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The nature of regulation has to adjust as fintech is transforming the financial landscape, according to Reserve Bank of India Deputy Governor, T Rabi Sankar.
The sheer diversity in the functions performed by fintech firms, which provide digital financial services, necessitates a widening of the regulatory perimeter, he said at IAMAI’s Global Fintech Festival.
So, the approach to regulation also needs to adapt to the type of entity being regulated.
“While similar activities should attract uniform regulation in most cases, such activity-based regulation might be less effective than entity-based regulation when one is dealing with financial activities by big tech firms,” said Sankar.
Mutating fintech landscape
The Deputy Governor observed that it is virtually impossible for legislation to keep in step with the fast mutating fintech landscape.
“Until legislation catches up, regulation has to adapt to ensure that the financial system absorbs digital innovation in a non-disruptive manner.
“Regulation is sometimes defined as the process of slowing down change to give time for a system to adapt and evolve,” Sankar said.
He underscored that the job of the regulator is not easy when a given financial service, performed by well-regulated financial firms, changes to include non-financial firms in a constantly reconfiguring financial value chain.
Similarly, there are frictions for a non-financial firm to get used to financial regulation.
Customer protection
Sankar opined that the social benefits of a new technology or its impact on customer needs to be well understood by all stakeholders – regulators, existing financial firms as well as innovating fintech entities.
Also see: Cryptocurrency — the time to act is now
“Slowing down the process of change — which attracts the criticism of stifling innovation — is often the best way to ensure customer protection,” he said.
Cross-border payments
A central bank digital currency (CBDC) can boost innovation in cross-border payments, making these transactions instantaneous and help overcome key challenges relating to time zone and exchange rate differences, according to Reserve Bank of India (RBI) Deputy Governor, T Rabi Sankar.
A CBDC is the legal tender issued by a central bank in a digital form. It is the same as a fiat currency and is exchangeable one-to-one with the fiat currency. Only its form is different.
Sankar observed that the frictions relating to time zone and exchange rate differences as also varying legal and regulatory requirements across jurisdictions can be solved through platform-based solutions.
These solutions can make real-time price discovery possible even for retail-sized transactions.
Sankar said settlement of cross-border payments in CBDC can happen without the settlement system of either of the countries or both countries being open.
Costly transactions
A July 2021 BIS report noted that cross-border payments suffer from long transaction delays and can be particularly costly due to the involvement of a high number of intermediaries across different time zones along the correspondent banking process.
The report said CBDCs can be open 24/7, eliminating any mismatch of operating hours. It could settle instantly, reducing the need for status updates.
Also see: ATM players in a tough spot
In a speech in July 2021, Sankar said going forward, after studying the impact of CBDC models, launch of general purpose CBDCs will be evaluated.
“The RBI is currently working towards a phased implementation strategy and examining use cases which could be implemented with little or no disruption,” he added.
Some key issues under RBI’s examination include the scope of CBDCs, whether they should be used in retail payments or also in wholesale payments, the underlying technology – whether it should be a distributed ledger or a centralised ledger, for instance, and whether the choice of technology should vary according to use cases, the validation mechanism – whether token based or account based, degree of anonymity etc.
However, conducting pilots in wholesale and retail segments may be a possibility in near future, Sankar said.
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