## A Regulatory Approach to Fintech

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**Canonical URL:** [A Regulatory Approach to Fintech](https://www.imf.org/-/media/files/publications/fandd/article/2018/june/straight.pdf)

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### Fintech: promise and risks
- Fintech examples and impacts:
  - Mobile payment systems in Kenya and China have brought millions of previously “unbanked” people into the financial system.
  - Peer-to-peer lending in Latvia, Brazil, and elsewhere has provided new credit sources for small businesses.
  - Advances in artificial intelligence can enhance fraud protection and regulatory compliance, potentially expanding access to financial services and deepening financial inclusion.
  - Distributed ledger technology can enable faster and cheaper transactions, securely store records (diplomas, real estate deeds), and automatically execute smart contracts.
- Risks and misuse:
  - Crypto assets and distributed ledger technology have been used for illicit purposes.
  - Fintech poses risks to consumer and investor protection, tax compliance, anti–money laundering, countering the financing of terrorism, and financial stability.
- Regulatory trade-offs:
  - Regulators must protect consumers and the integrity and stability of the financial system while avoiding stifling innovation that responsibly benefits the public.
  - Constructive engagement with market participants helps regulators stay abreast of benefits and quickly identify emerging risks.
  - Developing a forward-looking regulatory framework requires creativity, flexibility, and new expertise.

### Lessons from the financial crisis (three lessons)
- Lesson number one:
  - Trust is the foundation of the financial system and is fragile; regulators must ensure that new technologies do not undermine trust.
- Lesson number two:
  - Risk accumulates in unexpected places; examples include poorly understood instruments such as collateralized debt obligations prior to the global financial crisis.
  - Open questions: Will a more decentralized financial system be more stable or less? Will risk be more dispersed? Will diminished roles for traditional intermediaries make emerging risks more likely to go undetected?
- Lesson number three:
  - In a globalized world, financial shocks quickly reverberate across national boundaries; crisis response requires concerted global action.
  - Open questions: Will the evolving global financial system transmit shocks more quickly? How can resilience be strengthened? What can be done to enhance international cooperation?

### Global action and standard setting
- Current international activity:
  - National authorities have reacted with varying degrees of regulatory stringency; uncoordinated responses risk migration of activity to more lightly regulated jurisdictions in a “race to the bottom.”
  - Crypto assets are borderless, making a global approach vital.
- Bodies and actions referenced:
  - The Financial Action Task Force has provided guidance on addressing money-laundering and terrorist-financing risks associated with crypto assets.
  - The Financial Stability Board (FSB) is studying ways to monitor the growth of crypto assets to identify emerging threats to stability.
  - At a March meeting in Buenos Aires of G20 central bankers and finance ministers, the G20 agreed with the FSB’s assessment that crypto assets do not currently pose a threat to stability but could pose a threat at some point in the future; they asked the FSB and other standard-setting bodies to continue their work and report on progress.

### IMF’s role and recommended approaches
- IMF responsibilities and capabilities:
  - The IMF monitors the economies and financial systems of its 189 members, helps build institutional capacity, and advises on policies and regulatory structures, giving it a global perspective.
  - The IMF should understand, learn from, and potentially adopt innovative technologies to improve regulation, supervision, and surveillance.
- Regulatory approaches:
  - In some cases existing regulations will suffice; in others, new approaches may be required as new risks— including cybersecurity—emerge and as distinctions between entities and activities break down.
  - Regulatory “sandboxes,” used in Hong Kong SAR, Abu Dhabi, and elsewhere, can allow new financial technologies to be tested in closely supervised environments.
- Overarching guidance:
  - Do not postpone action until answers are completely clear; begin considering the regulatory framework of the future in a manner attuned to the rapid pace of change.
  - Keep an open mind about crypto assets and financial technology because of both risks and potential benefits.

*Christine Lagarde, Finance & Development, June 2018.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/june/straight.pdf_