## ftssacea

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### Executive Summary: overview and definition
- Financial technology (FinTech) defined by the Financial Stability Board as “technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services” (Financial Stability Board 2017).
- Since 2010, more than US$50 billion has been invested in almost 2,500 companies worldwide (Skan, Dickerson, and Gagliardi 2016).
- Technological building blocks: distributed computing, artificial intelligence, big data, cryptography, smart contracts, and mobile internet access.
- Policy priority: balance FinTech’s potential for inclusive growth and structural transformation with regulatory frameworks that manage associated risks.

### Current status in sub-Saharan Africa (key findings)
- Mobile money leadership and adoption:
  - Close to 40 out of 45 sub-Saharan African countries are actively using mobile money.
  - East Africa leads the region; Kenya a highlighted success.
  - Mobile money account penetration increased almost 20 percent between 2011 and 2014.
  - Close to 20 percent of GDP in transactions occur through mobile money, compared with 7 percent of GDP in Asia and less than 2 percent of GDP in other regions.
  - In a sample of 17 countries, mobile money accounts surpassed traditional deposit accounts by 2015 (reversal from 2012).
- Key financial and development indicators (2017 or latest available):
  - Bank or mobile money account (% of population ages 15+): Sub-Saharan Africa 43; Low & Middle Income 63; High Income 94.
  - ATMs (per 100,000 adults): Sub-Saharan Africa 6; Low & Middle Income 27; High Income 68.
  - Commercial bank branches (per 100,000 adults): Sub-Saharan Africa 5; Low & Middle Income 9; High Income 20.
  - Fixed broadband subscriptions (per 100 people): Sub-Saharan Africa 1; Low & Middle Income 9; High Income 31.
  - GDP per capita, PPP (current international $): Sub-Saharan Africa 3,730; Low & Middle Income 10,345; High Income 45,789.
  - Mobile cellular subscriptions (per 100 people): Sub-Saharan Africa 73; Low & Middle Income 96; High Income 126.

### Mobile money transactions: uses, success factors, and examples
- Usage statistics and platforms:
  - Kenya records 53 transactions per adult per year.
  - M-Pesa had almost 30 million users worldwide as of end-2016, of which 20.7 million are in Kenya.
  - As of 2017, 388 million of the continent’s 1.25 billion are online, with 160 million holding Facebook accounts.
  - There are now more mobile money agents in sub-Saharan Africa than ATMs or bank accounts.
  - Safaricom market share in Kenya: nearly 70 percent; Vodacom in Tanzania: close to half.
- Success drivers:
  - Low branch/ATM density and limited internet access created unmet demand; high mobile device penetration provided a platform.
  - Telecom-led regulatory model and single large telecom providers created critical mass; national identification systems in East Africa facilitated adoption.
  - Policy considerations: lower costs, improve access, and facilitate interoperability; address taxes and regulatory fees that may distort markets.
- Representative FinTech products and services:
  - Safaricom’s M-Shwari, Paga (Nigeria), SimbaPay, Orange Money and Orange Bank Africa, Zoona, Wizzit, GetBucks, Wizall.
- Sectoral impacts:
  - Agriculture: Tigo Kilimo (Tanzania), Connected Farmer program.
  - Health and fragile states: mobile wallets during Ebola in Sierra Leone; Rwanda–Zipline drone deliveries supported by mobile location services.
  - Consumer credit/infrastructure: M-Kopa Solar pay-as-you-go solar sales with consumer credit.

### Technological foundations and scope of FinTech (box 3)
- Core technologies and potential improvements:
  - Mobile access and the internet: lower information costs; increase transparency; incentives to formalize; contract enforcement; trust; financial inclusion and deepening.
  - Big data and artificial intelligence: alternative information for credit risk assessment.
  - Distributed ledger technology (DLT): promote transparency, reduce corruption; enable shared ledgers and real-time settlement (subject to scalability and energy concerns).
  - Cryptography: enable secure electronic transactions, smart contracts, cryptocurrencies.
- Financial inclusion and credit:
  - Mobile penetration: 81 mobile phones per 100 inhabitants.
  - Credit risk assessment cost remains high due to unreliable accounting, lack of credit bureaus, and legal limits.
  - Women-owned SMEs face greater credit access limitations.
  - Big data and machine learning can use alternative information (mobile usage, payments) to reduce credit assessment costs and attract nonbank entrants.
- Competition indicators (as presented):
  - Boone 20.04 20.06 20.08
  - C5 82.5 77.4 84.2
  - H statistic 0.49 0.55 0.60
  - Lerner 0.31 0.30 0.25
  - Notes: Boone maximum value is 0 (monopoly case); more negative implies higher competition. C5 = combined market share of five largest institutions. H-statistic = zero under monopoly. Lerner index = zero under perfect competition.

### Cross-border payments, remittances, and DLT potentials
- Remittances:
  - Cost of sending remittances to sub-Saharan Africa is the highest globally.
  - Causes: oligopolistic banking, low regional integration, multiple currencies, inefficient intra-African payment systems.
- FinTech potentials:
  - DLTs and network technologies can facilitate value transfers without traditional intermediation and can process foreign payments rapidly (examples: cryptocurrencies, Ripple).
  - Correspondent banking pressures: loss of correspondent relationships, high prefunding/liquidity costs, increased compliance costs (sanctions, AML/CFT) affect US dollar–denominated flows.
  - DLT-based systems can speed settlement, reduce back-office costs, and lower operational and counterparty risk, but raise operational risks and scalability constraints.
- Case: South African Reserve Bank proof of concept of a DLT-based wholesale payment system using a tokenized rand.

### Fiscal and monetary implications
- Fiscal sector:
  - Digitalizing government payments could create value of roughly 1 percent of GDP for most countries.
  - Gains in tax administration, compliance, targeting social programs, public financial management; smart contracts could improve procurement transparency.
  - Need to protect privacy and guard against new fraud/evasion channels.
- Monetary sector:
  - Private digital currencies currently struggle to satisfy medium of exchange, unit of account, store of value; pose ML/TF, tax evasion, fraud risks.
  - State-issued digital currency could satisfy money functions but poses risks to financial integrity, stability, and monetary policy implementation.
  - Wholesale central bank digital currencies combined with DLT may enhance settlement efficiency for securities and derivatives; central banks should monitor innovations.

### Infrastructure, regulation, and supervisory needs
- Hard infrastructure gaps:
  - Investment needed in internet connections and energy; public indebtedness constrains public financing; consider private sector partnerships.
- Soft infrastructure:
  - Regulation that balances rapid innovation with risk management; invest in skills and financial literacy.
- Regulatory and supervisory priorities:
  - Manage operational risk from third-party service providers.
  - Mitigate cyber-risks.
  - Monitor macro-financial risks as FinTech activity grows.
  - Use RegTech and SupTech to strengthen supervision (example: Rwanda’s electronic data warehouse; Nigeria’s developing "data stack").
- Safeguarding mobile payment float and operational measures:
  - Define float management and restrict reinvestment of floats in some jurisdictions.
  - Suggested safeguards: usage restrictions, protection requirements (insulation of customer funds, insurance/guarantees), float management (segregated trust accounts, multiple banks, safe assets).

### Risks, market structure, and trade-offs
- Benefits summarized:
  - Encourages decentralization and diversification, increasing transparency and improving inclusion.
- Risks summarized:
  - Micro-financial risks: maturity mismatch, liquidity mismatch, leverage.
  - Operational risks: governance, cyber, third-party reliance.
  - Propagation to financial sector: contagion, procyclicality, excess volatility.
- Market-structure risk:
  - Excessive nonbank entry may raise competition and efficiency but increase fragility (no deposit insurance, no central bank emergency lending, limited regulation).
- Policy trade-offs:
  - Fill hard infrastructure gaps while mobilizing financing and mitigating investment risks.
  - Balance rapid innovation and slow regulation; adopt proportional regulation and tailored sandboxes.
  - Emphasize identification for AML/CFT, consumer protection, financial literacy, human capital, and forward-looking skills policies.

### Annex 2 and regulatory sandboxes (examples)
- Annex 2 highlights:
  - Mexico FinTech regulation (March 2017): a FinTech law effective March 10, 2018 (see Conclusions for law features).
  - Mauritius Regulatory Sandbox License (RSL) launched October 20, 2016.
- Regulatory sandboxes:
  - Must be tailored to objectives, legal structures, and financial development levels.
  - Mauritius RSL examples: SelfKey (digital identity wallet service), online crowdfunding platform, medical company producing stem cells, financial provider for film industry investment products.

### Project Khokha (SARB DLT wholesale payment proof of concept)
- SARB reported results (2018):
  - "The typical daily volume of the South African payments system could be processed in less than two hours with full confidentiality of transactions and settlement finality."
  - "Transactions were processed within two seconds, across a network of geographically distributed nodes, with distributed consensus providing the requisite resilience."
  - "The SARB was able to view the detail of all the transactions to allow for regulatory oversight."
  - Caution: many issues remain before production deployment, including implementation practicalities, legal and regulatory factors, and broader economic impact.
- Broader DLT observations:
  - Enhances traceability and ledger reliability; difficult to hack.
  - Mobilizes large volumes of data to improve credit risk assessment.
  - Several central banks (e.g., Bank of Canada’s Project Jasper, Payments Canada) exploring DLT for wholesale payments.

### Mobile money, monetary policy, and empirical evidence
- Penetration:
  - "At the start of 2017, there were more than 420 million unique mobile subscribers in sub-Saharan Africa, equivalent to a penetration rate of 43 percent (GSMA Intelligence 2017)."
- Uncertain monetary effects:
  - Mobile money balances are fully backed by money deposited by providers in banks; no new money is created directly by mobile money.
  - Banks may use deposits to increase lending, creating money in the standard way; mobile money could affect the money multiplier and velocity.
- Empirical studies:
  - Weil, Mbiti, and Mwega (2012): monetary policy implications negligible so far in Kenya, Tanzania, Uganda; velocity of M-Pesa rises over time.
  - Ndirangu and Nyamongo (2015): mobile money has not affected conduct of monetary policy in Kenya.
  - Macha (2013): association between money demand instability in Tanzania after mobile money introduction.
  - Aron, Muellbauer, and Sebudde (2015): tentative evidence of downward pressure on inflation in Uganda; no significant effect on inflation forecasting models.
  - Adam and Walker (2015): DSGE model finds likely positive impact of mobile money on monetary policy efficacy.

### Conclusions: design lessons and regulatory implications
- DLT-based wholesale payment systems:
  - Central bank–issued digital depository receipts (DDRs) can function as cash when backed one for one by central bank cash and exchanged for central bank money without increasing money in the banking system.
  - RTGS implementation eliminates settlement risk but increases liquidity needs; liquidity-saving mechanisms (netting and queuing) reduce liquidity needs but introduce settlement delays.
  - Offering participants a choice between immediate RTGS settlement and queued netting can reconcile competing needs.
- Regulatory frameworks and sandboxes:
  - Can encourage innovation and inclusion while providing consumer protection and AML/CFT safeguards.
  - Example: Mexico’s FinTech Law (effective March 10, 2018) includes client/investor identification standards, restrictions on guaranteed returns, definitions of covered institutions (crowdfunding, electronic payments, virtual asset management), two-year sandbox authorizations, and a FinTech Council.
  - Mauritius RSL (October 20, 2016) provides flexible testing grounds; many successful applicants are FinTech firms.
- Policy imperatives:
  - Update infrastructure gap estimates (the oft-quoted "$93 billion necessary to fill the region’s gap dates to 2009") and mobilize financing for electricity, internet, and related hardware/software.
  - Prepare for demographic shifts: "By 2035, more than half of those entering the global labor market will be in sub-Saharan Africa."
  - Ensure proportional regulation and supervision, tailored sandboxes, policies to foster human capital and digital skills, and assessment of FinTech’s broader employment and productivity impacts.

_Italic: Source: ftssacea (IMF) — ftssacea - Executive Summary; box 3; Annex 2; Conclusions._

### Executive Summary ������������������������������������������������������������������������������������������������������

### Executive Summary

### Overview and definition
- Financial technology (FinTech) is a major force shaping the structure of the financial industry in sub-Saharan Africa.
- Working definition adopted by the Financial Stability Board: “technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services” (Financial Stability Board 2017).
- Since 2010, more than US$50 billion has been invested in almost 2,500 companies worldwide as FinTech redefines financial services (Skan, Dickerson, and Gagliardi 2016).
- Technological building blocks enabling FinTech include distributed computing, artificial intelligence, big data, cryptography, smart contracts, and mobile internet access.

### Current status in sub-Saharan Africa
- Sub-Saharan Africa has become the global leader in mobile money innovation, adoption, and usage.
- Close to 40 out of 45 sub-Saharan African countries are actively using mobile money.
- East Africa leads the region in mobile money adoption and usage.
- Kenya is highlighted as one of the most successful cases, built on an appropriate pricing strategy, suitable regulation, and a reliable and trustful network.
- Mobile money account penetration in sub-Saharan African countries recorded an increase of almost 20 percent between 2011 and 2014.
- Close to 20 percent of GDP in transactions are occurring through mobile money, compared with 7 percent of GDP in Asia and less than 2 percent of GDP in other regions.
- Mobile money has overtaken traditional bank accounts in several sub-Saharan African economies: in a sample of 17 countries, there were nearly twice as many traditional deposit accounts as mobile money accounts in 2012; by 2015, mobile money accounts surpassed traditional deposit accounts in those 17 economies.

### Key financial and development indicators (2017 or latest available)
- Bank or mobile money account (% of population ages 15+): Sub-Saharan Africa 43; Low & Middle Income 63; High Income 94.
- ATMs (per 100,000 adults): Sub-Saharan Africa 6; Low & Middle Income 27; High Income 68.
- Commercial bank branches (per 100,000 adults): Sub-Saharan Africa 5; Low & Middle Income 9; High Income 20.
- Fixed broadband subscriptions (per 100 people): Sub-Saharan Africa 1; Low & Middle Income 9; High Income 31.
- GDP per capita, PPP (current international $): Sub-Saharan Africa 3,730; Low & Middle Income 10,345; High Income 45,789.
- Mobile cellular subscriptions (per 100 people): Sub-Saharan Africa 73; Low & Middle Income 96; High Income 126.

### Opportunities and channels for impact
- FinTech can improve financial inclusion and deepen financial systems by:
  - Extending access to credit through overcoming information barriers.
  - Lowering the cost of cross-border transfers.
  - Serving as a catalyst for innovation in other sectors, such as agriculture and infrastructure.
- Potential to partly remedy pressures on correspondent banking relationships if new systems can satisfy anti–money laundering and countering the financing of terrorism requirements.
- Future distributed ledger technologies could enhance efficiency, security, and transparency of payment systems, lowering trading costs—subject to current challenges such as scalability and high energy consumption being resolved.

### Risks, vulnerabilities, and trade-offs
- FinTech challenges traditional structures and creates efficiency gains by opening up the financial services value chain, but it also raises concerns about new vulnerabilities and risks not well covered by existing regulation.
- New competitors without previous industry experience are providing innovative financial services, creating new types of risks that require understanding and oversight.
- Regulators and central banks in sub-Saharan Africa must balance the benefits of FinTech with the added vulnerabilities it may create, taking into account the region’s relatively low levels of financial inclusion, bank competition, and macro-financial linkages.

### Policy measures and priorities
- Fill large existing infrastructure gaps, starting with electricity and internet services.
- Address the perennial race between fast-moving innovation and the slower pace of regulation.
- Look beyond the financial sector to evaluate impacts on employment and productivity, the digital economy, and the potential for structural transformation.
- Consider FinTech as a leapfrogging opportunity to foster inclusive economic growth and development, while designing suitable regulatory frameworks to manage associated risks.

*Source: Executive Summary, ftssacea - Executive Summary (IMF)*

### 1. Mobi  le Mone  y Transactions

### 1. Mobile Money Transactions

### Uses and key statistics
- Kenya records 53 transactions per adult per year.
- M-Pesa had almost 30 million users worldwide as of end-2016, of which 20.7 million are in Kenya.
- As of 2017, 388 million of the continent’s 1.25 billion are online, with 160 million holding Facebook accounts.
- There are now more mobile money agents in sub-Saharan Africa than ATMs or bank accounts.
- East Africa leads the region in mobile money adoption and usage.
- Safaricom has a share of nearly 70 percent of the market in Kenya; Vodacom has a market share of close to half in Tanzania.

### Factors for success
- Low number of branches and automatic teller machines (ATMs) and absence of internet connections created large unfulfilled demand for payments services.
- Relatively large penetration of mobile devices provided a technological platform usable by mobile money agents.
- Telecom-led regulatory model: telecom provider works with the financial regulator to establish infrastructure for mobile payments; this model proved more successful in attracting users than bank-led models.
- Single large telecom providers created critical mass to overcome network effects and compatibility issues, though concentration raises potential stability concerns.
- National identification systems in East Africa facilitate faster mobile payment adoption and enable more secure transactions.
- Policy considerations:
  - Lower costs, improve access, and facilitate interoperability to foster competition.
  - Proliferation of taxes on the telecoms sector—customs duties on capital equipment and handsets, diverse regulatory fees, high corporate income tax and value-added tax rates, telephone call excises—may distort markets, impeding efficiency, affordability, and growth.

### Infrastructure and technological readiness
- Sub-Saharan Africa lags other regions in access to electricity, internet penetration, and technological readiness (World Bank’s Global Competitiveness Report 2017).
- All sub-Saharan African countries score relatively low on the technological readiness pillar, implying a large margin for improvement and significant potential impact from new technologies and infrastructure.

### FinTech beyond payments: products and platforms
- FinTech providers leverage large customer bases in payments to offer other services: saving, lending, insurance, cross-border payments, investment products.
- More advanced FinTech centered on lending is growing; crowdfunding and peer-to-peer lending expanded (Cambridge Centre for Alternative Finance (2017)).
- Examples of platforms and services (illustrative):
  - Safaricom’s M-Shwari: savings accounts and instantaneous micro-credit products integrated with mobile money.
  - Paga (Nigeria): digital bank services (peer-to-peer money transfer, bill payments, online payments, payroll).
  - SimbaPay: digital money transfer to mobile wallets; partnered with Family Bank for payments to China.
  - Orange Money and Orange Bank Africa: payment/withdrawal card (Visa) and bancassurance partnership (NSIA); Mowali joint venture for wallet interoperability.
  - Zoona: electronic accounts (Sunga Pockets) and partnership with Kiva for crowdlending.
  - Wizzit: payments company providing microfinance products via mobile channels.
  - GetBucks: microfinance personal loans up to six months via FinCloud platform.
  - Wizall: electronic payments and money transfer services in West Africa since 2015.

### From financial deepening to economic development
- FinTech acts as a technological enabler beyond financial inclusion, catalyzing innovation in agriculture, infrastructure, health, and public administration.
- Agricultural innovations: Tigo Kilimo (Tanzania) provides weather and agronomic SMS; Connected Farmer program sends market prices and enables digital payments and receipts.
- Fragile and conflict-affected states: mobile wallets shortened payment times and minimized fraud during the Ebola outbreak in Sierra Leone; mobile payments sustained health and education worker payments in Liberia.
- Health sector: Rwanda partnered with Zipline (drones guided by mobile phone–based location services) for delivery of medical products; mobile payments facilitate the business model.
- Infrastructure and consumer credit: M-Kopa Solar (Kenya) sells solar home systems with an initial deposit and daily payments over up to one year, combining rural electrification and consumer credit.

### Case study: M-Pesa (why Kenya)
- Launched in 2007 by Safaricom and Vodacom; jointly developed by UK Department for International Development and Vodafone.
- Functions: deposit/withdraw money, transfer between users, pay bills.
- Rapid regional expansion: Tanzania, Lesotho, Mozambique, Ghana, and beyond.
- Reasons for success:
  1. Low financial market infrastructure generated large unfulfilled demand; high mobile device access; need to overcome network effects, “chicken-and-egg” trap, and lack of trust.
  2. Appropriate pricing strategy to attract customers and merchants; deployment of a reliable and trusted network.
  3. Good working relationship with the Central Bank of Kenya, which provided regulatory space and prudential comfort.
- M-Pesa integration with banks (hybrid systems) enables access to formal savings, loans, and insurance via mobile platforms.

### Innovation and emerging technologies
- FinTech supports tech start-up hubs and employment; mobile networks have made mobile technology central for digital content and services.
- Emerging applications:
  - Blockchain: Bitland (Ghana) records land parcels on a blockchain to address undocumented agricultural land (reportedly as much as 90 percent undocumented), aiming to reduce forgery and speed dispute resolution.
- Potential impacts:
  - Improved access to weather/market data and digital payments for smallholder farmers.
  - Enhanced tax collection and domestic revenue mobilization via digital payments.
  - New business models addressing infrastructure deficits (e.g., pay-as-you-go solar).

*Source: Global Findex; Internet Society (2017).*

### box 3. Digital innovation and Financial Services in Sub-Saharan Africa (continued)

### box 3. Digital innovation and Financial Services in Sub-Saharan Africa (continued)

### Technological foundations and scope of FinTech
- FinTech draws on global technological innovations including:
  - Mobile access and the internet (person-to-person transactions).
  - Big data and artificial intelligence (availability and analysis of databases with billions of observations).
  - Distributed ledger technology (DLT): networking of independent computers to record, share, and synchronize transactions rather than have a centralized database.
  - Cryptography: robust security systems enabling electronic transactions, smart contracts, and cryptocurrencies.
- These technologies can reduce information costs, increase transparency, and enable greater trust and enforcement of contracts, while also introducing new risks that need mitigation.

### Financial inclusion and deepening
- Key observations:
  - Sub-Saharan Africa has lower levels of financial inclusion and depth compared to other emerging market and developing economies.
  - Mobile penetration: 81 mobile phones per 100 inhabitants.
  - Cost of credit risk assessment remains high due to unreliable accounting and financial information, lack of credit bureaus, and limitations in legal institutions.
  - Women-owned SMEs face greater limitations in access to credit.
- Potential FinTech impacts:
  - Big data and machine learning can reduce the cost of credit risk assessments by using alternative information (mobile phone usage data, payments data).
  - Alternative information could attract new entrants into credit provision, including non-deposit-taking FinTech firms (peer-to-peer and crowdfunding).
  - Implications include increased competition, use of personal information by third parties, and attendant legal and regulatory risks.
- Broader financial development needs:
  - Development beyond retail payments into banking sector and financial market infrastructure (capital markets, insurance, pension funds).
  - Financial literacy remains relatively low; FinTech tools are being trialed for insurance premiums (Lesotho), pension payments (Ghana), and government securities (Kenya).

### Competition and efficiency
- FinTech effects on market structure:
  - Reduces costs of financial services.
  - Creates market access opportunities for new entrants (nonbanks).
  - Broadens access to new segments of the market and customers.
  - Affects competitiveness of incumbents with potential large efficiency gains.
- Competition indicators by region (as presented):
  - Boone 20.04 20.06 20.08
  - C5 82.5 77.4 84.2
  - H statistic 0.49 0.55 0.60
  - Lerner 0.31 0.30 0.25
- Notes from the source:
  - Boone maximum value is 0 (monopoly case); more negative implies higher competition.
  - C5 is combined market share of five largest financial institutions.
  - H-statistic is zero under monopoly; greater values indicate higher competition.
  - Lerner index is zero under perfect competition; higher values indicate less competition.

### Cross-border and domestic payments
- Remittances:
  - Cost of sending remittances to sub-Saharan Africa is the highest globally.
  - Causes include oligopolistic banking industry, low regional and financial integration, multiple currencies, and inefficient intra-African payment systems.
- FinTech potentials:
  - DLTs can facilitate value transfer exchanges without cross-border intermediation.
  - Network technologies could bypass complex intermediaries (multiple correspondent banks or infrastructures such as Continuous Linked Settlement [CLS]).
  - Examples: international payments using cryptocurrencies can be securely received in minutes and rapidly settled in domestic currency; DLT systems such as Ripple can efficiently process foreign payments.
- Correspondent banking pressures:
  - Loss of correspondent banking relations and high prefunding/liquidity costs and increased compliance costs (sanctions, AML/CFT) have affected cross-border flows, particularly in US dollar–denominated transactions.
  - FinTech could offer cost savings and enhanced customer due diligence and information sharing if international AML/CFT standards are met.
- DLT for payment systems:
  - DLT keeps all operations jointly by network members with ordering, settlement, and payments implemented in real time.
  - Many sub-Saharan African settlement processes are non–real-time gross settlement systems and can take several days to execute.
  - DLT could speed settlement, reduce back-office costs, and lower operational and counterparty risk, but brings operational risks and scalability limits.
  - Example: South African Reserve Bank initiated a proof of concept simulating a “real-world” trial of a DLT-based wholesale payment system using a tokenized South African rand.

### Fiscal and monetary sector implications
- Fiscal sector:
  - Digitalizing government payments could create value of roughly 1 percent of GDP for most countries.
  - Potential gains in tax administration and compliance, targeting of social programs, and public financial management using transaction data combined with personal information.
  - Smart contracts could improve public procurement transparency and performance verification.
  - Systems must protect privacy and minimize new methods for fraud and evasion.
  - DLT could offer tools to promote transparency and reduce corruption.
- Monetary sector:
  - Digital currencies could potentially replace traditional currencies but private-sector digital currencies currently struggle to satisfy the three functions of money (medium of exchange, unit of account, store of value) partly because of erratic valuations.
  - Private digital currencies pose risks for money laundering, terrorism financing, tax evasion, fraud, and other financial crimes.
  - State-issued digital currency would satisfy the three functions of money and could support public policy goals (financial inclusion, security, consumer protection, some degree of privacy), but also poses risks to financial integrity, stability, and implications for monetary policy implementation.
  - Committee on Payments and Market Infrastructures and Markets Committee work: wholesale central bank digital currencies combined with DLT may enhance settlement efficiency for transactions involving securities and derivatives, but central banks should carefully monitor digital innovations.

### Hard and soft infrastructure needs and trade-offs
- Hard infrastructure:
  - Investment needed in internet connections and energy to enable firms to leverage technological improvements.
  - Large existing hard infrastructure gaps in the region; public indebtedness constrains public financing.
  - Need to consider private sector partnerships for financing or delivery of electricity and internet services.
- Soft infrastructure:
  - Regulation to support a favorable business environment and investment in skills.
  - Trade-off between catalyzing rapid innovation and taking time to identify and manage associated risks through regulation and supervision.
  - Central importance of financial regulation in supporting FinTech growth.

### Regulation, supervision, and risks
- Potential supervisory benefits from FinTech (RegTech and SupTech):
  - Strengthen financial stability by increasing diversification and transparency and enabling better risk assessment.
- Key risks and vulnerabilities:
  - Safety and soundness concerns: financial sector prone to crises, panics, or runs.
  - Market failures: externalities and asymmetric information amplify shocks.
  - FinTech can exacerbate existing vulnerabilities and create new weaknesses (Basel Committee on Banking Supervision 2017).
- Financial Stability Board priority areas relevant to sub-Saharan Africa:
  - (1) managing operational risk from third-party service providers,
  - (2) mitigating cyber-risks,
  - (3) monitoring macro-financial risks as FinTech activities increase.
- Country examples and regulatory steps:
  - Central Bank of Kenya (CBK) issued information and telecommunications technology risk management guidelines in 2012, cybersecurity guidance note in 2017, and extended cybersecurity guidelines to payment service providers in its 2018 draft guidelines.
  - CBK supervisory actions: vulnerability assessments, onsite examinations of information and communication technology systems, inclusion of information technology auditors in onsite inspections.
- Channels creating regulatory gaps:
  - Increased competition may reduce incumbents’ earnings and solvency, promoting higher risk taking.
  - Differential regulation for FinTech firms versus banks (capital and liquidity requirements) can create incentives for regulatory arbitrage and risk shifting.
  - Many new entrants have experience from other industries but lower financial-sector expertise, increasing risks (credit, operational, liquidity, AML/CFT).
- AML/CFT and virtual assets:
  - Virtual assets and related services can spur innovation but also create opportunities for criminals and terrorists to launder proceeds or finance illicit activities.
  - Innovations may favor anonymity and lack of transparency; faster, cheaper cross-border payments can facilitate international criminal networks.
- Regulatory approaches to balance risk and innovation:
  - Consideration whether FinTech firms should be regulated like traditional banks or subject to proportionate, differential regulation.
  - Use of licensing/market entry controls and preventive measures (customer due diligence, transaction monitoring, record keeping, suspicious transaction reporting).
  - Adoption of flexible regulatory approaches such as regulatory sandboxes: closed testing environments for developing regulatory frameworks for emerging business models.

### Benefits and risks (summary from Table 4)
- Benefits:
  - Encourages decentralization and diversification, dampening effects of financial shocks in the event of an institutional failure.
  - Increases transparency and enables more accurate risk assessment and pricing.
  - Improves financial inclusion of households and small businesses.
- Risks:
  - Vulnerability of financial technology firms to micro-financial risks (maturity mismatch, liquidity mismatch, leverage) and operational risks (governance, cyber, common third-party reliance).
  - Propagation to the rest of the financial sector through unforeseen channels.
  - Exacerbation of system-wide macro-financial risks such as contagion, procyclicality, or excess volatility.

*Source: box 3. Digital innovation and Financial Services in Sub-Saharan Africa (continued).*

### Annex 2 provides a description of one of the first regulations specifically

### ftssacea - Annex 2 provides a description of one of the first regulations specifically

### Annex examples and regulatory sandboxes
- Annex 2 describes a regulation specifically designed for FinTech providers set in March 2017 by the Ministry of Finance in Mexico, and the case of a new regulatory sandbox created in Mauritius in October 2016.
- Regulatory sandboxes are noted as a commonly used tool that "must be tailored to different objectives, legal structures, and levels of financial development."

### Technologies, uses, and sectoral impacts
- Summary of Technologies and uses (as listed in the source):
  - Mobile access and the internet
    - Potential Improvements: Lower information costs; Increase in transparency; Incentives to formalize; Contract enforcement; Greater trust; Financial inclusion and deepening
    - Sectors Impacted: Cross-border payments; Fiscal and monetary sectors
  - Big data and artificial intelligence
  - Distributed ledger technologies
    - Potential Improvements: Promoting transparency and reducing corruption
  - Cryptography

### Project Khokha: DLT-based wholesale payment system — key results and implications
- Project Khokha was initiated by the South African Reserve Bank (SARB) as a proof of concept simulating a “real-world” trial of a distributed ledger technology (DLT)-based wholesale payment system using a tokenized South African rand.
- Project context: Built on prior global initiatives such as the Bank of Canada’s Project Jasper and initiatives in Brazil, Europe, Japan, and Singapore.
- Results reported by SARB (2018):
  - "The typical daily volume of the South African payments system could be processed in less than two hours with full confidentiality of transactions and settlement finality."
  - "Transactions were processed within two seconds, across a network of geographically distributed nodes, with distributed consensus providing the requisite resilience."
  - "The SARB was able to view the detail of all the transactions to allow for regulatory oversight."
  - Caution: "There are many issues to consider before the decision to take a DLT-based system into production can be made, including those related to the practicalities of implementation, legal and regulatory factors, and the broader economic impact."
- Broader observations on DLT:
  - Enhances security and transparency while lowering trading costs.
  - Significantly enhances traceability and reliability of ledger information; blockchains are difficult to hack and could be robust against cyberattacks.
  - Can mobilize large volumes of data to better assess credit risk, contributing to financial stability.
  - Several central banks are analyzing DLT to replace existing real-time gross settlement systems.
  - Example: In 2016, Payments Canada, along with the bank of Canada, R3, and commercial banks, started Project Jasper to explore DLT-based wholesale payments.

### Mobile money, monetary policy, and empirical findings
- Penetration and context:
  - "At the start of 2017, there were more than 420 million unique mobile subscribers in sub-Saharan Africa, equivalent to a penetration rate of 43 percent (GSMA Intelligence 2017)."
- Uncertainties and mechanisms:
  - It is "not clear yet how mobile money can affect the money multiplier and the velocity of money."
  - In principle, "any mobile money balances are fully backed by money deposited by the mobile money service provider in a bank, so no new money is created."
  - Banks can use these additional funds to increase lending, which creates new money in the standard way.
  - Mobile money can foster financial inclusion and potentially affect the money multiplier.
- Empirical studies cited:
  - Weil, Mbiti, and Mwega (2012): Concluded monetary policy implications of mobile money have, so far, been negligible in Kenya, Tanzania, and Uganda; they show the velocity of M-Pesa rises over time, indicating increased use as a transaction vehicle; note potential for future implications if mobile money grows further.
  - Ndirangu and Nyamongo (2015): Concluded mobile money has not affected the conduct of monetary policy in Kenya as financial development has not caused structural shifts in long-term money demand.
  - Macha (2013): Found an association between instability of money demand in Tanzania after mobile money introduction, with implications for velocity of money.
  - Aron, Muellbauer, and Sebudde (2015): Found only tentative evidence that mobile money in Uganda may exert some downward pressure on inflation; also, in a related study they found no significant effect on inflation forecasting models in Uganda.
  - Adam and Walker (2015): Using a dynamic stochastic general equilibrium model, concluded the impact of mobile money is likely to be positive and enhance the efficacy of monetary policy implementation, while noting challenges to conventional money-targeting approaches.

### Risks, oversight issues, and safeguarding measures for mobile payments
- Five key risks and oversight issues identified (Khiaonarong 2014):
  - The legal regime
  - Financial integrity
  - Fund safeguarding
  - Operational resiliency
  - Risk controls in the payment system
- Float management definition: "Float refers to the balance of e-money, physical cash, or money in a bank account that a mobile agent can immediately access to meet customer demands to purchase or sell electronic money."
- Suggested safeguarding measures based on country experiences:
  1. Usage restrictions:
     - Restrict customer funds for money transfers and prohibit use for other purposes such as extending credit or covering operating expenses of the nonbank entity.
     - Introduce liquidity requirements for nonbank mobile payment schemes, including limiting the liquid asset categories to be held that are equivalent to the total value of customer funds collected.
  2. Protection requirements:
     - Insulate customer funds against the claims of other creditors of the nonbank in the event of its insolvency.
     - Introduce insurance or comparable guarantees of electronic values for nonbank mobile payment schemes.
     - Adopt mechanisms to guarantee traceability of customer funds in the event of mass conversion of electronic values to cash, or potential nonbank failure.
  3. Float management:
     - Use a segregated trust account held by a third party with a licensed and prudentially regulated bank.
     - Maintain multiple accounts at different banks to diversify risks.
     - Hold other forms of safe assets such as government securities.
- Observations on float management practices:
  - In sub-Saharan Africa, mobile operators cannot re-invest floats; by not allowing further investment of floats, regulatory authorities in sub-Saharan Africa have chosen to "endure the safety and integrity of mobile payment systems, enhancing financial sector stability."

### Regulatory and supervisory technologies in sub-Saharan Africa
- Examples:
  - National Bank of Rwanda: Uses an electronic data warehouse to automate and streamline reporting for supervision of more than 600 financial institutions; data can be pulled automatically every 24 hours or every 15 minutes for mobile money and money transfer operators.
  - Central Bank of Nigeria and the Nigeria Inter-Bank Settlement System: Developing a "data stack" including a data warehouse and dashboards to allow risk-based and timely financial supervision and inform strategies such as financial inclusion policies and regulatory interventions.

### Safety-efficiency frontier, market structure risks, and nonbank entry
- Conceptual framework:
  - The safety-efficiency frontier summarizes possible market structures that attain various levels of safety and efficiency, subject to regulatory and technological constraints.
  - Technological progress and regulatory changes can move the frontier, making previously unattainable allocations feasible.
- Policy concern:
  - FinTech can expand opportunities (efficiency and safety) but can also create suboptimal market situations if public policy is not well designed.
  - Example risk: "Excessive" market entry by nonbanks (e.g., mobile operators) may increase competition and efficiency but add fragility through cyber-risks, operational risks, limited regulatory capital, no access to deposit insurance, and no access to central bank emergency lending.
  - Such operators providing services beyond payments (savings accounts, microcredits) may be exposed to deposit runs or funding shortages, with potential contagion effects.

### Major trade-offs and policy priorities for sub-Saharan Africa
- Uncertainties: "There is much uncertainty around the ultimate impact of financial technology (FinTech)."
- Key trade-offs and priorities:
  - Fill large existing hard infrastructure gap (electricity and internet) while mobilizing domestic, foreign private financing, and concessional resources; mitigate risks associated with infrastructure investments.
  - Balance rapid innovation and the slow pace of regulation: be flexible to avoid stifling innovation while maintaining macroeconomic and financial stability and financial integrity.
  - Emphasize proportionality: "the balancing of risks and benefits against costs of regulation and supervision"—focus on price and financial stability, consumer protection from fraud, cyber-risk, and increasing financial literacy.
  - In anti-money laundering and counter-terrorist financing, ensure appropriate identification measures.
  - Use regulatory sandboxes tailored to objectives, legal structures, and financial development levels.
  - Think beyond financial-sector effects to assess FinTech's impact on employment, productivity, the digital economy, and structural transformation.
  - Leverage human capital: improve financial and digital inclusion and ensure financing to new sectors.
  - Adopt forward-looking education and skills policies that include financial literacy and skills upgrading for a sustainable digital economy and e-commerce.
  - Assess how competition in different sectors will affect the future e-economy.

### Conclusions and specific numeric estimates highlighted
- Infrastructure finance:
  - The oft-quoted figure of "$93 billion necessary to fill the region’s gap dates to 2009."
  - Even at "$93 billion," limits exist on public financing given government indebtedness and low domestic revenue mobilization.
- Demographics and labor market:
  - "By 2035, more than half of those entering the global labor market will be in sub-Saharan Africa."
- Policy imperatives:
  - Policymakers must update infrastructure gap estimates, mobilize financing for electricity generation, transmission, and distribution, critical internet infrastructure, and hardware and software systems necessary to provide internet services such as fiberoptic links.
  - Ensure proportional regulation and supervision, tailored sandboxes, and policies to foster human capital and skills aligned with a digital economy.

*Source: ftssacea - Annex 2 provides a description of one of the first regulations specifically (https://www.imf.org/-/media/files/publications/dp/2019/english/ftssacea.pdf)*

### Conclusions

### Conclusions

### Project Jasper: Distributed Ledger–based Wholesale Payment System
- Project Jasper built a proof-of-concept system that leveraged a settlement asset issued and controlled by a central bank.
- Implementation details:
  - Platform: Ethereum.
  - Settlement asset: digital depository receipt (DDR) representing Bank of Canada deposits. DDRs are issued by the Bank of Canada and are backed one for one by cash pledged to the bank by participants.
  - Final settlement: Ultimate settlement finality on the books of the Bank of Canada is achieved after exchanging DDRs with the Bank of Canada for Canadian dollars transferred into participants’ respective settlement accounts.
  - Function: For all intents and purposes, these DDRs functioned as cash in the system; as DDRs are exchanged for central bank money, there is no increase in money circulating in the banking system.
- Liquidity and settlement design:
  - Phase 1: Implemented as a pure real-time gross settlement (RTGS) system, with every individual payment on the ledger being prefunded by DDRs in the participant’s wallet.
  - Tradeoffs: RTGS systems eliminate settlement risk at the cost of an increased need for liquidity.
  - Liquidity-saving mechanisms: Jasper incorporates a liquidity-saving mechanism that allows participants to coordinate their payments to reduce liquidity needs. The most effective liquidity-saving mechanisms are those that support settlement by periodically matching offsetting payments submitted to a central payments queue and settling only net obligations.
  - Phase 2: Explored the possibility of giving banks the choice of entering payments for immediate settlement or into a queue for netting and deferred settlement.
  - Operational considerations: Offsetting algorithms reduce liquidity needs but cause delay in settlement, which is unacceptable for some types of payment.

### Regulatory frameworks for FinTech: purposes and objectives
- A regulatory framework could provide the legal certainty to support the organization, operation, functioning, and authorization of firms offering:
  - Alternative means of access to finance and investment.
  - Issuance and management of electronic payment funds.
  - Exchange of virtual assets.
- Regulatory goals for FinTech:
  - Encourage development of products and services covering market segments underserved by traditional financial institutions.
  - Provide prudential rules on corporate governance, accounting, and risk management.
  - Prevent money laundering and the financing of terrorism while protecting users of financial technologies.

### The Case of Mexico — FinTech Law (effective March 10, 2018)
- Key aspects of the law:
  - Anti-money laundering and counter-terrorist financing:
    - Establishes client and investor identification standards.
    - FinTech companies will not be allowed to make any guaranteed returns on investment or guarantee the result or success of investments.
    - Prohibits related persons, or those with the power to direct or control a FinTech institution’s management or resolutions, from applying for crowdfunding financing.
    - Prohibits officers, partners, board directors, managers, and other individuals imprisoned for over one year for a financial crime from certain roles (as described in the law).
  - Institutions covered:
    - Crowdfunding institutions.
    - Electronic payment institutions.
    - Virtual asset management institutions.
    - To provide services in Mexico, these FinTech institutions should be legally certified and incorporated as Mexican corporations or limited liability companies.
  - Sandboxes:
    - Enables innovative companies to operate using technological tools, models, services, or other means through innovative methods or processes.
    - A two-year temporary authorization will be provided (trial period).
  - FinTech Council:
    - Provides for the creation of a FinTech Council to act as a means of consultation, advice, and coordination to create a space for exchanging opinions, ideas, and knowledge between the public and private sector, to learn about innovations and plan their development and regulation.

### The Case of Mauritius — Regulatory Sandbox License (RSL)
- Approach:
  - Mauritius uses the concept of “regulatory sandbox” to spur innovation in the FinTech industry by accommodating entry of new entrepreneurs and avoiding a prescriptive regulatory approach.
  - The regulatory framework facilitates “testing grounds” for new digital business models not covered by current regulation.
  - Purpose: Adapt compliance with strict financial regulations to the growth and pace of innovation, ensuring consumer protection without overburdening the FinTech sector.
- Timeline and scope:
  - The Mauritius government launched the Regulatory Sandbox License (RSL) on October 20, 2016.
  - Although the RSL covers any innovative industry, most recent successful applicants are in the FinTech industry.
- Examples of RSL applicants:
  - SelfKey: obtained an RSL to develop a digital identity wallet service based on Blockchain.
  - Other licenses: issued to an online crowdfunding platform, a medical company producing stem cells, and a financial provider of new investment products for the film industry.

### Key implications and policy considerations
- Central bank–issued digital settlement assets (DDRs) can function effectively as cash within a DLT-based wholesale payment system when backed one for one by central bank cash and exchanged for central bank money without increasing money circulating in the banking system.
- Design trade-offs in wholesale payment systems:
  - RTGS provides immediate finality and eliminates settlement risk but increases liquidity needs.
  - Liquidity-saving mechanisms that net offsetting payments reduce liquidity needs but introduce settlement delays; offering participants a choice between immediate RTGS settlement and queued netting can reconcile competing needs.
- Regulatory frameworks and sandboxes can:
  - Encourage innovation and inclusion while providing consumer protection and anti–money laundering safeguards.
  - Be structured to allow temporary trial periods (for example, a two-year trial in Mexico) or broader flexible licensing approaches (as in Mauritius) to test new business models.
- Legal and supervisory clarity is critical to support firms offering electronic payments, virtual asset services, and crowdfunding, and to protect investors and the integrity of the financial system.

*Conclusions — ftssacea - Conclusions*

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_Source: https://www.imf.org/-/media/files/publications/dp/2019/english/ftssacea.pdf_