Emerging Technology-Related Issues in Finance and IMF Surveillance
Surveillance, a core mandate of the International Monetary Fund (IMF), is the responsibility to oversee the international monetary system and monitor the economic and financial policies of its 189 member countries. As part of this process, the IMF identifies potential risks to stability and recommends policies to sustain growth and promote financial and economic stability.
In recent years, technology has had a deep impact on the financial industry, creating new opportunities and risks. How well has IMF surveillance kept up with these technology-related issues?
This is the topic of a background paper prepared in the context of a recent evaluation of financial surveillance by the IMF’s Independent Evaluation Office. The paper examined the coverage by the IMF of three technology-related issues:
Cyber risk. The risk of disruption to financial institutions’ IT systems has long been recognized, but for much of this time it was treated as one source of ‘operational risk’ a general category for risks arising from inadequate or failed processes or from external events, including fraud, terrorist attacks, etc. It was not until early this decade that cyber risk per se started becoming the focus. Cyber risk is challenging for regulators because: (1) the means of cyber attacks vary widely; (2) vulnerability can arise not only from weaknesses in a firm’s own systems but also in those of its clients, suppliers, and infrastructure providers; and (3) there are no comprehensive data on cyber attacks, rendering risk aggregation and loss estimation extremely difficult. Although there has not yet been a cyber incident with global consequences, the consensus is that cyber risk can be systemic, and regulators are exploring a variety of policies and tools to mitigate it.
Fintech is technologically-enabled financial innovation that results in new business models, processes, or products. The innovations cover credit, deposit, and capital-raising (through applications such as mobile banking, crowdfunding, lending marketplaces); payment, clearing, and settlement (mobile wallets, distributed ledger technology (DLT), P2P transfers); investment management (robo-advice, copy-trading), and market support (big data analytics, security, and cloud computing). Fintech holds the promise of reducing inefficiencies in financial intermediation and promoting financial inclusion. At the same time, it creates risks for consumer privacy, market integrity and, potentially, financial stability, although the latter are considered still low.
Digital currencies (or crypto-currencies) is one particular application of fintech. The IMF prefers to call them ‘crypto-assets’ because they lack key attributes of sovereign currencies. Bitcoin is the best known, but there are over a thousand others. Their prices have been very volatile, eventually collapsing in 2018. After peaking at US$830 billion in January 2018, their total market cap is now just over US$100 billion. Digital currencies raise a number of prudential policy challenges (consumer and investor protection, market integrity, AML/CFT, fraud, and tax evasion). These could potentially threaten financial stability but the consensus among regulators is that they have not yet reached critical mass. The regulatory response to these challenges is in flux. Some jurisdictions ban digital currencies altogether while others recognize them as a form of payment or a type of financial asset. Some jurisdictions regulate the exchanges while others have introduced prudential requirements for firms buying, selling, or issuing crypto-assets. Finally, a separate aspect of the debate is the interest of several central banks to issue their own digital currency.
The evaluation shows that the IMF has been paying increasing attention to technology-related issues in finance, both from an analytical perspective and as a topic for bilateral surveillance. This engagement is in its early stages and still evolving. It has so far been more visible on fintech and digital currencies than on cyber security issues. In a handful of countries the IMF has discussed these issues in some depth, but more generally coverage has varied widely, as might be expected, reflecting judgments on the importance of these issues in the jurisdictions concerned. At the same time, the Fund has used its convening power to raise awareness of these issues—particularly cyber risk—and facilitate knowledge-sharing among developing and emerging market countries. Most recently, the IMF, together with the World Bank, developed the Bali Fintech Agenda, a framework for the consideration of policy issues in these areas by the international community and individual member countries.
Looking forward, the challenge for the IMF is to continue working closely with member countries in order to best respond to the needs of its membership. The Bali Fintech Agenda is expected to help guide the focus of this work within the Fund’s expertise and mandate, inform the dialogue with national authorities, and help shape the contributions of the Fund to the work of standard-setting bodies on fintech issues.