## Fintech — Building Trust Through Regulation

_IMF News, April 9, 2018_

## Source details

**Canonical URL:** [Fintech — Building Trust Through Regulation](https://www.imf.org/en/news/articles/2018/04/11/sp40918-fintech-building-trust-through-regulation)

## Other formats

- [Markdown version](/en/news/articles/2018/04/11/sp40918-fintech-building-trust-through-regulation/index.md)
- [Structured JSON version](/en/news/articles/2018/04/11/sp40918-fintech-building-trust-through-regulation/index.json)
- [Bundle manifest](/en/news/articles/2018/04/11/sp40918-fintech-building-trust-through-regulation/bundle-manifest.json)

## Bibliographic details
- Published: April 9, 2018

---

### Overview and context
- Remarks by Tobias Adrian, IMF Financial Counsellor and Director of the Monetary and Capital Markets Department, delivered at the IMF Fintech Roundtable on April 9, 2018.
- Purpose: discuss pivotal issues for policymakers and regulators about new financial technologies, including crypto-assets, and how to build confidence and public trust while enabling innovation.

### Opportunities from fintech
- Emerging technologies can:
  - support the introduction of new services;
  - drive efficiency gains in the financial sector;
  - foster financial inclusion and financial deepening;
  - deliver widespread economic and social benefits.
- Policy tools to support exploration:
  - enhance “fintech” awareness at official institutions;
  - create controlled environments where new technologies can be tested (innovation hubs and regulatory sandboxes);
  - promote financial education.

### Key statistics on crypto-assets and ICOs
- Market capitalization of crypto-assets reached more than $900 billion early this year.
- There are about 1,600 types of crypto-assets being traded worldwide.
- In 2017:
  - there were 880 Initial Coin Offerings, which raised about $6 billion.
- Previous year:
  - there were only 43 ICOs, which raised just $95 million.
- About half of last year’s ICOs have already failed.
- Coincheck breach: cyber losses (about $500 million) were higher than its total registered capital.

### Risks and channels of concern
- Financial stability risks:
  - disruptions to existing service providers, business models, and market structure;
  - migration of activities to unregulated sectors;
  - potential for contagion via indirect exposures (investments in related technologies, lending to crypto-investors, offering futures trading to clients).
- Investor and consumer risks:
  - extreme volatility and rapid retail growth have intensified concerns;
  - many small-scale investors have suffered dramatic losses, undermining confidence.
- Market integrity risks:
  - manipulation and insider trading threaten market integrity and warrant enforcement action.
- Operational, cyber, and liquidity risks at crypto-exchanges:
  - market risks in exchanges’ inventories due to higher volatility;
  - material counterparty default risk from margin lending when price moves exceed margin models;
  - liquidity risk if investor cash is not segregated and is used for other purposes;
  - some exchanges do not accept any fiat currencies, complicating liquidity management;
  - intrinsic operational and cyber risks illustrated by the Coincheck breach (about $500 million).
- Legal, data, and ethical concerns:
  - erosion of legal certainty;
  - balance between transparency and privacy;
  - ethical use, accountability, and ownership of customers’ personal data.
- Supervisory capacity gaps:
  - “Fintech awareness gap” where many supervisors lack understanding of exposures to crypto-assets and are not prepared given legal mandates and limited resources.

### Current regulatory landscape and challenges
- Crypto-assets were created outside traditional regulatory boundaries; many do not meet definitions of financial instruments, while some function similarly to them.
- Examples of existing regulatory reach:
  - many ICOs qualify as “public offerings of securities” and are covered by public-offering regulations and private-placement exceptions;
  - jurisdictions use enforcement powers to prosecute fraud and issue public warnings;
  - some regulators license exchanges or treat them as money transmitters;
  - many crypto-exchanges and intermediaries are subject to anti-money-laundering regulations.
- Regulatory approaches are varied and jurisdiction-specific, enabling businesses to move locations to optimize and arbitrage regulatory treatments.
- Uncoordinated regulations risk fragmentation and a “race to the bottom.”

### Policy recommendations and regulatory principles
- Strike a sensible balance between supporting innovation and maintaining a robust regulatory framework.
- Provide clear guidelines to reduce regulatory uncertainty and avoid the risk of a major clampdown that could destabilize the sector.
- Apply existing international principles where relevant, including governance, auditing, client asset segregation, minimum capital, outsourcing, cyber-security, and disclosure, to publicly offered crypto-assets and exchanges.
- Treat ICOs offered to the general public, tradable, and invested with an expectation of financial return as assets subject to regulation similar to other asset types.
- Subject ETFs, investment funds and derivatives of crypto-assets to appropriate regulation.
- Actively supervise crypto-exchanges with intrusive supervision given inherent risks.
- Strengthen investor and consumer protection measures and consider targeted investor-education programs.
- Address data gaps and enhance monitoring of direct and indirect exposures to crypto-assets.
- Encourage firms to limit exposures and apply prudential treatment for material exposures.
- Build international consensus and coordination to prevent regulatory gaps and to strengthen public confidence.

### Priorities for supervisors and international cooperation
- Prioritize enhanced monitoring and closing the “Fintech awareness gap.”
- Develop deep, multidisciplinary expertise combining technology, finance, law enforcement, prudential regulation, and public policy.
- Foster cooperation and coordination across jurisdictions and institutions to manage cross-sector and cross-border risks.
- Use the IMF’s role to facilitate global dialogue and help members strengthen regulatory frameworks and build trust.

### Conclusion
- Regulation is necessary where distortions, excessive arbitrage, market abuse, and contagion risk consumer, investor, and systemic safety.
- Financial innovation is occurring amid low public trust and movement toward less-regulated sectors; this calls for a far-reaching regulatory response.
- Building trust in new technologies requires frameworks that encourage creativity while safeguarding consumers and systemic stability.

*Remarks by Tobias Adrian, IMF Fintech Roundtable, April 9, 2018 — Fintech — Building Trust Through Regulation*

---


## References

- [Tobias Adrian](http://www.imf.org/external/np/bio/eng/ta.htm)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2018/04/11/sp40918-fintech-building-trust-through-regulation_