## wpiea2019071

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---

### I. Introduction: scope and approach
- Focus: fintech developments in Latin America and the Caribbean (LAC), concentrating on the financial sector and following the Bali Fintech Agenda (IMF and WB, 2018).
- Objective: take stock of the state of play in LAC, assessing opportunities, risks, regulatory responses, and policy implications.
- Paper structure overview:
  - Section II: level of financial development and inclusion in LAC.
  - Section III: evolution of fintech startups in the region, with emphasis on payment systems and fintech lending.
  - Section IV: regulatory and supervisory developments and challenges, financial stability implications, and country examples (Brazil, Colombia, Mexico).
  - Section V: macroeconomic aspects—central bank digital currencies, taxation issues, cross-border payments (especially remittances).
  - Section VI: cybersecurity and security of digitalized information; concrete measures to increase cybersecurity.
  - Section VII: main conclusions and issues for further analysis.

### II. Key opportunities from fintech in LAC
- Financial inclusion and development
  - Fintech can reduce transaction and services costs and foster financial inclusion and development.
  - 46 percent of fintech startups in the region seek to help underbanked consumers and/or small and medium enterprises (SMEs).
  - 271 startups identified focusing on SMEs with poor or no access to financial services.
  - Mobile money can increase inclusion for populations scattered across islands or remote areas and reduce remittance costs amid loss of correspondent banking relationships.
- Competition and intermediation
  - Fintech can enhance competition and improve intermediation, counteracting high concentration in banking after withdrawals of foreign banks post-global financial crisis.
  - Benefits depend on fintech development paths (new entrants vs. incumbent-funded) and regulatory responses; standardization, interoperability, and fair access to infrastructures are important.
- Growth and poverty reduction
  - Further financial development is expected to support growth and reduce growth volatility.
  - Financial inclusion could help reduce poverty and inequality, particularly in rural and remote areas.
- Technology-enabled credit assessment and service delivery
  - Use of artificial intelligence, machine learning, and big data can make borrower risk evaluation cheaper and quicker.
  - Digitally collected data (e-commerce, mobile transactions) could complement or substitute traditional client identification and credit risk assessment.
  - Application Programming Interfaces (APIs) provide flexibility, enabling efficient, user-friendly services targeting underserved markets.

### III. Major risks associated with fintech expansion
- Financial stability
  - Effects of fintech on financial system structure and stability are not well understood.
  - Startup-phase fintech firms may lack mature risk management systems comparable to incumbents.
  - Narrow-scope fintech applications may broaden into traditional banking services, raising systemic concerns.
- Financial integrity (AML/CFT)
  - Rapid expansion with complex transaction models may limit authorities' ability to identify real beneficial owners of assets.
  - Insufficient supervisory and regulatory resources could threaten financial integrity.
- Cyber risk
  - Increased digitalization/connectivity exposes operators and consumers to cyber risk; active risk management required to ensure cybersecurity measures are commensurate with underlying risk.
  - LAC is viewed as relatively less exposed to cyberthreats, possibly reflecting modest digitalization and limited online banking spread.
  - Shortage of skills, lack of innovative technologies, weak or inexistent cybercrime legislation, and incipient cybersecurity strategies constrain responses.
  - Recent cyberattacks in Chile and Mexico prompted swift regulatory reactions to strengthen cybersecurity.
- Consumer and data protection
  - Potential misuse of consumer data by fintech firms amid less developed or less stringent data privacy requirements compared with traditional banking.
- Distributional and exclusion risks
  - Use of machine learning in credit markets can inadvertently penalize already-disadvantaged groups, leading to financial exclusion.

### IV. Financial development status and fintech's role (findings)
- Financial Development Index context
  - LAC financial development (access, depth, efficiency) lags Emerging Asia but is at par with other emerging markets.
  - Brazil, Barbados, and Chile rank highest in the region on the Financial Development Index; Nicaragua, Haiti, and Paraguay rank poorly (Haiti and Paraguay worse than low-income country average).
- Access vs. intermediation
  - LAC scores relatively well on access to financial institutions (ATMs and bank branches per 100,000 adults improved), but remains below OECD average.
  - Bank intermediation is low: Credit-to-GDP in LAC is low relative to other EMs, and credit is expensive.
  - High reliance on nontraditional finance (borrowing from friends/family, informal lenders, banking correspondents) and high bank lending rates in concentrated banking systems limit use of formal saving and borrowing.
- Policy and regulatory performance
  - Many countries perform well in regulation and supervision of bank branches and agents, prudential regulation, and market conduct rules.
  - Remaining gaps: high service fees, need to improve credit reporting systems, regulation of electronic payments, and regulation and supervision of deposit-taking activities.
- Global comparisons and evidence
  - In emerging and developing economies, 55 percent of adult population is unbanked amid high financial costs, lack of documents, and distance.
  - Mobile money has significantly enhanced financial inclusion in parts of Sub-Saharan Africa and South Asia; online lending platforms have supported increased SME lending in the United Kingdom, United States, and China.

### V. Policy implications and priorities
- Regulatory adaptation
  - Adapt regulatory frameworks and supervisory practices to facilitate safe entry of new products, activities, and intermediaries while preventing stability and integrity risks.
  - Reinforce competition and commitment to open, free, and contestable markets to ensure a level playing field, promote innovation, consumer choice, and access to high-quality financial services (Bali Fintech Agenda, 2018).
- Risk management and supervision
  - Supervise fintech credit similarly to other forms of credit to avoid boom-and-bust cycles in immature financial markets.
  - Ensure fintech firms develop risk management practices commensurate with activities as they broaden services.
- Cybersecurity strengthening
  - Address shortages in cybersecurity skills, enact or update cybercrime legislation, and develop comprehensive cybersecurity strategies.
  - Scale cybersecurity responses commensurate with increasing digitalization and connectivity.
- Consumer and data protection
  - Strengthen regulatory requirements for data privacy to be on par with protections afforded in traditional banking systems.
- Inclusion-focused integration
  - Integrate fintech considerations into national financial inclusion strategies to overcome barriers and develop financial markets across a broad range of services.
- Central bank considerations
  - Central banks face the task of evaluating benefits and risks of adopting technological progress in payment systems and issuing their own digital currencies.

### Box: Use of Distributed Ledger Technology in Haiti (summary)
- Project: World Bank–financed pilot using blockchain to connect Haitian mango and avocado farmers with consumers in the United States and Canada.
- Preliminary results:
  - Spoilage rates reduced dramatically; shelf life and quality improved.
  - Farmers’ revenue increased eightfold.
  - Smart contracts and cross-border mobile payments reduce transaction costs; real-time data track merchandise across the value chain.
- Potential macroeconomic implications:
  - Improve financial inclusion for rural smallholder farmers.
  - Contribute to poverty reduction (in the Haitian countryside almost 70 percent of households are considered chronically poor, against a little over 20 percent in cities).
  - Increase fiscal transparency and tax compliance; potentially raise domestic revenue.
  - Generate some employment during harvest season and improve growers’ skills.
- Possible issues:
  - Logistical management at scale, system failure (hacking), governance of blockchain nodes, risk of intervention by interest groups, environmental consequences (mono-cultivation), operational challenges in harvesting tall mango trees.

### Box: Peru’s Fintech Application to its Payment Systems, 2017 (summary)
- Market size and fintech activity
  - Peru’s fintech market represents about 5 percent of the Latin American market.
  - Number of fintech firms in Peru: 57.
  - Activity mainly in online lending, payments and remittances.
- Financial inclusion trends and gaps
  - Account ownership: 29 percent of adults in 2014; 43 percent in 2017.
  - Gender disparity in account ownership has widened; Peru lags peers in several indicators; high costs cited by non-account owners.
- BiM (Billetera Móvil) e-wallet
  - Launched in 2016, enabled by 2013 law on mobile money and central bank’s 2016 circular regulating electronic money payment agreements.
  - Features cash-in/out, transfers, balance checks, airtime top-up on low-tech mobile phones.
  - Challenges: lack of integration with core banking systems, lack of interoperability with bank accounts, low agent coverage, difficulties cashing-in/out.
- Responses and potential enablers
  - Banco de la Nación participation, piloting supplier payments, banks enabling cash-in through POS terminals.
  - Digitization of government payments could boost usage.

### Box: Mexico’s Fintech Law — AML/CFT requirements (summary)
- Fintech firms must comply with Secretaría de Hacienda y Crédito Público (SHCP) requirements to prevent and detect potential AML/CFT activities.
- Compliance centers on:
  - client and user information storage;
  - detection of clients or transactions that could lead to felonies;
  - training to directors, executives, and employees;
  - internal or independent compliance evaluations and periodic reporting to the Comisión Nacional Bancaria y de Valores (CNBV).
- E-money institutions: CNBV authorization required to receive/deliver cash up to amounts equivalent to 10,000 UDIs per client (reception/delivery) and 1,500 UDIs per client on a daily basis (delivery).
- Crowdfunding institutions: CNBV authorization required to receive cash funds via deposits in authorized financial entities up to monthly amounts equivalent to 3,000 UDIs for low-risk clients and 10,000 UDIs for other clients.

### Central Bank Digital Currencies (CBDC): overview, design choices, and regional examples
- Motivations for CBDC consideration:
  - reduce costs of notes and coins, foster financial inclusion, respond to private digital currencies, and address reduced use of cash.
- Design choices materially affect anonymity, settlement, and central bank–bank relationships (token vs. account based; general public access vs. banks-only).
- AML/CFT implications:
  - CBDC can allow digital records and traceability; design choices affect anonymity and usefulness for AML/CFT.
  - Entirely anonymous or pseudonymous CBDC would offer little improvement over physical cash for AML/CFT.
  - Central banks may assume “know your customer” responsibilities for account-based CBDC available to the public.
  - Understanding and implementing revised FATF recommendations (October 2018) is important.
- Other risks:
  - operational risks from disruptions and cyberattacks;
  - potential disintermediation and increased substitutability between CBDC and bank deposits could affect bank profitability and deposit volatility.
- Country examples
  - Uruguay — E-Peso pilot: six months (November 2017–April 2018); limited issuance of $20 million for 10,000 mobile users; per-person and business limits: $30,000 per wallet and $200,000 for registered businesses; anonymous but traceable; central bank estimated cash transaction costs at 0.6 percent of GDP.
  - Eastern Caribbean Central Bank (ECCB) — contract with Bitt Inc. (February 21, 2019) for a digital EC dollar pilot aimed at reducing physical cash by 50 percent and promoting stability.
  - Ecuador — retail CBDC project launched 2014, services started February 2015; project terminated December 2017 due to low user uptake.

### Taxation: fintech and crypto-related tax treatments
- General points
  - Tax authorities need to review existing tax policy and legal frameworks and may amend laws or issue interpretative rulings.
  - Most jurisdictions in the region do not have public positions on taxation of fintech-related activities.
- Tax treatment of cryptocurrencies
  - Treatment depends on legal classification (asset, medium of exchange, legal tender, banned).
  - Notation: illegality of a transaction does not negate taxability of gains.
  - Examples and table excerpts list country classifications (selection includes Brazil, Argentina, Chile, Bermuda, Ecuador, Mexico, USA, Colombia).
- Box 4 highlights specific rules and examples:
  - VAT/GST: if cryptocurrency is treated as goods/services, VAT/GST generally applies; if treated as legal tender/money, supplies can be out-of-scope.
  - Gains from trading: taxable per first principles (capital gains vs. income).
  - Cryptocurrency mining: some jurisdictions tax block rewards as income; others tax only if mining constitutes a trade or business.
  - Remuneration, airdrops, ICOs: remuneration in crypto generally taxed in year of receipt; no universal specific treatments for airdrops/ICOs—treatment depends on token nature.
  - P2P activities: direct taxes—self-employed registration and reporting; indirect taxes—VAT/GST usually applies to goods/services; platform liability for tax is debated.
  - Example: Under Brazilian regulation, P2P loan companies must be corporations with minimum paid-in capital and net worth of BRL 1 million.
- Other taxes
  - Sector-specific taxes extending to P2P businesses (e.g., hotel guest taxes, ridesharing-related taxes).

### Cross-Border Payments and remittances
- Importance
  - Remittances to LAC equal to 1.5 percent of regional output in 2017.
  - In El Salvador, Haiti, Honduras, and Jamaica, remittances received exceed 15 percent of GDP.
- Key statistics on remittance costs
  - Global average cost of sending US$200 in remittances: 6.99 percent as of 2018Q2.
  - Cost of sending remittances to LAC: 6.1 percent.
  - Banks: 10.4 percent (most expensive channel).
  - MTOs: 6.2 percent.
  - Mobile operators and mobile money: 3.2 percent.
  - Officially recorded remittances to LAC in 2017: US$80.5 billion.
  - UN Sustainable Development goal: reduce transaction costs to less than 3 percent and eliminate remittance corridors with transaction costs higher than 5 percent by 2030.
- Findings
  - Emigrants rely primarily on banks and MTOs, funding transactions with cash or bank accounts.
  - High transaction costs reduce funds received by families.
  - Corridors with larger remittances have lower weighted average total costs (5.1 percent).
- Mobile money and fintech uptake
  - Mobile money underutilized in LAC compared to other regions.
  - Of 285 startups identified by IDB/Finnovista (2018) focused on payments in LAC, only 13 focus on international transfers and remittances.
  - Global fintech remittance firms (e.g., World Remit, TransferWise) are active in parts of LAC.
- Channels for development
  - MNOs with international networks, cross-jurisdiction MNO agreements, partnerships between MNOs, payment service providers, MTOs, banks, or global remittance hubs.
  - Development depends on diffusion of mobile phones and transaction accounts.
- Supportive regulatory environment
  - Harmonization and simplification of licensing (e.g., unify mobile money and international remittance licenses) and enabling partnerships can lower costs and expand access.
  - 60 percent of the Asociación de Supervisores Bancarios de las Américas reported remittances to LAC affected by withdrawal of global banks from correspondent banking.

### VI. Security Issues and Cyber Risk — LAC exposure and gaps
- Exposure and preparedness
  - LAC is, on average, less exposed to cyberthreats due to modest internet penetration (only about half of the population has access to and uses the internet), lower degrees of digitalization, and lower popularity of mobile banking.
  - 80 percent of Fintech companies in Latin America see cybersecurity as a threat (IDB and Finnovista, 2018).
  - About half of the region’s fintech startups already have contingency plans for cyber events.
  - Cyber insurance plays only a minor role in LAC compared to the U.S.
- Global Cybersecurity Index (GCI) findings
  - Region-wide deficiencies, particularly in capacity building.
  - Mexico and Uruguay have the strongest commitment in the region, ranking just behind Canada and the United States.
  - Recent national measures (e.g., Trinidad and Tobago, Brazil, Chile) may not be reflected in GCI (2016/2017 data).
- Specific weaknesses
  - Weak or nonexistent national cybercrime legislation in many countries.
  - Skill levels and cyber literacy are below average; availability of innovative technologies lags.
  - Many countries lack comprehensive cybersecurity strategies or institutional arrangements for audits and coordination.
- Recommended policy measures
  - Pass comprehensive, technology-neutral legislation covering substantive and procedural law; harmonize with international law (e.g., Budapest Convention on Cybercrime).
  - Strengthen organizational and institutional setups: empowered coordinating agencies, approval and oversight of cybersecurity plans, programs, procedures and standards.
  - Prioritize capacity building: staff training, capacity transfer, cooperation with more advanced countries.
  - Adopt international minimum standards and certification; increase investments in technology.

### VII. Conclusions and future research — summary and open questions
- Summary findings
  - Fintech activity in LAC is heterogeneous; developed countries with mature financial sectors tend to lead innovation.
  - Fintech investment has increased but lags some emerging market booms.
  - Payment systems and alternative financing are among the largest and fastest-growing fintech areas in LAC.
  - Adoption of mobile money services, cross-border transfers, and fintech credit remain limited.
  - Regulators have taken steps to contain risks while encouraging innovation; many central banks are evaluating CBDCs.
- Open questions for further research
  - Will fintech foster competition and improve intermediation in concentrated banking systems?
  - How to reshape regulation and supervision to encourage competition and innovation while containing risks and ensuring a level playing field?
  - How can LAC leverage fintech to facilitate cross-border remittances amid declining correspondent banking relationships while ensuring financial integrity?
  - Do CBDCs constitute good alternatives for LAC to replace physical cash to improve inclusion, particularly with informality and dollarization?
  - What risks stem from increased crypto-asset presence and how can small countries with limited capacity reap benefits while limiting risks?
  - Can better data and new technologies be leveraged to reduce informality (for example, on SME financial situations)?

### Annex I — Fintech: Potential Financial and Operational Risks — selected channels
- Financial risk
  - Maturity mismatch: could arise through securitization or if lending platforms use their own balance sheet to intermediate funds.
  - Leverage: not typically associated with current fintech activities but can arise temporarily (e.g., warehousing by lending or equity crowdfunding platforms).
- Operational risk
  - Governance and process control: firms outside regulatory perimeter or subject to lower standards may not have comparable oversight.
  - Cyber risks: greater connectivity expands entry points for cyber attackers.
  - Third-party reliance: concentration in cloud computing providers could create systemic vulnerabilities.
- Legal and regulatory risk
  - Innovative fintech activities (smart contracts, robo-advisors, blockchain) raise legal uncertainty (data privacy across jurisdictions, asset location when no single custodian exists).

*Italicized source attribution: IMF Working Paper content as provided in the source PDF.*

### References .............................................................................................................

### wpiea2019071 - References

### I. Introduction: scope and approach
- Focus: fintech developments in Latin America and the Caribbean (LAC), concentrating on the financial sector and following the Bali Fintech Agenda (IMF and WB, 2018).
- Objective: take stock of the state of play in LAC, assessing opportunities, risks, regulatory responses, and policy implications.
- Paper structure overview:
  - Section II: level of financial development and inclusion in LAC.
  - Section III: evolution of fintech startups in the region, with emphasis on payment systems and fintech lending.
  - Section IV: regulatory and supervisory developments and challenges, financial stability implications, and country examples (Brazil, Colombia, Mexico).
  - Section V: macroeconomic aspects—central bank digital currencies, taxation issues, cross-border payments (especially remittances).
  - Section VI: cybersecurity and security of digitalized information; concrete measures to increase cybersecurity.
  - Section VII: main conclusions and issues for further analysis.

### II. Key opportunities from fintech in LAC
- Financial inclusion and development:
  - Fintech can reduce transaction and services costs and foster financial inclusion and development.
  - 46 percent of fintech startups in the region seek to help underbanked consumers and/or small and medium enterprises (SMEs).
  - Example use case: mobile money can increase inclusion for populations scattered across islands or remote areas and reduce remittance costs amid loss of correspondent banking relationships.
  - 271 startups identified focusing on SMEs with poor or no access to financial services.
- Competition and intermediation:
  - Fintech can enhance competition and improve intermediation, counteracting high concentration in banking after withdrawals of foreign banks post-global financial crisis.
  - Potential to put pressure on margins and alleviate adverse consequences of concentrated banking systems.
  - Benefits depend on fintech development paths (new entrants vs. incumbent-funded) and regulatory responses; standardization, interoperability, and fair access to infrastructures are important.
- Growth and poverty reduction:
  - Further financial development is expected to support growth and reduce growth volatility.
  - Financial inclusion could help reduce poverty and inequality, particularly in rural and remote areas.
- Technology-enabled credit assessment and service delivery:
  - Use of artificial intelligence, machine learning, and big data can make borrower risk evaluation cheaper and quicker.
  - Digitally collected data (e-commerce, mobile transactions) could complement or substitute traditional client identification and credit risk assessment.
  - Application Programming Interfaces (APIs) provide flexibility, enabling efficient, user-friendly services targeting underserved markets.

### III. Major risks associated with fintech expansion
- Financial stability:
  - Effects of fintech on financial system structure and stability are not well understood.
  - Startup-phase fintech firms may lack mature risk management systems comparable to incumbents.
  - Narrow-scope fintech applications may broaden into traditional banking services, raising systemic concerns.
- Financial integrity (AML/CFT):
  - Rapid expansion with complex transaction models may limit authorities' ability to identify real beneficial owners of assets.
  - Insufficient supervisory and regulatory resources could threaten financial integrity.
- Cyber risk:
  - Increased digitalization/connectivity exposes operators and consumers to cyber risk; active risk management required to ensure cybersecurity measures are commensurate with underlying risk.
  - LAC is viewed as relatively less exposed to cyberthreats, possibly reflecting modest digitalization and limited online banking spread.
  - Commitment to increase cybersecurity lags some other EM regions due to shortage of skills, lack of innovative technologies, weak or inexistent cybercrime legislation, and incipient cybersecurity strategies.
  - Recent cyberattacks in Chile and Mexico prompted swift regulatory reactions to strengthen cybersecurity.
- Consumer and data protection:
  - Potential misuse of consumer data by fintech firms amid less developed or less stringent data privacy requirements compared with traditional banking.
- Distributional and exclusion risks:
  - Use of machine learning in credit markets can inadvertently penalize already-disadvantaged groups, leading to financial exclusion (Fuster and others, 2018).

### IV. Financial development status and fintech's role (findings)
- Financial Development Index context:
  - LAC financial development (access, depth, efficiency) lags Emerging Asia but is at par with other emerging markets.
  - Brazil, Barbados, and Chile rank highest in the region on the Financial Development Index; Nicaragua, Haiti, and Paraguay rank poorly (Haiti and Paraguay worse than low-income country average).
- Access vs. intermediation:
  - LAC scores relatively well on access to financial institutions (ATMs and bank branches per 100,000 adults improved), but remains below OECD average.
  - Bank intermediation is low: Credit-to-GDP in LAC is low relative to other EMs, and credit is expensive.
  - High reliance on nontraditional finance (borrowing from friends/family, informal lenders, banking correspondents) and high bank lending rates in concentrated banking systems limit use of formal saving and borrowing.
- Policy and regulatory performance:
  - Many countries perform well in regulation and supervision of bank branches and agents, prudential regulation, and market conduct rules (Dabla-Norris and others, 2015).
  - Remaining gaps: high service fees, need to improve credit reporting systems, regulation of electronic payments, and regulation and supervision of deposit-taking activities.
- Global comparisons and evidence:
  - In emerging and developing economies, 55 percent of adult population is unbanked amid high financial costs, lack of documents, and distance (World Bank).
  - Mobile money has significantly enhanced financial inclusion in parts of Sub-Saharan Africa and South Asia; online lending platforms have supported increased SME lending in the United Kingdom, United States, and China.

### V. Policy implications and priorities
- Regulatory adaptation:
  - Regulatory frameworks and supervisory practices should be adapted to facilitate safe entry of new products, activities, and intermediaries while preventing stability and integrity risks.
  - Reinforce competition and commitment to open, free, and contestable markets to ensure a level playing field, promote innovation, consumer choice, and access to high-quality financial services (Bali Fintech Agenda, 2018).
- Risk management and supervision:
  - Supervise fintech credit similarly to other forms of credit to avoid boom-and-bust cycles in immature financial markets.
  - Ensure fintech firms develop risk management practices commensurate with activities as they broaden services.
- Cybersecurity strengthening:
  - Address shortages in cybersecurity skills, enact or update cybercrime legislation, and develop comprehensive cybersecurity strategies.
  - Scale cybersecurity responses commensurate with increasing digitalization and connectivity.
- Consumer and data protection:
  - Strengthen regulatory requirements for data privacy to be on par with protections afforded in traditional banking systems.
- Inclusion-focused integration:
  - Integrate fintech considerations into national financial inclusion strategies to overcome barriers and develop financial markets across a broad range of services.
- Central bank considerations:
  - Central banks face the task of evaluating benefits and risks of adopting technological progress in payment systems and issuing their own digital currencies.

*wpiea2019071 - References*

### Box 1. Use of Distributed Ledger Technology in Haiti

### Box 1. Use of Distributed Ledger Technology in Haiti

### Project description and purpose
- A pilot project in Haiti, financed by the World Bank through an IDA loan, aimed at poverty reduction and financial inclusion, is under execution in Haiti.
- The project uses a third-party Cold Logistics Service provider to reduce spoilage and a broker, equipped with blockchain (distributed ledger) technology to connect Haitian mango and avocado farmers with consumers in the United States and Canada to obtain better sale prices.
- Wageningen University and Research supervised the technical dry run in May 2018, monitors the project, and provides recommendations tailored to the Haitian environment.
- The Haitian Ministry of Trade and Industry (MCI) supports the project by running the value chain analysis and identifying the mango and avocado smallholders for the pilot.

### Preliminary results
- Spoilage rates were reduced dramatically; shelf life and quality of produce improved due to better post-harvest handling and temperature control.
- Farmers’ revenue increased eightfold, as the technology helped eliminate inefficient middlemen resellers and reduce markups.
- Smart contracts and cross-border mobile payments reduce transaction costs, and real-time data enable all parties (including the government) to track merchandise throughout the whole value chain.
- Consumers were able to obtain granular information about the product by scanning a QR code, such as who the farmer is, where the tree is located, the timeline from harvest to table, and the price structure.

### Potential macroeconomic implications
- Improve financial inclusion by giving rural smallholder farmers access to a financial service platform.
- Contribute to poverty reduction among the rural poor, thus reducing income inequality between rural and urban zones (in the Haitian countryside, almost 70 percent of households are considered chronically poor, against a little over 20 percent in cities).
- Increase fiscal transparency and tax compliance (tax revenue is easily tracked), potentially raising domestic revenue.
- Generate some employment during the harvest season and improve the skills of produce growers.

### Possible issues
- Logistical management of a larger scale program with domestic resources could be challenging.
- Need for effective mechanisms to deal with system failure (for example, due to a hacking).
- Determining a sound and secure governance of the blockchain nodes to ensure integrity, scalability and relevance.
- Preventing intervention by interest groups (who may, for example, block shipments or transit until a “fine” is paid).
- Addressing potential environmental consequences (such as mono-cultivation if the program becomes too lucrative).
- Operational challenge noted: many mango trees are very tall, making harvest difficult and risky; higher values could encourage hiring help or exchanging labor services, and growers’ skills are improved through continuous training on postharvest fruit handling provided by the Cold Logistics Service.

*Prepared by M. Rousset (IMF) based on inputs from E. Duch (WB). Sources: Oostewechel and others, 2018.*

### Box 2. Peru’s Fintech Application to its Payment Systems, 2017

### Box 2. Peru’s Fintech Application to its Payment Systems, 2017

### Market size and fintech activity
- The Peruvian fintech market represents about 5 percent of the Latin American market.
- There are 57 fintech firms in Peru.
- Activity is mainly in online lending, and payments and remittances.
- Fintech activity is currently limited in scale but could provide innovative solutions to overcome barriers in demand and supply.

### Financial inclusion trends and gaps
- Account ownership rose from 29 percent of adults in 2014 to 43 percent in 2017, driven by increases in rural accounts.
- Remaining gaps:
  - The gender disparity in account ownership has widened.
  - Peru lags regional and income peers in several financial inclusion indicators.
  - Costs remain an obstacle: non-account owners cite high costs as the main reason for not having an account.

### BiM (Billetera Móvil) e-wallet: design, functionality, and uptake
- Launched in 2016 as a standardized, interoperable e-wallet to increase financial inclusion.
- Enabled by: the passage of the 2013 law on mobile money and the central bank’s 2016 circular regulating electronic money payment agreements.
- BiM features:
  - Allows users to cash-in/out, transfer money to others, check account balances, and top-up mobile airtime.
  - Operates through a simple interface on relatively low-tech mobile phones.
- Implementation challenges and reasons for uptake falling short of expectations:
  - Lack of integration between the e-money platform and the core banking system generated duplication of operating systems and the need for separate working capital at the agent level.
  - BiM accounts lack interoperability with bank/deposit accounts.
  - Low coverage of agents, particularly in remote areas, limits BiM’s reach.
  - Users faced difficulties in cashing-in/out, hindering BiM’s usefulness.

### Responses, operational changes, and potential enablers
- Peruvian Digital Payments (PDP) has been working to expand both its footprint and value proposition to final users.
- Important steps and pilot efforts:
  - State-owned Banco de la Nación’s participation on the mobile money platform.
  - Piloting suppliers’ payments.
  - Two banks enabling cash-in through POS terminals.
- Issues under discussion:
  - How to address the inability of non-shareholders to use the PDP platform.
  - Lack of interoperability between BiM and bank accounts.
  - The operation of BiM on an exclusive basis.
- Potential usage boosters:
  - The digitization of government payments could boost usage and help build a critical mass of transactions.
- Observation: While design shortfalls are being remedied, the operating model could be redefined.

### Key statistics and exact figures cited
- Peru’s fintech market share of Latin America: about 5 percent.
- Number of fintech firms in Peru: 57.
- Account ownership: 29 percent of adults in 2014; 43 percent in 2017.
- Enabling measures referenced: 2013 law on mobile money; central bank’s 2016 circular regulating electronic money payment agreements.

*Prepared by Y.N. Mooi (IMF). Sources: IDB and Finnovista, 2018; Fintech Radar Peru 2017; 2017 Global Findex survey.*

### Box 3. Provision on Anti-Money Laundering in the Fintech Law

### Box 3. Provision on Anti-Money Laundering in the Fintech Law

### Mexican Fintech Law — AML/CFT requirements
- The Mexican Fintech Law requires fintech firms to comply with Secretaría de Hacienda y Crédito Público (SHCP)’s requirement to prevent and detect potential AML/CFT activities.
- Regulatory framework centers on prevention and detection of transactions through:
  - client and user information storage;
  - detection of clients or transactions that could lead to felonies;
  - training to directors, executives, and employees that participate in such transactions;
  - internal or independent evaluations on compliance with such provisions and presentation of periodic information to the Comisión Nacional Bancaria y de Valores (CNBV).
- E-money institutions must request authorization from the CNBV to receive and deliver cash in Mexican currency, specifying the mechanisms to be used. Such authorization is subject to limits:
  - the reception and delivery of cash in Mexican currency up to an amount in Mexican Pesos equivalent to 10,000 UDIs per client;
  - the delivery of cash in Mexican currency up to an amount in Mexican Pesos equivalent to 1,500 UDIs per client on a daily basis.
- Crowdfunding institutions must request authorization from the CNBV to receive cash funds in Mexican currency from their clients (to allow clients to pay their loans or credits in cash) by means of deposits in accounts opened in financial entities authorized for such purposes, on behalf of the relevant crowdfunding institution, up to:
  - a monthly amount equivalent in Mexican Pesos to 3,000 UDIs for low-risk clients;
  - a monthly amount of 10,000 UDIs for other clients.

### Colombia — regulatory developments for fintech
- Authorities introduced new legislation and amendments to existing decrees to address fintech regulatory needs, including:
  - enactment of Law 1734, allowing establishment of specialized electronic deposit and payment companies;
  - amendments to the Sole Decree on the Finance Sector (Decree 2555), originally issued in 2010.
- Crowdfunding rules (2018): Decree 3157 defines crowdfunding as activity where more than one contributor is in contact with recipients, raising funds in their own name. Key elements:
  - crowdfunding service providers must be incorporated as sole purpose stock corporations authorized by the Superintendencia Financiera, stock exchanges, or trading systems;
  - fund-raisers must act on their own behalf for their own benefit;
  - funds must be used for productive investment projects.
- Crypto-assets: government is working on a new regulatory framework. Meanwhile:
  - the central bank reiterated that crypto-assets like Bitcoin are not recognized as a currency and are not supported by the central bank;
  - authorities clarified that financial institutions subject to supervision are not authorized to hold, invest in, intermediate or operate with cryptocurrencies.

### Challenges ahead for fintech regulation and supervision
- Objectives to balance: financial inclusion, financial stability and integrity, and consumer protection.
- Key points:
  - Adequate regulation should protect consumers and investors, ensure healthy competition, and guard against financial stability and integrity risks.
  - Authorities need to monitor fintech markets, assess vulnerabilities, and develop a financial stability assessment framework for fintech that accounts for evolving market structure.
  - Traditional entity-based regulatory frameworks may not fit fintech business models; activity-based regulation is increasingly necessary.
  - Regulators must develop new skills to assess and analyze fintech risks.
- Capacity constraints:
  - Supervisory and regulatory bodies need additional resources and expertise to keep up with industry and technology developments.
  - Limited capacity in smaller countries, including in the Caribbean, makes uncontrolled and rapid fintech adoption a challenge for financial stability and integrity.
- AML/CFT integrity concerns:
  - New technologies can strengthen compliance (e.g., “regtech”) but some innovations can be used for criminal activities.
  - Crypto-assets’ decentralization, global reach, and varying degrees of anonymity or “pseudo-anonymity” can impede regulatory action and raise questions about whom to regulate.
  - Rapid expansion of fintech with complex transaction models can limit authorities’ ability to identify beneficial owners and pose threats to financial integrity if supervisory resources are insufficient.

### Central Bank Digital Currencies (CBDC) — overview and AML/CFT implications
- Motivations for CBDC consideration include:
  - reducing costs of maintaining, transporting, replacing notes and coins;
  - fostering financial inclusion;
  - interest in technological innovations;
  - increased use of private digital currencies that may erode demand for central bank money and monetary policy transmission; and
  - reduced use of cash in some economies.
- IMF (2018b) framework: adoption case depends on design and country-specific characteristics; critical features include anonymity (traceability), security, transaction limits, and interest earned.
- CBDC design choices:
  - access (general public or just banks) and form (token or account based) influence anonymity and settlement characteristics.
  - account-based CBDC giving general public access to central bank accounts could materially affect relationships between central banks and commercial banks.
- Potential benefits:
  - Payment system: may reduce costs of notes and coins, improve payment infrastructure, and help financial inclusion where banking access is limited or settlement technology is inefficient.
  - Monetary policy: depending on access and remuneration, CBDC could strengthen pass-through of policy rates to market rates and provide timelier information on money demand.
- AML/CFT implications:
  - CBDC can allow digital records and traces and be designed to provide different degrees of anonymity, potentially improving AML/CFT application and reducing informal economic activities.
  - Benefits may be limited because illicit actors are unlikely to use traceable CBDC; entirely anonymous or pseudonymous CBDC would offer little improvement over physical cash.
  - Central banks may assume “know your customer” responsibilities for account-based CBDC available to the public to protect reputation.
  - Understanding and implementing revised FATF recommendations (October 2018) will be important.
  - Strong AML/CFT measures could include effective identification of the user and beneficial owner, and monitoring and reporting of suspicious transactions.
- Other risks:
  - operational risks from disruptions and cyberattacks;
  - potential disintermediation and increased substitutability between CBDC and bank deposits, which could lead banks to pay higher interest rates, squeeze profits, increase deposit volatility, or force reliance on wholesale funding — raising liquidity and financial stability risks.
- Need for further analysis on technological feasibility, operational costs, payment systems, and monetary policy transmission, especially in contexts of informality and dollarization.

### Country examples in the region — CBDC pilots and experiences
- Uruguay — E-Peso pilot program:
  - Pilot ran for six months (November 2017–April 2018).
  - Limited digital note issuance: $20 million for 10,000 mobile users.
  - Size per person limits: $30,000 per wallet and $200,000 for registered businesses.
  - E-peso used for payments in registered stores and businesses, and peer-to-peer transfers; settlement was instantaneous and ran on mobile phones (no internet connection needed).
  - E-peso was anonymous but traceable by the central bank, with unique digital notes preventing double spending and manipulation.
  - Central bank aims included reducing transaction costs of cash (estimated at 0.6 percent of GDP), improving financial innovation, and fostering financial inclusion.
  - Additional work planned before wider implementation to assess payment systems and impact on traditional banking, money demand, competition, lending spreads, financial intermediation and inclusion, disintermediation risks, and impacts on dollarization and exchange rate channels.
- Eastern Caribbean Central Bank (ECCB) — fintech pilot with Bitt Inc.:
  - On February 21, 2019, ECCB signed a contract with Bitt Inc. to conduct a CBDC pilot project (based on blockchain technology) in the Eastern Caribbean Currency Union.
  - Digital EC dollar to be distributed to financial institutions and used for transactions between customers and merchants, including peer-to-peer transactions, across ECCU economies.
  - Pilot aims included reducing physical cash by 50 percent, promoting greater financial sector stability, and expediting growth and development of ECCU member economies.
- Ecuador — retail CBDC project and termination:
  - Ecuador launched a retail CBDC project in 2014 and allowed the public to open accounts at the central bank for mobile payment applications; actual services started in February 2015.
  - Stated intentions: reduce currency in circulation (replacement cost for the BCE estimated at about US$3 million per year), foster financial inclusion, and help the poor given dollar cash scarcity and high cost of holding cash.
  - In December 2017, Ecuador’s National Assembly passed legislation to abolish the central bank electronic money system and instead allow the private sector to operate electronic mobile payment platforms; the project was terminated three years after launch due to low user uptake.
  - Lesson noted: in a dollarized economy, the form of money may not alter underlying demand for domestic currency; Ecuador officially dollarized in January 2000 after a crisis with very high inflation (over 100 percent).

*Italicized source attribution: IMF Working Paper content as provided in the source PDF.*

### introduction of CBDC could have been perceived by the public as a first step to restore

### wpiea2019071 - introduction of CBDC could have been perceived by the public as a first step to restore

### Introduction of CBDC — public perception and outcomes
- The introduction of CBDC could have been perceived by the public as a first step to restore monetary autonomy.
- The government repeatedly reaffirmed its commitment to maintaining the dollarized monetary system and stressed that use of CBDC would be voluntary and that even public employees and state contractors would not be obliged to accept it in payments from the state.
- Despite the efforts to convince the public on the merit of CBDC, the demand for the CBDC did not materialize as expected.
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### Venezuela — Petro
- Venezuela announced its plan to introduce “Petro”.
- In February 2018, President Nicolas Maduro announced the launch of the oil-backed “Petro" digital currency, with ICO of about 100 million petro tokens (equivalent to US$6 billion).
- Reportedly, the ICO has not taken place thus far.

### Taxation — overview for fintech
- Fintech requires tax authorities to review existing tax policy and legal frameworks and make changes accordingly.
- Changes can be implemented either by amending existing tax laws or by elaborating new interpretations of existing rules as they apply to fintech activities.
- New interpretations can take the form of statements (or position papers) such as a notice or a ruling issued by tax authorities, specifying the application of existing laws to fintech activities.
- Most jurisdictions in Latin America and the Caribbean do not have public positions on taxation of fintech-related activities, and the few that do rely primarily on existing legal frameworks.
- Today, there is no comprehensive source for taxation-related information specific to the region.
- While a detailed tabulation of fiscal positions by jurisdiction is not available, Box III (referenced) presents general rules for tax treatment of fintech-related activities also applicable to the region.

### Tax treatment of cryptocurrencies — legal classification and examples
- Tax treatment of cryptocurrency trading/exchange depends on how cryptocurrencies are classified from a legal standpoint.
- In many cases, in the absence of specific statements by country authorities, explicit classification is unavailable.
- Select examples of cryptocurrency treatment by nations in the region are listed (table excerpt):  
  - Asset / Medium of exchange / Legal tender / Banned examples include:  
    - Brazil / Argentina / N/A / Bolivia  
    - Chile / Bermuda / Ecuador  
    - Mexico / USA / Colombia
- Notation: In many jurisdictions, the illegality of a transaction does not negate the taxability of the gains derived from them, and therefore even in countries where cryptocurrencies are banned from the regulatory perspective, rules may need to be devised or the existing frameworks may need to be interpreted on how a crypto transaction ought to be taxed.
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### Box 4. Taxation Issues — detailed rules and examples
- VAT/GST treatment:
  - If the supply of a cryptocurrency is treated as a supply of goods or services in countries with VAT/GST, cryptocurrency transactions are generally subject to VAT/GST (example: Singapore).
  - If cryptocurrencies are interpreted as legal tender/money/currency, in countries with VAT/GST such supplies are out-of-scope and not subject to VAT/GST (example: certain EU treatments where certain types of cryptocurrencies subjectively used as means of payment are exempt from VAT).
- Gains from trading:
  - Gains derived from trading in cryptocurrencies are generally taxable in accordance with first principles (i.e. capital gains tax if held as investment, income tax if held as part of trade or business).
  - In the EU example above, rules on gains or losses from foreign currency exchange apply.
- Cryptocurrency mining:
  - Income tax treatment of block rewards from mining varies:
    - Some jurisdictions fully tax block rewards received from mining as income (example: US, Israel).
    - Others only tax block rewards if mining activities amount to a trade or business or go beyond mere speculation (examples: Singapore, Australia, South Africa, Netherlands).
  - Supply of mining “services” generally considered to be out-of-scope (i.e. not taxable) for VAT/GST purposes (examples: United Kingdom and Germany).
- Remuneration, airdrops, ICOs:
  - Remuneration paid in cryptocurrency generally subject to tax in the year of receipt and subject to pay-as-you-earn withholding where applicable (examples: US, Australia, Netherlands, South Africa).
  - No specific tax treatment for coins received during airdrops.
  - No specific tax treatment on amounts raised during ICOs—likely to depend on the nature of tokens issued.
- P2P activities:
  - Taxation of person-to-person (P2P) activities is generally straightforward, although cross-country specificities exist.
  - Example: Under Brazilian regulation, P2P loan companies must act exclusively via electronic platforms, be incorporated as corporations, and have minimum paid-in capital and net worth of BRL 1 million at all times. They may also provide other services, such as credit analysis, loan collection and electronic money issue (Carrigues Digital).
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### Tax treatment of P2P activity — by tax type
- Direct taxes:
  - P2P sellers typically register as self-employed businesses and are responsible for self-reporting their income and tax liability to the tax authorities, with all deductions applicable to the self-employed.
  - Typical exemptions apply:
    - Due to irregularity of engagement and small scale of many P2P sellers.
    - On some rental income (typically, if it is below a certain threshold).
- Indirect taxes:
  - In countries with VAT/GST, VAT/GST will apply to the provision of goods and services in the P2P economy.
  - Generally, the P2P platform is liable to discharge the tax on services provided by the sellers, although the question of who is liable is disputed by some authorities.
  - Typical exemptions apply:
    - For businesses operating below a certain threshold of gross income.
    - On long-term residential rental income.

*Prepared by M. Rousset based on Carrigues Digital (2018) and Gupta and others (2017).*

### Box 4. Taxation Issues (concluded)

### Box 4. Taxation Issues (concluded)

### Other taxes
- Some countries apply sector-specific taxes that would extend to P2P business operating in the sector. Examples:
  - Taxes applicable to hotel guests now extend to users in the P2P accommodation-rental sector
  - Taxes targeted at the ridesharing sector, especially in the presence of license fees applicable to traditional taxi drivers

### C. Cross-Border Payments — overview and importance
- Fintech has the potential to improve efficiency and reduce the cost of cross-border transfers, an important source of income for many LAC countries.
- LAC’s large migrant population abroad sent home sizeable remittances equal to 1.5 percent of regional output in 2017.
- The potential transformative impact of fintech on remittances may be particularly significant for relatively less developed economies in the Caribbean and Central America, whose remittance inflows dwarf those received by their South American neighbors.
- In four countries—El Salvador, Haiti, Honduras, and Jamaica—remittances received exceed 15 percent of GDP.

### Sending remittances — costs and channels
Key statistics:
- The global average cost of sending US$200 in remittances was 6.99 percent as of 2018Q2.
- Cost of sending remittances to LAC: 6.1 percent.
- Banks are the most expensive channel: 10.4 percent.
- Costs of sending remittances through MTOs reached 6.2 percent.
- Mobile operators and mobile money transmit remittances at 3.2 percent.
- Officially recorded remittances to LAC in 2017: US$80.5 billion.
- UN Sustainable Development goal: reduce transaction costs to less than 3 percent and eliminate remittance corridors with transaction costs higher than 5 percent by 2030.

Findings:
- Emigrants continue to rely primarily on banks and money transfer operators (MTOs) to send remittances, funding transactions primarily with cash or their bank accounts.
- High transaction costs reduce the money received by migrants’ families in LAC.
- Remittance corridors with larger remittances benefit from lower costs: the weighted average total cost is lower than the global average at 5.1 percent.

### Mobile money and fintech uptake in LAC
Findings:
- There is substantial scope to increase the share of remittances transferred to LAC with innovative technologies.
- Mobile money is underutilized in LAC compared to other regions, both in terms of services used to send and receive remittances.
- LAC accounts for a much smaller share of world remittances transacted with mobile money than its share in total world remittances.
- Sub-Saharan Africa accounts for the bulk of global mobile money remittance transactions despite a much smaller share of world remittances.
- According to the World Bank’s Global Findex Database, the percent of both senders and receivers of remittances that use mobile money for remittance transactions is low compared to most other regions (Global Findex focuses on domestic remittances).

Fintech activity and services:
- Fintech activity in cross-border payment technologies within LAC remains limited.
- Of the 285 startups identified by IDB/Finnovista (2018) focused on payment solutions in LAC, only 13 are focused on international transfers and remittances.
- Mobile money remittance service providers remain limited in number in LAC and active in only a select few LAC countries (per GSMA Mobile Money Deployment Tracker).
- Global fintech companies focused on money transfer services have begun to serve LAC; examples:
  - World Remit (online financial institution regulated by the UK’s FCA that partners with MNOs, MTOs and banks) is available in most LAC countries.
  - TransferWise, a P2P transactions company, is available in select countries in the region (e.g. Brazil, Chile, Mexico).

### Channels for further development of mobile money cross-border transactions
- Alternative channels for development:
  - Existing mobile network operators (MNOs) with international networks could act as end-to-end payment service providers across countries.
  - Multiple MNOs across jurisdictions could enter into agreements with payment service providers, traditional MTOs, or banks.
  - MNOs from different jurisdictions could agree to exchange payments or partner with traditional or online mobile payments operators or global remittance hubs.
- In practice, development in LAC will likely occur simultaneously along these avenues and will depend on the diffusion of mobile phones and transaction accounts in the region.
- A key advantage — and potential financial stability challenge — is that increased roles for mobile service providers could circumvent correspondent banks in clearing and settlement, potentially mitigating the effects of global banks’ withdrawal from correspondent banking relationships.

Evidence on correspondent banking withdrawal:
- 60 percent of the Asociación de Supervisores Bancarios de las Américas reported that remittances to LAC have been affected by the withdrawal of global banks from correspondent banking.

### Supportive regulatory environment — considerations and options
Findings and recommendations:
- Supportive regulation from both the United States (the origin of the majority of remittances to LAC) and recipient countries is important.
- From the U.S. perspective, regulation over money transmitters (including traditional MTOs and firms involved in technology-based money transmissions) is at the state level; this lack of harmonization can be costly for firms and may hinder fintech development for cross-border transfers.
- From recipient-country perspectives, removing regulatory burdens that hinder development is important. Potential options:
  - Unifying licenses for mobile money and international remittances where separate licenses are currently required.
  - Licensing remittance service providers to both send and receive cross-border payments.
  - Supporting partnerships between traditional MTOs with established networks and mobile money providers (e.g., Western Union partnerships with Tigo Money in LAC) or with global remittance hubs to connect providers and lower costs.

### VI. Security Issues and Cyber Risk — LAC exposure and gaps
Findings:
- LAC is, on average, less exposed to cyberthreats than some other regions due to modest internet penetration (only about half of the population has access to and uses the internet), lower degrees of digitalization (especially in government), and lower popularity of mobile banking.
- Recent cyberattacks affected more developed financial systems in the region (such as Chile and Mexico), underscoring the need to strengthen cybersecurity frameworks.
- According to IDB and Finnovista (2018), 80 percent of Fintech companies in Latin America see cybersecurity as a threat.
- About half of the region’s fintech startups already have contingency plans for cyber events.
- Cyber insurance plays only a minor role in the market in LAC compared to the U.S.

Global Cybersecurity Index (GCI) findings:
- The GCI (ITU) measures countries’ commitment to strengthen cybersecurity across five pillars: legal, technical, organizational, capacity building and cooperation.
- The region’s deficiencies are broad-based, with particularly large weaknesses in capacity building.
- Dispersion across LAC is wide: Mexico and Uruguay have the strongest commitment in the region, ranking just behind Canada and the United States.
- Some recent national measures may not be reflected in the GCI (2016/2017 data), e.g., Trinidad and Tobago passed cybercrime legislation; Brazil passed data protection and cybersecurity legislation and regulation; Chile is preparing new cybersecurity legislation.

Specific weaknesses in LAC:
- Legislation and regulation: national cybercrime legislation is either weak or still inexistent in many LAC countries.
- Capacity and standards: skill levels with respect to cybersecurity are below average and cyber literacy is relatively low; the availability of innovative technologies also lags.
- Strategy and institutional setup: while most countries have or are formulating cybersecurity strategies, many have not; institutional arrangements for regular audits and coordination need strengthening.

Policy measures recommended:
- Pass comprehensive, technology-neutral legislation covering both substantive and procedural law; harmonize national legislation with international law to facilitate cross-border cooperation (the Budapest Convention on Cybercrime is a common starting point).
- Strengthen organizational and institutional setups: create or empower dedicated agencies to coordinate and implement cybersecurity strategies, approve plans, programs, reports, procedures, principles and standards, and ensure proper application.
- Prioritize capacity building: staff training, capacity transfer, and cooperation with more advanced countries; the United States has provided technical assistance in the past.
- Develop and adopt international minimum standards and certification to signal achievement of standards.
- Increase investments in technology to avoid further falling behind.

### VII. Conclusions and future research — summary and open questions
Summary of paper’s findings:
- Fintech activity in LAC is heterogeneous; developed countries with mature financial sectors tend to lead innovation, but low income and emerging market economies can benefit disproportionately from fintech.
- Fintech investment in the region has increased impressively but still lags booms in some emerging markets in Asia and Eastern Europe.
- Fintech provides opportunities for financial inclusion and development, with payment systems and alternative financing among the largest and fastest-growing fintech areas in LAC.
- Adoption of mobile money services, cross-border transfers, and fintech credit remain limited, leaving room for boosting financial inclusion through new technologies.
- Regulators in the region have taken steps to contain financial system and consumer risks while encouraging innovation; many central banks are evaluating central bank digital currencies.

Open questions for future research (as listed in the paper):
- Will fintech foster competition and improve intermediation in banking systems characterized by high concentration and low competition, thereby reducing borrowing costs and improving intermediation?
- How best to reshape regulation and supervision to encourage competition and innovation while containing risks and ensuring a level playing field?
- How can LAC leverage fintech further to facilitate cross-border remittances transfers, particularly amid declining correspondent banking relationships while ensuring financial integrity?
- Do central bank digital currencies constitute good alternatives for LAC to replace physical cash to improve financial inclusion, particularly in the presence of informality and dollarization?
- What are the risks stemming from increased crypto-asset presence? How can small countries with limited human capital and technical resources reap benefits while limiting risks?
- Can better data and new technologies (such as on SME's financial situation) be leveraged to reduce informality?

- The paper serves as a first step towards understanding fintech in LAC and lays the ground for further analysis on the listed open questions, which will be the subject of forthcoming research.

*Source: Box 4. Taxation Issues (concluded), wpiea2019071*

### REFERENCES

### REFERENCES

### Annex I — Fintech: Potential Financial and Operational Risks — Possible Channels

- Financial risk
  - Maturity mismatch
    - Maturity mismatches could arise through securitization or if lending platforms were to start using their own balance sheet to intermediate funds.
  - Leverage
    - Not typically associated with fintech activities in their current form, but there are some cases where it could arise temporarily. For example, in some cases, fintech business and consumer lending or equity crowdfunding platforms may borrow funds in order to finance temporary holdings (or “warehousing”) of bond or equity issuance.

### Annex I — Fintech: Potential Financial and Operational Risks — Operational risk

- Governance and process control
  - Fintech companies that fall outside the regulatory perimeter or are subject to lower regulatory or supervisory standards, such as some third parties offering services to regulated financial institutions, may not be subject to the same level of oversight or scrutiny of their governance and business processes to which regulated financial institutions are subject.
- Cyber risks
  - The susceptibility of financial activity to cyber-attacks is likely to be higher the more the systems of different institutions are connected, amongst which there is a weak link. In general, greater use of technology and digital solutions expand the range and number of entry points cyber hackers might target.
- Third-part reliance
  - Some fintech activities could increase third-party reliance within the financial system—for example, cloud computing services could be provided by a limited number of parties, which could have significant implications for a range of cloud-based financial services in the event of operational issues. Disruptions to these types of third-party services–– perhaps due to operational difficulties––are more likely to pose systemic risks the more central these third parties are in linking together multiple systemically important institutions or markets.

### Annex I — Fintech: Potential Financial and Operational Risks — Legal and regulatory risk

- Legal and regulatory risk
  - To the extent that fintech activities are innovative and are not covered by existing legislation, legal and regulatory frameworks may need to adapt. For instance, there are issues of legal uncertainty related to fintech innovations such as smart contracts or robo-advisors. Blockchain has also raised questions, such as data privacy concerns across jurisdictions, and identifying the location of an asset when no one bank or entity is the custodian of the record.

*Source: FSB, 2017, “Financial Stability Implications from Fintech.”*

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_Source: https://www.imf.org/-/media/files/publications/wp/2019/wpiea2019071.pdf_