fintech: RBI: The financial system must be protected against fintech risks

The Reserve Bank of India (RBI) said on Thursday that the wider financial system must be protected from the potential of the fintech industry to cause instability, while recognizing the sector’s role in democratizing access to finance. organized finance.

The central bank has also continued its writedown of crypto assets, saying they weaken exchange rate management and financial regulation.

“BigTech can grow rapidly and pose a risk to financial stability, which can result from increased disintermediation of incumbent institutions,” the central bank noted in its Financial Stability Report (FSR) released Thursday. “Additionally, the complex intertwined operational linkages between BigTech companies and financial institutions could lead to concentration and contagion risks and issues related to potential anti-competitive behavior.”

The regulator added that the emergence of fintech has exposed the banking system to new risks that go beyond prudential issues and cut across topics such as data privacy, cybersecurity, consumer protection, competition and compliance with anti-money laundering policies.

“Regulators and supervisors face a difficult balancing act between innovation friendliness and financial stability risk management, which requires greater engagement from stakeholders such as regulators, industry fintech and academia,” the report said.

RBI Guv warns against crypto

Central bank data showed that India’s fintech industry, among the fastest growing in the world, was valued at between $50 billion and $60 billion in 2020.

It is expected to reach $150 billion by 2025. India has the highest fintech adoption rate in the world, at 87%, and has received $8.53 billion in funding in 278 deals in 2021-2022.

In addition, the banking regulator has once again warned against the proliferation of virtual currencies, describing these instruments as “danger”. “Cryptocurrencies are a clear danger,” RBI Governor Shaktikanta Das noted in the report’s foreword. “Anything that derives its value from pretense, without any underlying, is speculation under a fancy name.”

Das said while technology has extended the reach of the financial sector across social hierarchy and geography, its benefits must be fully exploited while guarding against its potential to disrupt financial stability.

The monetary authority noted that cryptocurrencies are not currencies because they have no issuer; they are not a debt instrument or a financial asset and they have no intrinsic value. He added that history has shown that private currencies lead to instability over time and “dollarization” of the system because they create parallel monetary systems, which can undermine sovereign control over the money supply, interest rates, and interest rates. interest and macroeconomic stability.

“For developing economies, cryptocurrencies can erode capital account regulation, which can weaken exchange rate management,” the regulator noted in the report. “Although the degree of cryptocurrency appears limited so far, its growth circumvents restrictions on exchange rates and capital controls and limits the effectiveness of national monetary policy transmission, posing a threat to the “monetary sovereignty. Problems with these assets such as price crashes could spread to payment systems and harm real economic activity.”

The regulator also added that while central banks around the world are working on pilot projects to introduce central bank-backed digital currencies (CBDCs), a shift from bank deposits to such instruments could potentially reduce credit availability or increase credit costs. “The majority of central banks in the BIS survey are unsure about imposing limits on CBDC transactions or balances to counter the risk of disintermediation,” he said.

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Don F. Davis