## Fast-Moving FinTech Poses Challenge for Regulators

_IMF Blog, April 13, 2022_

## Source details

**Canonical URL:** [Fast-Moving FinTech Poses Challenge for Regulators](https://www.imf.org/en/blogs/articles/2022/04/13/blog041322-sm2022-gfsr-ch3)

## Other formats

- [Markdown version](/en/blogs/articles/2022/04/13/blog041322-sm2022-gfsr-ch3/index.md)
- [Structured JSON version](/en/blogs/articles/2022/04/13/blog041322-sm2022-gfsr-ch3/index.json)
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## Bibliographic details
- Authors: Antonio Garcia Pascual, Fabio Natalucci
- Published: April 13, 2022

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### Overview
- Title: Fast-Moving FinTech Poses Challenge for Regulators
- Authors: Antonio Garcia Pascual, Fabio Natalucci
- Date: April 13, 2022
- Context: Summarizes key messages from the Global Financial Stability Report on rapid FinTech advances and implications for financial stability and regulation.

### Adding risk
- Neobanks (digital banks) are growing in systemic importance in their local markets.
- Neobanks are more exposed than traditional banks to:
  - Consumer lending risks, which "usually has fewer buffers against losses because it tends to be more uncollateralized."
  - Higher risk-taking in their securities portfolios.
  - Higher liquidity risks: "liquid assets held by neobanks relative to their deposits tend to be lower than what would be held by traditional banks."
- Risk-management systems and overall resilience of most neobanks remain untested in an economic downturn.
- Competitive effects:
  - FinTech mortgage originators in the United States have followed aggressive growth strategies during home lending expansions (for example, during the pandemic).
  - Competitive pressure from FinTech firms has "significantly hurt profitability of traditional banks, and this trend is set to continue."
- Decentralized finance (DeFi):
  - Described as a "crypto-based financial network without a central intermediary."
  - Offers potential benefits: "more innovative, inclusive, and transparent financial services" via greater efficiency and accessibility.
  - Involves buildup of leverage and is particularly vulnerable to market, liquidity, and cyber risks.
  - Cyberattacks can be lethal for DeFi platforms, "stealing financial assets and undermining user trust."
  - Lack of deposit insurance in DeFi increases perception that deposits are at risk; "large customer withdrawals often follow news of cyberattacks on providers."
  - Growing adoption by institutional investors has strengthened links between DeFi and traditional financial institutions.
  - In some economies, DeFi is helping to accelerate "cryptoization, in which residents embrace crypto assets instead of the local currency."

### Stepped-up regulation
- Movement of financial-services activity from regulated banks to entities/platforms with little or no oversight shifts associated risks outside traditional regulatory perimeters.
- FinTech and traditional banks remain intertwined, including through "the provision of liquidity and leverage by banks to FinTechs."
- Regulatory challenges:
  - Regulatory arbitrage: firms may move or set up operations in less-regulated sectors and regions.
  - Interconnectedness that may require supervisory and regulatory action, including better consumer and investor protection.
- Policy guidance and recommendations:
  - Implement policies that target both FinTech firms and traditional banks proportionately to foster opportunities while containing risks.
  - For neobanks: impose stronger capital, liquidity, and risk-management requirements "commensurate with their risks."
  - For incumbent banks and established entities: enhance prudential supervision with greater focus on the health of less technologically advanced banks, whose existing business models "may be less sustainable over the long term."
  - For DeFi: focus regulation on entities accelerating its growth, such as stablecoin issuers and centralized crypto exchanges.
  - Encourage robust governance in DeFi through industry codes and self-regulatory organizations to serve as conduits for regulatory oversight.

*Source: Fast-Moving FinTech Poses Challenge for Regulators — Antonio Garcia Pascual and Fabio Natalucci; April 13, 2022.*

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## Content in this bundle

- **Chapter 3**
  - [Chapter 3 (Markdown version)](/-/media/files/publications/gfsr/2022/april/english/ch3.pdf.md){rel="alternate" type="text/markdown"}
  - [Chapter 3 (PDF)](/-/media/files/publications/gfsr/2022/april/english/ch3.pdf){rel="external" type="application/pdf"}

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## References

- [https://www.imf.org/wp-content/uploads/2022/04/GFSR-CH3-FinTechs-Chart1-1.jpg](https://www.imf.org/wp-content/uploads/2022/04/GFSR-CH3-FinTechs-Chart1-1.jpg)
- [https://www.imf.org/wp-content/uploads/2022/04/GFSR-CH3-FinTechs-Chart2.jpg](https://www.imf.org/wp-content/uploads/2022/04/GFSR-CH3-FinTechs-Chart2.jpg)
- [cryptoization](https://blogs.imf.org/2021/10/01/crypto-boom-poses-new-challenges-to-financial-stability/)

_Source: https://www.imf.org/en/blogs/articles/2022/04/13/blog041322-sm2022-gfsr-ch3_