Fintech — Building Trust Through Regulation

April 9, 2018

Good morning, ladies and gentlemen. It’s my pleasure to welcome you to the first IMF Fintech Roundtable.

Over the next couple of days, we’ll discuss many of the pivotal issues faced by policymakers and regulators: What are the risks and benefits of new financial technologies—including crypto-assets? What new challenges and opportunities confront central banks and financial markets? Will technology fundamentally change risk management and supervision? In a fast-changing environment, can we be confident that the financial-stability impact of new technologies can be managed?

Emerging technologies are dramatically transforming the financial services landscape — creating opportunities as well as challenges for consumers, service providers and regulators. New technologies could support the introduction of new services; drive efficiency gains in the financial sector; foster financial inclusion and financial deepening; and deliver widespread economic and social benefits.

To maximize the full potential of new financial technologies, policymakers must strike a sensible balance — creating a supportive space for innovation while maintaining a robust regulatory framework. Adopting well-designed standards can promote both certainty for innovators and safety for consumers.

Here at the Fund, we encourage our member countries to explore new technologies — by enhancing “fintech” awareness at official institutions; by creating controlled environments where new technologies can be tested; and by promoting financial education. Many countries are indeed working with fintech companies in innovation hubs and regulatory sandboxes, and we look forward to hearing about the lessons they’ve learned.

We must remain aware, however, of potential risks that new technologies might pose — especially when they operate outside the purview of financial regulation and supervision.

Financial stability could be affected — through disruptions to existing service providers, business models, and market structure. Activities might also migrate to unregulated sectors; pose money-laundering and terrorist-financing risks; and create additional operational risks related to IT, cybercrime, and outsourcing. New technologies and new forms of intermediation may erode legal certainty, and the balance between transparency and privacy. The rapidly increasing use of customers’ personal data raises concerns about the ethical use of data; accountability and ownership; and cybersecurity.

Recognizing both benefits and risks, the IMF has been closely monitoring developments in this field. The widespread adoption of new technologies is not only changing business models and providing widespread opportunities, but it’s also challenging the thinking of financial regulators and supervisors. As they explore new ideas, they must keep in mind that the key factor — in fintech, as in all areas of financial services — is building confidence and strengthening public trust.

The Risks and Rewards of Crypto-Assets

One area, in particular, deserves our intense focus: the potential risks, and regulatory implications, of crypto-assets.

The rapid growth of crypto-assets has raised questions about the effectiveness of the current regulatory perimeter—and about the ability of the existing regulatory architecture to adapt to changing conditions. The market capitalization of crypto-assets reached more than $900 billion early this year – a five-fold increase over the last year. There are now about 1,600 types of crypto-assets being traded worldwide. In 2017, there were 880 Initial Coin Offerings, which raised about $6 billion—a vast increase over the previous year, when there were only 43 ICOs, which raised just $95 million.

Moreover: The market capitalization of crypto-assets may still be just a small fraction of the broader financial sector — but their extreme volatility, rapid growth among retail investors, and several spectacular cases of hacks and failures have recently intensified regulatory concerns. Stronger measures for investor and consumer protection are essential—as are stronger safeguards against potential financial instability.

About half of last year’s ICOs have already failed. Many small-scale investors have suffered dramatic losses. Confidence in the realm of crypto-assets has been shaken.

Amid the blow to market confidence: The question of regulating crypto-assets and exchanges is an important concern. It is no surprise that country authorities and IMF country teams continue to ask the Fund for advice on appropriate regulatory measures.

As we consider regulation, it’s worth reflecting on whether crypto-assets truly qualify as “currencies.” After all, they’re not a good unit of account; they’re not a widespread medium of exchange; and they’re not a stable store of value. So they cannot be accurately classified as “currencies.” Perhaps they’re better-defined as digitally created vehicles that use cryptography for security, and that are native tokens of distributed ledgers or blockchains. Crypto-assets or digital tokens seem more appropriate terms.

Uncoordinated regulations could lead to fragmentation

By their very nature, crypto assets were created outside the boundaries of traditional regulatory frameworks. While many crypto-assets may not meet the definition of financial instruments, some of them function in a way that is similar to them.

It would be misguided to imagine that crypto-assets are currently beyond the reach of regulation. Some aspects of crypto-assets are already within the existing regulatory perimeter. For example: many ICOs qualify as “public offerings of securities” by securities regulators, and therefore they are covered by public-offering regulations and private-placement exceptions.

Some jurisdictions are also using their enforcement powers to prosecute fraud or the avoidance of applicable regulation, while issuing warnings to the public about crypto-assets’ potentially fraudulent implications. Some regulators are licensing exchanges, or are treating them as money transmitters. Other jurisdictions have decided to ban ICOs altogether. Many crypto-exchanges and intermediaries are subject to anti-money-laundering regulations—and, of course, they need to meet the standards preventing criminal abuse and fraud

The regulatory approaches are varied and jurisdiction specific. However, the nature of fintech services allows for businesses to easily and quickly move locations to optimize and arbitrage the regulatory treatments and many are already actively doing so.

Appropriate regulation would support innovation

Under the current fragmented approach, many important risks remain unaddressed. Regulatory frameworks should be tailored to address those new risks. Yet both policymakers and innovators should not see regulations as stifling innovation, but rather, as shaping an environment that helps build trust.

One of the main risks in the crypto-asset industry, after all, is regulatory uncertainty, including the risks of a major clampdown by authorities. Providing clear guidelines that ease uncertainty would help establish a solid foundation for crypto-assets to grow in a more sustainable manner.

International principles can already address identified risks

As we’ve seen in many areas of financial regulation since the global financial crisis, we all work together to continue reaping the collective benefits of a safe and secure global financial system. The rapid pace of innovation, and its borderless nature, calls for building international consensus—thus helping eliminate gaps in regulation that might provoke a “race to the bottom.”

An early formation of an international consensus would also help strengthen public confidence, and would provide a smoother landscape for innovators. Effective regulation is essential in maintaining public confidence — because the larger and the more complex a system is, the bigger the shock when regulation is introduced.

Because the realm of crypto-assets is developing so fast, regulators should be wary of categorizing them too strictly, because narrow definitions might become obsolete overnight.

Instead, drawing on existing international principles for financial regulation — such as those of governance, auditing, client asset segregation, minimum capital, outsourcing, cyber-security, and disclosure—could be applicable to publicly offered crypto-assets and exchanges. Applying such principles will help authorities address the new risks more quickly and more consistently.

ICOs should face regulation

In addition, it’s vital that crypto-assets be subject to certain regulation. If crypto-assets are offered to the general public, are expected to be tradable, and are invested with some expectation of financial return, then such assets should be subject to regulations like other types of asset. Threats to market integrity, such as manipulation and insider trading, surely make crypto-assets subject to enforcement action. In addition, ETFs, investment funds and derivatives of crypto-assets clearly warrant regulation.

Regulators should also consider their own risk appetite: Are current regulatory boundaries effective in preventing the abuse of retail investors? Are current enforcement approaches sufficient? Even if current enforcement approaches were enhanced, and perhaps coupled with targeted investor-education programs, they might be unable to ensure investor protection. That kind of flaw might provoke a loss of trust in the financial system more broadly.

Crypto-exchanges should be supervised actively

Crypto-exchanges today have risks that are not being properly addressed. Some authorities have already started to address anti-money-laundering and fraud risks but, clearly, more needs to be done. While crypto-exchanges provide market-making and some may provide margin-lending services, and liquidity support to clients, their risks are often overlooked. The higher volatility of the underlying assets implies significant market risks in the exchanges’ inventories. It also means material counterparty default risk to the investors to whom the exchanges provide margin lending — because required margins may not be enough to cover the loss of their positions if the price change is greater than that modeled in the margin calculation.

The exchanges may also face liquidity risk, if the cash deposited from investors is not segregated and if it has been used for other purposes, such as inventory purchase of illiquid crypto-assets or provided for leveraged trading of other clients. Some exchanges, focusing only on crypto-assets, don’t accept any fiat currencies — a factor that could make their liquidity management more difficult.

Certain risks, in fact, are intrinsic to crypto-exchanges’ business model – operational risks and cyber risks, for example. The recent breach of the crypto-exchange Coincheck shows that cyber losses (about $500 million) were higher than its total registered capital. Due to those inherent risks, crypto-exchanges should be subject to intrusive supervision.

Enhanced monitoring should be prioritized

In our roundtable here this week, we can be frank about yet another considerable risk: the knowledge gap, or “Fintech awareness gap.” This goes beyond the divide that exists between Fintech entrepreneurs and regulators. Many supervisors do not have a good understanding about how their own supervised entities are exposed to crypto-assets, or how the risks of those assets could affect the financial sector. Many are seeking to adapt to the new crypto environment, yet many regulators are not prepared to face the growing risks, given their legal mandates and limited resources. If supervision falters or fails, there is a great risk of reputational damage to regulators and the financial sector as a whole. That risk calls for prompt and coordinated action.

Financial regulators must address data gaps and monitor the risk of contagion from crypto-assets to the broader financial sector. Let’s not take too much comfort from the fact that, today, the direct exposure of the financial sector to crypto-assets seems limited. There are growing risks of indirect exposures, such as investments in related technologies, lending to crypto-investors, and the offering of futures trading to their clients. Supervisors should continue monitoring exposures to crypto-assets in a direct and indirect manner and encourage them to limit their exposures more carefully, when needed. Material exposures require a prudential treatment.


Regulation does not offer the answer to every fintech dilemma — yet it is certainly needed when distortions, excessive arbitrage, market abuse, and the risk of contagion pose a danger to consumers, investors and the broader financial system. Regulatory boundaries may need to be revised, given the cross-sector and cross-border growth of the crypto-asset sector — and that fact means that building a global consensus and consistent application of regulation is essential.

Financial innovation is occurring at a time when public trust in the financial sector is low, and when financial intermediation is moving toward less-regulated sectors. Yet leaps in computing power, technology, big-data analytics, and big-tech business models are poised to transform the landscape of the financial sector. These new challenges call for a far-reaching regulatory response.

Crypto-assets exemplify why policymakers and international institutions must coordinate more closely than ever. Cooperation and coordination are needed to meet every aspect of the fintech challenge. Developing and acquiring deep expertise — bringing together technology, finance, law enforcement, prudential regulation and public policy—is more vital than ever before.

Over the next couple of days, our discussions will clarify where we need to work together, and explore how we can strengthen our work together — and they’ll help identify areas where the IMF can help facilitate a global dialogue.

To help capture the greatest benefit from continuing waves of innovation, we must help build trust in new technologies — by promoting an atmosphere that encourages creativity, without sacrificing consumer protection or systemic safety. If regulators devise frameworks that strengthen public trust, they can inspire entrepreneurship and unleash the full creative energies of technology innovators.

I’m looking forward to imaginative and productive discussions with all of you, and I wish you every success here at this week’s roundtable.

Thank you very much.

IMF Communications Department

PRESS OFFICER: Randa Mohamed Elnagar

Phone: +1 202 623-7100Email: