Regulatory Approaches for Inclusive FinTech

Oldřich Dědek, CNB Board Member

Closing statement at the conference Global Dialogue on Regulatory Approaches for Inclusive FinTech, Prague, 27 September 2019

Ladies and Gentlemen.

I would like to thank you for attending this conference for which the Czech National Bank gladly provided this Congress Centre. All speakers also deserve my thanks. I am convinced that the discussion was rich and thought-provoking and contributed to further understanding of the topics discussed.

This conference addressed the issues of financial inclusion. To be frank, when I joined the Bank Board, I hardly knew what this term meant. But after attending a few FinTech events, my knowledge improved. I realised and appreciated the goals of financial inclusion in terms of providing diverse social groups, namely in less developed countries, with access to financial products at a reasonable price. The connection with FinTech innovations is also straightforward. Even in the less developed world, these diverse social groups own mobile phones and have access to the Internet.

One might conclude from that that the key goals of financial inclusion are not so relevant for advanced economies with a well-developed, stable and competitive banking sector. But financial inclusion covers a larger agenda, crucial for advanced economies as well. One of the interesting areas is connected with the phenomenon of Big Data, gathered through social media and other channels in which people leave a digital footprint. As a result, financial institutions could get better evaluation of client risks and based on this knowledge, they could even exclude some customers from using certain risky financial instruments.

Regarding the distinction between less and more advanced countries, I need to stress the following point. It happens to us in the European Union that we are so focused on the implementation of our Europe-wide initiatives, such as PSD2 or GDPR, that we cease paying adequate attention to achievements elsewhere. At the same time, the developing countries’ advantage is that while catching up they can leapfrog the current business models or technologies that are slowly becoming obsolete and thus reach the cutting edge earlier than us.

That’s why frank exchange of views, such as we’ve had over the last two days, is valuable for us at the Czech central bank, and we are very glad that we could provide space for it to take place. I would like to point out in this regard particularly the discussions on ‘Creating and Enabling FinTech Ecosystems’ and on cybersecurity frameworks and their implementation by various central banks.

Ladies and gentlemen. We live in an increasingly digitalized world which poses new challenges to central banks as well. One of them is CBDC which stands for Central Bank Digital Currency. It’s a hot issue, for example, in Sweden, where the volume of cash in circulation is permanently falling in absolute terms and smart phones have become the main payment instrument. So far it is not a prevailing trend as witnessed in the Czech Republic, where the volume of currency in circulation is continuously rising and we have to invest large amounts of money in purchasing and maintaining machines for controlling the quality of and sorting banknotes and coins.

There are a lot of unanswered questions regarding CBDC. For example:

  • Should central banks compete with private money administered by commercial banks? The banks invest massively in user-friendly and service-rich internet banking. So the question is whether the Czech National Bank should also invest in these systems in order to keep up with the commercial banking sector.
  • Another concern is what would be the motives of the general public in using CBDC? Is it because a central bank cannot, by definition, go bankrupt? However, this has its own risks, namely a ‘run’ on the banking sector or flight to safe central bank money in turbulent times.
  • Last but not least, this issue also raises questions in terms of costs for the central bank budget. How many new employees should we hire to be in contact with a nation-wide clientele?

As I said earlier, there are more questions than answers.

Let me mention one more fresh, new challenge, posed by the emergence of so-called Global Stable Coins. As you now, Facebook has a plan to create a currency that millions of people all around the world would use. Let me remind you that central banks are the outcome of evolutionary recognition that monetary authorities cannot by guided by profit-making. Why? Because it would be easy for central banks to earn money through highly selfish behaviour. They might be tempted to push inflation up because higher inflation increases demand for banknotes, which are a source of seignorage. Another temptation might be to permanently depreciate domestic currency in order to reap accounting profits.

Facebook and other social media are private bodies, guided by the profit principle. Some of them have the ambition to issue money of their own. On the one hand, we cannot stop progress. On the other hand, we should not repeat the bumpy evolution from private money to modern central banking.

Let me conclude with the obvious fact that the entire financial world has been changing, meaning central banks must be able to cope with this changing environment, characterized by the influx of FinTech innovations. More importantly, how active and supportive should central banks be in this area? According to standard classification, the options are becoming a contact point, an innovation hub or a sandbox.

For now, the Czech National Bank has decided not to take the most demanding route, the sandbox. It would mean amending some laws and the application of double standards for regulated entities. The CNB is responsible for supervising the entire financial sector, so we have a host of problems to be solved even without the FinTech industry. We have to weigh the pros and cons of alternative uses of human and financial resources thoroughly. We don’t yet know what the actual demand for this central bank service will be. So, we think that it is a good decision to start by creating a platform through which we will help FinTech companies by clarifying the existing regulation and by organizing an exchange of views.

Ladies and gentlemen, thank you for your attention. I wish you a safe flight to your final destinations.