a man making payments with a card on a card machine

Regulations can hinder innovation in financial services. Regulators need to strike a balance between mitigating risks and encouraging innovation. Source: Shutterstock

Can financial regulators can mitigate risk without hindering innovation?

THERE is no question that fintech is changing the financial landscape. Especially in Southeast Asia, where there’s a large unbanked population, fintech innovations allowed more people to have access to financial services.

However, regulatory hurdles have often been a hindrance towards fintech innovation. Unsurprising, considering the sensitive nature of data and services provided by financial services.

Regulators need to strike a balance between mitigating risk and encouraging innovation, or prepare to patch holes in the industry later.

The rise of technology such as crypto assets and peer-to-peer lending has helped open up alternatives for many consumers. It enables faster transactions and removes barriers of transferring money between countries.

On the flip side, the same technology can be used to facilitate crime. Fraud, tax evasion, money laundering, and terrorism financing are amongst some of the risks that consumers and investors face.

In a blogpost by Managing Director of the International Monetary Fund, Christine Lagarde suggested some guidelines that regulators should follow.

There are three key points, which she believes regulators should keep in mind.

  1. Regulations should ensure trust is maintained while allowing financial systems to benefit from new technologies.
  2. There is a lack of understanding of risks in new models of financial services. Regulators need to thoroughly understand the risks posed by these new technologies.
  3. International cooperation is key. A global world means financial shocks quickly affect other countries; countries must work together to mitigate the risk.

Currently, there are measures in place to lay out an international regulatory framework for addressing risks posed by crypto assets.

Lagarde explained, “The Financial Action Task Force, a global standard-setting body, has already provided guidance to its members on how they should address money-laundering and terrorist-financing risks associated with crypto assets.”

She continued, “The Financial Stability Board (FSB), which coordinates financial regulation for the Group of 20 (G20) largest advanced and emerging economies, is studying ways to monitor the growth of crypto assets with an eye toward identifying emerging threats to stability.”

Lagarde explained that in certain cases, it is enough to apply existing regulations; others will require a thorough evaluation as new risks emerge.

In some places, like Hong Kong and Abu Dhabi, regulators are establishing regulatory sandboxes to test out new financial technology under supervised conditions.

“We must keep an open mind about crypto assets and financial technology more broadly, not only because of the risks they pose but also because of their potential to improve our lives,” she concluded.