WHY GOVERNMENTS MUST ENABLE THE TRANSFORMATIVE POWER OF NEW TECH
Policymakers should resist the urge to protect companies from disruptive technologies, writes Nasser Saidi
Technology has often resulted in disruptions (remember typewriters, fax machines, film cameras, desk telephones and floppy disks?), but it also supported the process of globalisation through digital transformation, cross-border flows of data and information, e-commerce and cloud computing.
It has disrupted many regulated industries, including banking and finance, transport, energy, telecoms, health, defence and government. We now live in a world where the largest movie house no longer owns any cinemas, thanks to Netflix.
The largest accommodation provider, Airbnb, owns no real estate, and Skype, WeChat and WhatsApp exist without owning any telecoms infrastructure.
Blockchain distributed ledger technology (DLT) and artificial intelligence are general purpose technologies with widespread applicability in modern economies.
DLT applications can be used for digital identities of people and companies, maintaining patient records in health care, or the sale and purchase of real (think property) as well as digital assets, or in supply chain, like IBM’s fully transparent food system. AI will soon become ubiquitous, with applications in national security, data science, business intelligence, health care and entertainment – and the list goes on.
The UAE’s aspiration to support and become a leader in the Fourth Industrial Revolution – with its blockchain and AI strategy – is likely to benefit it and help transform and diversify its economy. Given its growing digitisation over the past decades, the banking and financial sector is a leading candidate for disruption.
Total global investment in the FinTech sector was $122 billion (Dh448.1bn) over the past three years, with 2017 alone seeing investments to the tune of $31bn, according to KPMG.
The US remains the largest player, accounting for some two thirds of investments, but China is catching up fast.
As FinTech grows, there should be increased focus on its economic development potential: given widespread availability of smartphones, FinTech is an enabler for financial inclusion and access to finance.
The Middle East is a ripe playing field for such initiatives, especially given the relatively high mobile-phone penetration: among the unbanked, 86 per cent of men and 75 per cent of women have a mobile phone. But only 35 per cent of women have a bank account. Not to mention how useful it could be for creating digital identities, thereby allowing for access to finance and e-services for more than 15 million Syrian, Iraqi and other refugees displaced in the region. All of this requires investment in infrastructure and an enabling environment.
Current bank regulatory and supervisory frameworks generally predate the emergence of technology-enabled innovation. As regulators in the region start implementing new supervisory models, it is critical to avoid regulatory barriers to the adoption and spread of new technologies, especially ones that could stifle innovative ideas, while ensuring consumer protection and financial stability. To facilitate innovation, regulators across the globe have focused on either building regulatory sandboxes – testing in a controlled environment, with tailored policy options – developing accelerators or “boot camps” for start-ups or just enabling an “innovation hub” that acts as a place to meet and exchange ideas. In the region, both the DIFC and ADGM are at the forefront, with accelerators and regulatory sandboxes in place.
Given the cross-country applications of technology like DLT and payment systems, coupled with the global growth of some FinTech firms, cross-country and cross-sector co-operation is essential between regulators. Ongoing discussions are needed, especially with respect to uncertainties: safeguarding data privacy, digital identity and its impact on the use of financial services, cyber security, compliance with anti-money laundering and countering financing of terrorism (AML/ CFT), risk mitigation when there is a technology-governance gap, and so on.
While incumbents and new entrants evolve and adjust to the disruptive potential, regulators are themselves starting to adapt within this ecosystem, leading to a branch called reg tech. What is reg tech?
The Bank for International Settlements defines it as “any range of FinTech applications for regulatory reporting and compliance purposes by regulated financial institutions. This can also refer to firms that offer such applications.”
Reg tech could transform risk management at financial institutions and regulatory compliance by reducing its cost.
It could also facilitate identity management (know your customer for onboarding, AML/ CFT checks) and improve fraud detection. Sup tech – technology for supervisors – goes a step beyond, and could increase supervisory effectiveness and efficiency.
Some examples include algorithmic regulation and supervision (in areas such as high-frequency trading, algorithm-based credit scoring, robot-advisers) or real time supervision (look at the data as it is generated in the regulated institutions’ operational systems) or even machine-readable regulations.
Together, these could result in major paradigm shift as to how a regulator functions.
A new integrated, digital financial world is emerging.
The region’s policymakers and regulators should support the burgeoning, innovative start-up culture, rather than being protective of incumbents, which are typically owned by governments and have been shielded from competition.
Some guidelines and principles are:
Be supportive of technologies like DLT, AI and related innovations, and remove barriers to their use by undertaking a pro-active and regular review of regulatory regimes.
Create and support innovation facilitators like hubs, sandboxes, incubators and accelerators. The best practice is to review and create structural mechanisms to enable ongoing market engagements.
Co-ordination, collaboration and communication between domestic regulators is necessary. The emergence of innovations such as digital money, crypto-assets, initial coin offerings and digital financial and non-financial services requires the development of new regulatory regimes and co-operation and co-ordination between regulators in different industries.
Build staff capacity and knowledge of regulators and supervisors in the fast-evolving landscape.
Digital finance has gone beyond cross-border to become borderless. This requires international co-ordination and co-operation by authorities to monitor macro-financial risks, mitigate cyber risks and manage operational risks from third-party providers, such as cloud-based services.