a databased ecosystem which is going to drive competition and that's what we expect that will happen it's slow in uptake but we'll see once it's there and people get used to it as we saw for example in the UK that incumbent institutions Turn Around from saying well we now have to share data into how we now can get data and we can build on that I think you're making a super important point because we really moved from an economy where Finance was at the middle and all the financial regulation of entity ities and services was there very clearly defined to a world which is driven by data and the data sits somewhere else it doesn't necessarily sit with the financial institutions they have a lot but they haven't very good management around it so this shift into a data economy also requires how we as users are able to engage with it until today our data is often taken we don't know who has it for which purpose so bringing back General data privacy protection consent and control is another important element for the user so that the user can actually use their data for particular benefits as opposed to having it all divulged in one go right but maybe moving to Brian to look at how the UAE and Abu Dhabi is is looking at this open finance opportunity tell us a little bit about this framework which really was published this year which is very comprehensive um and it certainly it's more comprehensive than the European approach we've seen so far yeah certainly you know P from the central bank about what was published this year we VI a framework that's been uh in place now for the last two years yeah and I think you sort of look at Finance in general and you know to P to this point you've you had the conversation around money but it's also been one of convergence you think about payments you think about investment products you think about the experience that someone has now from a financial service provider is one that is abstracting away all these different parts and making it very very seamless now open finance facilitates that it Fosters that and when we set out the framework back in 2022 we started to see some of that Innovation come into abgm we've seen a couple of some of the firms that have actually established themselves or the presence and expanded across the UAE they've actually now started to take on additional licenses from the central bank and we see that that's something that started from a very nent position of them being able to say it's not driven by a regulatory push but it's actually by a an industry demand for Innovation and naturally that industry demand is because there is a client on the other side who is looking for this convenience and so the framework we've had U has facilitated that and we believe that we consider that open finance is again just one of those areas where making that more Equitable in terms of the access to these uh to this data that Peter was referring to significantly improves the experience and pricing that clients would have uh and we expect that as more firms come into the center and lean into the regulation that uh Paul will talk about from the central bank that will give a much more cohesive open finance experience across the UAE right so in terms of the evolution to the next framework you also have now the instant payment platform which is a key enable of this so Paul tell us about how this is all coming together now yeah it's a very good uh very good point but let me start by saying when we at the Central Bank looked at open finance we wanted to start from you know where everyone ended but more importantly we want to do something new so the way we look at open finance and one of the Lessons Learned actually is that if you try to mandate this and make it as a compliance exercise it will fail yeah so that's why Innovation is at the heart of what we do and we've designed our open finance framework to allow for Innovation the way we would like to call it is as this is three wins it has to be a win for the fintex win for the consumer and win for the bank if again you make it a compliance exercise it's going to become very very difficult to make it you know you make it a big win number two and more importantly we wanted to navigate the entire economy and steer it towards the digital economy toward an economy where you have open data open Insurance open Healthcare and we think open finance is the best Segway to move into an open data economy and so we created a very comprehensive framework that goes beyond payment you know it involves also insurance and soon enough we will also involve Capital Mark product now this sits very you know well with what we've been doing on the other side with one of our critical Financial Market infrastructure the instant payment platform or what we call Annie in the in the U and Annie the instant pay platform allow you to initiate and settle payments instantaneously in the year so both the open finance framework and an you know they they they work together you could initiate a transaction on the open finance platform and then settle it instantaneously on an and Peter I mean we've seen this in Europe right we started with first of all harmonizing the payment system now we're rolling out sepa instant regulation for next year we have the infrastructures but not everybody's yet using them the way they should and we feel in Europe we always had to push harder on the regulatory side while here it's much more about the competition enablement and The Innovation so what I find exciting about the UAE and Abu Dhabi in particular is that you're actually taking all the best practices but you have this energy to create something new that is more commercial and more adopted by every user Peter walk us through a little bit what the commission is now doing as a next iteration to get the market up in terms of digital assets operational resilience sepa instant because you have lots of regulatory initiatives that are still to converge right well if if you look at financial services policy and regulation traditionally it really is about economic and Financial Risk Market risk counterparty risk and these things and economists rule that world because of digitalization the as I said the role of data and Technology becomes center stage in finance and what we have been doing in the last couple of years is to really uh is a and seeing is a coming of age of technology and data in financial services policy so the digital operational resilience act which is about cyber security in the financial sector and interestingly the data show that the financial sector is the largest I sector in the economy all over the world one fif of all the expenditure on ICT is in the financial sector the financial sector is the sector which is most under attack from uh by by cyber threats so to really bring operational risk and operational resilience center stage and make it as important in the boardroom of financial institutions as economic and market risk is and R I know you you advise Boards of financial institutions and Boards of financial institutions often are full of Bankers Bankers are not rep uh operations people they don't like technology they don't they don't know where it is the technology is run from some basement somewhere else another building and so on and we said no this is so crucial for the financial institution that it has to become a boardroom resp responsibility the technology crypto assets digital assets the digitalization of assets is absolutely essential blockchain technology I'm personally convinced that if we had no Financial Market infrastructure at all today and people around here in the room were told go and build a financial Market infrastructure from scratch they would build it on a distributed Ledger there is no doubt about that because the current infrastructures which we have where every institution has its own Ledger leads to great inefficiencies because what are these financial institutions doing all day long they're trading serving customers but they're spending huge amount of money on reconciling and confirming And reconfirming Trades to each other highly inefficient very costly settlement times take forever and so if you rep platform this on distributed Ledger technology you have huge efficiency gains and you can also basically put any asset real world asset a financial asset um a um a native asset on a distributed Ledger and and financialized it transact it so that is about digital assets and then open finance the the financial data Act is really is to expand the approach which we have for payments where we because of competition reasons forced payment institutions and Banks to open up their payment account data to others we're going we we're currently expanding this to all the other Financial verticals so that if you have say a brokerage account an investment account with a investment firm with a broker that firm will be required if under your consent to share the data with others if you are have uh insurance policies and everyone has insurance policies your insurance company will be required to share data on your on your your policies with others with your approval so we're really putting the customer in control in charge of his or own his or her own data and data Destiny and we think that this on the one hand does indeed will it will shake up traditional Finance because it will force them uh to content with competition from innovators now they don't have to compete because the customers are very sticky customers don't go anywhere so and because customers aren't mobile companies don't really provide the best service because once the customer is your customer he or she rarely leaves with the customer in control of its own data and allowing them to share their data with other providers Financial firms are going to face more competition and that's a good thing because it'll wake them up we don't want financial institutions to go out of business we don't want them to lose out we want them to really enter the 21st century and to become datadriven companies because we're living in a data economy so maybe Paul in terms of that Innovation potential that you're creating here do you see the mindset being quite different in the UAE in terms of the willingness to share because you're getting data back which is all about making the data work better across the economy but also in terms of the infrastructure I mean having been involved in building payments systems and the regulation around it for decades now um how you are approaching your infrastructure with those additional data highways that have to be secure they have to be cyber resilient I think that is the most critical piece that we all look at as as an industry really how do you create this excitement of innovation potential and maybe let finex and other providers participate in a co-creative approach just to like to hear more and when is it happening given the framework is out this year sure so the regulation has been out a couple of months ago what we're currently doing is we're building a platform an open finance platform that will also go live either by the end of this year or early next year at the latest what's very interesting about our model is that we've learned from other countries you know mistakes and experiences and so we've seen lots of friction and lots of fragmentation you know across Europe across other countries when it comes to open Banking and when it comes to fex conting with banks and therefore we came up with an idea to build a more centralized API platform that makes it easier on fintex they're are licensed by the central bank to connect to Banks through the central API Hub and so we're providing the infrastructure the pipes if you will and you know again to avoid all this friction all of this fragmentation issue that we've seen in other countries and then allow these fex to share data in a very secure in a SE in a seamless way and what we want now is that we want the industry to come and build on top of what we've done so the rule of the central bank is to build the infrastructure we build the rails and then we invite the banks the fexs and even the technology companies to come and build applications products and services on top of what we're doing and we think we have a you know one of its kind open finance platform doesn't exist anywhere in the world I think time will tell um if we're going to be successful of course we think we're going to be very successful um but it's a very unique open finance platform that you won't see anywhere else yeah which is amazing and I mean I remember the standardization was the biggest problem across Europe UK UK did standardize which made it the most open banking Advanced Market but still only 10 billion transactions a year which is nothing compared to everything else whilst in Europe we are seeing very slow conversion and again we had to put regulatory measures in place to harmonize things that went off on a tangent so doing it in the straightforward way um with enough harmonization at the core is really critical so I think that's amazing now Ryan when we think about I guess the policy framework the supervision uh do you and also the institutional landscape do you see uh different actors now coming to this Market being attracted by The Innovation potential that's created here yeah I think that's a that's a good question on two fronts one is how our framework has shaped up over that period so the digital assets framework that we have in place came out in 2018 it was one of the you know comprehensive one of the first in the world in in in this regard and at the same time at that point the nature of the firms that you were looking at was fairly new to regulation they were new to finance in some way but they had technologies that they were looking to develop Innovation from um and a lot of it was from an industry that was looking for Price exposure they were looking for spot positions how can I acquire the digital assets so you naturally saw a lot more of exchange type activities um and then and some to later extent on the uh broker deal ERS but if you move and transition over time what we've seen is certainly now more activities around I have price exposure can I actually safely store my assets that's when custody came in as a very keen interest independent custodians coming into the center and also now some more sophisticated uh price exposure from derivative products which is now what we're starting to see more bigger um uh the bigger players who are seasoned been in finance understand regulation very robust established Technologies and certainly they're looking for depth of Market from an Institutional perspective the derivative products are more more sophisticated and naturally we see the transition from that going next to be how do I earn yield I have the digital asset now how am I going to now you know maximize the value that I can get from this from a regulation perspective what we've done is to continue calibrating our expectations for the desired outcome uh on on the one front is definitely through rules but also in raising the bar on guidance um so if you think about just last week we published it risk management guidance that covers comprehensive aspects digital assets included on how you safely protect things like your cryptographic keys which are very very important if you're a custodian that an institution is going to expect to trust to hold these assets but alongside that has also been internally improving the way we supervise the space uh and and that's relied quite extensively on subtec that's building internal custom tools that allow us to be able to have a better Insight of the operations of the firms a lot of this is actually blockchain native so there's certainly a lot of there's a lot more of a public footprint that you can actually uh View and make sure that it coporates with some of the you know representations that the firms are giving but equally making sure that the firms themselves have those systems and controls that can allow them to put their hand up and say yep that particular rule this is how we're meeting it and for any client that then asks them the question they can also be very very uh capable in showing that they're actually Meeting those expectations from the regulator so there has been uh a step approach in this and as recently as you know just within this month we've again shared a consultation paper on areas we see further enhancements in uh the digital asset space on the how do you earn yield things like staking coming up with discussion items yield farming uh or more even extensively what can custodians hold plus of course new you know virtual assets related business models how can I lend against my you know collateral that I'm holding and all of these become uh very interesting for the institutional player because they have a depth of Market trusted intermediaries they're trying to reduce on that counterparty risk but also asking the question how can I take leverage how can I take a margin on this which is new to the digital asset space but obviously in the traditional Finance space has been very established and it's very much there and it just requires more from a regulation perspective on how we approach this because the some of the traditional tools don't lend themselves quite well for digital asset native Industries um or businesses and because they're digitally native it also means certain things like being able to pull an API is actually a much easier conversation because they just have that from the get-go their business model is designed with those capabilities making a really important point because what we see of course is that the supervisor and the Central Bank in terms of the infrastructure are learning with evolution in the market and if you're doing it faster than others you always have the edge so even for supervisors it's a critical piece to use technology to be able to monitor your market and supervise but also keep on learning how things are working and when they Crosswire in the wrong way because there is obviously a lot of risk and I do think as we're moving up with the operational resilience and cyber resilience there will be other technologies that supervisors particularly can use to actually supervise how risky the landscape is but just bringing it back for the last sort of two and a half minutes I just wanted to mention the term risk risk and Trust uh and what we do see in the old world the problem is the Paradigm of risk is bad and I sit on various Boards of actual Financial market infrastructures and Banks and every time we talk about risk it is never seen as an opportunity and I do feel that in Abu Dhabi the capital of capital people are seeing the good side of risk and they're using technology to mitigate it in a proactive way but they're enabling the market to grow and that's what I find most exciting here I think it's something Peter that the Europeans can learn from definitely but even thinking about the whole asset agnostic ecosystem Paul that we're in now building an infrastructure and growing it with a platform on top to allow for asset agnostic operations is going to be really the potential isn't it absolutely and this is how we see the you know Vision at the Central Bank um you know again when we're building all of these Financial Market infrastructure platforms the idea is that we are you know asset agnostic and we want to ensure that you know whatever uh you know system or scheme we may be running or the industry may be running it works very seamless and it can cut across different you know assets you know whether digital assets or non-digital assets in a very seamless way one thing we you know we take very seriously is is as you mentioned risk but we think with the you know all the Innovation that we have today with AI and geni we think you could easily mitigate lots of these risks so we don't see you know lots of regulators and our colleagues they focus a lot on you know risks and looking at the maybe you know the dark side which is is nothing wrong with it we we try to focus more on the bright side we try to focus more on how do we use these technologies that we have available today to mitigate risks and we've seen some really good examples and um you know regulators coming up with supervision technology platforms sup Tech platforms this is something that we're also doing at the Central Bank of the UAE that will help us mitigate risks especially when it comes to fraud consumer protection how do we ensure reconciliation happens if it's a DLT or non DLT happens instantaneous there are lots of challenges when you bring you know large scale Technologies like instant payment platform and we've seen lots of issues whether it's at flaud whether it's around you know consumer protection but with the capabilities that AI bring and some of the Gen you know you know provides in today's word we think that we can mitigate and help avoid lots of these risks yeah excellent so suffice to say that we are now in a data economy and I think the action is here in the UAE in Abu Dhabi in terms of the Central Bank and the infrastructure perspective on how you're creating this Innovation platform the regulator how you supervise how you develop the policy rules that work for a broader ecosystem and keep on learning from the innovators all the time Peter we have to admit in Europe it's a little bit slower we still have to change the mindset of the old banking world but we're getting there and I just want to say what a fantastic panel thank you to the panelist Abu Dhabi capital of capital you rock thank thank you thank you [Music]