The financial system must be protected against FinTech risks. http://www.inventiva.co.in/trends/rbi-the-financial-system/
RBI: The Reserve Bank of India (RBI) has recognized the importance of the FinTech sector in democratizing access to organized finance, but has urged caution over the sector’s potential to generate volatility in the financial system at large.
According to the RBI, large IT companies that offer financial services jeopardize the stability of the financial system due to the potential for anti-competitive behavior and the cascading impact of their closely interconnected operational relationships with financial institutions.
The introduction of FinTech, according to the central bank’s 25th Financial Stability Report (FSR), has exposed the banking system to new risks that go beyond prudential concerns and frequently intersect with other related public policy objectives. data privacy protection, cybersecurity, consumer protectioncompetition and compliance with anti-money laundering policies.
It was pointed out that big tech has the potential to grow rapidly and endanger financial stability due to greater disintermediation of established institutions.
According to the article published on Thursday, “Complex intertwined operational relationships between BigTech companies and financial institutions can contribute to concentration and contagion risks, as well as challenges related to likely anti-competitive behavior.”
Regulators and supervisors must strike a difficult balance between encouraging innovation and controlling threats to the stability of the financial system.
To achieve common principles for the management of FinTech activities, including business and revenue models, governance, conduct and risk management, it has been said that this requires greater interaction between stakeholders, including including regulators, the FinTech industry and academia.
The central bank has persisted in devaluing cryptocurrency assets, saying they undermine efforts to govern exchange rates and comply with financial rules.
In its Financial Stability Report (FSR), released on Thursday, the central bank said that “BigTech can grow rapidly and pose a danger to financial stability, which can result from increased disintermediation of traditional institutions.”
According to the study, which references a survey, regulators and supervisors around the world are scrambling to assess the risks and rewards of Big Tech entering the financial sector.
Authorities should be aware of any potential new ties between significant digital companies and existing financial institutions in the future.
According to a study, the financial technology (FinTech) sector has grown rapidly in recent years. The size of the global FinTech market, estimated at $111 billion in 2020, is expected to grow to $698 billion by 2030, growing at a CAGR of 20.3%.
The FinTech sector in India, which is among the fastest growing in the world, has a valuation of $50-60 billion in 2020 and is expected to reach $150 billion by 2025. India has the most high fintech adoption rate (87%), raising $8.53 billion in funding (in 278 transactions) between 2021 and 2022.
According to the report, FinTech innovations are ubiquitous, particularly in retail and wholesale payments, financial market infrastructures, investment management, insurance, credit provision and equity capital raising. These developments could lead to significant changes in the financial environment.
The use of FinTech, according to research, can promote financial inclusion, expand the range of financial goods and services, improve the efficiency of financial service delivery, and improve consumer satisfaction.
Additionally, there are concerns about potential anti-competitive behavior due to the complex operational ties between BigTech companies and financial institutions.
The regulator went on to say that the development of FinTech has exposed the banking sector to new dangers that go beyond prudential concerns and interact with issues such as data privacy, cybersecurity, consumer protection, competition and compliance with anti-money laundering regulations.
In addition, it can lead to improvements in risk management, including better underwriting models, better targeted products, and efficiency benefits in credit granting procedures.
According to the research, “regulators and supervisors face a complex balance between innovation-friendliness and controlling threats to financial stability,” which requires greater stakeholder engagement, including regulators, the FinTech sector and academics.
The RBI has issued a cryptocurrency warning.
According to central bank projections, India’s fintech sector, which is one of the fastest growing in the world, will be valued at between $50 billion and $60 billion by 2020. It is expected to grow into a $150 billion business by 2020. by 2025. With an acceptance rate of 87%. , India is the world leader in fintech and has received $8.53 billion in funding under 278 deals in the years 2021-2022.
Separately, the banking regulator again warned customers to avoid the rise of virtual currencies, describing them as a “risk”. RBI Governor Shaktikanta Das remarked in the report’s introduction that “cryptocurrencies pose an obvious concern.” “Anything that derives its value from fantasy and has no substance is nothing more than speculative behavior disguised as something else.”
Technology has expanded the reach of the financial sector across social strata and geographic boundaries, but Das argues that these benefits must be fully realized while keeping in mind how they can undermine financial stability.
Cryptocurrencies, according to monetary authorities, are not currencies since they have no issuer, no intrinsic value, and are neither financial assets nor debt instruments. Private currencies can potentially lead to the establishment of alternative monetary systems, jeopardizing sovereign authority over the money supply, interest rates and macroeconomic stability, leading to long-term instability and the “dollarization” of the economy.
The paper claims that cryptocurrencies “can impede the ability of emerging economies to manage their capital accounts, adversely affecting exchange rate management.” By circumventing exchange rate restrictions and capital controls, and by hampering the effective transmission of national monetary policy, cryptocurrencies threaten monetary sovereignty. Price declines and other issues with these assets could cause payment systems to malfunction, reducing real economic activity.
The regulator has issued a warning as central banks around the world begin testing central bank-backed digital currencies (CBDCs), saying switching bank deposits to such instruments could reduce credit availability or increase costs credit. According to the BIS survey, “the majority of central banks are unsure about imposing restrictions on CBDC transactions or balances to reduce the risk of disintermediation.”
edited and proofread by nikita sharma