From smartphones to cloud computing, technology is rapidly changing virtually every facet of society, including communications, business and government. The financial world is no exception.
As a result, the financial world stands at a critical juncture. Yes, the widespread adoption of new technologies, such as blockchain-based systems, offers many potential benefits. But it also gives rise to new risks, including risks to financial stability. That causes challenges for financial regulators, a subject I addressed at the 2017 World Government Summit in Dubai.
For example, we need to define the legal status of a virtual currency, or digital token. We need to combat money laundering and terrorist financing by figuring out how best to perform customer due diligence on virtual currency transfers. Fintech also has macroeconomic implications that need to be better understood as we develop policies to help the Fund’s member countries navigate this rapidly changing environment.
Financial technology, or fintech—a term that encompasses products, developers and operators of alternative financial systems—is challenging traditional business models. And it is growing rapidly. According to one recent estimate, fintech investment quadrupled from 2010 to 2015, to $19 billion annually.
Fintech innovation has come in many shapes and forms—from peer-to-peer lending, to high-frequency trading, to big data and robotics. There are many success stories. Think of cell phone-based banking in Kenya and China, which is bringing millions of people—previously “unbanked”—into the mainstream financial system. Think of the virtual currency exchanges that allow people in developing countries to transfer money across borders quickly and cheaply.
All this calls for more creative thinking. How exactly will these technologies change the financial world? Will they completely transform it? Will banks be replaced by blockchain-based systems that facilitate peer-to-peer transactions? Will artificial intelligence reduce the need for trained professionals? And if so, can smart machines provide better financial advice to investors?
The truth is: we do not know yet. Significant investment is going into fintech, but most of its real-world applications are still being tested.
And the regulatory challenges are just emerging. For instance, cryptocurrencies like Bitcoin can be used to make anonymous cross-border transfers—which increases the risk of money laundering and terrorist financing.
Another risk—over the medium term—is the potential impact on financial stability brought about by the entry of new types of financial services providers into the market.
Questions abound. Should new technologies—often driven by algorithms—be subject to the same type of regulation used in the past? Or are new regulatory approaches needed for evolving technologies? Can the forces of innovation help reduce risks and maximize benefits?
Some jurisdictions are taking a creative and far-sighted approach to regulation—by establishing “fintech sandboxes,” such as the “Regulatory Laboratory” in Abu Dhabi and the “Fintech Supervisory Sandbox” in Hong Kong.
These initiatives are designed to promote innovation by allowing new technologies to be developed and tested in a closely supervised environment.
Here at the IMF, we are closely monitoring fintech developments. Last year, we published a paper on virtual currencies, focusing on the regulatory, financial, and monetary implications. We have since broadened our focus to cover blockchain applications more generally. And we have recently established a High-level Advisory Panel of Leaders in Fintech to help us understand developments in the field. We expect to publish a new study on fintech in May.
As I see it, all this amounts to a “brave new world” for the financial sector. For some, a brave new world means a frightening vision of the future—much like the world described in Aldous Huxley’s famous novel.
But one could also think of Shakespeare’s evocation of this brave new world in The Tempest: “O wonder! How many goodly creatures are there here! How beauteous mankind is! O brave new world."