By Kathy Gibson – Fintech is causing disruption on all levels, and central banks have to think carefully about new frameworks and regulations.
Pragmatically, says Dr Arif Ismail, head of fintech at the South African Reserve Bank, fintechs are helping to reach the markets that have not been reached by the traditional banks.
Technology is a big part of the fintech revolution – but Ismail points out that fintech itself is about digital payments, remittances, loans and more.
“We must be very clear about what we mean by fintech. It is not the small scale startups and non-banks; it is not the underlying technology.
“What we mean by fintech is innovation unusual – innovations that challenge underlying business models.”
Changes in the payments landscape include challenges to the underlying historic store of value (fiat currency); new instruments and channels (new form factors, QR codes, mobile devices); and alternate platforms (for example, decentralised ledgers).
“For us to analyse the changes as central bankers, these are the three things we think about very carefully,” Ismail says.
The big question, he adds, is how these new forms align with regulations.
The current three forms of money are cash, commercial bank money and central bank deposits (usually for large value payments).
“There is a potential though for a fourth form of money – a central bank-issued digital currency that is universally accessible and electronic,” Ismail says.
This could be in the form of digital tokens, which Ismail points out could reshape the financial markets. “There is huge potential in this domain, but one that needs to be progressed and matured over time.”
In fact, the SARB has issued an expression of interest in retail digital tokens.
“We would have to think very carefully about how something like this would impact banking, financial intermediation, inclusion and financial stability,” Ismail adds.
However, he cautions that there is probably another year of robust policy thinking ahead before clarity around digital currencies would emerge.
There are a number of other central bank considering CBDCs. “We need to consider the learning from potential trials such as the e-Krona project,” Ismail points out.
Among these is a policy review on crypto assets, which has been underway for some months. In fact, the Intergovernmental Fintech Working Group (IFWG) will be able to issue policy within about two months, Ismail says.
SARB has put in place a number of frameworks to assess the potential disruption brought about by fintech. These frameworks have been informed by ongoing work with global bodies such as the Bank for International Settlements.
“We have deliberately as a set of authorities put together a cross-regulatory fintech group that reviews and works with the emerging fintech issues,” Ismail says.
Interventions from this practice include thinking about crypto assets and policy frameworks.
The IFWG are reviewing the set-up of a potential innovation hub, which may include a regulatory guidance unit. “This will likely be a one-stop shop for innovators to get guidance on how to comply with regulation,” Ismail explains.
An associated innovation accelerator will provide the likely space for rapid proof of concept projects.
We must have a bias for action and trial new ideas, learning rapidly from prototyping, Ismail adds.
“The central bank is on top of fintech matters,” he says. “We stay humble, though, and accept that we need to be alive to continual learning in a fast changing environment.”