Mark Wetjen, DTCC Managing Director and Head of Global Public Policy
Fintech innovations like distributed ledger technology (DLT), cloud computing, artificial intelligence (AI) and robotics will transform the global marketplace over time. In fact, we’re already seeing the impact in certain pockets of the industry, from providing a better client experience to strengthening market infrastructure, increasing access to capital markets, realizing efficiencies and reducing costs.
Currently, policymakers are pursuing various initiatives and collaborating with the industry to assess how fintech applications can fit into existing regulatory frameworks to support innovation while continuing to ensure that important policy objectives will be met. These objectives include systemic risk, investor protections, orderly financial markets as well as others.
In looking at the implementation of new technologies, the industry is increasingly realising that to ensure they can be leveraged harmoniously across borders, guidance and recommendations at both the international and EU level are essential, given that national solutions can fragment the market and lead to process inefficiencies.
In addition, the adoption of common global standards will be essential to realizing the vast potential of many new technologies. Looking specifically at DLT for example, a common set of standards across jurisdictions will be critical for successful deployment and to avoid fragmentation, inefficiency, and higher risks and costs. Also, critical to the successful deployment of new technologies is a clear governance structure and best practice guidelines to prevent them from compromising end objectives. Industry-owned market infrastructures can play an important role in creating governance structures around future fintech applications.
EU policymakers should consider promoting an open source model where libraries of solutions are available to developers and innovators to create new products and services under specific licenses. Two examples that stand out are the Hyperledger Project and the Enterprise Ethereum Alliance – both of which are committed to the open source development of blockchains. Communities like these can help to maximise collaboration among industry participations and encourage and facilitate the adoption of global standards applicable to the technology.
Furthermore, due consideration must be given to the security of innovative technologies, particularly those developed by new entrants to the market, because these firms may not have the same level of operational controls as those of incumbents, who have operated in the financial industry and been subject to regulatory oversight for decades. The last thing we want is to increase cyber security and contagion risk in a highly interconnected marketplace. Therefore, it is imperative these firms ensure they can respond to and recover from cyber-attacks that may compromise their activities.
Indeed, cross-industry coordination around response and recovery mechanisms is essential to mitigating the systemic consequences of such attacks.
Innovations in fintech have the potential to fundamentally change financial services. To realise it, the industry must make sure fintech is applied within an appropriate regulatory framework, according to standards and governance structures and encompassed by stringent cyber security measures. Failure to do so means we risk compromising the very objectives fintech set out to achieve – enhancing the provision of financial services, reducing risk, and, ultimately, promoting global economic growth.
This article first appeared in Views magazine on September 4.