Fintech Regulation and Supervision Challenges within the Banking Industry: A Comparative Study within the G-20 3031254279, 9783031254277

Citation preview

Fintech Regulation and Supervision Challenges within the Banking Industry A Comparative Study within the G-20

Felix I. Lessambo

Palgrave Macmillan Studies in Banking and Financial Institutions

Series Editor Philip Molyneux, Bangor University, Bangor, UK

The Palgrave Macmillan Studies in Banking and Financial Institutions series is international in orientation and includes studies of banking systems in particular countries or regions as well as contemporary themes such as Islamic Banking, Financial Exclusion, Mergers and Acquisitions, Risk Management, and IT in Banking. The books focus on research and practice and include up to date and innovative studies that cover issues which impact banking systems globally.

Felix I. Lessambo

Fintech Regulation and Supervision Challenges within the Banking Industry A Comparative Study within the G-20

Felix I. Lessambo Fordham University New Britain, CT, USA

ISSN 2523-336X ISSN 2523-3378 (electronic) Palgrave Macmillan Studies in Banking and Financial Institutions ISBN 978-3-031-25427-7 ISBN 978-3-031-25428-4 (eBook) https://doi.org/10.1007/978-3-031-25428-4 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover illustration: Paul Souders This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Acknowledgments

Writing a book is always a challenge. However, writing a book on US Mergers & Acquisitions is a more daring intellectual exercise. I would like to thank my astoundingly supportive friends who motivated me all along the project, knowing my dedication to the subject and thought I am more than able to complete this project: Dr. Marsha Gordon, Dr. Linda Sama, Dr. Lavern A. Wright, Dr. Lester Reid, Yanick Gil, Jerry Izouele, and Jordan Romine. Last but not least, thank you to all the original readers of this book when it was in its infancy. Without your enthusiasm and encouragement, this book may have never been ready.

v

Disclaimer

While the author has made every effort to ensure that the information in this book is correct at the time of publication, he does not assume and hereby disclaims any liability to any Party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause. This publication is designed to provide accurate and authoritative information in regards to the subject matter covered. It is sold on the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is needed, the services of a competent professional should be sought.

vii

Contents

1

Banking Regulation and Fintech Challenges 1.1 General 1.2 Evolution of Fintech 1.2.1 Fintech 1.0 (1886–1967) 1.2.2 Fintech 2.0 (1967–2008): Digitalization 1.2.3 Fintech 3.0 and 3.5 (2008–Current): The Start-Ups Era 1.3 Advantages and Disadvantages of FinTech 1.3.1 Advantages 1.3.1.1 Efficiency Enhancement 1.3.1.2 Financial Inclusion 1.3.1.3 Decentralization 1.3.1.4 Transparency 1.3.1.5 Reduced Credit Risks 1.3.2 Disadvantages 1.3.2.1 Concentration 1.3.2.2 Risks to Financial Stability 1.3.2.3 Macro-Financial Risks 1.3.2.4 Micro-Financial Risks 1.3.2.5 Managerial Risks 1.4 Fintech Activities 1.4.1 Digital Payment and Lending 1.4.2 Digital Platform Financing

1 1 2 3 4 4 5 5 5 6 6 7 7 7 8 8 9 9 9 10 10 11

ix

x

CONTENTS

1.5 1.6

1.4.3 Robot-Advice 1.4.4 InsurTech Business Model 1.4.5 Crypto Assets FinTech Regulation The Bali Fintech Paper 1.6.1 The Bali Agenda 1.6.2 The 12 Elements Under the Bali Agenda 1.6.2.1 Embrace the Promise of Fintech 1.6.2.2 Enable New Technologies to Enhance Financial Service Provision 1.6.2.3 Reinforce Competition and Commitment to Open, Free, and Contestable Markets 1.6.2.4 Foster Fintech to Promote Financial Inclusion and Develop Financial Markets 1.6.2.5 Monitor Developments Closely to Deepen Understanding of Evolving Financial Systems 1.6.2.6 Adapt Regulatory Framework and Supervisory Practices for Orderly Development and Stability of the Financial System 1.6.2.7 Safeguard the Integrity of Financial Systems 1.6.2.8 Modernize Legal Frameworks to Provide an Enabling Legal Landscape 1.6.2.9 Ensure the Stability of Domestic Monetary and Financial Systems 1.6.2.10 Develop Robust Financial and Data Infrastructure to Sustain Fintech Benefits 1.6.2.11 Encourage International Cooperation and Information Sharing

13 14 15 16 19 19 21 21

21

22

22

22

23 23

23 24

24

24

CONTENTS

1.6.2.12

1.7 2

3

Enhance Collective Surveillance of the International Monetary and Financial System

Fintech Future

International Standard Setting Boards 2.1 General 2.2 The Basel Committee—Overview 2.2.1 Mission and Objectives 2.2.2 Activities 2.2.3 Organizational Structure 2.3 The Financial Stability Institute 2.3.1 Missions 2.3.2 Objectives 2.3.3 Organizational Governance 2.3.4 FSI Activities 2.4 International Association of Insurance Supervisors (IAIS) 2.4.1 Mission 2.5 International Organization of Securities Commissions 2.5.1 IOSCO Mission 2.5.2 IOSCO Governance 2.6 International Association of Deposit Insurers 2.6.1 Mission and Objectives 2.6.2 IADI Governance 2.7 The Committee on Payments and Market Infrastructure (CPMI) 2.7.1 Mission and Objectives 2.7.2 Governance/Organization 2.8 The Financial Action Task Force on Money Laundering (FATF) 2.8.1 Mission and Objectives 2.8.2 FAFT Secretary FinTech Regulations and Supervision in the United States 3.1 General 3.2 Fintech Regulation and Supervision 3.2.1 The Office of the Comptroller of the Currency 3.2.1.1 The OCC Mission and Objectives

xi

25 25 27 27 27 28 28 29 32 32 33 33 33 34 34 34 35 36 36 36 37 38 38 38 39 40 41 43 43 44 44 44

xii

CONTENTS

3.3

3.4

4

3.2.1.2 OCC and National Bank Charter 3.2.1.3 OCC Structure 3.2.2 The Consumer Financial Protection Bureau (CFPB) 3.2.3 The Securities and Exchange Commission (SEC) 3.2.3.1 Mission and Objectives 3.2.4 The Commodity and Futures Trading Commission (CFTC) 3.2.4.1 Mission and Objectives 3.2.4.2 Organizational Chart 3.2.5 US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) 3.2.5.1 FinCen Activities Fintech Regulations 3.3.1 FinTech Regulation Approach 3.3.2 The OCC Fintech Charter 3.3.3 Digital Payment and Lending 3.3.4 Digital Platform Financing 3.3.5 Cryptocurrency 3.3.6 InsurTech OCC Financial Statements 3.4.1 The Balance Sheet 3.4.1.1 Assets 3.4.1.2 Investments 3.4.1.3 Liabilities 3.4.1.4 Net Position 3.4.2 Statements of Net Cost 3.4.3 Revenues and Other Financing Sources 3.4.4 Statements of Changes in Net Position 3.4.5 Statements of Custodial Activity

The European Banking Authority 4.1 General 4.2 EBA Mission and Objectives 4.3 EBA Scope of action 4.4 EBA Organizational Structure

47 48 49 51 52 53 53 54 54 56 57 57 58 59 59 60 61 62 63 63 63 64 64 66 66 67 67 73 73 74 74 75

CONTENTS

4.5 4.6 4.7 5

6

EBA Funding The EU Sandbox Approach Fintech Regulatory and Supervision

xiii

76 77 77

The Deutsche Bundesbank 5.1 General 5.2 Missions and Objectives 5.3 Organizational Structure 5.4 Deutsche Bundesbank and Banking Supervision 5.4.1 The Federal Financial Supervisory Authority (BaFin) 5.4.2 The Consumer Advisory Council 5.4.3 The Financial Stability Committee 5.4.4 The Insurance Advisory Council 5.4.5 The Securities Council 5.4.6 The Deutsche Bundesbank 5.5 Fintech Regulation 5.5.1 Sandbox Approach 5.5.2 Mobile Payments 5.5.3 Crowdfunding and Crowdlending 5.5.4 Robot-Advice 5.5.5 Blockchain 5.5.6 InsurTech 5.6 DB Financial Statements 5.6.1 The Balance Sheet 5.6.2 Profit and Loss

81 81 81 82 82

The Bank of France 6.1 General 6.2 Missions and Objectives 6.3 Organizational Structure 6.3.1 Governor and Deputy Governors 6.3.2 The Executive Committee 6.3.3 The General Council 6.3.4 The Audit Committee 6.3.5 The Compensation Committee 6.4 Fintech Regulation 6.4.1 Sandbox Approach 6.4.2 Electronic Payments 6.4.3 Crowdfunding and Crowdlending

93 93 94 94 94 96 96 96 96 96 97 97 98

82 85 85 86 86 86 86 87 87 87 88 88 89 89 89 89

xiv

CONTENTS

6.4.4 Robot-Advice 6.4.5 Cryptocurrencies and Blockchain 6.4.6 InsurTech BDF Financial Statements

98 98 100 100

7

The Bank of Italy (Banca d’Italia) 7.1 General 7.2 Missions and Objectives 7.3 Organizational Structure 7.3.1 The Governing Board 7.3.2 The Board of Directors 7.3.3 The Board of Auditors 7.3.4 The Shareholding Meeting 7.3.5 The External Auditor 7.4 Fintech Regulations 7.4.1 The Sandbox Approach 7.4.2 Digital Payments and Money Transfer 7.4.3 Crowdfunding 7.4.4 Robot-Advisory Services 7.4.5 Cryptocurrency 7.4.6 InsurTech 7.5 Banca d’Italia Financial Statements 7.5.1 The Balance Sheet 7.5.2 Profit and Loss

103 103 103 104 104 104 106 106 107 107 108 108 108 109 109 110 110 110 110

8

The Central Bank of Spain (Banco de España) 8.1 General 8.2 Missions and Objectives 8.3 Organizational Structure 8.3.1 The Governor 8.3.2 The Deputy Governor 8.3.3 The Governing Council 8.3.4 The Executive Commission 8.3.5 The Audit Committee 8.4 FinTech Regulation 8.4.1 The Sandbox Approach 8.4.2 Payment Services 8.4.3 Online Banking 8.4.4 Social Trading Platforms 8.4.5 Crowdfunding

115 115 115 116 116 117 119 119 119 120 121 121 121 122 122

6.5

CONTENTS

8.5

8.4.6 Cryptocurrency 8.4.7 InsurTech Financial Statements 8.5.1 The Balance Sheet 8.5.2 Profit and Loss

xv

122 123 123 123 123

9

The Prudential Regulation Authority 9.1 General 9.2 Mission and Objectives 9.3 Organizational Structure 9.4 Funding 9.5 Fintech Regulatory and Supervision 9.5.1 Fintech Accelerator: Bank of England (BoE) 9.5.2 Digital Payment and Lending 9.5.3 Digital Platform Financing 9.5.4 Blockchain/Cryptocurrency 9.5.5 InsurTech Business Model

127 127 128 128 128 129 129 130 130 131 132

10

China Banking Insurance Regulatory Commission 10.1 General 10.2 Mission and Objectives 10.3 Main Responsibilities 10.4 Organizational Structure 10.5 Fintech Regulatory and Supervision 10.5.1 Digital Payments and Lending 10.5.2 Digital Financing Platform 10.5.3 Cryptocurrency 10.5.4 InsurTech 10.6 Financial Statements 10.6.1 Income Statement 10.6.2 Balance Sheet 10.6.3 Statement of Cash Flows

133 133 133 134 136 137 138 139 139 139 140 140 140 141

11

The Reserve Bank of India 11.1 General 11.2 Mission and Objectives 11.3 Organizational Structure 11.4 Funding 11.5 Fintech Regulatory and Supervision 11.5.1 The Sandbox Approach

145 145 146 146 147 148 148

xvi

CONTENTS

11.6

11.5.2 Digital Payments and Lending 11.5.3 Digital Financing Platform 11.5.4 Cryptocurrency 11.5.5 InsurTech Financial Statements 11.6.1 The Balance Sheet 11.6.2 The Statement of Income 11.6.3 The Statement of Cash Flows

148 148 149 149 150 150 151 151

12

The Bank of “South” Korea 12.1 General 12.2 Objectives and Missions 12.3 Organizational Structure 12.4 Fintech Regulations 12.4.1 The Sandbox Approach 12.4.2 Mobile Payments/Digital Payments 12.4.3 Digital Financial Platform 12.4.4 Robot-Advisor 12.4.5 Cryptocurrency 12.4.6 InsurTech 12.5 Financial Statements 12.5.1 The Balance Sheet 12.5.2 Statement of Income 12.5.3 Statement of Changes in Equity 12.5.4 Statement of Appreciation of Earned Surplus

153 153 153 154 155 155 156 156 156 157 158 158 158 158 160 161

13

Indonesia Bank 13.1 General 13.2 Objectives and Missions 13.3 Organizational Structure 13.4 Fintech Regulation 13.4.1 Sandbox Approach 13.4.2 Digital Payments 13.4.3 Digital Financial Platform 13.4.4 Cryptocurrency 13.4.5 Insurtech 13.5 Financial Statements 13.5.1 Statement of Financial Position 13.5.2 Statement of Profit & Loss 13.5.3 Statement of Cash Flows

163 163 163 165 166 167 167 168 168 169 169 169 169 169

CONTENTS

xvii

14

Bank 14.1 14.2 14.3 14.4 14.5

of Canada General Bank of Canada Mission and Objectives Bank of Canada- Organizational Structure Bank of Canada Funding Fintech Regulatory and Supervision 14.5.1 The Sandbox Approach 14.5.2 Digital Payments 14.5.3 Crowdfunding 14.5.4 Cryptocurrency 14.5.5 Robot-Advice 14.5.6 InsurTech 14.6 Bank of Canada: Financial Statements 14.6.1 The Balance Sheet 14.6.2 The Statement of income

175 175 175 177 180 180 181 181 182 183 183 184 184 184 184

15

The Australian Prudential Regulation Authority 15.1 General 15.2 Mission and Objectives 15.3 Organizational Structure 15.3.1 Committees 15.3.2 Audit Committee 15.4 Funding 15.5 Financial Digital Information Supervision 15.6 Fintech Regulatory and Supervision 15.6.1 Sandbox Approach 15.6.2 Digital Payments and Lending 15.6.3 Digital Financing Platform 15.6.4 Cryptocurrency 15.6.5 InsurTech 15.7 Financial Statements 15.7.1 Statement of Financial Position 15.7.2 Statement of Income 15.7.2.1 APRA’s Income 15.7.2.2 Reserves 15.7.3 Statement of Changes in Equity 15.7.4 Statement of Cash Flows

187 187 188 188 188 188 189 189 191 192 192 193 193 193 194 194 195 195 196 197 198

xviii

16

17

CONTENTS

The Swiss National Bank 16.1 General 16.2 SNB Mission and Objectives 16.3 SNB Organizational Structure 16.3.1 The Bank Council 16.3.2 The Governing Board 16.3.3 Departments 16.3.4 The Secretariat General 16.3.5 The Internal Auditors 16.4 SNB Funding 16.5 Financial Digital Information Supervision 16.6 Fintech Regulatory and Supervision 16.6.1 Sandbox Approach 16.6.2 Mobile Payment 16.6.3 Money Transfer 16.6.4 Distributed Ledger Technology 16.6.5 InsurTech 16.6.6 Robot-Advice (Online Wealth Management) 16.7 SNB Financial Statements 16.7.1 The Balance Sheet 16.7.2 Income Statement and Appropriation of Profit

199 199 199 200 200 200 200 201 201 201 201 202 205 205 206 206 207 207 208 208

The Central Bank of Russia 17.1 General 17.2 Mission and Objectives 17.3 Organizational Structure 17.4 Funding 17.5 Fintech Regulatory and Supervision 17.5.1 Sandbox Approach 17.5.2 Digital payments and lending 17.5.3 Digital Platform Financing 17.5.4 Blockchain/ cryptocurrency 17.5.5 InsurTech 17.6 Financial Statements 17.6.1 The Balance sheet 17.6.2 The Statement of income 17.6.3 Statement of Capital, Funds, and Profit Allocation

211 211 212 212 214 214 214 215 216 218 218 219 219 219

209

219

CONTENTS

xix

18

Brazil Central Bank 18.1 General 18.2 Mission and Objectives 18.3 Organizational Structure 18.4 Funding 18.5 Fintech Regulatory and Supervision 18.5.1 Sandbox Approach 18.5.2 Digital Payment and Lending 18.5.3 Digital Platform Financing 18.5.4 Cryptocurrency 18.5.5 InsurTech 18.6 Financial Statements 18.6.1 The Balance Sheet 18.6.2 The Statement of Income 18.6.3 The Statement of Change in Equity 18.6.4 Statements of Cash Flows

223 223 223 224 224 226 226 227 228 228 228 229 229 229 229 229

19

Central Bank of Argentina 19.1 General 19.2 Missions and Objectives 19.3 Organizational Structure and Governance 19.3.1 The Governor 19.3.2 The Deputy Governor 19.3.3 The Board of Directors 19.3.4 The Comptroller 19.4 FinTech Regulations 19.4.1 Sandbox Approach 19.4.2 Mobile Payments 19.4.3 Payment Service Providers and Payment Accounts Definitions 19.4.4 Crowdfunding 19.4.5 Cryptocurrency 19.4.6 InsurTech 19.5 Financial Statements 19.5.1 The Balance Sheet 19.5.2 Statement of Income 19.5.3 Statement of Change in Equity 19.5.4 Statement of Cash Flows

233 233 233 234 234 234 234 236 236 236 237 237 239 239 239 239 239 240 243 244

xx

CONTENTS

20

Central Bank of Mexico 20.1 General 20.2 Missions and Objectives 20.3 Organizational Structure and Governance 20.3.1 Governing Board 20.3.2 The Board of Directors 20.3.3 The Audit Committee 20.4 Fintech Regulations 20.4.1 Mexico Sandbox Approach 20.4.2 Lending 20.4.3 Crowdfunding 20.4.4 Cryptocurrency 20.4.5 InsurTech 20.5 Financial Statements 20.5.1 Balance Sheet 20.5.2 Statement of Income 20.5.3 Statement of Changes in Equity

245 245 245 246 246 247 247 247 248 249 249 250 251 251 251 251 251

21

The Saudi Arabia Monetary Authority 21.1 General 21.2 Mission and Objectives 21.3 Organizational Structure 21.4 Fintech Regulatory and Supervision 21.4.1 The Sandbox Approach 21.4.2 Digital Payment and Lending 21.4.3 Digital Platform Financing 21.4.4 Cryptocurrency 21.4.5 InsurTech 21.5 Financial Statements 21.5.1 Statement of Financial Position 21.5.2 Statement of Revenues and Expenses

255 255 255 256 256 258 258 259 259 260 260 260 261

22

The Central Bank of Turkey 22.1 General 22.2 Missions and Objectives 22.3 Organization Governance 22.3.1 The Governor 22.3.2 The Board 22.3.3 The Monetary Policy Committee 22.3.4 The Executive Committee

267 267 268 268 268 269 270 271

CONTENTS

22.4 22.5

22.6

22.3.5 The General Assembly 22.3.6 The Auditing Committee The CBRT Ownership and Funding Fintech Regulation and Supervision 22.5.1 The Sandbox Approach 22.5.2 Digital Payment 22.5.3 Digital Lending 22.5.4 Blockchain and Cryptocurrency 22.5.5 Robot-Advice 22.5.6 InsurTech Financial Statements 22.6.1 Balance Sheet as of December 2020 22.6.2 Profit and Loss Statement

xxi

272 272 274 274 275 275 276 277 278 278 278 278 278

23

The South African Reserve Bank (SARB) 23.1 General 23.2 Mission and Objectives 23.3 Organizational Structure 23.4 Funding 23.5 Fintech Regulatory and Supervision 23.5.1 The Sandbag Approach 23.5.2 Digital Payment and Lending 23.5.3 Digital Platform Financing 23.5.4 Robot-Advice 23.5.5 Cryptocurrency 23.5.6 InsurTech 23.6 Financial Statements 23.6.1 The Statement of Financial Position 23.6.2 Statement of Profit and Loss 23.6.3 Statement of Cash Flows 23.6.4 Statement of Change in Equity

283 283 284 284 284 285 286 286 287 287 288 288 288 289 289 289 289

24

Sandbox and Innovation Test Bed Case Study 24.1 General 24.2 Regulatory Sandbox and an Incubator 24.3 Examples of Sandbox Throughout the G-20 24.3.1 Sandboxes in the United States 24.3.2 Sandboxes in the European Union 24.3.3 Sandbox in the United Kingdom 24.3.4 Sandboxes in Asian-Pacific region

295 295 296 297 297 299 301 302

xxii

CONTENTS

24.4 24.5

24.3.5 Sandboxes in Latin America Cross-Border Sandbox Coordination Global Financial Innovation network—The Global Sandbox

303 304 304

Glossary of Terms

307

Bibliography

313

Index

319

Acronyms

ACPR AMF AML AML/CFT ASBA BCBS BIS BoE BSA BSA/AML CAGR CBDC CHF CRD CSBS DFA DLT EBA EBI ECB EDPS EFSF ESFS ETF EU

Autorité de Contrôle Prudentiel et de Résolution (France) Autorité des Marches Financiers (France) Anti-Money Laundering Anti-Money Laundering and Countering the Financing of Terrorism Association of Supervisors of Banks of the Americas Basel Committee on Banking Supervision Bank for International Settlements Bank of England Bank Secrecy Act Bank Secrecy Act/Anti-Money Laundering Compound Annual Growth Rate Central Bank Digital Currency Swiss Francs Central Registration Depository Conference of State Bank Supervisors Dodd-Frank Act Distributed Ledger Technology European Banking Authority European Banking Institute European Central Bank European Data Protection Supervisor European Financial Stability Facility European System of Financial Supervision Electronic Funds Transfer European Union xxiii

xxiv

ACRONYMS

FDIC FinCEN FinTech FSB G-SIBs ICO IEDOM IMF IOSCO KYC NCB OCC OMB PSD RM SEC SRM TD TFEU UK USD

Federal Deposit Insurance Corporation Financial Crimes Enforcement Network Financial Technology Financial Stability Board Global Systemically Important Banks Initial Coin Offering Institut d’émission des départements d’outre-mer (France) International Monetary Fund International Organization of Securities Commissioners Know Your Customer National Central Bank Office of the Comptroller of the Currency Office of Management and Budget Payment Services Directive Regulated Market Securities and Exchange Commission Single Resolution Mechanism EU Transparency Directive (2004/109/EC) Treaty on the Functioning of the European Union United Kingdom U.S. Dollar

List of Figures

Fig. 1.1

Transaction volumes of the 4 Fintech activities (BIS, 2019). Note Transaction volumes for each activity were calculated as follows. Fintech balance sheet lending is the sum of balance sheet business lending and balance sheet consumer lending; loan crowdfunding is the sum of peer-to-peer (i) business lending, (ii) consumer lending and (iii) property lending (a loan secured against a property to a consumer/business borrower); equity crowdfunding is the sum of seven crowdfunding activities: (i) equity-based, (ii) revenue/profit-sharing (eg securities, and sharing in the royalties of the business), (iii) debt-based (eg bonds or debentures at a fixed interest rate); (iv) invoice trading (eg invoices/receivable notes at a discount); (v) real estate (eg equity/subordinated-debt financing for real state); (vi) mini-bonds (eg unsecured retail bond) and (vii) community shares Source FSI staff calculations based on CCAF (2020). Donation- and reward-based crowdfunding were excluded. Data are based on regional reports by the Cambridge Centre for Alternative Finance (CCAF) and its research partners. The CCAF surveys active platforms in each region and cross-checks transaction volumes through direct contact, secondary data sources and web-scraping methods. Pleas note that the numbers might not add up due to rounding

13

xxv

xxvi

LIST OF FIGURES

Fig. 1.2

Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig.

1.3 2.1 2.2 3.1 3.2 3.3 3.4 3.5 3.6 3.7 4.1 5.1

Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig.

5.2 5.3 5.4 6.1 6.2 6.3 7.1 7.2 7.3 8.1

Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig.

8.2 8.3 9.1 10.1 10.2 10.3 10.4 10.5 11.1 11.2 11.3

Implication of Fintech development for banks (BCBS, 2018) (Source BCBS, Implications of FinTech developments for banks and bank supervisors, sound practices, February 2018) Top ten most attractive locations for jobs in finance Global Economy Meeting Governing Body FAFT Secretary MMLA participation OCC departments & offices CFTC chart organization OCC balance sheet OCC statement of net cost OCC statement of changes in net position OCC statement of custodial activity EBA organizational structure Deutsche Bundesbank—Regional offices and branches (Source https://www.bundesbank.de/resource/blob/ 618334/4c085c3da67a7e5055169dd8739347c5/mL/ organisationsplan-der-zentrale-data.pdf) DB regional offices and branches DB balance sheet DB profit and loss account Banque de France—organizational structure BDF balance sheet BDF profit and loss account Banca d’Italia—organization chart Banca d’Italia—Balance sheet Banca d’Italia—profit and loss Banco de Espana—organization chart (Source https:// www.bde.es/f/webbde/INF/MenuHorizontal/SobreE lBanco/organiza/ficheros/en/Organigramas_i.pdf) Banco de Espana—balance sheet Banco de Espana—profit and loss PRA—organization chart CBRC organizational chart CBRC consolidated statement of profit and loss CBRC comprehensive statement of profit and loss CBRC balance sheet CBRC statement of cash flows RBI organization chart RBI—balance sheet RBI—statement of income

16 20 39 42 45 49 54 65 66 68 69 76

83 84 90 92 95 101 102 105 111 113

117 124 126 128 137 141 142 143 144 147 150 151

LIST OF FIGURES

Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig.

11.4 12.1 12.2 12.3 12.4 12.5 12.6 13.1 13.2 13.3 13.4 14.1

Fig. 14.2 Fig. 14.3 Fig. 15.1 Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig.

15.2 15.3 15.4 15.5 16.1 16.2 16.3 17.1

Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig.

17.2 17.3 17.4 18.1 18.2 18.3 18.4 18.5 19.1

Fig. Fig. Fig. Fig. Fig.

19.2 19.3 20.1 20.2 20.3

RBI statement of cash flows BoK–organization chart BoK–digital financial platform growth BoK–balance sheet BoK–statement of income BoK–statement of changes in equity BoK–statement of appreciation of earned surplus Bank of Indonesia- Organization chart Bank of Indonesia- Statement of financial position Bank of Indonesia- Statement of income Bank of Indonesia- Statement of cash flows Bank of Canada- Organization chart (https://www.ban kofcanada.ca/wp-content/uploads/2010/07/organizat ional_chart_january2023_high_level.pdf) Bank of Canada- Balance sheet Bank of Canada- Statement of income APRA- Organization chart (Source https://www.apra. gov.au/apras-organisation-structure) Statement of financial position Statement of income Statement of changes in equity Statement of cash flows SNB—Balance sheet Statement of profit & loss Statement of appropriation of profit CBR—Organizational chart (Source https://www.cbr.ru/ Content/Document/File/105256/scheme_eng.pdf) CBR—Balance sheet CBR—Statement of income CBR—Statement of capital, funds, and profit allocation Organizational chart Balance sheet Statement of income Statement of changes in equity Statement of cash flows BCRA—Organizational chart (Source https://www.bcra. gob.ar/Pdfs/Institucional/ORG_BCRA_i.pdf) Balance sheet Statement of income Banxico—organization chart Banco do Mexico—Balance Sheet Banco do Mexico—Statement of income

xxvii 152 155 157 159 161 162 162 165 170 172 173

178 185 185 190 194 195 197 198 208 210 210 213 220 221 222 225 230 231 232 232 235 240 242 246 252 253

xxviii

LIST OF FIGURES

Fig. 20.4 Fig. 21.1 Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig. Fig.

21.2 21.3 22.1 22.2 22.3 23.1 23.2 23.3 23.4 23.5 24.1

Fig. 24.2 Fig. 24.3

Statement of changes in equity SAMA—organization chart (Source https://www.sama. gov.sa/en-us/about/pages/organizationstructure.aspx) Statement of financial position Statement of revenues and expenses CBTurkey- Organization Chart Balance Sheet Statement of profit and Loss SARB—Organizational chart Statement of financial position Statement of profit and loss Statement of cash flows Statement of changes in equity Sandboxes by world bank regions (Source WBG (2020): Number of sandboxes by world bank regions) Sandboxes themes by world bank regions (Source WBG (2020): Sandbox themes by WBG region) Sandboxes innovation hubs, and Regtech Labs (Source WBG Research)

254 257 262 265 273 279 281 285 290 291 292 293 297 299 303

CHAPTER 1

Banking Regulation and Fintech Challenges

1.1

General

The term “fintech” has become a common way to describe any business that uses technology to conduct financial transactions. FinTech is often seen today as the new marriage of financial services and information technology. The term “fintech” was coined by Citigroup in the early 1990s and referred to the “Financial Services Technology Consortium,” a project initiated by Citigroup to facilitate technological cooperation efforts.1 The term FinTech is not confined to specific sectors or business models lending, but instead covers the entire scope of services and products traditionally provided by the financial services industry: banking, insurance, loans, personal finance, electronic payments, Loans, venture capital, wealth management, etc. The Fintech industry is blossoming. While the global financial sector is expected to be worth US$26.5 trillion in 2022 with a CAGR of 6%, the fintech community saw dramatic growth in 2021 with 43 new fintech unicorns now worth over US$187 billion (as of the

1 Douglas Arner, Janos Barberis, and Ross Buckley (2016): The Evolution of FinTech: A New Post-Crisis Paradigm? University of New South Wales Law Research Series, University of Hong Kong Faculty of Law Research Paper No. 2015/047; UNSW Law Research Paper No. 2016-62.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_1

1

2

F. I. LESSAMBO

first half of 2019). That is slightly over 1% of the global financial industry.2 FinTech has the potential to fundamentally transform the financial landscape, provide consumers with a greater variety of financial products at competitive prices, and help financial institutions become more efficient. The rapid and transformational changes brought on by FinTech need to be monitored and evaluated so that regulators and society can keep up with the underlying technological and entrepreneurial flux. For a sustainable business ecosystem, FinTechs need to bridge the digital divide and promote equitable and broad-based customer participation. The financial system relies on trust—losing sight of risks to the stability and integrity of the financial system could jeopardize that trust. FinTech is generally described as an industry that uses technology to make financial systems and the delivery of financial services more efficient. It “technologically enabled financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and institutions and the provision of financial services.”3 The World Bank and the IMF use the term “fintech” to describe “advances in technology that have the potential to transform the provision of financial services spurring the development of new business models, applications, processes, and products.4 ”

1.2

Evolution of Fintech

The history and evolution of fintech are much broader and more inclusive than that. In fact, fintech can be traced all the way back to—not the Internet, not the 2008 financial crisis—but to the 1850s, shortly before the Civil War. The term only gained traction in the twenty-first century, but in reality, it has driven how people interact with their money for well over a century. The most wave of fintech can be traced back to the late nineteenth century when money could be moved around by telegrams and Morse code—though this probably would not get many 2 David Jarvis (2021): Four FinTech Trends to Watch in 2022 and Beyond, FinTech

Futures-North American Edition. 3 EBI (2021): Fintech Regulation and the Licensing Principle, https://ebi-europa.eu/ events/fintech-regulation-and-the-licensing-principle/. 4 Indermit Gill (2021): Global Regulatory Database to Help Policymakers Unlock Fintech’s Potential, World Bank Blog, https://blogs.worldbank.org/psd/global-regula tory-database-help-policymakers-unlock-fintechs-potential.

1

BANKING REGULATION AND FINTECH CHALLENGES

3

investors excited today. That journey started several decades before one could download an app on a phone and make a transaction with the push of a button. According to a paper by Arneris, Barberis, and Ross,5 fintech can be split into a number of different eras. Each of these three (and a half…) eras saw a distinct level of differentiation in the market that led to changes in the way consumers interacted with their money. 1.2.1

Fintech 1.0 (1886–1967)

The first period of fintech 1.0 began when the early financial globalization happened. This first wave involved the building of the infrastructure that supported globalized financial services. The first transatlantic cable (1866) and Fedwire (1918) in the United States enabled the first electronic fund transfer system using technologies such as telegraph and Morse code.6 During that period, the financial sector has adopted traditional analog technologies such as the telegraph, railroads, canals, and steamships, which underpinned financial interlinkages across borders, allowing rapid transmission of financial information, transactions, and payments across the world.7 In the 1950s, the first credit card was created, and thus, the foundation for the modern-day, non-cash payment system was born. Diner’s Club was the first to introduce them in the 1950s and American Express followed suit in 1958 thus establishing a new era of financial services.8

5 Ross Buckley, Douglas W. Arner, and Janos N. Barberis (2016): The Evolution of Fintech: A New Post-Crisis Paradigm? University of New South Wales Law Research Series, file:///C:/Users/NBPLCO~1/AppData/Local/Temp/SSRN-id3044280.pdf. 6 Kukuh Setiawan, Nadia Maulisa (2019): The Evolution of Fintech: A Regulatory Approach Perspective, Atlantis Press, Advances in Economics, Business and Management Research, volume 130, 1–8. 7 Kukuh Setiawan, Nadia Maulisa (2019): The Evolution of Fintech: A Regulatory Approach Perspective, Atlantis Press, Advances in Economics, Business and Management Research, volume 130, 1–8. 8 Ross Buckley, Douglas W. Arner, and Janos N. Barberis (2016): The Evolution of Fintech: A New Post-Crisis Paradigm? University of New South Wales Law Research Series.

4

F. I. LESSAMBO

1.2.2

Fintech 2.0 (1967–2008): Digitalization

The invention of the Barclays ATM Machine in 1967 was believed to mark the commencement of the second era of the digitalization period in the financial sector.9 The 1970s saw the establishment of NASDAQ, the world’s first digital stock exchange and SWIFT (Society for Worldwide Interbank Financial Telecommunication), a communication protocol between financial institutions facilitating the large volume of cross-border payments. Further innovations included the first generation of Automated Clearing Houses in the United Kingdom and the formation of the Society for Worldwide Interbank Financial Telecommunication (SWIFT) as a global financial messaging network in 1973. The era continued through the 1980s with the rise of bank mainframe computers and the growth of online banking. In 1995, Wells Fargo launched the first-ever Internet banking experience for financial customers, followed with the emergence of the first branchless banks such as ING Direct and HSBC Direct launched in the UK financial market scheme in 2005.10 The 2008 financial crisis put a break upon financial innovations experienced during this era. 1.2.3

Fintech 3.0 and 3.5 (2008–Current): The Start-Ups Era

Post-financial crisis, lack of trust in banks aligned with regulatory change opens up the market to new providers. Over the years, various big tech companies, telecommunication providers, and financial start-ups across the world launched their version of digital wallets (i.e., China Alipay in 2004, Philippines G-Wallet in 2004, and Kenya M Pesa in 2005). In the lending industry, the formation of ZOPA as the UK first peer-topeer lending (P2P lending) platform in 2005 marks the beginning of P2P lending disruption. Peer-to-peer (P2P) networks directly connect computer users online. P2P lending platforms differ dramatically in type

9 Kukuh Setiawan, Nadia Maulisa (2019): The Evolution of Fintech: A Regulatory Approach Perspective, Atlantis Press, Advances in Economics, Business and Management Research, volume 130, 1–8. 10 Kukuh Setiawan, Nadia Maulisa (2019): The Evolution of Fintech: A Regulatory Approach Perspective, Atlantis Press, And Advances in Economics, Business and Management Research, volume 130, 1–8.

1

BANKING REGULATION AND FINTECH CHALLENGES

5

and approach. Some connect borrowers and lenders directly; others connect them via a third-party intermediary.11 Bitcoin was born in 2009 followed by other cryptocurrencies using blockchain technology. Smartphone adoption means that mobile devices become the primary means by which people access the web and other financial services. It has become the era of the start-up, with an appetite for innovation among investors and consumers driving a wave of new products and services.12 On the other hand, the emergence of various FinTech start-ups in the developing markets (Asia, Africa, and South America) has been primarily prompted by the pursuit to achieve economic driven goals and was the last mover advantage that occurs after the transition. To achieve their economic goals established, banks in the developed world are starting to provide digitized services and products and brand themselves like start-ups. Through the new technologies, they are offering digital banking products using open banking that allows third-party companies access to financial data, digital platform financing. Fintech 3.5 signals a move away from the Western-dominated financial world and acknowledges the advances that are being made in digital banking around the world.

1.3

Advantages and Disadvantages of FinTech 1.3.1

Advantages

1.3.1.1 Efficiency Enhancement Fintech innovation has introduced competition and increased inclusion, particularly in emerging markets and developing economies.13 FinTechs have played a key role in making the financial sector more

11 Ian Galloway (209/2010): Peer-to-Peer Lending and Community Development Finance, Federal Reserve Bank of San Francisco, Winter 2009/2010 Volume 21, Issue 3, 18–39. 12 Ross Buckley, Douglas W. Arner, and Janos N. Barberis (2016): The Evolution of Fintech: A New Post-Crisis Paradigm? University of New South Wales Law Research Series. 13 Erik Feyen, Jon Frost, Leonardo Gambacorta, Harish Natarajan, and Matthew Saal (2021): Fintech and the Digital Transformation of Financial Services: Implications for Market Structure and Public Policy, BIS Papers, No. 117, https://www.bis.org/publ/ bppdf/bispap117.htm.

6

F. I. LESSAMBO

efficient.14 In the United States, FinTech lenders enhanced ease of borrowing by processing mortgages 15–30% quicker than other lenders with no evidence of higher (conditional) default rates.15 Some also claim that fintech start-up enterprises improve the efficiency of the financial system.16 1.3.1.2 Financial Inclusion Proponents of FinTech argue that the advances made by FinTech firms and entrepreneurs create more choice and options, ultimately resulting in more accessible financial markets for ordinary consumers—not just top income earners.17 Moreover, the technology and data that FinTech uses make it easier to distribute information, advise, and offer more basic aspects of financial services including banking, investing, borrowing, and saving to larger populations.18 By overcoming market failures such as information asymmetry or high transaction costs, FinTechs help enhance financial inclusion. In a survey of retail borrowers on a large Chinese platform, more than half reported that they had no prior borrowing history from a financial institution.19 Big data and machine learning techniques may even help reduce human biases against discriminated groups.20 1.3.1.3 Decentralization Diversified financial markets can contribute to reducing liquidity constraints compared to the situation with institutionally more concentrated markets therefore reducing solvency and liquidity risks. Decentralization may also affect operational risks thus if properly secured those

14 Thomas Philippon (2020): On Fintech and Financial Inclusion, BIS Working Papers No 841, 1–19, https://www.bis.org/publ/work841.pdf. 15 A. Fuster, M. Plosser, P. Schnabl, and J. Vickery (2019): The Role of Technology

in Mortgage Lending. The Review of Financial Studies, 32(5), 1854–1899. 16 V.A. Vlasov (2017): The Evolution of E-Money. European Research Studies Journal, 20(1), 215–224. 17 Center Forward (2018): FinTech and Its Role in the Future of Financial Services. 18 Idem. 19 L. Deer, J. Mi, and Y. Yuxin (2015): The Rise of Peer-to-Peer Lending in China: An Overview and Survey Case Study. Association of Chartered Certified Accountants. 20 R. Bartlett, A. Morse, R. Stanton, and N. Wallace (2018): Consumer-Lending Discrimination in the Era of FinTech” Working paper, 1–51, https://faculty.haas.berkeley. edu/morse/research/papers/discrim.pdf.

1

BANKING REGULATION AND FINTECH CHALLENGES

7

systems could be more resilient to cyber risks compared to centralized systems, especially in terms of recordkeeping and service availability.21 1.3.1.4 Transparency The increasing weight of transparency supported by new technologies has expanded the amount of information central banks produce and communicate.22 It is expected that RegTech1 could provide improved transparency between market participants and regulators, drive standardization, and continue delivering value to shareholders. As one fintech industry pundit puts it: “Transparency is important for comparative shopping between fintech players and for business legitimacy. It shows we are stepping up and maturing as an industry.”23 1.3.1.5 Reduced Credit Risks By providing more choice of credit sources, proliferation of FinTechs could lower the risks an economy faces if credit provisioning is dominated by a few banks. FinTechs focused on credit could be beneficial for commercial banks as some of them rely on FinTech platforms’ credit assessment processes.24 1.3.2

Disadvantages

For financial institutions, these may include data privacy, cyber security, and third-party dependency and concentration risks. In addition, there are significant challenges that institutions face regarding the explainability of predictive models used in money laundering and artificial intelligence applications related to issues of bias, ethics, and fairness. Moreover, FinTech can undermine financial stability through micro-financial and

21 Milena Vuˇcini´c (2020): Fintech and Financial Stability Potential Influence of FinTech on Financial Stability, Risks and Benefits. Journal of Central Banking Theory and Practice, 2, 57. 22 Lehtimäki and Palmu (2019): Central Bank Communication and Monetary Policy

Predictability Under Uncertain Economic Conditions. Journal of Central Banking Theory and Practice, Central bank of Montenegro, 8(2), 5–32. 23 Sheedy, C. (2019): Fintech Goes Mainstream and Transparent. CA Today. https:// www.icas.com/news/fintech-goes-mainstream-and-transparent. 24 S. Claessens, J. Frost, G. Turner, and F. Zhu (2018): FinTech Credit Markets Across the World: Size, Drivers and Policy Issues. BIS Quarterly Review, September.

8

F. I. LESSAMBO

macro-financial channels. Therefore, FinTech could create micro- and macro-financial risks to financial stability. 1.3.2.1 Concentration The fintech sector is evolving rapidly, and certain companies are becoming more concentrated in some areas of financial services and certain geographies. The underlying economics of intermediation combined with new technology may lead to concentration among both traditional and new financial services providers. Monopolistic or anti-competitive behaviors by big technology platforms are already being scrutinized. As financial services move toward similar technology-driven configurations, regulators are grappling with questions of how best to regulate and supervise a landscape that is increasingly characterized by new players and business models, and to address potential challenges to financial stability, financial integrity, fair competition, and consumer protection (including data privacy). 1.3.2.2 Risks to Financial Stability Financial technology can influence financial stability by changing the market structure in financial services.25 Financial regulation aims to address market failures and prevent potential risks from materializing by addressing the vulnerabilities and imperfections in the financial system. However, Fintech companies that provide core banking functions (i.e., credit, liquidity, and maturity transformation) can enhance financial stability to the extent that these activities might diversify credit and liquidity risk within the financial system. Conversely, given their short track record and relative lack of banking experience, new entrants could also create systemic vulnerabilities, especially in an economic downturn or during periods of market stress. Fintech can pose risks to consumers and investors and, more broadly, to financial stability and integrity (IMF and World Bank [2018]). The Financial Stability Board (FSB) has not found evidence of fintech innovations having an adverse systemic impact on the financial system. Nonetheless, the disintermediation of financial services through fintech exposes people who are not financially literate to a lot of risk. Finally yet importantly, the entry of BigTech firms to the financial 25 Milena Vuˇcini´c (2020): Fintech and Financial Stability Potential Influence of FinTech on Financial Stability, Risks and Benefits. Journal of Central Banking Theory and Practice, 2, 49.

1

BANKING REGULATION AND FINTECH CHALLENGES

9

systems introduces new risks. BigTech firms have potential to emerge very quickly in payment systems as systemically important financial institutions therefore becoming significant from the perspective of financial stability26 BigTech can affect financial stability in three ways: (1) even if their isolated financial activities might not be systemic, they could but cumulatively generate significant financial risk, especially because these could be scaledup very rapidly, (2) risks could be magnified by their interlinkages with regulated financial entities, such as partnerships to originate and distribute financial products, and (3) they could generate risks as they carry out a systemically important activity ancillary to financial services, such as cloud services.27 1.3.2.3 Macro-Financial Risks Financial innovations could have potential to over time produce macrofinancial risks therefore endangering stability of the entire financial system. The extent to which financial innovation could have an impact and become a source of financial risk depends on the type of innovation and its potential to evolve over time. Macro-financial risks are unsustainable credit growth, pro-cyclicality, and incentives for great risk taking, contagion, and systemic importance.28 1.3.2.4 Micro-Financial Risks Micro-financial risks refer to those coming from single firms or sectors that are vulnerable to shocks. Those shocks could have a potential to trigger the situation, which can cause systemic impacts to the financial system. Micro-financial risks occur from financial and operational sources. 1.3.2.5 Managerial Risks Some have argued that most FinTech start-ups are quite small with small management teams who lack capacity, fewer financial resources that

26 Milena Vuˇcini´c (2020): Fintech and Financial Stability Potential Influence of FinTech on Financial Stability, Risks and Benefits. Journal of Central Banking Theory and Practice, 2, 51. 27 Tobias Adrian (2021): BigTech in Financial Services, IMF, https://www.imf.org/ en/News/Articles/2021/06/16/sp061721-bigtech-in-financial-services. 28 Milena Vuˇcini´c (2020): Fintech and Financial Stability Potential Influence of FinTech on Financial Stability, Risks and Benefits. Journal of Central Banking Theory and Practice, 2, 43–66.

10

F. I. LESSAMBO

prevent appropriate scaling, limited credit and start-up experience, lack of a developed business model, inability to attract analytics and personnel talent, and limited compliance knowledge. Moreover, a huge part of the world’s community does not have access to digital technologies upon which Fintech thrives. That is, Fintech goes hand in hand with the progress of digital technologies such as broadband Internet, data stations, smartphones, mobile wireless access, and other advanced current bases. Finally, the regulations around fintech in the world are not perfect, and there is the possibility that some of these may be some potential fraud in the absence of regulation.29

1.4

Fintech Activities

Fintech activities can include regulatory tech, lending, payments, saving, investing, insurance, robot-advice, accounting, risk management, claims processing, and underwriting. Globally, financial technology is projected to reach a market value of $305 billion by 2025, according to Market Data Forecast. That growth is fueled by rapid consumer adoption and by businesses—particularly small and medium-sized enterprises—turning to fintech for banking and payments, financial management, financing, and insurance.30 1.4.1

Digital Payment and Lending

The digital payment market is a $3trillion industry, corresponding to 13% of total commerce, and will more than double by 2022, informs the McKinsey report Global payments 2018.31 Recent advances in technology have opened up new ways to pay, in line with consumers’ demand

29 Edgar Mondragón Tenorio (2021): Advantages and Disadvantages of Fintech Companies, BBVA, https://www.bbva.ch/en/news/advantages-and-disadvantages-of-fin tech-companies/. 30 Tobias Adrian (2021): BigTech in Financial Services, IMF, https://www.imf.org/ en/News/Articles/2021/06/16/sp061721-bigtech-in-financial-services. 31 McKinsey Global Payment Report (2018): A Dynamic Industry Continues to Break New Ground, https://www.mckinsey.com/~/media/mckinsey/industries/financial%20s ervices/our%20insights/global%20payments%20expansive%20growth%20targeted%20oppo rtunities/global-payments-map-2018.ashx.

1

BANKING REGULATION AND FINTECH CHALLENGES

11

for payment methods that are convenient, easy to use, frictionless, lowcost, and contactless. A digital payment (aka electronic payment) is the transfer of value from one payment account to another using a digital device such as a mobile phone, POS (Point of Sales) or computer, and a digital channel of communications such as mobile wireless data or SWIFT. There are two types of system: overlay and stand-alone systems. The overlay systems use existing payment instruments (e.g., traditional credit or debit cards stored in a digital wallet) and payment infrastructure to process, clear, and settle payments. Conversely, the stand-alone systems are “closed-loop” payment systems that do not depend on existing payment infrastructure.32 Electronic payment allows customers to make cashless payments for goods and services through card, mobile phones, or the Internet; it presents several advantages, including cost and time savings and reduced transaction costs. For users, digital payments provide many benefits to both senders and recipients of the transaction. Their ability to reduce time and associated expenses to collect payments goes beyond the mere convenience of the operation. In the case of governments, digital payments reduce leakage and incidents of ghost recipients, and they improve the traceability of the payment process.33 1.4.2

Digital Platform Financing

Fintech platform financing (FPF) refers to those fintech activities that are facilitated by electronic platforms and provide a mechanism for intermediating funding over the Internet.34 Two types of fintech must be distinguished: (i) fintech balance sheet (FBS) lending and (ii) crowdfunding. Fintech balance sheet lending refers to electronic platforms that use their own balance sheet in the ordinary course of business to intermediate borrowers and lenders over the Internet. Crowdfunding involves

32 Johannes Ehrentraud, Jermy Prenio, Codruta Boar, Mathilde Janfils and Aidan Lawson (2021): Fintech and Payments: Regulating Digital Payment Services and e-Money, BIS, https://www.bis.org/fsi/publ/insights33.htm. 33 Romina Bandura, and Sundar Ramanujam (2021): Developing Inclusive Digital Payment Systems, Center for Strategic and International Studies, https://www.csis.org/ analysis/developing-inclusive-digital-payment-systems. 34 Johannes Ehrentraud, Denise Garcia Ocampo, and Camila Quevedo Vega (2020): Regulating Fintech Financing: Digital Banks and Fintech Platforms, BIS, 1–39, https:// www.bis.org/fsi/publ/insights27.pdf.

12

F. I. LESSAMBO

bypassing traditional financial intermediaries and using online web-based platforms to connect users of funds with retail funders. There are two types of crowdfunding: loan crowdfunding and investment crowdfunding. Loan-type crowdfunding involves crowdfunding business operators who intermediate between users and parties seeking funds, and such operators must obtain registration as money lending businesses. The business operators typically solicit funds for loans from the public in the form of investments in fund vehicles and lend such funds to fund users. Investment crowdfunding is a way to source money for a company by asking a large number of backers to each invest a relatively small amount in it. In return, backers receive equity shares of the company. Investment-type crowdfunding is divided into investments in (i) more highly liquid securities, such as stocks and share options, and (ii) other securities, such as equity interests in funds. FBS lenders use their own balance sheet to lend and keep loans to maturity or sell them on to investors. In many jurisdictions, FBS lending is subject to existing regulations for non-bank lenders. In the United States, for instance, non-bank lenders are required to comply with state laws regulating money lending in each state they offer their services. That is, unless they partner with a chartered bank, they are often required to obtain a license in every state in which they lend. Likewise, in the EU, alternative investment fund managers (AIFMs) that use investment funds to carry on lending activities are subject to authorization requirements under the Alternative Investment Fund Managers Directive (AIFMD) and must meet certain requirements. In most jurisdictions, crowdfunding platforms need to be licensed or registered before they can perform crowdfunding activities and satisfy certain conditions. In the United States, all regulated crowdfunding transactions must take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal. To invest, a potential investor must open an account with a crowdfunding intermediary—a brokerdealer or funding portal. All written communications relating to that crowdfunding investment must be electronically delivered. The US Securities and Exchange Commission (SEC) regulates which investors and issuers can participate and how portal operators should conduct business and adhere to reporting requirements (Fig. 1.1).

1

BANKING REGULATION AND FINTECH CHALLENGES

13

Fig. 1.1 Transaction volumes of the 4 Fintech activities (BIS, 2019). Note Transaction volumes for each activity were calculated as follows. Fintech balance sheet lending is the sum of balance sheet business lending and balance sheet consumer lending; loan crowdfunding is the sum of peer-to-peer (i) business lending, (ii) consumer lending and (iii) property lending (a loan secured against a property to a consumer/business borrower); equity crowdfunding is the sum of seven crowdfunding activities: (i) equity-based, (ii) revenue/profit-sharing (eg securities, and sharing in the royalties of the business), (iii) debt-based (eg bonds or debentures at a fixed interest rate); (iv) invoice trading (eg invoices/receivable notes at a discount); (v) real estate (eg equity/subordinated-debt financing for real state); (vi) mini-bonds (eg unsecured retail bond) and (vii) community shares Source FSI staff calculations based on CCAF (2020). Donation- and rewardbased crowdfunding were excluded. Data are based on regional reports by the Cambridge Centre for Alternative Finance (CCAF) and its research partners. The CCAF surveys active platforms in each region and cross-checks transaction volumes through direct contact, secondary data sources and web-scraping methods. Pleas note that the numbers might not add up due to rounding

1.4.3

Robot-Advice

The utilization of robot-advisors in fintech is not a new phenomenon. At the core of a robot-adviser’s business model is an algorithm that translates a client’s information into actionable advice. Wealth managers have been using robot-advisors behind the scenes to gain additional information before offering their final recommendation to clients.35 Robot-advisors (also spelled robot-adviser or robot advisor) are digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. Robot-advisors in fintech can 35 Naveen Joshi (2021): Seven Applications of Robo-Advisors in Fintech, BBNTimes.com, https://www.bbntimes.com/technology/7-applications-of-robo-adv isors-in-fintech.

14

F. I. LESSAMBO

estimate and predict how the portfolio balance of a customer would look like if the customer invests according to its strategies. For this purpose, robot-advisors analyze investment strategies and potential risks to understand their impact on personal finances in the future. The industry has experienced explosive growth as a result; client assets managed by robotadvisors nearly $1 trillion in 2020, with the expectation of reaching $2.9 trillion worldwide by 2025. The main advantage of robot-advisors is that they are low-cost alternatives to traditional advisors. Moreover, they are easily accessible and are available 24/7 as long as the user has an Internet connection. Robot-advisers are typically classified as providers of financial advice under securities regulation and need to be authorized by the securities regulator, irrespective of whether the advice is provided digitally, face to face, or a mix of both.36 1.4.4

InsurTech Business Model

The insurance industry has undergone tremendous changes due to technological innovations in the industry. InsurTech companies (e.g., P2P insurers) have a digital technology-led operating model. They engage with the market on digital platforms; engage in real-time policy engagement, claim management, and rewards redemption; and engage in risk-sharing models with their policyholder communities.37 InsurTech is having a both disruptive and transformative effect on the retail and commercial parts of the insurance industry. It is leading to radical change in product development, distribution, modeling, underwriting, and claims and administration practices. Thousands of enterprises involved in online insurance have been reportedly established each of the last several years. The 2021 World InsurTech Research report also suggests that traditional insurers, going forward, will own only the sources of competitive advantages such as underwriting, product development, and claims. The rest of the value chain will increasingly depend on trusted InsurTechs and 36 Johannes Ehrentraud, Jermy Prenio, Codruta Boar, Mathilde Janfils, and Aidan Lawson (2021): Fintech and Payments: Regulating Digital Payment Services and e-Money, BIS, https://www.bis.org/fsi/publ/insights33.htm. 37 Andrew J. Moodley (2019): Digital Transformation in South Africa’s Short-Term Insurance Sector: Traditional Insurers’ Responses to the Internet of Things (IoT) and Insurtech. The African Journal of Information and Communication (AJIC), 24, 9.

1

BANKING REGULATION AND FINTECH CHALLENGES

15

BigTechs.38 InsurTech is short for technology-led insurance start-ups. It is a subset of the larger fintech sector, at the intersection of insurance and technology, where companies focus on manufacturing, distributing, and aggregating insurance policies. Now, one can buy insurance cover using mobile apps. Many jurisdictions consider that existing regulations adequately cover the underlying risks of these innovative products. 1.4.5

Crypto Assets

Digital currencies have moved from the periphery of the finance world to the mainstream over the past few years, leading to deeper scrutiny worldwide to prevent providers operating unfettered.39 At a high level, blockchain technology utilizes well-known computer science mechanisms and cryptographic primitives mixed with recordkeeping concepts.40 The technology became widely known in 2009 with the launch of the Bitcoin network, the first of many modern cryptocurrencies. In Bitcoin, and similar systems, the transfer of digital information that represents electronic cash takes place in a distributed system. Blockchain technology has enabled the development of many cryptocurrency systems (i.e., Bitcoin and Ethereum). Therefore, blockchain technology is viewed as bound to Bitcoin or possibly cryptocurrency solutions in general.41 While crypto assets such as Bitcoin fail to qualify as a payment instrument due to their high volatility, the role of stablecoins as a new payment method may potentially increase over time. In advanced economies, they are also often classified as collective investment schemes (CIS), as securities other than CIS and deposits, and in emerging markets, as payment instruments. In June 2019, the G20 mandated the FSB to examine regulatory issues raised by “global stablecoin” arrangements (GSCs) and to advice

38 Sheersh Kapoor (2021): The Rise of InsurTechs in India—No More the New Kid in Town, Economic Times, https://bfsi.economictimes.indiatimes.com/news/insurance/ the-rise-of-insurtechs-in-india-no-more-the-new-kid-in-town/86416353. 39 Bloomberg (2021): New Cryptocurrency Rules to be Introduced in South Africa in 2022. 40 Dylan Yaga Peter Mell Nik Roby Karen Scarfone (2018): Blockchain Technology Overview, US Department of Commerce, https://nvlpubs.nist.gov/nistpubs/ir/2018/ nist.ir.8202.pdf. 41 Idem.

16

F. I. LESSAMBO

Fig. 1.2 Implication of Fintech development for banks (BCBS, 2018) (Source BCBS, Implications of FinTech developments for banks and bank supervisors, sound practices, February 2018)

on multilateral responses. The FSB developed a set of regulatory recommendations intended to promote coordinated and effective regulation, supervision, and oversight of GSC arrangements, at both the domestic and international levels. Overall, the recommendations call for regulation, supervision, and oversight that is proportionate to the risks, and stress the value of flexible, efficient, inclusive, and multi-sectoral crossborder cooperation, coordination, and information-sharing arrangements among authorities that take into account the evolving nature of GSC arrangements and the risks they may pose over time42 (Fig. 1.2).

1.5

FinTech Regulation

Regulatory authorities have responded to fintech activities in a number of ways. Most jurisdictions apply existing banking laws and regulations to digital banking. That is, applicants for a banking license with a fintech 42 Johannes Ehrentraud, Jermy Prenio, Codruta Boar, Mathilde Janfils, and Aidan Lawson (2021): Fintech and Payments: Regulating Digital Payment Services and e-Money, BIS, https://www.bis.org/fsi/publ/insights33.htm.

1

BANKING REGULATION AND FINTECH CHALLENGES

17

business model need to pass through the same licensing process and face the same regulatory requirements as applicants with a traditional business model. Some have put in place fintech-specific licensing regimes that require entities to go through an authorization process before they can offer their fintech services. This category includes cases where regulatory instruments such as laws, regulations, or guidelines were issued or amended to regulate fintech activities or otherwise include fintech-specific elements.43 Others have issued requirements that are fintech-specific, modify existing ones, or even prohibit certain activities. Others have taken the path of explaining how the existing regulatory framework is applied to fintech business models and clarify their supervisory expectations.44 Many fintech products today are covered by existing regulation under the principle of “same activity, same treatment.” Nevertheless, fintech-specific regulation has been developed in some cases.45 For instance, in the case of digital banking, some data show that most jurisdictions apply existing banking laws and regulations to banks within their remit, regardless of the technology they adopt or the presence (or absence) of branches. However, certain jurisdictions—such as Hong Kong, Singapore, and the Philippines—have separate license arrangements for digital-only banks. Others, such as the UK and Australia, chose a middle ground—one that involves transitional arrangements and restricted licensing in the initial phase.46 In assessing whether their regulatory framework is adequate or needs to be adjusted, financial authorities will need to weigh multiple elements. Some jurisdictions have adopted the use of innovation facilitators, such as “sandboxes,” to support the fintech sector and help them analyze market trends. But whatever path they take, authorities will need to balance the potential benefits for society—faster financial development and greater inclusion—against the potential risks to financial stability and market integrity and to the welfare of consumers and investors.47 43 Erik Feyen, Jon Frost, Leonardo Gambacorta, Harish Natarajan, and Matthew Saal (2021): Fintech and the Digital Transformation of Financial Services: Implications for Market Structure and Public Policy, BIS, p. 11. 44 Erik Feyen, Jon Frost, Leonardo Gambacorta, Harish Natarajan, and Matthew Saal (2021): Fintech and the Digital Transformation of Financial Services: Implications for Market Structure and Public Policy, BIS, p. 2. 45 Idem. 46 Idem. 47 Idem.

18

F. I. LESSAMBO

Fintechs can be viewed as double-edged swords. Despite various benefits, these innovations can sometimes magnify existing threats to consumers such as likelihood of privacy breaches and cybersecurity risks, leaving behind digitally illiterate and unconnected consumers. Thus, while the role of regulation is undisputed for the financial system as such, it assumes greater importance for innovations such as FinTechs. Some fintechs have chosen a regulated status as part of their evolving product strategies. For example, alternative finance platforms initially focused on matching supply and demand of capital, avoiding the regulatory burden of intermediation. However, in the process of re-bundling, some fintechs have sought full banking licenses. In particular, lending platforms have faced challenges to fund their operations in wholesale markets or using a pure P2P funding model. As a result, they have become more reliant on incumbents for funding or have sought their own banking licenses. For example, Grab and SoFi have sought banking licenses; while GoJek and MoneyTap collaborate with banks (the latter also has a non-bank financial company license). Other fintechs prefer to avoid a higher regulatory burden by expanding across borders to reach scale with their existing product offering.48 A central bank’s interest in FinTech is not confined to its impact on the financial sector per se, but rather its implications for financial stability and monetary policy. The regulatory environment, like the roots that provide life to a tree, provides a solid foundation for FinTech activities. A survey-based study under the aegis of the Bank for International Settlements (BIS) summarizes the responses of regulators across the world to rapidly emerging FinTech.49 While most surveyed jurisdictions did not have a dedicated regulatory regime for FinTech lending, many had it in place for digital payments and crowdfunding. For insurance, existing regulations were broadly considered sufficient. Warnings and clarifications were the most common regulatory responses to crypto assets, but a few respondent jurisdictions also reported emergence of crypto-specific licenses. With regard to enabling technologies, most regulators tweaked existing guidelines to include tech-specific elements. 48 Erik Feyen, Jon Frost, Leonardo Gambacorta, Harish Natarajan, and Matthew Saal (2021): Fintech and the Digital Transformation of Financial Services: Implications for Market Structure and Public Policy, BIS, p. 22. 49 J. Ehrentraud, D. Ocampo, L. Garzoni, and M. Piccolo, M. (2020): Policy Responses to FinTech: A Cross Country Overview, BIS, https://www.bis.org/fsi/publ/insights23_s ummary.pdf.

1

BANKING REGULATION AND FINTECH CHALLENGES

19

Regulators have been particularly active on application programming interfaces (APIs), cloud computing, and biometric identification. With many FinTechs leveraging cloud computing, it is becoming systemically important to the financial system. It is possible that going forward some future software could end up being exclusively available on cloud platforms. In such cases, central banks may have to opt for in-house cloud development or collaborate with various service providers. For instance, the US Federal Reserve has visited Amazon’s cloud facilities for on-site inspections, while the European Banking Authority has published guidelines for cloud outsourcing.50 However, for artificial intelligence, machine learning, and DLT, regulatory action has been limited to risk assessments and issuance of general guidance. Some fintechs have chosen a regulated status as part of their evolving product strategies. For example, alternative finance platforms initially focused on matching supply and demand of capital, avoiding the regulatory burden of intermediation. However, in the process of re-bundling, some fintechs have sought full banking licenses. In particular, lending platforms have faced challenges to fund their operations in wholesale markets or using a pure P2P funding model. As a result, they have become more reliant on incumbents for funding or have sought their own banking licenses. For example, Grab and SoFi have sought banking licenses; while GoJek and MoneyTap collaborate with banks, the latter also has a nonbank financial company license. Other fintechs prefer to avoid a higher regulatory burden by expanding across borders to reach scale with their existing product offerings (Fig. 1.3).

1.6

The Bali Fintech Paper 1.6.1

The Bali Agenda

The Agenda outlines high-level issues for consideration by individual country members of the IMF and World Bank as they seek to develop their policy responses. It provides a framework to support the Sustainable Development Goals, particularly in low-income countries, where

50 EBA (2019): EBA Publishes Revised Guidelines on Outsourcing Arrangements, https://www.eba.europa.eu/eba-publishes-revised-guidelines-on-outsourcing-arrang ements.

20

F. I. LESSAMBO

Fig. 1.3 Top ten most attractive locations for jobs in finance

access to financial services is low.51 The Agenda offers a framework for the consideration of high-level issues by individual member countries, including in their own domestic policy discussions. It has been prepared to highlight the opportunities and potential risks of fintech and has benefited from the work by international standard setting boards and national authorities. It recommends member countries to strike the right balance between enabling financial innovation on the one hand and addressing

51 IMF (2018): The Bali Fintech Agenda: A Blueprint for Successfully Harnessing Fintech’s Opportunities, https://www.imf.org/en/News/Articles/2018/10/ 11/pr18388-the-bali-fintech-agenda.

1

BANKING REGULATION AND FINTECH CHALLENGES

21

challenges to market and financial integrity, consumer protection, and financial stability on the other52 : 1.6.2

The 12 Elements Under the Bali Agenda

The Bali Agenda brings together key considerations for policymakers and the international community into the 12 elements, which apply to both conventional and Islamic financial instruments and products. While it does not represent the work programs of the IMF or the World Bank, nor does it aim to provide specific guidance or policy advice, it is intended as a framework to support awareness, further learning, and ongoing work.53 1.6.2.1 Embrace the Promise of Fintech Governments need to explore fintech from the perspective of increasing financial inclusion for underserved populations, deepening financial markets, and improving the efficiency of financial service provision. Fintech offers wide-ranging opportunities to improve cross-border payments systems, help financial institutions to streamline their business processes, and improve access to financial services. Governments need to consider a cross-agency approach, bringing together relevant ministries and agencies (such as central banks and financial regulators, telecommunication authorities, competition authorities, consumer protection agencies, financial intelligence units, and internal revenue agencies) in the conception and development of Fintech policies and objectives. 1.6.2.2

Enable New Technologies to Enhance Financial Service Provision Governments need to consider a range of actions to develop open and affordable digital and financial infrastructures, and a conducive policy environment for fintech such as (i) encourage the development of financial infrastructures, such as those for credit reporting and cross-border payments that have fair, transparent, and risk-based access and usage 52 IMF (2018): The Bali Fintech Agenda: A Blueprint for Successfully Harnessing Fintech’s Opportunities, https://www.imf.org/en/Publications/Policy-Papers/Issues/ 2018/10/11/pp101118-bali-fintech-agenda. 53 IMF (2018): The Bali Fintech Agenda: A Blueprint for Successfully Harnessing Fintech’s Opportunities, https://www.imf.org/en/News/Articles/2018/10/ 11/pr18388-the-bali-fintech-agenda.

22

F. I. LESSAMBO

criteria; (ii) facilitate the development of telecommunications, broadband, and mobile data services; (iii) promote digitization across the government and more broadly the entire economy, and enable financial sector’s fair access to relevant data. 1.6.2.3

Reinforce Competition and Commitment to Open, Free, and Contestable Markets Governments need to reinforce fair competition and commit to open, free, and contestable markets to ensure a level playing field and to promote innovation, consumer choice, and access to quality financial services. That is so, as Fintech is eroding the boundaries among financial products, services, and markets and inducing a shift in the composition of the industry and the competitive landscape. 1.6.2.4

Foster Fintech to Promote Financial Inclusion and Develop Financial Markets Governments need to consider Fintech as critical to overcoming longstanding barriers to financial inclusion and to providing an opportunity for developing countries to leapfrog straight to digital approaches. Moreover, they must foster partnerships and promote knowledge sharing and knowledge-exchange among public- and private-sector players, civil society, and other key stakeholders in the fintech ecosystem. 1.6.2.5

Monitor Developments Closely to Deepen Understanding of Evolving Financial Systems Member countries need to create new avenues and forums for dialogue and experience sharing, with both incumbent firms and entrants in the fintech industry. To that end, data gathering and surveillance must be aimed at supporting public-policy goals relating to fair and orderly markets, financial inclusion, and the promotion of competition as well as to financial stability risk, consumer and investor protection, and financial integrity. Such an exchange would facilitate global monitoring of financial stability risks and broader public-policy objectives, such as financial integrity.

1

BANKING REGULATION AND FINTECH CHALLENGES

23

1.6.2.6

Adapt Regulatory Framework and Supervisory Practices for Orderly Development and Stability of the Financial System Authorities need to ensure that the knowledge, skills, and tools of staff remain relevant and effective to supervise innovative business models. That could entail additional training as well as the recruitment of additional specialized staff to complement existing expertise. Moreover, authorities need to conduct a review of the adequacy of the regulatory framework and perimeter whenever necessary. In general, authorities are informed by performing assessments of financial stability risks, misconduct, and operational resilience. 1.6.2.7 Safeguard the Integrity of Financial Systems Some fintech applications pose new threats to financial integrity. The potential risks vary greatly from one product to another, but crypto assets are typically deemed to present a higher potential of misuse for ML/TF, fraud, tax evasion, and other illicit activities. Their decentralized nature and global reach, as well as the absence of a regulated intermediary in many transactions, raise difficult questions about whom to regulate. Their varying degrees of anonymity or “pseudo-anonymity” can significantly impede regulatory action. The increased complexity of transaction models could further constrain the authorities’ ability to identify the real beneficial owners of assets and potential criminal activity. In other words, authorities would need to consider developing institutional capacity and ensuring adequate communication with fintech providers. 1.6.2.8

Modernize Legal Frameworks to Provide an Enabling Legal Landscape As existing legal frameworks can become inadequately equipped to manage new risks arising from greater reliance on highly complex technologies, such as automated processes and decentralized protocols, and activities that increasingly blur jurisdictional borders, governments would need to examine the suitability of existing laws that govern ownership of data7 and insolvency and bankruptcy. Such modernization would involve building on the specific features of the country’s legal framework, as well as the industry and social practices facilitated by fintech.

24

F. I. LESSAMBO

1.6.2.9

Ensure the Stability of Domestic Monetary and Financial Systems Policymakers need to think through the impact of specific fintech innovations and, whenever necessary, adapt operational frameworks of monetary policy to ensure effective transmission. Fintech activities could lead to a decentralization and shift of activities outside the perimeter of the traditional banking sector. Although such shifts are not a new phenomenon, the speed and intensity with which these developments take place raise issues for central banks, financial supervisors, and other agencies to consider—including any potential need for adjustments to their legislative and regulatory frameworks may be needed. 1.6.2.10

Develop Robust Financial and Data Infrastructure to Sustain Fintech Benefits Strong standards of operational resilience help market participants and infrastructures to withstand and rapidly recover from disruptions, thus supporting confidence in the continuity of services and preserving the “safety and soundness” and the integrity of the financial system. Moreover, robust standards are needed to achieve a minimum level of cyber resilience across the entire financial services supply chain to maintain the safety and soundness of the financial system and integrity of data. Finally yet importantly, robust data governance frameworks are essential to sustain the trust and confidence of users and to deliver the benefits of fintech. Important components of such frameworks include: (i) clarity of data ownership; (ii) safeguards to protect data confidentiality, availability, and integrity, while encouraging appropriate regulatory information sharing; (iii) privacy considerations; and (iv) the ethical use of data. 1.6.2.11

Encourage International Cooperation and Information Sharing The heterogeneity across the international community can provide rooms for activity migration toward more lightly regulated jurisdictions in a “race to the bottom” that would undermine the regulatory efforts at the national level. Therefore, greater harmonization between national regulatory frameworks would help level the playing field and facilitate the adoption of innovative technologies in financial services on a global scale.

1

BANKING REGULATION AND FINTECH CHALLENGES

25

Also, member countries can support international collaboration, leveraging their membership in international financial institutions, inter alia, by: I. Sharing views and experiences with each other and with the private sector on fintech developments and country responses using international fora as conduits. Building experience and capacity, and contributing to influence the global agenda, and II. Monitoring global market developments and emerging issues and risks, including opportunities and challenges to financial development and inclusion, and disruptions to market structures and to business models of existing financial service providers, to ensure the adequacy of the regulatory environment. 1.6.2.12

Enhance Collective Surveillance of the International Monetary and Financial System Fintech services could potentially amplify interconnectedness, spillovers, and capital-flow volatility; alter the relative attractiveness of currencies; and reduce the effectiveness of capital-flow measures. Nonetheless, fintech innovations—including the growing use of crypto assets—may also increase the complexity of assessing the drivers of capital flows, diminish the effectiveness of purely domestic policy responses, and hence increase the value of cross-border cooperation of policies to mitigate the riskiness of capital flows.

1.7

Fintech Future

As FinTech becomes more mainstream and commercialized, it continues to attract greater regulatory scrutiny from a number of different federal and state regulators. In a recent white paper, the US Treasury Department recommended regulatory changes to protect consumers and businesses looking to obtain loans through FinTech, noting that neither the Consumer Financial Protection Bureau (CFPB) nor the existing banking regulatory agencies have jurisdiction that currently applies to the FinTech sector. In addition to Treasury and the CFPB, other federal agencies have expressed concern over the current lack of oversight including the Internal Revenue Service (IRS), Department of Justice (DOJ), Federal Deposit Insurance Corporation (FDIC), Federal Housing

26

F. I. LESSAMBO

Finance Agency (FHFA), and the Federal Reserve Board (FRB), among others. The three cornerstones of banking: taking deposits, making loans, and facilitating payments, are being reassembled functionally and digitally outside of the bank regulatory perimeter by certain firms. Without comprehensive consolidated supervision, no single regulator can see the whole picture and understand how a firm as a whole operates and takes risk. No crypto firm as of to date is subject to comprehensive consolidated supervision, creating gaps in supervision, and risks can build out of the sight and reach of regulators.

CHAPTER 2

International Standard Setting Boards

2.1

General

Though FinTech brings some advantages, it also poses potential risks to financial stability. In order to preserve financial stability and understand how it could be affected by FinTech activities, international organizations and national bodies consider FinTech when assessing potential risks and developing regulatory frameworks.1

2.2

The Basel Committee---Overview

The Basel Committee on Banking Supervision is a committee of banking supervisory authorities, which was established by the Central Bank Governors of the G-10 countries in 1975.2 The Basel Committee on Banking Supervision (BCBS) is the primary global standard setter for the prudential regulation of banks and provides a forum for regular cooperation on banking supervisory matters. Its 45 members comprise central banks and bank supervisors from 28 jurisdictions. The BCBS does not possess 1 Milena Vuˇcini´c (2020): Fintech and Financial Stability Potential Influence of FinTech on Financial Stability, Risks and Benefits. Journal of Central Banking Theory and Practice, 2, 45. 2 https://www.bis.org/bcbs/organ_and_gov.htm.

© The Author(s), under exclusive license to Springer Nature 27 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_2

28

F. I. LESSAMBO

any formal supranational authority. Its decisions do not have legal force. Rather, the BCBS relies on its members’ commitments, as described in Section 5, to achieve its mandate. The BCBS supports the work and activities of regional groups of banking supervisors worldwide. Secretariat staff may participate in meetings of such groups to exchange ideas and seek feedback on BCBS work. 2.2.1

Mission and Objectives

Its mandate is to strengthen the regulation, supervision, and practices of banks worldwide with the purpose of enhancing financial stability. The Financial Stability Institute (FSI) is a joint initiative of the BCBS and the BIS to assist supervisors around the world in implementing sound prudential standards.3 The BCBS supports FSI activities, including in particular the BCBS-FSI High-level Meetings. These are targeted at senior policymakers within central banks and supervisory authorities and provide a series of regional fora for distributing information on BCBS standards, keeping participants updated on Committee work, sharing supervisory practices and concerns, and establishing and maintaining strong contacts. 2.2.2

Activities

The BCBS seeks to achieve its mandate through the following activities4 : a. exchanging information on developments in the banking sector and financial markets, to help identify current or emerging risks for the global financial system; b. sharing supervisory issues, approaches, and techniques to promote common understanding and to improve cross-border cooperation; c. establishing and promoting global standards for the regulation and supervision of banks as well as guidelines and sound practices; d. addressing regulatory and supervisory gaps that pose risks to financial stability;

3 https://www.bis.org/bcbs/. 4 https://www.bis.org/bcbs/.

2

INTERNATIONAL STANDARD SETTING BOARDS

29

e. monitoring the implementation of BCBS standards in member countries and beyond with the purpose of ensuring their timely, consistent, and effective implementation and contributing to a “level playing field” among internationally active banks; f. consulting with central banks and bank supervisory authorities which are not members of the BCBS to benefit from their input into the BCBS policy formulation process and to promote the implementation of BCBS standards, guidelines, and sound practices beyond BCBS member countries; and g. coordinating and cooperating with other financial sector standard setters and international bodies, particularly those involved in promoting financial stability. 2.2.3

Organizational Structure

The internal organizational structure of the BCBS comprises: a. The Committee The Committee is the ultimate decision-making body of the BCBS with responsibility for ensuring that its mandate is achieved. The Committee is responsible for: – developing, guiding, and monitoring the BCBS work program within the general direction provided by the Group of Governors and Heads of Supervision (GHOS); – establishing and promoting BCBS standards, guidelines, and sound practices; – establishing and disbanding groups, working groups, virtual networks, and task forces; approving and modifying their mandates; and monitoring their progress; – recommending to the GHOS amendments to the BCBS Charter; and – deciding on the organizational regulations governing its activities. The Committee generally meets three times every year. However, the Chair can decide to hold additional or fewer meetings as necessary. The Chair presides over Committee meetings. All BCBS members and

30

F. I. LESSAMBO

observers are entitled to appoint one representative to attend Committee meetings. BCBS representatives should be senior officials of their organizations and should have the authority to commit their institutions. Representation at Committee meetings is expected to be, for example, at the level of head of banking supervision, head of banking policy/regulation, central bank deputy governor, and head of financial stability department or equivalent. Decisions by the Committee are taken by consensus among its members. Committee decisions of public interest shall be communicated through the BCBS website. The Committee shall issue, when appropriate, press statements to communicate its decisions. b. Groups, working groups, virtual networks, and task forces BCBS groups report directly to the Committee. They are composed of senior staff from BCBS members that guide or undertake major areas of Committee work. BCBS groups form part of the permanent internal structure of the BCBS and thus operate without a specific deliverable or end date. Working groups consist of experts from BCBS members that support the technical work of BCBS groups. Virtual networks serve as an expert group that are called upon as needed by the parent group or the Committee. The primary function of virtual networks is to monitor existing policies. Task forces are created to undertake specific tasks for a limited time. These are generally composed of technical experts from BCBS member institutions. However, when the Committee creates these groupings, they consist of BCBS representatives and deal with specific issues that require prompt attention of the Committee. In such cases, they are called high-level task forces. c. The Chair The Chair directs the work of the Committee in accordance with the BCBS mandate. The Chair is appointed by the GHOS for a term of three years that can be renewed once. The Chair’s main responsibilities are to: • convene and chair Committee meetings. If the Chair is unable to attend a Committee meeting, he or she can designate the Secretary General to chair the meeting on his/her behalf;

2

INTERNATIONAL STANDARD SETTING BOARDS

31

• monitor the progress of the BCBS work program and provide operational guidance between meetings to carry forward the decisions and directions of the Committee; • report to the GHOS when appropriate; and • represent the BCBS externally and be the principal spokesperson for the BCBS. • The Secretariat The Secretariat is provided by the Bank for International Settlements (BIS) and supports the work of the Committee, the Chair, and the groups around which the Committee organizes its work. The Secretariat is composed mainly of professional staff, mostly on temporary secondment from BCBS members. The Secretariat’s main responsibilities are to: • provide support and assistance to the Committee, the Chair, groups, working groups, virtual networks, and task forces; • ensure timely and effective information flow to all BCBS members; • facilitate coordination across groups, working groups, virtual networks, and task forces; • facilitate a close contact between BCBS members and non-member authorities; • support the cooperation between the BCBS and other institutions; • maintain the BCBS records, administer the BCBS website, and deal with correspondence of the BCBS; and • carry out all other functions that are assigned by the Committee and the Chair. The Secretary General reports to the Chair and directs the work of the Secretariat. The Secretary General manages the financial, material, and human resources allocated to the Secretariat. He/she also assists the Chair in representing the Committee externally. The Secretary General is selected by the Chair on recommendation of a selection panel comprising BCBS and/or GHOS members and a senior representative of the BIS. The term of appointment is typically three years with the potential to be extended. Deputy Secretaries General report to and assist the Secretary General in discharging his/her duties. Deputy Secretaries General substitute for the Secretary General in case of absence, incapacity, or as requested by the Secretary General. The

32

F. I. LESSAMBO

Secretary General in conjunction with the Chair selects deputy Secretaries General. The BCBS sets standards for the prudential regulation and supervision of banks. The BCBS expects full implementation of its standards by BCBS members and their internationally active banks. However, BCBS standards constitute minimum requirements and BCBS members may decide to go beyond them. The Committee expects standards to be incorporated into local legal frameworks through each jurisdiction’s rule-making process within the pre-defined timeframe established by the Committee. If deviation from literal transposition into local legal frameworks is unavoidable, members should seek the greatest possible equivalence of standards and their outcome. In January 2013, the Basel Committee on Banking Supervision issued 14 principles for effective risk data aggregation and risk reporting and outlined the paths to compliance for globally systemically important banks (G-SIBs) and domestic systemically important banks (D-SIBs).

2.3

The Financial Stability Institute

The Bank jointly created the Financial Stability Institute (FSI) in 1998 for International Settlements and the Basel Committee on Banking Supervision. The FSI was set up after the series of crises that hit the world economy in the 1990s. Many of these started in emerging market economies, but their effects then rippled outwards to the advanced economies too.5 2.3.1

Missions

Its mandate is to assist supervisors around the world in improving and strengthening their financial systems. A major part of its mission is to support the implementation of global financial standards and sound supervisory practices. The press release announcing the FSI’s establishment put it as below:

5 Fernando Restoy (2019): The work of the Financial Stability Institute: past, present and beyond, https://www.bis.org/speeches/sp190327.htm.

2

INTERNATIONAL STANDARD SETTING BOARDS

33

The need to strengthen financial systems worldwide has led to increased demand for assistance in implementing sound policies in all areas bearing on financial system stability. To help respond to these demands, and to improve the effectiveness with which training is planned, coordinated and delivered, the BIS in a joint initiative with the Basel Committee on Banking Supervision is establishing an Institute for Financial Stability.

2.3.2

Objectives

– Promote sound supervisory standards and practices globally and support full implementation of these standards in all countries. – Keep supervisors updated with the latest information on market products, practices, and techniques. – Provide a venue for policy discussion and sharing of supervisory practices and experiences. – Promote cross-sectoral and cross-border supervisory contacts and cooperation. 2.3.3

Organizational Governance

The FSI Advisory Board provides strategic advice to the FSI to help it fulfill its mandate of promoting sound supervisory standards and practices while remaining responsive to the changing needs of financial sector authorities worldwide. 2.3.4

FSI Activities

The FSI delivers on its mandate by supporting the implementation of global regulatory standards and sound supervisory practices by central banks and financial sector regulatory and supervisory authorities worldwide. The FSB is carrying out analytical and policy work to foster global financial stability in response to the pandemic as well as new and emerging risks, and to enhance the functioning of the regulatory reforms established after the 2008 global financial crisis.6

6 FSB (2021): Promoting Global Financial Stability-Annual Report, p. 10.

34

F. I. LESSAMBO

2.4 International Association of Insurance Supervisors (IAIS) Established in 1994, the IAIS is a voluntary membership organization of insurance supervisors and regulators from more than 200 jurisdictions, constituting 97% of the world’s insurance premiums. It is the international standard setting body responsible for developing and assisting in the implementation of principles, standards, and other supporting material for the supervision of the insurance sector. 2.4.1

Mission

The IAIS mission is to promote effective and globally consistent supervision of the insurance industry in order to develop and maintain fair, safe, and stable insurance markets for the benefit and protection of policyholders and to contribute to global financial stability. The IAIS also provides a forum for members to share their experiences and understanding of insurance supervision and insurance markets. The IAIS coordinates its work with other international financial policymakers and associations of supervisors or regulators, and assists in shaping financial systems globally. In particular, the IAIS is a member of the Financial Stability Board (FSB), member of the Standards Advisory Council of the International Accounting Standards Board (IASB), and partner in the Access to Insurance Initiative (A2ii). In recognition of its collective expertise, G20 leaders also routinely call upon the IAIS and other international standard setting bodies for input on insurance issues, as well as on issues related to the regulation and supervision of the global financial sector.

2.5

International Organization of Securities Commissions

The International Organization of Securities Commissions (“IOSCO”) is an association of securities regulatory organizations, which was created in 1983 and now comprises more than 180 members. The Commission was originally admitted as an Associate Member in 1991 and became a Full Member in 1997. IOSCO now embraces almost the entire world’s securities and derivatives regulatory bodies and plays an increasingly important role in assisting members to achieve and maintain high regulatory standards in the interests of investors and the prevention of crime.

2

INTERNATIONAL STANDARD SETTING BOARDS

35

Membership was originally restricted to the regulatory authorities of the European Union Member States, but has widened significantly to include, in addition to many European Union Member States, Guernsey and the other Crown Dependencies, Brazil, Canada, Hong Kong, Japan, Mexico, Norway, Switzerland, South Africa and the United States of America. IOSCO members have resolved: • to cooperate together to promote high standards of regulation in order to maintain just, efficient, and sound markets; • to exchange information on their respective experiences in order to promote the development of domestic markets; • to unite their efforts to establish standards and an effective surveillance of international securities transactions; and • to provide mutual assistance to promote the integrity of the markets by a rigorous application of the standards and by effective enforcement against offenses. 2.5.1

IOSCO Mission

IOSCO’s Mission is: – to cooperate in developing, implementing, and promoting adherence to internationally recognized and consistent standards of regulation, oversight, and enforcement in order to protect investors, maintain fair, efficient and transparent markets, and seek to address systemic risks; – to enhance investor protection and promote investor confidence in the integrity of securities markets through strengthened information exchange and cooperation in enforcement against misconduct and in supervision of markets and market intermediaries; and – to exchange information at both global and regional levels on their respective experiences in order to assist the development of markets, strengthen market infrastructure, and implement appropriate regulation.

36

F. I. LESSAMBO

2.5.2

IOSCO Governance

The IOSCO Board is composed of 18 Nominated Members which are from jurisdictions with the largest markets (based on measures of equity market capitalization, debt market issuance, assets under management, and derivatives trading), the Chair and the Vice Chair of the Growth and Emerging Markets (GEM) Committee, the Chairs of the four IOSCO Regional Committees, two Members elected by the GEM Committee from its Membership, and two Members elected by each of the four Regional Committees from their Memberships.

2.6

International Association of Deposit Insurers

IADI is a forum for deposit insurers from around the world to gather to share knowledge and expertise. It provides training and educational programs and produces research and guidance on matters related to deposit insurance. 2.6.1

Mission and Objectives

– To contribute to the enhancement of deposit insurance effectiveness by promoting guidance and international cooperation. – To contribute to the stability of financial systems by promoting international cooperation in the field of deposit insurance and providing guidance for establishing new, and enhancing existing, deposit insurance systems, and to encourage wide international contact among deposit insurers and other interested parties. In the furtherance of its objectives, IADI, in particular: – develops principles, standards, and guidance to enhance the effectiveness of deposit insurance systems—taking into account different circumstances, settings, and structures; – encourages consideration and voluntary application of its principles, standards, and guidelines; – develops methodologies for the assessment of compliance with its principles, standards, and guidelines and facilitates assessment processes;

2

INTERNATIONAL STANDARD SETTING BOARDS

37

– enhances the understanding of common interests and issues related to deposit insurance; – facilitates the sharing and exchange of expertise and information on deposit insurance issues through training, development, and educational programs and provides advice on the establishment or enhancement of effective deposit insurance systems; – undertakes research on issues relating to deposit insurance; – cooperates with other international organizations, particularly those involved in issues related to financial markets and promotion of financial growth, stability, and integrity; – creates awareness among supervisors and regulators of financial institutions concerning the key role of deposit insurance systems in maintaining financial stability; and – takes such other action as may be necessary or useful for its objectives and activities. 2.6.2

IADI Governance

IADI is governed by the Executive Council, composed of individuals elected by the members.7 Members of the Executive Council must comply with IADI’s Code of Conduct. The Executive Council is structured as a working body with broad participation encouraged by means of a committee structure that is largely self-reliant. Four Council Committees have been established by the Executive Council to provide an oversight and advisory role to the work of the Association. Much of IADI’s work is initially addressed through the Executive Council and, where appropriate, is carried out through the Council Committees, their related Subcommittees (known as Technical Committees), and the Secretariat. All members of the Executive Council serve on at least one of the Association’s four Council Committees, and perhaps Technical Committees, to which other members and associates may join. In addition, Regional Committees have been created for Africa, Asia–Pacific, the Caribbean, Eurasia, Europe, Latin America, the Middle East and North Africa, and North America, to reflect regional interests and common issues through the sharing and exchange of information and ideas.

7 https://www.iadi.org/en/about-iadi/organisation/.

38

F. I. LESSAMBO

2.7 The Committee on Payments and Market Infrastructure (CPMI) The Committee on Payments and Market Infrastructures (CPMI) is an international standard setter that promotes monitors and makes recommendations about the safety and efficiency of payment, clearing, settlement, and related arrangements, thereby supporting financial stability and the wider economy.8 The CPMI also serves as a forum for central bank cooperation in related oversight, policy, and operational matters, including the provision of central bank services.9 The CPMI does not possess any formal supranational authority. It relies on the commitment of its members to carry out its mandate. The CPMI sets standards under the expectation that they will be fully incorporated into local legal, regulatory, and policy frameworks in accordance with each jurisdiction’s rule-making process within a timeframe that may be established by the Committee.10 It also expects relevant arrangements to observe its standards. 2.7.1

Mission and Objectives

The Committee on Payments and Market Infrastructures (CPMI) promotes the safety and efficiency of payment, clearing, settlement, and related arrangements, thereby supporting financial stability and the wider economy. The CPMI monitors and analyzes developments in these arrangements, both within and across jurisdictions. It also serves as a forum for central bank cooperation in related oversight, policy, and operational matters, including the provision of central bank services. 2.7.2

Governance/Organization

The Global Economy Meeting (GEM) is the governing body of the CPMI. The CPMI reports to the GEM and, through the Economic Consultative Committee (ECC), seeks the GEM’s endorsement for major decisions. The Committee is composed of representatives of its members and meets about three times per year. CPMI members may appoint one 8 https://www.bis.org/cpmi/about/overview.htm. 9 BIS (2020): CPMI Overview, https://www.bis.org/cpmi/about/overview.htm. 10 BIS (2014): Committee on Payments and Market Infrastructures, 1–6, https://www. bis.org/cpmi/charter.pdf.

2

INTERNATIONAL STANDARD SETTING BOARDS

39

Fig. 2.1 Global Economy Meeting Governing Body

representative and one alternate to attend Committee meetings. Decisions are reached by way of consensus among members. The Committee may establish working groups to perform specifically assigned tasks or functions (Fig. 2.1).

2.8 The Financial Action Task Force on Money Laundering (FATF) In response to mounting concern over money laundering, the G-7 Summit that was held in Paris in 1989 established the Financial Action

40

F. I. LESSAMBO

Task Force on Money Laundering (FATF).11 Recognizing the threat posed to the banking system and to financial institutions, the G-7 Heads of State or Government and President of the European Commission convened the Task Force from the G-7 Member States, the European Commission, and eight other countries. The Financial Action Task Force (FATF) is an inter-governmental policymaking body whose purpose is to establish international standards, and to develop and promote policies, at both national and international levels, to combat money laundering and the financing of terrorism. The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. The FATF monitors countries to ensure they implement the FATF Standards fully and effectively, and holds countries to account that do not comply. 2.8.1

Mission and Objectives

The Task Force was given the responsibility of examining money laundering techniques and trends, reviewing the action, which had already been taken at a national or international level, and setting out the measures that still needed to be taken to combat money laundering. In April 1990, less than one year after its creation, the FATF issued a report containing a set of Forty Recommendations, which were intended to provide a comprehensive plan of action needed to fight against money laundering. In 2001, the development of standards in the fight against terrorist financing was added to the mission of the FATF. In October 2001, the FATF issued the Eight Special Recommendations to deal with the issue of terrorist financing.12 The continued evolution of money laundering techniques led the FATF to revise the FATF standards comprehensively in June 2003. In October 2004, the FATF published Nine Special Recommendations, further strengthening the agreed international standards for combating money laundering and terrorist financing—the 40 + 9 Recommendations. In February 2012, the FATF completed a thorough review of its standards and published the revised FATF Recommendations. This revision is

11 History of the FATF, https://www.fatf-gafi.org/about/historyofthefatf/#d.en.3157. 12 History of the FAFT, https://www.fatf-gafi.org/about/historyofthefatf/.

2

INTERNATIONAL STANDARD SETTING BOARDS

41

intended to strengthen global safeguards and further protect the integrity of the financial system by providing governments with stronger tools to take action against financial crime. They have been expanded to deal with new threats such as the financing of proliferation of weapons of mass destruction and to be clearer on transparency and tougher on corruption. The Nine Special Recommendations on terrorist financing have been fully integrated with the measures against money laundering. This has resulted in a stronger and clearer set of standards. The FATF has identified trade-based money laundering (TBML) as an issue for its members. According to the FATF, TBML involves the exploitation of the international trade system for the purpose of transferring value and obscuring the true origins of illicit wealth. This process is defined as disguising the proceeds of crime and moving value through trade transactions to legitimize their illicit origin and varies in complexity, but typically involves the misrepresentation of the price, quantity, or quality of imports or exports. The FATF has notably issued guidance to countries on the application of the FATF standard to “virtual currencies,” recommending that AML/CFT efforts focus on the points of intersection between the crypto asset world and the traditional financial sector—in particular, the crypto asset exchanges. 2.8.2

FAFT Secretary

The FATF Secretariat is a highly motivated, multicultural, and dedicated team of professional support staff and experts from all over the world. It brings together individuals from 15 countries, with 10 languages, and many years’ experience and expertise from law enforcement and intelligence agencies, financial intelligence units, policy advisors, and the legal profession. The Secretariat supports the substantive work of the FATF membership and global network (Fig. 2.2).

Fig. 2.2 FAFT Secretary

42 F. I. LESSAMBO

CHAPTER 3

FinTech Regulations and Supervision in the United States

3.1

General

Under the US dual banking system, banks and financial services are chartered and supervised by either a US state or the federal government. The Office of the Comptroller of the Currency (OCC), the primary federal bank regulator for national banks, announced in July 2018 that it would begin accepting special purpose national bank charter applications from fintech companies that receive deposits, paychecks, or lend money.1 Fintech companies that choose to apply for and receive this special purpose national bank charter will become subject to the laws, regulations, reporting requirements, and ongoing supervision that apply to national banks, and will also be held to the same standards of safety and soundness, fair access, and fair treatment of customers that apply to national banks.

1 OCC (2018): News Release 2018-74 | July 31, 2018, https://www.occ.gov/newsissuances/news-releases/2018/nr-occ-2018-74.html.

© The Author(s), under exclusive license to Springer Nature 43 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_3

44

F. I. LESSAMBO

3.2

Fintech Regulation and Supervision

The United States is the global financial leader, and to ensure the next generation of Americans enjoys greater opportunity, it is critical to integrate digital assets into existing law and to harness the efficiency and transparency of this asset class while addressing risk. Fintech businesses are not subject to any fintech-specific regulatory framework by any single federal or state regulator. Rather, depending on the activities performed, a fintech company may be subject to a myriad of federal and state licensing or registration requirements, and, thereby, also subject to laws and regulations at both the federal and state levels. The types of licenses that may be required at the state level include consumer lending, money transmission, and virtual currency licenses. The Conference of State Bank Supervisors (CSBS) launched an effort to coordinate licensing and supervision among state supervisors, dubbed Vision 2020. As of year-end 2020, 29 states had signed on to a multistate money services business-licensing agreement, a process designed to streamline the money transmitter licensing process. As of to date, fintech companies fall under the regulatory and supervisory authorities of several agencies (Fig. 3.1). 3.2.1

The Office of the Comptroller of the Currency

3.2.1.1 The OCC Mission and Objectives The OCC has been through many changes since it was established. Its powers were supplemented by the creation of the Federal Reserve System in 1913. The OCC played a crucial role in maintaining economic stability throughout World War I and World War II. Today, the organization plays a vital role in ensuring economic stability, recovery, and promoting responsible innovation by banks. Digital assets, including cryptocurrencies, have seen explosive growth in recent years, surpassing a $3 trillion market cap last November and up from $14 billion just five years prior. At least 16% of Americans have invested in, used, or traded cryptocurrency, according to a November study by the Pew Research Center.2 The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier,

2 Pew Research Center (2021): 16% of Americans Say They Have Ever Invested in, Traded, or Used Cryptocurrency, https://www.pewresearch.org/fact-tank/2021/11/11/ 16-of-americans-say-they-have-ever-invested-in-traded-or-used-cryptocurrency/.

3

FINTECH REGULATIONS AND SUPERVISION …

45

Fig. 3.1 MMLA participation

but also has substantial implications for consumer protection, financial stability, national security, and climate risk. On March 9, 2022, President Biden signed an executive order, which lays out a national policy for digital assets across six key priorities: consumer and investor protection; financial stability; illicit finance; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation. The Office of the Comptroller of the Currency (OCC), the primary federal bank regulator for national banks, announced in July 2018 that it would begin accepting special purpose national bank charter applications from fintech companies that receive deposits, paychecks, or lend money. Fintech companies that choose to apply for and receive this special purpose national bank charter will become subject to the laws, regulations, reporting requirements, and ongoing supervision that apply to national banks and will also be held to the same standards of safety and soundness, fair access, and fair treatment of customers that apply to national banks. The chartering of fintech companies by the OCC has

46

F. I. LESSAMBO

drawn some criticism from state regulators, among others, who argue that the regulation of such companies is better accomplished at the local level by regulators who may have a deeper knowledge of certain fintech industry participants and more tailored regulations. In fact, the charter had been on hold due in part to lawsuits from certain state regulators, which believe that an OCC charter exceeds the agency’s authority. The OCC has created an Office of Innovation in order to help provide a regulatory framework that is receptive to responsible innovation. The Office of Innovation is intended to serve as a central point of contact for requests and information relating to innovation and has been holding office hours to provide increased OCC staff access to fintech market players. The OCC has approved national banks to hold unique cryptographic keys associated with cryptocurrencies on behalf of customers and provide related custody services. The OCC has also approved national bank charter applications for Varo Bank and has accepted an application from Figure Bank for a national bank charter without deposit insurance. Finally, the OCC has recently approved crypto custodians Paxos, Anchorage, and Protego as national trust companies. Regulators with jurisdiction over fintech businesses have not shied away from issuing enforcement actions where fintech businesses are conducting activities in violation of the law. In recent years, fintech companies have been subject to enforcement actions by regulators, including the CFPB, SEC, and CFTC. Enforcement orders have been issued for, among other things, insufficient data security practices, violations of federal securities laws, including anti-fraud laws, failing to obtain requisite licenses or registrations, and unfair and deceptive practices. In July 2018, the OCC issued a Supplement to the Comptroller’s Licensing Manual to clarify how the OCC would evaluate applications for an SPNB charter from fintech companies that would engage in lending money or paying checks, but would not take deposits. While SPNBs would be subject to the same laws and regulations that apply to all federally chartered banks, irrespective of whether new delivery channels or technology is used, the OCC may tailor its standards based on a bank’s business model and activities. As such, the OCC expects fintech SPNBs to establish a contingency plan that includes options to sell, wind down or merge with a non-bank affiliate, and demonstrate an ongoing commitment to financial inclusion. While the fintech license enables more than one fintech activity, it may be of particular use for fintech companies involved in crowdfunding, e-money, or payments. An SPNB, according

3

FINTECH REGULATIONS AND SUPERVISION …

47

to OCC definition, is a national bank that engages in a limited range of banking or fiduciary activities, targets a limited customer base, incorporates non-traditional elements, or has a narrowly targeted business plan. In response, the New York Department of Financial Services (DFS) filed a lawsuit in federal court against the OCC, claiming that issuing SPNB charters to non-depository institutions exceeded the OCC’s authority under the National Bank Act. In May 2019, the US District Court for the Southern District of New York found in favor of the DFS, arguing that the National Banking Act permits the OCC to charter firms that engage in the “business of banking,” which, as used in the National Bank Act, “unambiguously requires receiving deposits as an aspect of the business” (Mayer Brown Perspectives (2019)). 3.2.1.2 OCC and National Bank Charter In December 2016, the OCC announced in a white paper (“FinTech Charter Paper”) that it would accept applications from FinTech firms for charters as special purpose national banks.3 The FinTech Charter Paper suggested that the OCC could consider applications from FinTech companies that perform any of four services: fiduciary activities, receiving deposits, paying checks, or lending money. Each of the four permissible activities is construed broadly by the OCC; for instance, the FinTech Charter Paper analogizes issuing debit cards or facilitating electronic payments to paying checks. Although national banks are required to apply for and receive deposit insurance from the FDIC and to become members of the Federal Reserve System, neither the FDIC nor the Federal Reserve Board has made any public statement, supportive, or otherwise, regarding the OCC’s proposed FinTech national bank charter. The FinTech national bank charter, as proposed in 2016, would have benefitted FinTech lenders because a national bank charter would permit the FinTech lender to preempt a number of state laws, including laws that would prevent the FinTech lender from “exporting” the usury rate from a high usury rate state to a state with a lower usury rate. However, developments since 2016 are likely to render a FinTech national bank charter less attractive, and perhaps unnecessary, for many FinTech lenders. The creation of state chartered “banks” that do not have FDIC insurance 3 OCC, Exploring Special Purpose National Bank Charters for Fintech Companies (December 2016), available athttps://www.occ.treas.gov/topics/responsible-innovation/ comments/special-purpose-national-bank-charters-for-fintech.pdf.

48

F. I. LESSAMBO

raises a number of questions about the treatment of such banks under other federal and state laws. Are such banks treated as banks for purposes of the federal securities laws, thereby enjoying exemptions from registration of their securities or registration as investment advisers with the SEC? Will other states treat such banks as banks for purposes of their state securities laws? 3.2.1.3 OCC Structure The OCC has four district offices, field and satellite offices nationwide, and an examining office in London. The staff of bank examiners conducts on-site reviews of national banks and federal savings associations or thrifts.4 They provide supervision by analyzing the institution’s loan and investment portfolios, funds management, capital, earnings, liquidity, and sensitivity to market risk. Examiners also review internal controls and compliance with applicable regulations and laws and evaluate management’s ability to identify and control risk (Fig. 3.2). On July 6, 2021, the Office of the Comptroller of the Currency (OCC) announced structural changes intended to enhance the agency’s efficiency and effectiveness.5 These changes aim to improve collaboration, alignment, and engagement within the agency. The agency is realigning its Economics, Supervision System and Analytical Support, and Systemic Risk Identification Support and Specialty Supervision units under a new Senior Deputy Comptroller for Supervision Risk and Analysis. Because of this change, agency bank supervision units (Bank Supervision Policy, Midsize and Community Bank Supervision, Large Bank Supervision, and Supervision Risk and Analysis) and the Office of Management will report directly to the head of the agency. The agency also will merge its Enterprise Risk Management Office with its Office of Enterprise Governance and Ombudsman. Senior Deputy Comptroller will take on the additional title of Chief Risk Officer overseeing that function.

4 https://www.occ.treas.gov/about/who-we-are/organizations/index-organization. html. 5 OCC (2021): OCC Announces Organizational Changes, News Release 2021-73, https://www.occ.gov/news-issuances/news-releases/2021/nr-occ-2021-73.html.

3

FINTECH REGULATIONS AND SUPERVISION …

49

Fig. 3.2 OCC departments & offices

3.2.2

The Consumer Financial Protection Bureau (CFPB)

In June 2009, President Obama proposed to address failures of consumer protection by establishing a new financial agency to focus directly on consumer protection.6 This new agency would heighten government accountability by consolidating in one-place responsibilities that had been scattered across government. In July 2010, Congress passed and President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act.7 The law—often referred to as the Dodd-Frank Act— created the Consumer Financial Protection Bureau (the CFPB). The CFPB and the federal banking regulators (i.e., the Fed, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, and National Credit Union Administration) share consumer compliance regulation over banks, with their authorities varying depending on the 6 https://www.consumerfinance.gov/data-research/research-reports/building-thecfpb/. 7 Public Law No: 111-203 (07/21/2010).

50

F. I. LESSAMBO

bank’s size.8 Part of the purpose of creating the Bureau was to increase accountability in government by consolidating consumer financial protection authorities that had existed across seven different federal agencies into one. Federal financial regulators have been outspoken regarding the vast potential for financial technology innovation and the simultaneous need to tailor the regulation of the sector to protect consumers and mitigate risk without stifling such potential for industry growth. The CFPB holds primary consumer compliance regulatory authority over larger banks with more than $10 billion in assets. Smaller “community” banks must comply with CFPB’s rules on implementing enumerated consumer laws, but the bank regulators hold primary supervisory and enforcement authority for issuing consumer compliance regulation for smaller banks.9 A single director, appointed by the President with the advice and consent of the Senate for a five-year term, heads the CFPB. As the fintech space continues to develop, fintech companies have seen an increasing desire on the part of regulators to gain an understanding of the industry from, and work with, fintech market players. At the federal level, the Consumer Financial Protection Bureau (CFPB) has jurisdiction over providers of financial services to consumers. Because many fintech businesses are aimed at providing services predominantly to consumers, the CFPB has the ability to enforce a range of consumer protection laws (such as consumer lending laws and anti-discrimination laws) that apply to the activities of such companies. The CFPB also has authority to enforce against the use of unfair and deceptive acts and practices generally. On April 25, 2022, the CFPB announced that it is invoking a largely unused legal provision to examine non-bank financial companies that pose risks to consumers. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB has authority to use traditional law enforcement to stop companies from engaging in conduct that pose risk to consumers; this can involve adversarial litigation.10 However, the law

8 Congressional Research Services (2022): Introduction to Financial Services: The Consumer Financial Protection Bureau, 1–3, https://sgp.fas.org/crs/misc/IF10031.pdf. 9 Congressional Research Services (2022): Introduction to Financial Services: The Consumer Financial Protection Bureau, 1–3, https://sgp.fas.org/crs/misc/IF10031.pdf. 10 CFPB (2022): CFPB Invokes Dormant Authority to Examine Nonbank Companies Posing Risks to Consumers, https://www.consumerfinance.gov/about-us/newsroom/ cfpb-invokes-dormant-authority-to-examine-nonbank-companies-posing-risks-to-consum ers/.

3

FINTECH REGULATIONS AND SUPERVISION …

51

also gives the CFPB authority to conduct supervisory examinations to review the books and records of regulated entities. CFPB examiners typically provide a report to entities with problems that need to be addressed, and responsible institutions typically take prompt corrective action. 3.2.3

The Securities and Exchange Commission (SEC)

To help restore confidence in the securities markets in the wake of the stock market crash of 1929, Congress passed the Securities Exchange Act of 1934, which authorized the creation of the Securities and Exchange Commission.11 Prior to the Great Crash of 1929, there was little support for federal regulation of the securities markets. This was particularly obvious during the post-World War I surge of securities activity. Tempted by promises of “rags to riches” transformations and easy credit, most investors gave little thought to the systemic risk that arose from widespread abuse of margin financing and unreliable information about the securities in which they were investing. During the 1920s, approximately 20 million shareholders took advantage of post-war prosperity and set out to make their fortunes in the stock market. It is estimated that onehalf of the $50 billion in new securities offered during this period became worthless. When the stock market crashed in October 1929, public confidence in the markets plummeted. Investors and banks lost great sums of money in the ensuing Great Depression, and restoring faith in the capital markets was essential to economic recovery. Congress held hearings to identify problems and search for solutions. Based on those hearings, Congress passed the Securities Act of 1931 (Securities Act)—the first federal law to regulate the issuance of securities—followed by the Securities Exchange Act of 1934 (Exchange Act). The SEC was established to regulate and enforce this legislation. The SEC oversees federal securities laws broadly aimed at (i) protecting investors; (ii) maintaining fair, orderly, and efficient markets; and (iii) facilitating capital formation. These laws aim to provide investors and the markets with reliable information, clear rules for honest dealing, and specifically ensure the following:

11 Congressional Research Services (2022): Introduction to Financial Services: The Securities and Exchange Commission, 1–3, https://crsreports.congress.gov/product/pdf/ IF/IF11714.

52

F. I. LESSAMBO

– A company that publicly offers securities for investment dollars is forthcoming and transparent about its business, the securities it is selling, and the risks involved with investing. – A person who sells and trades securities does so in a fair and honest manner. 3.2.3.1 Mission and Objectives Five presidentially appointed commissioners, including a chair, subject to Senate confirmation, lead the SEC. Commissioners have staggered fiveyear terms, and no more than three commissioners may belong to the same political party.12 The SEC is responsible for overseeing the nation’s securities markets and certain primary participants, including broker-dealers, investment companies, investment advisers, clearing agencies, transfer agents, credit rating agencies, and securities exchanges, as well as organizations such as the Financial Industry Regulatory Authority, Municipal Securities Rulemaking Board, and the Public Company Accounting Oversight Board. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 20103 (Dodd-Frank Act), the agency’s jurisdiction was expanded to include certain participants in the derivatives markets, private fund advisers, and municipal advisors.13 In 2018, the SEC established within the Division of Corporation Finance, an agency (FinHub) to encourage responsible innovation in the financial sector, including in evolving areas such as distributed ledger technology and digital assets, automated investment advice, digital marketplace financing, and artificial intelligence and machine learning. On December. 3, 2020, the SEC announced that its Strategic Hub for Innovation and Financial Technology has become a stand-alone office.14 The Strategic Hub for Innovation and Financial Technology (FinHub) coordinates the agency’s oversight and response regarding emerging technologies in financial, regulatory, and supervisory systems, including in the areas of distributed ledger technology (e.g., digital assets), automated investment advice, 12 Five presidentially appointed commissioners, including a chair, subject to Senate confirmation, lead the SEC. Commissioners have staggered five-year terms, and no more than three commissioners may belong to the same political party. 13 https://www.sec.gov/about/reports/sec-fy2014-agency-mission-information.pdf. 14 SEC (2020): FinHub Specialized Unit to Become Stand-Alone Office, https://www.

sec.gov/news/press-release/2020-303.

3

FINTECH REGULATIONS AND SUPERVISION …

53

digital marketplace financing, and artificial intelligence/machine learning. Through internal and external engagement, FinHub helps shape the SEC’s approach to technological advancements in the financial industry. FinHub is comprised of “delegates” from divisions and offices across the agency, who serve as internal and external subject matter experts for financial technology (FinTech) matters. FinHub utilizes and augments existing institutional expertise concerning leading-edge technologies and innovation, which foreshadow the future direction of the financial industry.15 3.2.4

The Commodity and Futures Trading Commission (CFTC)

The Commodity Futures Trading Commission (CFTC) was created in 1974 through enactment of the Commodity Futures Trading Commission Act to regulate commodities futures and options markets, which at the time were poised to expand beyond their traditional base in agricultural commodities to encompass contracts based on financial variables, such as interest rates and stock indexes.16 Over the years, the futures industry has become increasingly varied and complex. The Commodity Exchange Act (CEA) regulates the trading of commodity futures in the United States. Passed in 1936, it has been amended several times since then. The CEA establishes the statutory framework under which the CFTC operates. Under this Act, the CFTC has authority to establish regulations that are published in title 17 of the Code of Federal Regulations. 3.2.4.1 Mission and Objectives The CFTC’s mission is to prevent excessive speculation, manipulation of commodity prices, and fraud. The agency administers the Commodity Exchange Act (CEA), which was passed in 1936. To that end, the CFTC promotes the integrity, resilience, and vibrancy of the US derivatives

15 SEC (2020): Strategic Hub for Innovation and Financial Technology (FinHub), https://www.sec.gov/finhub. 16 Congressional Research Service (2013): The Commodity Futures Trading Commission: Background and Current Issues, 1–22, https://crsreports.congress.gov/product/ pdf/R/R43117/3.

54

F. I. LESSAMBO

Fig. 3.3 CFTC chart organization

markets through sound regulation. Since 2018, the CFTC entered in agreement with foreign regulators for sharing Fintech information.17 3.2.4.2 Organizational Chart The CFTC organization consists of the offices of the Chairman and Commissioners as well as the agency’s 13 operating divisions and offices.18 The Chairman leads the CFTC organization in his or her capacity as the agency’s Chief Executive. The CFTC’s Executive Leadership Team consists of the heads of each operating division and office, the agency’s Chief of Staff/Chief Operating Officer, and the CFTC Chairman in his or her capacity as the agency’s Chief Executive. These individuals are responsible for carrying out the CFTC’s administrative, regulatory, and enforcement agenda as directed by the Chairman (Fig. 3.3). 3.2.5

US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN)

Treasury Order Number 105-08 established the Financial Crimes Enforcement Network (FinCEN) in April 1990.19 FinCEN was made a Treasury bureau by the USA PATRIOT Act of October 2001. It is one of Treasury’s primary agencies to oversee and implement policies to prevent 17 Fintech Foundry (2018): CFTC and ASIC Agree to FinTech Information Sharing Arrangement, https://fintech.shearman.com/fintech-blog?categoryid=1588. 18 https://www.cftc.gov/About/CFTCOrganization/index.htm. 19 https://www.fincen.gov/.

3

FINTECH REGULATIONS AND SUPERVISION …

55

and detect money laundering. This is accomplished in two ways. First, FinCEN works in partnership with the financial community to deter and detect money laundering. FinCEN uses counter-money laundering laws, such as the Bank Secrecy Act (BSA), to require reporting and recordkeeping by banks and other financial institutions. This recordkeeping preserves a financial trail for investigators to follow as they track criminals and their assets. The Act also requires reporting suspicious currency transactions, which could trigger investigations. Second, FinCEN provides intelligence and analytical support to law enforcement and works to maximize information sharing among law enforcement agencies. FinCEN’s work is concentrated on combining information reported under the BSA with other government and public information. This information is then disclosed to FinCEN’s customers in the law enforcement community. These reports help them build investigations and plan new strategies to combat money laundering. The mission of the Financial Crimes Enforcement Network is to safeguard the financial system from illicit use, combat money laundering and its related crimes including terrorism, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence. Congress has given FinCEN certain duties and responsibilities for the central collection, analysis, and dissemination of data reported under FinCEN’s regulations and other related data in support of government and financial industry partners at the federal, state, local, and international levels. FinCEN exercises regulatory functions primarily under the Currency and Financial Transactions Reporting Act of 1970, as amended by Title III of the USA PATRIOT Act of 2001 and other legislation, which legislative framework is commonly referred to as the “Bank Secrecy Act” (BSA). The BSA is the nation’s first and most comprehensive federal anti-money laundering and counter-terrorism financing (AML/CFT) statute. In brief, the BSA authorizes the Secretary of the Treasury to issue regulations requiring banks and other financial institutions to take a number of precautions against financial crime, including the establishment of AML programs and the filing of reports that have been determined to have a high degree of usefulness in criminal, tax, and regulatory investigations and proceedings, and certain intelligence and counter-terrorism matters. The Secretary of the Treasury has delegated to the Director of FinCEN the authority to implement, administer, and enforce compliance with the BSA and associated regulations.

56

F. I. LESSAMBO

3.2.5.1 FinCen Activities The basic concept underlying FinCEN’s core activities is “follow the money.” The primary motive of criminals is financial gain, and they leave financial trails as they try to launder the proceeds of crimes or attempt to spend their ill-gotten profits. FinCEN collaborates with law enforcement at all levels of government and supports the nation’s foreign policy and national security objectives. Law enforcement agencies successfully use similar techniques, including searching information collected by FinCEN from the financial industry, to investigate and hold accountable a broad range of criminals, including perpetrators of fraud, tax evaders, and narcotics traffickers. More recently, the techniques used to follow money trails also have been applied to investigating and disrupting terrorist groups, which often depend on financial and other support networks. In July 2018, the US Department of Treasury released a report on non-bank financials, fintech, and innovation.20 Among the over 80 recommendations in the report, the Treasury identified the ability of regulatory sandboxes to promote innovation. Specifically, the Treasury recommended that federal and state financial regulators establish a unified solution that coordinates and expedites regulatory relief under applicable laws and regulations to permit meaningful experimentation for innovative products, services, and processes. In June 2015, the New York State Financial Services Department (NYSFSD) published the Virtual Currency Business Activity (BitLicense) rules that apply to a wide range of activities involving virtual currencies such as their transmission, storage, holding, maintaining custody or control, buying, selling, performing exchange services, controlling administering, or issuing this type of currencies.21 These rules include both prudential and market conduct requirements. On May 11, 2021, FinCEN issued new beneficial owner rules impacting banks and the program managers and similar companies that help banks comply with the Bank Secrecy Act, including FinTech companies that provide AML on-boarding and monitoring services. Under the new rules,

20 US Department of the Treasury (2018): Treasury Releases Report on Nonbank Financials, Fintech, and Innovation, https://home.treasury.gov/news/press-releases/ sm447. 21 Johannes Ehrentraud, Denise Garcia Ocampo, Lorena Garzoni, Mateo Piccolo (2020): Policy Responses to Fintech: A Cross-Country Overview, 1–60, https://www. bis.org/fsi/publ/insights23.pdf.

3

FINTECH REGULATIONS AND SUPERVISION …

57

banks and other covered financial institutions will be required to identify and verify the identity of the beneficial owners of their legal entity customers.22 These rules will add to your regulatory burdens, particularly over the next several weeks. The rules require a covered institution to identify each individual who directly or indirectly owns 25% or more of the equity interest of the customer, and one individual with significant responsibility to control or direct the customer. Depending on the entity’s structure, this could be one to five individuals.

3.3 3.3.1

Fintech Regulations FinTech Regulation Approach

Like all financial services, Fintech in the United States is regulated at both the state and federal levels. Under the US dual banking system, banks and financial services are chartered and supervised by either a US state or the federal government. The growth of FinTech companies primarily regulated by the states has restored the state banking regulators to a level of importance they have not enjoyed in 30 years.23 The Constitution’s Supremacy Clause provides that federal law is “the supreme Law of the Land” notwithstanding any state law to the contrary. Thus, federal law and the authority of federal agencies generally preempt state laws and agencies where there is direct conflict. However, for some Fintech-related issues, there is no specific federal law, subjecting the industry to both levels of authority. The regulations of a Fintech entity depend on how the entity is structured, the types of products or services it offers, and the particular jurisdictions in which it operates. Therefore, though Fintech falls primarily within the ambit of the OCC, other regulators play significant roles as well (i.e., SEC, FCTC, FinCEN). Finally, there is a change in banking agency approach to digital assets and addressing the issues raised by digital assets remains a considerable regulatory priority. The OCC, Federal Reserve Board, and FDIC need to take a more coordinated approach to digital assets, one result of which may be that certain state 22 Dan Cohen and John ReVeal (2021): Beneficial Owner New Account Rules: What FinTech AML Program Managers and Their Financial Institutions Need to Know, https://www.fintechlawblog.com/2018/04/beneficial-owner-new-account-ruleswhat-fintech-aml-program-managers-and-their-financial-institutions-need-to-know/. 23 Paul T. Clark (2020): The Fintech War Between the States and the OCC Is Redefining What It Means to Be a Bank in the United States.

58

F. I. LESSAMBO

bank regulatory agencies may take the lead on innovative proposals in the short term. To sum it up, Fintech entities are subject to licensing and chartering regimes at the federal level and on a state-by-state basis, which collectively determine whether and how firms are supervised by regulatory authorities. To provide a uniform regulatory structure, the OCC has proposed issuing special purpose national bank charters (Fintech charters) to qualifying Fintech entities. These so-called Fintech banks would be authorized to lend money and transmit funds, but not accept deposits. Because the Fintech charter would be issued under the National Bank Act, Fintech banks would benefit from federal preemption of state lending and money transmission licensing requirements. Although first proposed in 2016, the OCC has granted very few Fintech charters. The lack of interest is likely due to uncertainty caused by state challenges to the OCC’s legal authority to issue such charters. 3.3.2

The OCC Fintech Charter

The OCC gets its authority from the National Bank Act (NBA) and is responsible for supervising national banks that fall under federal jurisdiction and are hence exempt from state laws. The US Office of the Comptroller of the Currency (OCC) has a long-standing practice of granting special national bank charters for banks limiting their activities to fiduciary services, including trust banks and credit card banks. The rise of Fintechs that were involved in the “three core banking functions”: receiving deposits, paying checks, and lending money posed a gap for the OCC who proposed the idea of a special purpose national bank (SPNB) charter also called the “Fintech charter” in 2016 for those firms. In practice, this meant that those that applied for this federally regulated charter would benefit from the preemption of many state laws and regulations hence potentially easing the regulatory burden by consolidating a company’s responsibilities. Due to the turf lines it crossed, this charter has been fraught with hurdles and lawsuits, and at the time of this publication, no OCC Fintech charter had yet been granted since it opened for applications in July 2018. This is largely attributable to the fact that the relationship with state regulators as well as other federal regulators has not been made clear.

3

3.3.3

FINTECH REGULATIONS AND SUPERVISION …

59

Digital Payment and Lending

In each year since 2017, FinTech-originated personal loan balances have exceeded outstanding loan balances originated by banks, credit unions, or traditional finance companies.24 Non-banking entities providing loan products and payment services are required to obtain a license from state banking authorities, including money transmitter licenses for companies engaged in payments (e.g., PayPal, Venmo, Apple Pay, etc.) and lender licenses for companies engaged in extending credit. KPMG reported that 2019 set an annual record for investment in the US FinTech industry, with $59.8 billion invested, up from 2014 investment of $31.3 billion.25 The portions of the FinTech industry that are the subject of this Alert— FinTech lenders and FinTech payments providers—have each seen rapid growth in recent years as well. In 2019, it was reported that FinTech lenders taken together made nearly half of all personal loans in the United States, up from less than 1% in 2010.26 3.3.4

Digital Platform Financing

Digital finance platforms are multilateral IT systems that connect a network of participating institutions to one another and to the operator of each system for conducting financial transactions.27 DFP aims to provide an entire ecosystem with multiple services between clients and regulated intermediaries, either directly (where the client is a DFP client) or indirectly, in an effort to make a profit. Crowdfunding platforms, for instance, allow a person the ability to invest in projects or ideas by simply using the website or app.

24 TransUnion, FinTechs Continue to Drive Personal Loan Growth (February 21, 2019), available at https://newsroom.transunion.com/fintechs-continue-to-drive-per sonal-loans-to-record-levels. 25 KPMG, Pulse of Fintech H2 2019 (February 2020), available at https://assets.

kpmg/content/dam/kpmg/xx/pdf/2020/02/pulse-of-fintech-h2-2019.pdf. 26 Will Hernandez, Fintech Lenders Taking More Market Share from Banks, Survey Finds, American Banker (September 25, 2019). 27 Dirk A. Zetzsche, William A. Birdthistle, Douglas W. Arner, and Ross P. Buckley (2020): Digital Finance Platforms: Toward a New Regulatory Paradigm. University of Pennsylvania Journal of Business Law, 23(1), 285.

60

F. I. LESSAMBO

3.3.5

Cryptocurrency

A cryptocurrency is a virtual currency that is exchanged using online virtual currency exchange websites, like Coinbase, and it is tracked using blockchain technology. Cryptocurrency transactions and businesses engaged in facilitating such transactions are subject to money transmission laws to varying degrees. FinCEN regulates what it has dubbed “convertible virtual currency” under the Bank Secrecy Act. In July 2020, the Office of the Comptroller of the Currency clarified that national banks and federal savings associations may provide cryptocurrency custody services and hold cryptographic keys on behalf of customers. The SEC has determined that some cryptocurrencies are securities. Under the Howey Test, if the SEC finds the purchase of cryptocurrency involved: (1) the investment of money in a common enterprise with; (2) a reasonable expectation of profits; (3) to be derived from the entrepreneurial or managerial efforts of others, then the cryptocurrency is a security. Another regulator, the CFTC, has stated that certain cryptocurrencies are commodities, subject to its jurisdiction if used in a derivatives contract, or if there is fraud or manipulation involving a cryptocurrency traded in interstate commerce. Finally yet importantly, FinCEN has defined convertible virtual currency (“CVC”) as a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. There is no single treatment of cryptocurrency in the United States. The uncertainty comes from a combination of the overlapping jurisdictions of the SEC, CFTC, and FinCEN and the piecemeal opinions and rulemakings from the regulators trying to catch up with the industry. Put differently, no crypto firm is subject to comprehensive consolidated supervision. The United States has limited regulations in relation to digital tokens/ICOs. Since 2015, the CFTC has been prosecuting those who have not complied with the regulatory requirements regarding virtual currencies. In recent news, two bills regarding tokens were introduced to the House for review, the Token Taxonomy Act of 2019 (TTA) and the Digital Taxonomy Act of 2019 (DTA). The TTA would set exact specifications on what a digital token is, and it would ultimately rule out digital tokens as being securities. The DTA would allocate $25 million per year to the Federal Trade Commission (FTC) to allow them to “prevent unfair and deceptive practices in digital token transactions” (Wink, 2019). Another part of the DTA is that every year the FTC would write a report

3

FINTECH REGULATIONS AND SUPERVISION …

61

detailing their enforcement actions and recommendations for extra legislation regarding digital tokens and submit to Congress to review. The law review also highlights how state legislation is leading the way in fintech regulations and why the federal government is falling behind. Another kind of digital token is an initial coin offering (ICO), which is one that lacks specific regulations. ICOs allow companies to raise capital by issuing their own form of cryptocurrency in exchange for money, usually in the form of a more popular cryptocurrency, like Bitcoin. This allows for the growth of capital, without giving up a portion of the ownership of the company (Sherry, 2019). ICOs are also being regulated using the “Howey Test” the same way most tokens are being regulated. This may work for those being considered securities, but for other types of ICOs there is much risk involved in investing in them, such as fraud and loss. 3.3.6

InsurTech

In the United States, both the states and the federal government regulate insurance companies. The National Association of Insurance Commissioners (NAIC) is the US standard setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia, and five US territories. Insurance intermediation has traditionally used either the agent/broker or bancassurance model. Nowadays, the intermediation occurs through InsurTech start-up. InsurTech is the term being used to describe the new technologies with the potential to bring innovation to the insurance sector and affect the regulatory practices of insurance markets.28 Advanced technologies and data are already affecting distribution and underwriting, with policies being priced, purchased, and bound in near real time. InsurTech companies have made the process of buying all types of insurance easier and more convenient, from consumer products to small business insurance. InsurTech encompasses a host of technological innovations, including Big Data/advanced analytics, artificial intelligence, the Internet of Things, machine learning, blockchain, telematics, software as a service, and more.29 The InsurTech market is expected to grow

28 OECD (2017), Technology and Innovation in the Insurance Sector, p. 4. 29 Laura Foggan and Mark Meyer (2019): Insurance/Reinsurance – Navigating

Insurtech Regulation without a Map, Crowell Moring.

62

F. I. LESSAMBO

by USD 33.73 billion from 2021 to 2025, progressing at a CAGR of 45.28% as per the latest market report by Technavio. Most regulators are of the view that insurTech firms should be subject to the same facts-andcircumstances analysis as non-tech actors with respect to whether a given activity triggers producer-licensing requirements. Regulators are looking for ways to enable insurers to test InsurTech initiatives that do not clearly fall under existing laws. Forward-looking states are competing with each other for first-mover advantage. The situation as it stands requires less regulatory competition and more cooperation among the aforementioned agencies in order to set a comprehensive regulatory framework.

3.4

OCC Financial Statements

Congress does not fund the Office of the Comptroller of the Currency. Instead, the OCC’s operating and capital budget is funded primarily by assessments, fees paid by banks, interest received on investments, and other income. The OCC also receives revenue from its investment income, which is primarily from US Treasury securities. The OCC’s financial statements are prepared from the agency’s accounting records in conformity with GAAP as set forth by the FASAB. The OCC’s financial statements are presented in accordance with the reporting guidance established by the OMB in Circular No. A-136, “Financial Reporting Requirements.” Accounting standards require all reporting entities to disclose that accounting standards allow certain presentations and disclosures to be modified, if needed, to prevent the disclosure of classified information. The OCC has prepared these statements from its books and records in accordance with US generally accepted accounting principles (GAAP) for federal entities and the formats prescribed by the Office of Management and Budget (OMB). In addition, the OCC prepares financial reports to monitor and control budgetary resources using the same books and records. The OCC’s financial statements consist of the Balance Sheets, the Statements of Net Cost, and the Statements of Changes in Net Position, the Statements of Budgetary Resources, and the Statements of Custodial Activity. The OCC presents the financial statements and notes on a comparative basis, providing financial information for FY 2020 and FY 2019. The Statements of Budgetary Resources provide information about how budgetary resources were made available to the OCC for the year.

3

FINTECH REGULATIONS AND SUPERVISION …

63

These statements present the status of these resources and the net outlay of budgetary resources at the end of the year. 3.4.1

The Balance Sheet

3.4.1.1 Assets The OCC’s assets include both “entity” and “non-entity” assets. The OCC uses entity assets, which belong to the agency, to fund operations. Non-entity assets are assets that the OCC holds on behalf of another federal agency. The OCC’s non-entity assets presented as accounts receivable are CMPs due the federal government through court-enforced legal actions. As of September 30, 2020, total assets were $2,075.7 million, an increase of $30.7 million, or 1.5%, from the total assets of $2,045.0 million reported on September 30, 2019. 3.4.1.2 Investments The OCC primarily invests available funds in nonmarketable US Treasury securities issued through the US Department of the Treasury’s Bureau of the Fiscal Service consistent with the provisions of 12 USC 481 and 12 USC 192. The OCC manages risk by diversifying its portfolio holdings through laddering security maturities over a period not to exceed five years. Laddering in this manner facilitates the ability to reinvest in short- and long-term US Treasury securities while maintaining sufficient cash for daily operating expenses. The OCC has the positive intent and ability to hold all US Treasury securities to maturity and does not maintain any available for sale or trading securities. On September 30, 2020, the amortized book value of intragovernmental investments and related accrued interest was $1,994.9 million, compared with $1,967.4 million the previous year. The difference of $27.5 million, or 1.4%, reflects an increase in invested funds because of operating surpluses. The market value of the OCC’s intragovernmental investment portfolio in FY 2020 was $40.7 million higher than book value, compared with FY 2019, when the market value was $11.4 million higher than book value. This change is primarily attributable to the substantial decline in interest rates in FY 2020—when interest rates decrease, the market value of the agency’s longer-term securities increases. The OCC’s intragovernmental investment portfolio is composed of overnight and longer-term securities. The portion of the portfolio comprising longer-term investments as of September 30, 2020, and September 30, 2019, was $1,328.0 million,

64

F. I. LESSAMBO

or 67.0%, and $1,212.0 million, or 62.0%, respectively. The weighted average maturity of the portfolio, including overnights, increased year over year to 1.61 years as of September 30, 2020, compared with 1.30 years as of September 30, 2019. This rise in the weighted average maturity reflects an increase in the OCC’s longer-term investment holdings. The OCC’s intragovernmental portfolio earned an annual yield of 1.6% in FY 2020, compared with 2.14% in FY 2019. The year-to-year decrease in the annual yield results from overnight rates falling from 2.31% to 0.85% and long-term rates declining from 2.08% to 1.86%. The OCC calculates annual portfolio yield by dividing the total interest earned during the year by the average ending monthly book value of investments. 3.4.1.3 Liabilities The OCC’s liabilities represent the resources due to others or held for future recognition and are composed largely of deferred revenue, accrued annual leave, accrued payroll and benefits, and other actuarial liabilities. Deferred revenue represents the unearned portion of semiannual assessments. As of September 30, 2020, total liabilities were $501.0 million, a net decrease of $7.3 million, or 1.4%, from total liabilities of $508.3 million on September 30, 2019. This change is largely due to a decrease in deferred revenue in FY 2020 because of the reduction in the rates in the assessment fee schedules as well as a decrease in other liabilities. These decreases were partially offset by an increase in actuarial liabilities and accrued annual leave. 3.4.1.4 Net Position The OCC’s net position of $1,574.7 million as of September 30, 2020, an increase of $37.9 million, or 2.5%, over the $1,536.8 million reported for FY 2019, represents the cumulative net excess of the OCC’s revenues over the cost of operations. The net position is presented on both the Balance Sheets and the Statements of Changes in Net Position. The OCC allocates a significant portion of the net position to its financial reserves. Financial reserves are integral to the effective stewardship of the OCC’s resources, and the OCC has a disciplined process for reviewing its reserve balances and allocating funds appropriately to support its ability to accomplish the agency’s mission. The OCC’s financial reserves are available to reduce the impact on the OCC’s operations in the event of a significant fluctuation in revenues or expenses. The OCC also sets aside funds

3

FINTECH REGULATIONS AND SUPERVISION …

65

for ongoing operations. As of September 30, 2020, the OCC’s financial reserves were $1,493.5 million. This represents an increase of 3.4% from the end of FY 2019, when that amount was $1,444.4 million. These reserves are essential to a prudent and reasonable financial management strategy (Fig. 3.4).

Fig. 3.4 OCC balance sheet

66

F. I. LESSAMBO

Fig. 3.5 OCC statement of net cost

3.4.2

Statements of Net Cost

See Fig. 3.5. 3.4.3

Revenues and Other Financing Sources

The OCC derives its revenue primarily from assessments and fees paid by banks, from income on investments in nonmarketable US Treasury securities, and from rental income and reimbursable activities with other entities. The OCC does not receive congressional appropriations to fund its operations. Therefore, the OCC has no unexpended appropriations. The OCC’s semiannual bank assessments are collected in the middle of each six-month assessment cycle. At the time of collection, the OCC

3

FINTECH REGULATIONS AND SUPERVISION …

67

records deferred revenue on its balance sheet as a liability for the assessments that the agency has not yet earned. The OCC recognizes deferred revenue as revenue as the supervisory services are delivered over the following three months. Federal statute stipulates that the OCC’s funds are neither government funds nor appropriated monies (12 USC 481). They are maintained in a US Government trust fund and remain available to cover the cost of the OCC’s operations in accordance with policies established by the Comptroller of the Currency. 3.4.4

Statements of Changes in Net Position

Net position represents the net result of operations since inception and includes cumulative amounts related to investments in capitalized assets held by the OCC. The OCC allocates a portion of its net position as financial reserves for use at the Comptroller’s discretion. In addition, the OCC sets aside funds in the net position to cover the cost of ongoing operations, including commitments and open obligations supporting the achievement of OCC strategic goals and objectives. The year-to-year increase in net position reflects the excess of revenues over the cost of operations for both years presented. Table 21 shows balances for FY 2020 and FY 2019 (Fig. 3.6). 3.4.5

Statements of Custodial Activity

The OCC assesses fines and penalties against people or banks for violations of law, regulation, and orders; unsafe or unsound practices; and breaches of fiduciary duty. These amounts typically are collected in the same year that the OCC assesses them and are recognized as cash collected that will be transferred to the General Fund of the US Treasury. The change in FY 2020 is due to an increase in the need to assess penalties against regulated institutions (Fig. 3.7). White House FACT SHEET: President Biden to Sign Executive Order on Ensuring Responsible Development of Digital Assets March 09, 2022 • Statements and Releases

68

F. I. LESSAMBO

Fig. 3.6 OCC statement of changes in net position

Outlines First Whole-of-Government Strategy to Protect Consumers, Financial Stability, National Security, and Address Climate Risks

3

FINTECH REGULATIONS AND SUPERVISION …

Fig. 3.7 OCC statement of custodial activity

Digital assets, including cryptocurrencies, have seen explosive growth in recent years, surpassing a $3 trillion market cap last November and up from $14 billion just five years prior. Surveys suggest that around 16% of adult Americans—approximately 40 million people—have invested in, traded, or used cryptocurrencies. Over 100 countries are exploring or piloting Central Bank Digital Currencies (CBDCs), a digital form of a country’s sovereign currency. The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security, and climate risk. The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system, and the climate. And, it must play a leading role in international engagement and global governance of digital assets consistent with democratic values and US global competitiveness. That is why today, President Biden will sign an Executive Order outlining the first-ever, whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their

69

70

F. I. LESSAMBO

underlying technology. The Order lays out a national policy for digital assets across six key priorities: consumer and investor protection; financial stability; illicit finance; US leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation. Specifically, the Executive Order calls for measures to: Protect US Consumers, Investors, and Businesses by directing the Department of the Treasury and other agency partners to assess and develop policy recommendations to address the implications of the growing digital asset sector and changes in financial markets for consumers, investors, businesses, and equitable economic growth. The Order also encourages regulators to ensure sufficient oversight and safeguard against any systemic financial risks posed by digital assets. Protect US and Global Financial Stability and Mitigate Systemic Risk by encouraging the Financial Stability Oversight Council to identify and mitigate economy-wide (i.e., systemic) financial risks posed by digital assets and to develop appropriate policy recommendations to address any regulatory gaps. Mitigate the Illicit Finance and National Security Risks Posed by the Illicit Use of Digital Assets by directing an unprecedented focus of coordinated action across all relevant US Government agencies to mitigate these risks. It also directs agencies to work with our allies and partners to ensure international frameworks, capabilities, and partnerships are aligned and responsive to risks. Promote US Leadership in Technology and Economic Competitiveness to Reinforce US Leadership in the Global Financial System by directing the Department of Commerce to work across the US Government in establishing a framework to drive US competitiveness and leadership in, and leveraging of digital asset technologies. This framework will serve as a foundation for agencies and integrate this as a priority into their policy, research and development, and operational approaches to digital assets. Promote Equitable Access to Safe and Affordable Financial Services by affirming the critical need for safe, affordable, and accessible financial services as a US national interest that must inform our approach to digital asset innovation, including disparate impact risk. Such safe access is especially important for communities that have long had insufficient access to financial services. The Secretary of the Treasury, working with all relevant agencies, will produce a report on the future of money and payment systems, to include implications for economic growth, financial growth and inclusion, national security, and the extent to which technological innovation may influence that future.

3

FINTECH REGULATIONS AND SUPERVISION …

71

Support Technological Advances and Ensure Responsible Development and Use of Digital Assets by directing the US Government to take concrete steps to study and support technological advances in the responsible development, design, and implementation of digital asset systems while prioritizing privacy, security, combating illicit exploitation, and reducing negative climate impacts. Explore a US Central Bank Digital Currency (CBDC) by placing urgency on research and development of a potential United States CBDC, should issuance be deemed in the national interest. The Order directs the US Government to assess the technological infrastructure and capacity needs for a potential US CBDC in a manner that protects Americans’ interests. The Order also encourages the Federal Reserve to continue its research, development, and assessment efforts for a US CBDC, including development of a plan for broader US Government action in support of their work. This effort prioritizes US participation in multi-country experimentation and ensures US leadership internationally to promote CBDC development that is consistent with US priorities and democratic values. The Administration will continue work across agencies and with Congress to establish policies that guard against risks and guide responsible innovation, with our allies and partners to develop aligned international capabilities that respond to national security risks, and with the private sector to study and support technological advances in digital assets.

Source: https://www.whitehouse.gov/briefing-room/statements-rel eases/2022/03/09/fact-sheet-president-biden-to-sign-executive-orderon-ensuring-responsible-innovation-in-digital-assets/?utm_source=link.

CHAPTER 4

The European Banking Authority

4.1

General

The EBA was established on January 1, 2011, upon which date it inherited all of the tasks and responsibilities of the Committee of European Banking Supervisors (CEBS).1 In continuity with the CEBS secretariat, it was initially located in London. The main task of the EBA is to contribute to the creation of the European Single Rulebook in banking whose objective is to provide a single set of harmonized prudential rules for financial institutions throughout the EU. The Authority also plays an important role in promoting convergence of supervisory practices and is mandated to assess risks and vulnerabilities in the EU banking sector. The European Banking Authority (EBA) is a regulatory agency of the European Union headquartered in Paris. Its activities include conducting stress tests on European banks to increase transparency in the European financial system and identifying weaknesses in banks’ capital structures.

1 “EBA at glance.” European Banking Authority, 31 December 2014. Retrieved 24 February 2022.

© The Author(s), under exclusive license to Springer Nature 73 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_4

74

F. I. LESSAMBO

4.2

EBA Mission and Objectives

The European Banking Authority (EBA) is a regulatory body that strives to maintain financial stability throughout the European Union’s (EU) banking industry.2 The European Parliament, replacing the Committee of European Banking Supervisors (CEBS), established it in 2010. The European Banking Authority (EBA) aims to supervise financial integrity and ensure financial stability across the European Union (EU). The European Union (EU) is a unified international organization that governs the economic, political, and social policies of 27 members. Its aim is to create an efficient, transparent, and stable single market in EU banking products.

4.3

EBA Scope of action

According to Article 1(2) of the founding Regulation of the EBA, as amended, the EBA shall act within the powers conferred by the Regulation and within the scope of the following legislative texts3 : – – – – – – – – –

Capital Requirements Regulation (CRR) Capital Requirements Directive (CRD) Bank Recovery and Resolution Directive (BRRD) Deposit Guarantee Schemes Directive (DGSD) Payment Services Directive (PSD) E-Money Directive (EMD) Financial Conglomerates Directive (FICOD) Distance Marketing Directive (DMD) Regulation on information accompanying transfers of funds (WTR)

In addition, to the extent that those acts apply to credit and financial institutions and the competent authorities that supervise them, the EBA will also act within the relevant parts of the following directives: – Payment Accounts Directive (PAD) – Mortgage Credit Directive (MCD)

2 EBA: Missions and Tasks, https://www.eba.europa.eu/about-us/missions-and-tasks. 3 EBA Regulation and Institutional Framework, https://www.eba.europa.eu/about-us/

legal-framework/eba-regulation-and-institutional-framework.

4

– – – – –

THE EUROPEAN BANKING AUTHORITY

75

Central Securities Depositories Regulation (CSDR) Markets in Financial Instruments Directive (MiFID II) Markets in financial instruments Regulation (MiFIR) Anti-Money Laundering Directive (AMLD) Interchange Fees Regulation (IFR)

Further, the EBA acts within the scope of all directives, regulations, and decisions based on those acts, and of any further legally binding Union act, which confers tasks on the Authority. It also acts in accordance with the SSM Regulation (EU) No 1024/2013. Finally, it acts in the field of activities of credit institutions, financial conglomerates, investment firms, payment institutions, and e-money institutions in relation to issues not directly covered in the acts referred to above.

4.4

EBA Organizational Structure

The two governing bodies of the EBA are4 : • The Board of Supervisors (BoS) which is the main decision-making body of the Authority. It takes all policy decisions of the EBA, such as adopting draft Technical Standards, Guidelines, Opinions, and Reports. Decisions on specific matters related to resolution of financial institutions have been delegated by the BoS to the Resolution Committee (ResCo). The Board of Supervisors is the main decision-making body of the European Banking Authority. The main role of the Board of Supervisors is to take all policy decisions of the EBA, such as adopting draft technical standards, guidelines, opinions, and reports. The Board of Supervisors also takes the final decision on the EBA’s budget. It is composed of the EBA’s Chairperson, and of the 27 national supervisory authorities, where applicable accompanied by a representative of the national central bank, with Observers from the European Commission (EC), the European Systemic Risk Board (ESRB), the European Central Bank (ECB), the European Securities and Markets 4 EBA: Governance Structure, https://www.eba.europa.eu/about-us/organisation.

76

F. I. LESSAMBO

Fig. 4.1 EBA organizational structure

Authority (ESMA), and the European Insurance and Occupational Pension Authority (EIOPA). The Members of the Board of Supervisors shall act independently and in the Union’s interest. • The Management Board whose role is to ensure the Authority carries out its mission and performs the tasks assigned to it. In this respect, it is entrusted with the power to propose, among other things, the annual work program, the annual budget, the staff policy plan, and the annual report (Fig. 4.1).

4.5

EBA Funding

The financial regulation, applicable to the European Banking Authority, forms the basis for the Authority’s budget implementation and financial management. The initial and amended budgets provide information on the approved budget for one financial year, while the final accounts of

4

THE EUROPEAN BANKING AUTHORITY

77

the Authority provide information on the financial performance of the Authority in the concerned financial year.5

4.6

The EU Sandbox Approach

The EU current regulatory sandboxes have adopted a model based on customized application of existing rules, using the available tools for supervisory discretion. Within a sandbox, the latitude afforded to supervisors to waive certain regulatory requirements or to apply them in a flexible way varies among Member States, and faces the boundaries set by the EU harmonization.6 Individual regulatory sandboxes publish a list of requirements from which a derogation may be granted,7 others provide some guidance on how the regulator may exercise its discretion.8 To customize the applicable requirements, the operational sandboxes in the EU use the exercise of legally embedded levers of proportionality as many requirements under the EU financial services legislation contain proportionality tools, which allow for supervisory discretion by taking into account certain factors, such as the risk profile, or the size, complexity and interconnectedness of the firms concerned.

4.7

Fintech Regulatory and Supervision

The EBA Founding Regulation mandates the EBA to act in the field of activities of credit institutions, financial conglomerates, investment firms, payment institutions, and electronic money institutions. The EBA is tasked with monitoring new and existing financial activities, and market developments in the areas of its competence, and may adopt guidelines 5 EBA (2021): EBA’s Study Shows that EU Banks’ Funding Plans Are Poised to Gradually Return to a Pre-pandemic Funding Composition by 2023, https://www.eba. europa.eu/eba%E2%80%99s-study-shows-eu-banks%E2%80%99-funding-plans-are-poisedgradually-return-pre-pandemic-funding. 6 Radostina Parent (2020): Regulatory Sandboxes and Innovation Hubs for FinTech—Impact on Innovation, Financial Stability, and Supervisory Convergence, p. 34; https://www.europarl.europa.eu/RegData/etudes/STUD/2020/652752/ IPOL_STU(2020)652752_EN.pdf. 7 See for example about the Hungarian regulatory sandbox, MNB Decree on diverging rules of compliance with obligations under certain MNB Decrees. 8 See for example about the Dutch regulatory sandbox, https://www.dnb.nl/en/bin aries/More-room-for-innovation-in-the-financialpercentage20sector_tcm47-361364.pdf.

78

F. I. LESSAMBO

and recommendations or provide advice to the European Parliament, the Council, and the Commission, with a view to promoting the safety and soundness of markets and convergence of regulatory and supervisory practices and to achieving a coordinated approach to the regulatory and supervisory treatment of new or innovative financial activities.9 Article 9(2) of the EBA’s Founding Regulation imposes a duty on the EBA to monitor new and existing financial activities. This obligation extends to all areas of the EBA’s competence, including in the field of activities of credit institutions, financial conglomerates, investment firms, payment institutions, and electronic money institutions. Consistent with the EBA’s statutory objectives and duty to monitor financial innovation, the EBA developed the 2018 FinTech Roadmap, established the FinTech Knowledge Hub, and set out the EBA’s FinTech priorities until 2020.10 The EBA’s current and future FinTech priorities include a range of actions to support the scaling of innovative technology cross-border while ensuring high standards of financial sector operational resilience and consumer protection in line with the European Commission’s Digital Finance Strategy (DFS) published on 24 September 2020. The main objectives of the DFS are to: i. tackle fragmentation in the Digital Single Market for financial services; ii. ensure that the EU regulatory framework facilitates digital innovation in the interest of consumers and market efficiency; iii. create a European financial data space to promote data-driven innovation; and iv. address new challenges and risks associated with the digital transformation. The DFS sets out significant new roles and mandates for the EBA including in relation to: – artificial intelligence, – digital identities, – RegTech and SupTech, and

9 EBA (2017): EBA Publishes a Discussion Paper on Its Approach to FinTech, https:// www.eba.europa.eu/eba-publishes-a-discussion-paper-on-its-approach-to-fintech. 10 EBA (2018): Financial Innovation and FinTech, https://www.eba.europa.eu/financ ial-innovation-and-fintech.

4

THE EUROPEAN BANKING AUTHORITY

79

– On the suitability of the EU’s regulatory and supervisory framework. The DFS is accompanied by legislative proposals for markets in cryptoassets (MiCA) and digital operational resilience (DORA), which include a number of mandates for the ESAs to support the development of EU regulatory frameworks in the areas of crypto-assets and ICT and security risk management, respectively. Specifically, MiCA proposes the establishment of an EU framework for the regulation of specified activities involving crypto-assets that are not already covered by EU law (namely issuance of crypto-assets; custody and administration of crypto-assets; operation of crypto-asset trading platforms and exchanges (to fiat or other crypto)). To this end, MiCA proposes several important new policy mandates and supervision functions for the EBA for issuers of “significant asset-backed crypto-assets.” Meanwhile, DORA aims to put in place a comprehensive framework on digital operational resilience for EU financial entities and to consolidate and upgrade the ICT risk requirements that have so far been spread over the financial services legislation. DORA proposes new policy mandates for the EBA in ICT risk management, incident reporting, digital operational resilience testing, and measures for a sound management by financial entities of the ICT third-party risk as well as a new ESA oversight role over critical ICT third-party providers. The proposals build on the work carried out under the March 2018 EC FinTech Action Plan, the EBA’s FinTech Roadmap, and advice of the EBA and other ESAs, and set out a wide range of potential new tasks for the EBA. The proposals, if agreed, will facilitate the scaling up of technology-enabled financial services cross-border while ensuring effective risk mitigation for consumers and financial stability in line with the principle of technological neutrality. While fintech banks are held to the same authorization standards as other banks, the guide highlights supervisory considerations with respect to the specific nature of banks with fintech business models, in particular on: i. suitability of the members of the management body (IT competence, financial competence, fitness and propriety); ii. suitability of shareholders (reputation and financial soundness of shareholders with a qualifying holding); iii. structural organization (credit scoring and governance, IT-related risks, outsourcing, data governance and security);

80

F. I. LESSAMBO

iv. program of operations (execution risks arising from the business model, exit plans); and v. capital, liquidity, and solvency assessment. In the European Union, payment service providers are regulated as payment institutions under the Payment Services Directive 2 (PSD2) and e-money providers are regulated as e-money institutions under the Electronic Money Directive 2 (EMD2).61 While the latter can also provide payment services, they are the only non-banks allowed to issue emoney. E-money institutions are subject to more stringent and additional requirements than institutions providing only payment services. In the EU, PSD2 introduced two new categories of regulated payment service providers, referred to collectively as third-party payment services providers (TPPs)11 : payment initiation service providers (PISPs) and account information service providers (AISPs). TPPs do not operate payment accounts themselves but, once authorized by their clients, have access to their clients’ payment accounts held by other financial institutions. Specifically, PISPs enable consumers to make online payments while informing merchants that the payment has been made. As such, they represent an alternative to online credit card payments. AISPs provide users with aggregate information on their accounts, irrespective of where they are being held. Finally yet importantly, GDPR has been in force since May 2018, resulting in the same privacy protection throughout Europe. GDPR is primarily intended for the protection of personal data and privacy of consumers. Therefore, the impact for FinTech companies is large and it is key for them to handle financial data structured and with care. This, however, also leads to new opportunities for innovation. It has contributed to the quality of utilizing customer data and trust in handling financial data by FinTech companies with innovative service.

11 European Data Protection Board (2020): Guidelines 06/2020 on the Interplay of the Second Payment Services Directive and the GDPR-Version 2.0; 1–26, https://edpb.europa.eu/sites/default/files/files/file1/edpb_guidelines_202 006_psd2_afterpublicconsultation_en.pdf.

CHAPTER 5

The Deutsche Bundesbank

5.1

General

The Deutsche Bundesbank was established as the central bank of the Federal Republic of Germany in 1957. The Central Office is located in Frankfurt am Main. The Deutsche Bundesbank is the independent central bank of the Federal Republic of Germany. The Deutsche Bundesbank, literally “German Federal Bank,” is the central bank of the Federal Republic of Germany and as such part of the European System of Central Banks. Due to its strength and former size, the Bundesbank is the most influential member of the ESCB. The Bundesbank is an integral component of the European System of Central Banks (ESCB) and, as such, is jointly responsible for price stability within the euro area. Its main task is to secure price stability in the euro area. Its stability policy also relies on support from economic, fiscal, and wage policy.

5.2

Missions and Objectives

The Bundesbank is the most influential member of the ESCB. It also performs other key tasks at both the national and international level. Among these are national supervision of credit institutions, including a role in the European Single Supervisory Mechanism, as well as the areas of

© The Author(s), under exclusive license to Springer Nature 81 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_5

82

F. I. LESSAMBO

cash management, payment systems, and financial stability. The Bundesbank is involved in many international institutions and committees that are dedicated to stabilizing the financial system. Moreover, the Bundesbank manages Germany’s foreign reserves, acts as the government’s fiscal agent, and carries out important statistical tasks. It also advises the Federal Government on issues of importance to monetary policy.

5.3

Organizational Structure

See Fig. 5.1.

5.4 Deutsche Bundesbank and Banking Supervision In Germany, the task of banking supervision is shared by the Federal Financial Supervisory Authority (BaFin) and the Deutsche Bundesbank. The German Banking Act essentially forms the legal basis for the supervision of banking business and financial services, while the Payment Services Oversight Act is the legal basis for the supervision of payment institutions and e-money institutions. Within the framework of banking supervision, the Regional Offices monitor credit institutions and financial service providers in their respective regions (Fig. 5.2). 5.4.1

The Federal Financial Supervisory Authority (BaFin)

The Federal Financial Supervisory Authority better known by its abbreviation BaFin is the financial regulatory authority for Germany. It is an autonomous public-law institution and is subject to the legal and technical oversight of the Federal Ministry of Finance. It is an independent federal institution with headquarters in Bonn and Frankfurt and falls under the supervision of the Federal Ministry of Finance. It brings together under one roof the supervision of banks and financial services providers, insurance undertakings, and securities trading. Fees and contributions from the institutions and undertakings under its supervision fund it. Its primary objective is to ensure the proper functioning, stability, and integrity of the German financial system. Bank customers, insurance policyholders, and investors ought to be able to trust the financial system. As of January 1, 2018, BaFin has also been the National Resolution Authority (NRA)

THE DEUTSCHE BUNDESBANK

Fig. 5.1 Deutsche Bundesbank—Regional offices and branches (Source https://www.bundesbank.de/resource/blob/ 618334/4c085c3da67a7e5055169dd8739347c5/mL/organisationsplan-der-zentrale-data.pdf)

5

83

84

F. I. LESSAMBO

Fig. 5.2 DB regional offices and branches

in Germany. BaFin is the authority in Germany responsible for the supervision of the financial sector (in particular credit institutions, payment institutions, e-money institutions, and investment service providers). As part of its responsibilities, BaFin takes action against companies carrying out activities without a license for which a license is required. BaFin grants

5

THE DEUTSCHE BUNDESBANK

85

the required licenses and supervises companies that are under its supervision. A number different bodies support and advise BaFin in its work and oversees its activities, inter alia: – BaFin’s Administrative Council The Administrative Council monitors the management of BaFin and supports BaFin in the performance of its supervisory functions. In addition, it is responsible for deciding on the budget of BaFin, which is funded completely by the companies it supervises and is thus not covered by the federal government’s budget. The Administrative Council comprises 17 voting members. – The Advisory Board The Advisory Board is responsible for advising BaFin on issues related to its supervisory duties. Furthermore, it assists BaFin in the further development of supervisory principles. The Advisory Board is responsible for advising BaFin on issues related to its supervisory duties. Furthermore, it assists BaFin in the further development of supervisory principles. 5.4.2

The Consumer Advisory Council

The Consumer Advisory Council is responsible for advising BaFin on issues related to its supervisory duties from a consumer’s perspective. The Consumer Advisory Council collects, analyzes, and reports to BaFin data relating to current developments in the banking and insurance businesses and in the areas of financial services and financial instruments (“consumer trends”). 5.4.3

The Financial Stability Committee

The key task of the Financial Stability Committee is to regularly discuss the matters of decisive importance for financial stability based on analyses of the Bundesbank, to issue warnings of risks when these are identified and to make recommendations on how to prevent such risks. The Committee also discusses the warnings and recommendations of the ESRB. Another purpose is to strengthen cooperation among the institutions represented in the Committee in times of financial crisis.

86

F. I. LESSAMBO

5.4.4

The Insurance Advisory Council

The Insurance Advisory Council addresses issues of insurance practice and provides advice to BaFin on the implementation and further development of supervisory law. In addition, there are circumstances where the German Insurance Supervision Act provides that the Insurance Advisory Council must be consulted. 5.4.5

The Securities Council

The Securities Council advises BaFin in matters of securities supervision, for example, when it comes to issuing regulations or establishing guidelines. However, the Council may also submit proposals of its own concerning the development of supervisory practice. 5.4.6

The Deutsche Bundesbank

In Germany, the task of banking supervision is shared by the Federal Financial Supervisory Authority (BaFin) and the Deutsche Bundesbank. The Bundesbank has the task of continuously monitoring the roughly 1,680 credit institutions, 1,300 financial services institutions, and 100 payment institutions and e-money institutions active throughout Germany, in particular with regard to their solvency and liquidity.

5.5

Fintech Regulation

Fintech companies are subject to the same provisions as traditional companies in the financial services sector. German fintech industry covers all kinds of regulated and unregulated activities including not only payment services (including mobile payments, payment initiation services, and account information services) but also: crowdfunding and crowdlending (peer-to-peer lending); robot-advice and automated portfolio management; crypto assets, virtual currencies; other blockchainrelated activities; insurtech; and regtech. Depending on its structure, a fintech may require authorization or approvals by BaFin, or by another supervisory authority. BaFin has established an organizational unit within the President’s Directorate that focuses on fintechs and provides information on regulatory implications on its website. BaFin also encourages direct dialogue through events such as the BaFin-Tech conference, which

5

THE DEUTSCHE BUNDESBANK

87

addresses both established companies and start-ups in the fintech sector. Moreover, BaFin states on its website that the assessment of whether the activities of a fintech require a license can only be made based on the circumstances of the individual case. 5.5.1

Sandbox Approach

The German Economic Affairs Ministry launched the Regulatory Sandboxes Strategy in December 2018.1 The central aim of the companies and research establishments engaged in regulatory sandboxes is to trial new technologies and business models in real life. The strategy is pursuing three key goals: (i) create the necessary legal leeway so that smart ideas can continue to be tested and realized in Germany; (ii) learning from one another, finding like-minded people, sharing knowledge2 ; (iii) to identify regulatory obstacles and to develop legally compliant solutions to facilitate innovation in Germany and gather experience for tomorrow’s regulations. 5.5.2

Mobile Payments

In Germany, more and more customers are reaching for their smartphone instead of cash or card when paying for goods. Here, mobile payments are gaining more momentum by the day. Savings banks and cooperative banks also run a successful peer-to-peer (P2P) mobile payment service. Established banks are concerned of losing the battle for the customer in payments, which would leave them merely as interchangeable settlement agents in the background. 5.5.3

Crowdfunding and Crowdlending

In general, investment-based crowdfunding platforms act as a “financial investments broker,” only brokering the issue of the loan and sale of

1 Federal Ministry for Economic Affairs and Energy (2019): Making Space for Innovation—The Handbook for Regulatory Sandboxes, https://www.bmwk.de/Redakt ion/EN/Publikationen/Digitale-Welt/handbook-regulatory-sandboxes.pdf?__blob=public ationFile&v=2. 2 To bring together and network the relevant decision-makers from businesses, research and administration.

88

F. I. LESSAMBO

the asset investment.3 Equity crowdfunding so far, does not exist in any significant way due to the very strict formal requirements when transferring title to shares in German limited liability companies. A company interested in obtaining funding through a German crowdfunding platform must contact the platform, develop a funding case together, and market the case through the platform. 5.5.4

Robot-Advice

In general, Robot-advice meets the definition of investment advice and therefore requires authorization under banking or industrial law. If such authorization has not been granted or if the associated requirements of the German Securities Trading Act or of the German Industrial Code are not satisfied, the providers expose themselves to a considerable legal risk.4 Even though many new offers are coming onto the market, it is therefore not worthwhile to launch a robot-advisor for the sake of speed, which tries (in vain) to avoid having to fulfill the requirements applicable to investment advice. Instead, the providers should make use of the opportunities offered by new media to provide full investment advice with the authorization and under the supervision of BaFin and therefore contribute toward the creation of a consumer-friendly market environment. 5.5.5

Blockchain

A blockchain is a specific distributed ledger type that builds on a peerto-peer network where all data are replicated across multiple servers

3 Dr. Michael Jünemann, Johannes Wirtz, Timo Förster (2021): ECSPR—Current Crowdfunding Models Under the Crowdfunding Regulation, https://www.twobirds. com/en/insights/2021/germany/ecspr-current-crowdfunding-models-under-the-crowdf unding-regulation. 4 Philippe Krahnhof and Cam-Duc Au (2020): The Role of Robo-Advisors in the German Banking Market—Critical Analysis on Human Versus Digital Advisory Services, International Conference, Brussels, Belgium, Institute for Technology and Research, ISSN: 978-93-89732-92-4, https://www.researchgate.net/publication/342549761_The_ Role_of_Robo-Advisors_in_the_German_Banking_Market_-_Critical_Analysis_on_Human_ versus_Digital_Advisory_Services.

5

THE DEUTSCHE BUNDESBANK

89

(nodes) in a fault-tolerant way.5 Crypto-assets are considered a financial instrument under the KWG and are regulated in the same manner as any other financial instruments under German law. Since January 2020, crypto-assets are considered “financial instruments” within the meaning of section 1(11) of the Banking Act. Therefore, any and all business operations relating to crypto-assets fall under the German securities and banking regulations. In August 2021, BaFin approved the first blockchain-based issuing of equity (common stock according to the German Stock Corporation Act), which was scheduled to take place in October 2021. 5.5.6

InsurTech

Insurance supervision is divided between the Federal Government and the Federal States—in accordance with the federalist system of the Federal Republic of Germany. Insurtechs are subject to insurance supervision if they conduct insurance business. BaFin’s ongoing supervision does not differentiate between traditional insurance undertakings and insurtech companies. Pursuant to section 8(2) of the VAG, authorizations may only be granted to public limited companies, mutual societies, public corporate bodies, and institutions under public law. The requirements for an authorization can differ depending on the line of business being pursued. Section 9 of the VAG regulates the documentation to be submitted as part of an application for authorization to conduct insurance business.

5.6

DB Financial Statements 5.6.1

The Balance Sheet

See Fig. 5.3. 5.6.2

Profit and Loss

See Fig. 5.4.

5 B.-J. Butijn, D. A. Tamburri, and W.-J. van den Heuvel (2020): Blockchains. ACM Computing Surveys, 53(3). 10.1145/3369052.

90

F. I. LESSAMBO

Fig. 5.3 DB balance sheet

5

Fig. 5.3 (continued)

THE DEUTSCHE BUNDESBANK

91

92

F. I. LESSAMBO

Fig. 5.4 DB profit and loss account

CHAPTER 6

The Bank of France

6.1

General

The Banque de France is an independent institution governed by French and European law, and a member of the Eurosystem, which is the federal system comprising the European Central Bank and the national central banks of the euro area.1 The Banque de France was created in 1800, by Napoleon Bonaparte to restore confidence in the French banking system. The original statutes organized the activities of the Bank, but other competing issuing institutions remained. In 1803, the Bank obtained an issuing right for the city of Paris, then gradually until 1848, for the whole country.2 Its three main missions are monetary strategy, financial stability, and the provision of economic services to the community. The bank was privatized in 1993, a step taken partly in preparation for France’s participation in the European Monetary System, whose member countries converted to a single currency, the euro, in 1999.3 The Banque de 1 https://www.banque-france.fr/en/banque-de-france/about-banque-de-france/instit utional-framework. 2 https://www.citeco.fr/10000-years-history-economics/industrial-revolutions/cre ation-of-the-banque-de-france-by-napoleon-bonaparte. 3 https://www.britannica.com/topic/Banque-de-France.

© The Author(s), under exclusive license to Springer Nature 93 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_6

94

F. I. LESSAMBO

France network currently comprises 96 departmental branches (of which 13 were regional branches as of January 1, 2016), to which are linked 21 economic centers and six household over-indebtedness centers. Services related to currency management are carried out at 52 of these sites, as well as at three specialized centers. To facilitate access to the public services provided by the Banque de France (household over-indebtedness, access to payment incident databases), 74 customer service and information offices have been opened in towns where the Banque de France has no permanent branch.

6.2

Missions and Objectives

The Banque de France plays a dual role of protection and supervision: (i) it is responsible for strengthening regulations and monitoring risks, and for ensuring the safety of savers’ deposits, (ii) it oversees the financial sector (777 banks and 827 insurance companies and mutual institutions), ensures the smooth operation of payment systems and market infrastructures, and regularly assesses the risks and weaknesses in the financial system. Moreover, it provides practical services to households and businesses in severe financial difficulty. For SMEs, its services include company ratings, credit mediation and support for very small enterprises. The Bank also compiles national and regional surveys of economic conditions that are widely sought after by business leaders. Finally yet importantly, it is charged with delivering price stability and maintaining public confidence in cash.

6.3

Organizational Structure

The Banque de France’s system of governance reflects its independence from the political authorities. A governor, who is appointed by the president, manages it. He presides over the Bank’s General Council, the body responsible for deliberating on all matters relating to non-Eurosystem activities (Fig. 6.1). 6.3.1

Governor and Deputy Governors

The Governor, assisted by two Deputy Governors, is responsible for the management of the Banque de France. He chairs the Bank’s General Council and is responsible for preparing and implementing its decisions.

6

THE BANK OF FRANCE

95

Fig. 6.1 Banque de France—organizational structure

The Governor and Deputy Governors are appointed by decree by the Council of Ministers for a six-year term, renewable once. The Governor is also Chairman of the Autorité de contrôle prudentiel et de résolution (ACPR—Prudential Supervision and Resolution Authority), the Banking Mediation Committee, the Observatory for Payment Instruments Security, the Observatory for Regulated Savings, and the Observatory for Banking Inclusion. He is a member of the Haut Conseil de stabilité financière (HCSF—High Council for Financial Stability).

96

F. I. LESSAMBO

6.3.2

The Executive Committee

The Executive Committee is at the heart of the operational functioning of the Banque de France. It is chaired by the Governor and composed of the Deputy Governors, the Directors General, the Deputy Secretary General for Strategy, and the Director of Legal Affairs. The Director General of the Institut d’émission des départements d’outre-mer (IEDOM—the French overseas departments note-issuing bank) and the Institut d’émission d’outre-mer (IEOM—the French overseas note-issuing bank) is also a member. 6.3.3

The General Council

The General Council performs the main functions of a board of directors. It deliberates on issues relating to the management of activities that are not within the remit of the ESCB. The General Council comprised the Governor, the Deputy Governors, a staff-elected representative, Vice-Chairman of the ACPR, and an alternate censor. 6.3.4

The Audit Committee

The Audit Committee is charged with informing the General Council on issues related to financial reporting, external and internal auditing, internal control, and risk management. As part of this role, it was responsible for examining and validating the reports submitted by the auditors on the Bank’s financial statements. 6.3.5

The Compensation Committee

The Compensation Committee is responsible for reviewing the remuneration of the Bank’s senior management.

6.4

Fintech Regulation

French financial institutions are regulated by both the AMF and the ACPR (which is the regulatory arm of the French Central Bank). The AMF’s primary purpose is to protect investors by ensuring the proper functioning of financial markets, while the ACPR is in charge of preserving the stability of the financial system and supervising the

6

THE BANK OF FRANCE

97

banking and insurance sectors. France does not have per se an approach regarding Fintech regulation. The regulation to which a Fintech company may be subject to depends on its activities. A strong network of business angels, venture capital funds, and professional organizations and associations supports French Fintech start-ups. 6.4.1

Sandbox Approach

There are no regulatory sandboxes in France. However, a few private hubs for FinTech and public initiatives (i.e., Finance Innovation) tend to promote innovation. However, since 2020, the ACPR-FinTech Innovation Unit was set up to monitor and analyze the digitalization of the French financial companies. Within the AMF, the ACPR-FinTech Innovation Unit leads the FinTech Forum, which gathers together professionals several times a year, in order to discuss regulatory and supervisory subjects related to Fintech and innovation. The team depends on the General Secretary of the ACPR and provides an interface between project initiators and the involved ACPR Directorates, as well as the Bank of France (for projects regarding payment services) and the Autorité des Marchés Financiers (for projects regarding investment services). 6.4.2

Electronic Payments

The payment instrument landscape is evolving rapidly in France. The country has one of the highest rates of use of cashless payment instruments. At the end of 2019, there were 50,316 ATMs in metropolitan France. While this number fell by 4.1% in 2019, the number of private access points rose by 10.1%.4 The Banque de France was given specific responsibility for the oversight of cashless payment instruments by the law of November 15, 2001, which requires it to ensure “that the means of payment other than fiduciary currency are secure and that the regulations applicable thereto are pertinent” (Article L.141–4 of the French Monetary and Financial Code).5 The law of January 28, 2013 4 The use of cash in France and in the euro area (2021), https://www.banque-france. fr/en/banknotes/analysing-and-anticipating/use-cash-france-and-euro-area. 5 Oversight of cashless means of payment (2022), https://www.banque-france.fr/en/ financial-stability/market-infrastructure-and-payment-systems/oversight-tasks/oversightcashless-means-payment.

98

F. I. LESSAMBO

extended this scope further to cover special payment vouchers such as luncheon and holiday vouchers, which are subject to special legal and regulatory requirements. Moreover, the Banque de France is responsible for verifying the security and efficiency of work carried out by thirdparty service providers on behalf of credit and payment institutions. The oversight mission of the Banque de France is part of a wider European approach, known as Eurosystem oversight framework for electronic payments (PISA). 6.4.3

Crowdfunding and Crowdlending

Crowdfunding platforms allow investors to invest in the companies themselves, through the issuance of shares or bonds, while crowdlending platforms allow their users to grant loans. French crowdfunding and crowdlending platforms have been struggling recently as traditional banks are increasingly willing to lend to SMEs at low rates. Crowdfunding and crowdlending platforms have to register with the ACPR and/or the AMF either as crowdfunding/crowdlending intermediaries (for donations and crowdlending platforms) or as crowdfunding investment advisors (for investment-based crowdfunding). 6.4.4

Robot-Advice

Robot-advisors are personalized online savings management services that allow individuals to invest their savings in a smart and automated way. Although their business models vary significantly, these companies generally rely on artificial intelligence to suggest an optimal asset allocation, which may vary over time based on the risk profile of the client and their personal savings goals. Most of these robot-advisors are primarily regulated by the AMF as financial investment advisors. Yomoni is the only robot-advisor regulated as an investment management company. 6.4.5

Cryptocurrencies and Blockchain

The first French regulation of cryptocurrency came in January 2014, the Prudential Supervision and Resolution Authority (ACPR), the French banking and insurance regulatory authority, stated that entities receiving legal currency on behalf of clients in relation to the purchase or sale of

6

THE BANK OF FRANCE

99

cryptocurrencies were required to obtain a license to provide payment services.6 Under the Ordinance No. 2017-1674 of December 8, 2017 and Decree No. 2018-1226 of December 24, 2018, the French government introduced innovative legislation allowing blockchain technology to be used to issue, register, and transfer unlisted securities. The major recent Fintech-related legislation is the PACTE Act, which was enacted in May 2019 and recently supplemented by the order 2020-1544 of December 9, 2020, which extended the scope of services on crypto assets requiring registration with the AMF. It introduces a comprehensive regulatory framework for token issuances (“ICOs”) and digital assets service providers. With respect to ICOs and cryptocurrencies, the PACTE Act contains three key measures: – Optional AMF approval for ICOs. The AMF may grant an approval to public offerings of tokens. This approval is optional and not mandatory: potential token issuers are free to require the AMF’s visa or proceed with their ICO without the AMF’s approval. To be qualified for the approval, the following requirements must be met: (i) the issuer is a legal entity incorporated in France, or at least registered in France through a branch; (ii) the disclosure document and the marketing materials are accurate, written in plain language, non-misleading, and describe the risks associated with the offer; and (iii) the issuer plans to implement adequate procedures to track and safeguard the funds raised in the ICO. As of 2020, only three visas have been granted by the AMF, to the companies French ICO in December 2019, WPO in May 2020, and iExec Blockchain Tech in October 2020. – Digital assets service providers: The services related to digital assets include various kinds of traditional investment services: • custody of digital assets or cryptographic private keys for third parties; • purchase or sale of digital assets against legal currency; • purchase or sale of digital assets against other digital assets; • operation of a digital assets trading platform; and 6 ACPR, Position 2014-P-01, https://acpr.banque.france.fr/sites/default/files/201 40101_acpr_position_bitcoin.pdf.

100

F. I. LESSAMBO

• various other services related to digital assets: receipt and transmission of orders on behalf of third parties; asset management; investment advice related to digital assets; underwriting; and placing with or without a firm commitment. – Right to open a bank account: Banks now have to set up objective, non-discriminatory and proportionate rules to determine if the following categories of entities should be allowed to open an account in their books: i token issuers, which have been granted an optional approval by the AMF; ii registered digital assets service providers; and iii Digital assets service providers, which obtained an optional license. Their access to basic banking services shall not be hindered by the bank once the account is open. 6.4.6

InsurTech

InsurTech companies are subject to the same legislation as insurance undertakings, unless they merely provide technological services to regulated entities. The French Prudential Supervision and Resolution Authority (ACPR) is an administrative authority in charge of the regulation of the insurance market, as well as of the banking market.

6.5 See Figs. 6.2 and 6.3.

BDF Financial Statements

6

Fig. 6.2 BDF balance sheet

THE BANK OF FRANCE

101

102

F. I. LESSAMBO

Fig. 6.3 BDF profit and loss account

CHAPTER 7

The Bank of Italy (Banca d’Italia)

7.1

General

The Bank of Italy is the central bank of the Republic of Italy. It is a publiclaw institution regulated by national and European legislation. The Bank of Italy was constituted in 1893 as part of an overall reorganization of Italy’s banks of issue. It is an integral part of the Eurosystem, which is made up of the national central banks of the euro area and the European Central Bank. The Eurosystem and the central banks of the member states of the European Union that have not adopted the euro make up the European System of Central Banks. It contributes to the decisions on the single monetary policy of the euro area and performs the tasks entrusted to it as a central bank forming part of the Eurosystem. The capital of the Bank of Italy is set at e7,500,000,000 in registered shares with a unitary nominal value, established by law, of e25,000.

7.2

Missions and Objectives

The Bank of Italy’s primary function is ensuring monetary and financial stability, which are essential to sustained economic growth. The Bank’s activity comprises a range of commitments within the Eurosystem and worldwide. It carries out foreign exchange operations in accordance

© The Author(s), under exclusive license to Springer Nature 103 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_7

104

F. I. LESSAMBO

with the rules laid down by the Eurosystem, and manages the country’s own foreign exchange reserves and a part of those of the ECB on the latter’s behalf. It is also responsible for producing the quantity of euro banknotes established by the Eurosystem, managing the currency in circulation and fighting against forgery. The Bank performs services for the State by carrying out treasury operations (public sector receipts and disbursements), acting as agent for the public debt, and combating usury. It protects customers by supervising the transparency and fairness of the conduct of banking and financial institutions, strengthening the instruments for individual customer protection and improving the level of financial literacy in the country.

7.3

Organizational Structure

The Statute provides that the Bank is to be governed by the Shareholders’ Meeting, the Board of Directors, the Governing Board, consisting of the Governor, the Senior Deputy Governor and three other Deputy Governors, and the Board of Auditors (Fig. 7.1). 7.3.1

The Governing Board

The Directorate (Governing Board) is a collegial body, is made up of the Governor, the Senior Deputy Governor, and the three Deputy Governors and authorized to adopt measures of external significance regarding the exercise of the public functions entrusted by law to the Bank in pursuit of its aims, other than decisions falling under the authority of the ESCB. An absolute majority of those passes resolutions present; where the numbers in a division are equal, the Governor has the casting vote. Minutes are kept of meetings. 7.3.2

The Board of Directors

The Board of Directors is responsible for operational, organizational, and accounting matters. It adopts resolutions establishing the geographical distribution and general organizational setup of the Bank, approves the annual expenditure budget and agreements negotiated with trade unions, and is kept informed by the Governor of the material facts regarding

THE BANK OF ITALY (BANCA D’ITALIA)

Fig. 7.1 Banca d’Italia—organization chart

7

105

106

F. I. LESSAMBO

the administration of the Bank.1 The Board of Directors consists of the Governor and thirteen directors elected by shareholders’ meetings held at the main branches of the Bank. The Board of Directors, acting on a proposal from the Governing Board and after consulting the Board of Auditors, draws up the plan for the distribution of the net profit and decides on its presentation to the Shareholders’ Meeting for approval. 7.3.3

The Board of Auditors

The Board of Auditors performs control functions with regard to the administration of the Bank to verify compliance with the law, the Statute, and the General Regulations. It consists of five standing members, including the chairperson, and two alternates. The members of the Board of Auditors are appointed by the shareholders’ meeting to a term of office of three years and may be re-elected no more than three times. The Board carries out accounting checks, without prejudice to the activity of the external auditors, examines the annual accounts and submits a report thereon to the shareholders’ meeting, and expresses its opinion on the distribution of the net profit. The Board checks that the accounts are properly kept and that operations are correctly entered in the account records examines the annual accounts and expresses its opinion on the distribution of the net profit. A member of the Board of Auditors participates in the meetings of the internal audit advisory committee as an observer. 7.3.4

The Shareholding Meeting

Shareholders’ meetings are ordinary or extraordinary. Extraordinary shareholders’ meetings decide on amendments to the statute; ordinary shareholders’ meetings decide on all other matters specified by the statute. The annual ordinary general meeting of shareholders is held not later than 31 March, to approve the annual accounts, the allocation of the net profit, and, where necessary, the election of the members and chair of the Board of Auditors. Moreover, no later than 31 May every year, the Bank of Italy publishes its annual report on economic and financial developments

1 Articles 15, 16, 17, and 18 of the Statute.

7

THE BANK OF ITALY (BANCA D’ITALIA)

107

that form the basis for the Governor’s Concluding Remarks, which are delivered during a public meeting not limited to the shareholders. 7.3.5

The External Auditor

The auditors have full power to examine all books and accounts of the Bank and obtain information about its transactions. In preparing the annual accounts, the Bank is required to comply with accounting principles and standards that are mainly laid down in special rules. The auditors are liable for the professional opinion they render.

7.4

Fintech Regulations

In addition to being the central bank of Italy and forming part of the Eurosystem, the Bank of Italy is the lead supervisory authority in the banking and financial services sector. It shares some of its supervisory functions with the National Commission for Companies and the Stock Exchange (CONSOB), which provides investor protection and supervises the Italian securities market. Last but not least, Insurance Supervisory Authority (IVASS) is the supervisory authority for the Italian private insurance market. Italian financial institutions are making huge investments in digital and IT transformation, through integrating cloud technologies, leveraging big data analytics, developing new end-to-end processes and cybersecurity. The regulators and supervisors are taking strong steps toward fintech. Decree 100/2021 issued by the Ministry of Economy and Finance, implementing the delegated act envisaged under Decree Law 34/2019 (“Growth Decree”), sets out the “FinTech Committee rules and experimentation,” i.e., the regulatory sandbox of FinTech activities at the supervisory authorities. Through the sandbox, the supervisory authorities aim to support the growth and development of the Italian FinTech market, thanks to the introduction of innovative models in the banking, financial, and insurance sectors, while guaranteeing adequate levels of consumer protection and competition, and safeguarding financial stability.

108

F. I. LESSAMBO

7.4.1

The Sandbox Approach

The Bank of Italy has created a Fintech Channel as the point of contact through which operators can dialogue easily and informally with it. Operators can present projects in the field of financial services and of payments, based on innovative technology, or propose technological solutions designed for banks and financial intermediaries. The objectives are: (i) to promote dialogue between market operators and the Bank of Italy; (ii) to support the digital evolution of Italy’s financial market as part of the development of the regulatory framework; and (iii) to showcase the opportunities linked to the Bank of Italy’s innovation facilities.2 7.4.2

Digital Payments and Money Transfer

On January 13, 2018, Directive (EU) 2015/2366 on payment services in the internal market (PSD2) came into force, which promotes greater competition, efficiency, and innovation in the EU payment services market, while strengthening the protection of payment service users, as well as the transparency and security of electronic payments. Legislative Decree No. 218/2017 (“PSD2 Decree”) implemented EU Directive No. 2015/2366 on payment services in the internal market, modifying TUB. The PSD2 Decree introduced two new payment services: the account information service (“AIS”); and the payment initiation service (“PIS”), and both banks and payment/e-money institutions could provide PIS and AIS after a prior communication to the Bank of Italy. 7.4.3

Crowdfunding

Social lending activities must comply with the specific regulation related to Reserved Activities. The collection of savings is an activity reserved to the banks, and the Bank of Italy stated that this activity is prohibited to both managers and borrowers, with some exceptions. TAR Lazio (Administrative Court, Judgment No. 12848/2009) ruled that if the activity 2 https://www.bancaditalia.it/focus/fintech/index.html?com.dotmarketing.htmlpage. language=1.

7

THE BANK OF ITALY (BANCA D’ITALIA)

109

carried out through an online platform that connects lenders to borrowers constitutes a form of collection of savings, then it is a Reserved Activity that can only be performed by authorized entities. Law Decree No. 179/2012 (converted in Law No. 221/2012, then amended by Consob Regulation No. 18592/2013) introduced the equity-based crowdfunding regulation. Pursuant to the Italian Financial Act and Consob Regulation No. 18592/2013, only investment firms, banks authorized to provide investment services, or portal managers specifically authorized by Consob can manage equity crowdfunding. Law No. 145/2018 introduced the possibility to use crowdfunding portals in order to offer debt instruments addressed to professional investors. Following recent amendments to the Consolidated Financial Act and the Crowdfunding Regulation, the Italian regulation also introduced the possibility, within certain limits, for the aforesaid entities to collect bonds and other debt financial instruments through such online portals (debt crowdfunding). 7.4.4

Robot-Advisory Services

FinTech companies can provide investment services only after CONSOB and/or the Bank of Italy have granted them ad hoc authorization, as the case may be. Robot-advice is governed by the same provisions that regulate investment advice in general, as it concerns a well-defined transaction relating to specific financial instruments, characterized by a personalized recommendation addressed to a client or group of clients. Moreover, the intermediary providing robot-advice is responsible for monitoring and testing the underlying algorithms. 7.4.5

Cryptocurrency

There is no specific regulation on cryptocurrencies and crypto assets in Italy. Thus, legislative Decree No. 90/2017 (as amended by Legislative Decree No. 125/2019) subject virtual currency providers to the regulations established for traditional money exchange operators. However, the storage, exchange, or use of virtual currencies is allowed, but providers of e-wallet and crypto-exchange services must comply with the AML regulation. CONSOB stated that crypto assets are deemed investments as they

110

F. I. LESSAMBO

consist in the digital representation of rights linked to investments in entrepreneurial projects, to be stored and then distributed by means of DLT technologies. 7.4.6

InsurTech

There are no regulatory provisions in force in Italy for the InsurTech sector. Innovative models of insurance brokerage are currently being tested, including the offer of policies together with consumer goods sold through online portals or apps.

7.5

Banca d’Italia Financial Statements 7.5.1

The Balance Sheet

See Fig. 7.2. 7.5.2 See Fig. 7.3.

Profit and Loss

7

THE BANK OF ITALY (BANCA D’ITALIA)

Fig. 7.2 Banca d’Italia—Balance sheet

111

112

F. I. LESSAMBO

Fig. 7.2 (continued)

7

THE BANK OF ITALY (BANCA D’ITALIA)

Fig. 7.3 Banca d’Italia—profit and loss

113

CHAPTER 8

The Central Bank of Spain (Banco de España)

8.1

General

The Bank of Spain (Banco de España) is the central bank of Spain. It is one of the oldest European central banks,1 established in Madrid in 1782 by Charles III, to stabilize government finances through its state bonds (vales reales ) following the American Revolutionary War in which Spain gave military and financial support to the Thirteen Colonies. Today the bank is a member of the European System of Central Banks and is also Spain’s national competent authority for banking supervision within the Single Supervisory Mechanism. The Bank of Spain Autonomy Act regulates its activity.

8.2

Missions and Objectives

One of the Banco de España’s responsibilities is ensuring the stability of the Spanish financial system. To this end, it pursues both price and financial system stability and, through its analysis, contributes toward other economic policymaking. Financial stability is key to social wellbeing. A stable financial system will be able to absorb the impact of 1 Pablo Martin-Acena (2018): The Bank of Spain, 1782–2017: A History, Cambridge University Press, pp. 172–205.

© The Author(s), under exclusive license to Springer Nature 115 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_8

116

F. I. LESSAMBO

shocks and the materialization of risks without the financial intermediation process being adversely affected and further damage being inflicted on economic activity. The Bank of Spain as a central bank pursues the following functions2 : – Hold and manage foreign exchange reserves and precious metals not transferred to the ECB. – Promote the smooth functioning and stability of the financial system and, without prejudice to the tasks of the ECB, of national payment systems. Emergency liquidity operations are carried out in this context. – Supervise the solvency and compliance with the specific regulations of credit institutions, other entities, and financial markets for which it has been assigned supervision. – Put hard currency into circulation and carry out, on behalf of the state, the other functions entrusted to it in this regard. – Compile and publish statistics related to its tasks and assist the ECB in the collection of statistical information. – Provide treasury and financial agency services for public debt. – Advise the government and prepare appropriate reports and studies.

8.3

Organizational Structure

The governing structures of the Bank is divided among four branches: (i) the Governor; (ii) the Deputy Governor; (iii) the Governing Council; and (iv) the Executive Commission (Fig. 8.1). 8.3.1

The Governor

The Governor directs the Bank chairs the Governing Council and the Executive Commission, and is the legal representative of the Bank before those institutions and international organizations in which he is expected to participate. The King, following a proposal by the Prime Minister, appoints him. His mandate is for a six-year term and is not renewable.

2 Ibai Puente González and Uría Menéndez (2017): Banking Regulation in Spain: Overview-Corporate Governance, Thomson Reuters, Practical Law.

8

THE CENTRAL BANK OF SPAIN (BANCO DE ESPAÑA)

117

Fig. 8.1 Banco de Espana—organization chart (Source https://www.bde.es/ f/webbde/INF/MenuHorizontal/SobreElBanco/organiza/ficheros/en/Organi gramas_i.pdf)

8.3.2

The Deputy Governor

The Deputy Governor of the Banco de España stands in for the Governor in the event that the post is vacant or in the Governor’s absence, and performs the duties established in the Bank’s regulations or delegated to him by the Governor. The Government at the proposal of the Governor appoints him. His mandate is for a six-year term and is not renewable.

118

F. I. LESSAMBO

Fig. 8.1 (continued)

8

THE CENTRAL BANK OF SPAIN (BANCO DE ESPAÑA)

8.3.3

119

The Governing Council

The Governing Council of the Banco de España is formed by: (i) the Governor, (ii) the Deputy Governor; (iii) Six council members; (iv) the General Secretary for Treasury and International Financing; and (v) the Vice-Chairman of the National Securities Market Commission (CNMV). The Governing Council of the Banco de España approves the general guidelines for the Bank’s activities, in particular: – those relating to monetary policy, the application of which it oversees. – circulars of the Banco de España. – proposals for sanctions, which the Bank must submit to the Minister for Economic Affairs and Finance, and it may impose those sanctions that are within its authority. – the approvals necessary for carrying out the functions produced by the Banco de España that are not the exclusive authority of the Executive Commission. The Governing Council ratifies the appointment of the DirectorsGeneral of the Banco de España. 8.3.4

The Executive Commission

The Executive Commission of the Banco de España, subject to the guidelines of the Governing Council: (i) implements monetary policy; (ii) determines administrative authorizations to be granted by the Bank; (iii) makes recommendations and requests to credit institutions; and (iv) determines intervention measures and the replacement of directors or other measures that have been vested by law to the Banco de España. 8.3.5

The Audit Committee

The Audit Committee is formed by three members of the Governing Council, designated by the Council, upon proposal of the Governor. The Governing Council designates the Chairman of the Audit Committee from among its members. In case of absence, the member with the longest standing as member of the Governing Council replaces him. The Audit Committee members have to attend personally the meetings of

120

F. I. LESSAMBO

the Audit Committee, and their attendance cannot be delegated. They shall be substituted by another member of the Governing Council designated by the Council, upon proposal of the Governor, when the post becomes vacant or in the event of absence or prolonged illness of any of the members. In addition to the examination of the draft annual accounts, the Audit Committee has the following functions: – supervising relations with the external auditors and their work and reports; – supervising the workings of the internal audit and control departments; – preparing the relevant reports for the Governing Council on the annual accounts, the performance of the external audit, and the workings of the internal audit and control department; – taking note of the agreements related to risk management adopted by the Risk Board, and keeping in contact with the latter in those matters related to the Audit Committee object; – having knowledge of the annual accounts of the special-purpose entities of Banco de España, prior to their approval.

8.4

FinTech Regulation

The regulator in charge of supervision of fintech businesses is the Spanish Securities Market Commission (“CNMV”), together with the Bank of Spain, and the DGSFP, depending on the type of entity intending to provide services in Spain and the exact nature of those services. Spain is among the most energetic fintech environments in all of Europe, which translates to one of the most active in the world. Spain welcomes sandbox regulatory approach, which consists of controlled safe spaces that allow experimentation for new business proposals. It is designed as the ideal environment to identify the best projects for the betterment of financial service provisions through digital innovation. Fintechs are not expressly regulated in Spain. This is mainly because fintech businesses in Spain cover a vast range of activities.

8

THE CENTRAL BANK OF SPAIN (BANCO DE ESPAÑA)

8.4.1

121

The Sandbox Approach

In 2016, the CNMV created an “innovation hub” under the name of “Portal Fintech,” with the following objectives: i. provide support to developers and financial institutions on regulatory aspects of securities markets that might affect their projects; ii. create an informal space where developers and financial institutions can share their initiatives in this field; and iii. generate criteria on certain relevant Fintech issues in the securities markets.3 8.4.2

Payment Services

Regulators in Spain follow the EU PSD2 regarding payment services. PSD2 is a new European directive for payments from consumers and businesses. This law is effective from January 2018 onward and ensures that new parties can gain access to transaction data and that they can make payments for customers. These services are only allowed if the company has a license and if the consumer has given explicit consent to access the transaction data. The first PSD2 licenses in the Spain were issued in 2019. This law allows innovations such as combining transaction data of multiple accounts, or providing insight to customers into their transactions. 8.4.3

Online Banking

There is no specific regulatory framework governing online banking or neobanks, which are those fintechs that offer a 100% mobile banking experience by partnering with a traditional bank to manage operations; such bank is really the one in charge of issues such as regulatory compliance, Know Your Customer (“KYC”) policies, and all the processes, controls, and restrictions to which the fintech is subject to.

3 https://www.cnmv.es/Portal/Fintech/Innovacion.aspx?lang=en.

122

F. I. LESSAMBO

8.4.4

Social Trading Platforms

These platforms are under the authorization, supervision, inspection, and sanction of the CNMV, with the participation of the Bank of Spain, in case of lending-based crowdfunding. Law 5/2015, of April 27, on the Promotion of Business Financing (“LFFE”) regulates financial crowdfunding platforms involved in the intermediation of financing through loans, bonds, or equity participations. 8.4.5

Crowdfunding

Law 5/2015 regulates crowdfunding and crowdlending platforms and the provision of their services. These activities require an authorization from the CNMV. Spanish law imposes no restriction on the ability of fintechs to be founded via equity or debt. According to the Digital Market Outlook, the crowdfunding segment in Spain is expected to grow to 530.8M US dollars in 2024 with average funding per loan 77,739.6 US dollars.4 In 2015, CNMV presented a specific legal framework for financial crowdfunding, which added clarity to provider-investor relationship and attracted more players to this niche. 8.4.6

Cryptocurrency

Since there is no specific regulation on cryptocurrencies in Spain, they cannot be treated as legal tender, which is exclusively reserved for the Euro as the national currency. Cryptocurrency cannot be considered either as a financial instrument (promissory note, derivative, etc.) or a currency (domestic or foreign), but, when traded individually, in the case of public offerings or chattels or commodities, they could be assimilated to securities. When so, ICOs may fall within the prospectus filing requirements of the Spanish stock market law (“LMV”). While cryptocurrencies are not per se securities, Spain’s general security and investment laws govern ICOs when they are classified as “public offerings of transferable

4 Sabina Reminskaya (2020): CNMV and Crowdfunding in Spain, https://lenderkit. com/blog/crowdfunding-in-spain/.

8

THE CENTRAL BANK OF SPAIN (BANCO DE ESPAÑA)

123

securities.” That is, ICOs that are not public offerings are not regulated under any of the three acts mentioned above. 8.4.7

InsurTech

All InsurTechs performing in the insurance sector, although not directly as an insurance company but rolling an intermediary profile must meet specific requirements in their special area provided in Royal Decree Law 3/2020. The Association of Fintech and InsurTech (“AEFI”), which promotes fintech initiatives, has published a white paper on InsurTech regulation to boost legislative initiatives. However, the licensing authority for all insurance business is the Directorate General for Insurance and Pension Funds (“DGSFP”) operating under the jurisdiction of the Spanish Ministry of Economy.

8.5

Financial Statements 8.5.1

The Balance Sheet

Central Bank Balance Sheet in Spain increased to 1,203,668 EUR Million in March from 1,193,638 EUR Million in February of 2022 (Fig. 8.2). 8.5.2 See Fig. 8.3.

Profit and Loss

124

F. I. LESSAMBO

Fig. 8.2 Banco de Espana—balance sheet

8

Fig. 8.2 (continued)

THE CENTRAL BANK OF SPAIN (BANCO DE ESPAÑA)

125

126

F. I. LESSAMBO

Fig. 8.3 Banco de Espana—profit and loss

CHAPTER 9

The Prudential Regulation Authority

9.1

General

The Prudential Regulation Authority (PRA) is a part of the Bank of England and is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers, and major investment firms.1 The Prudential Regulation Authority is a newer financial regulatory authority in the UK. Prior to the PRA, the UK had the Financial Services Authority (FSA). The FSA was the main governmental body in charge of regulating financial services companies. In 2013, the FSA disbanded and the PRA was created. The Bank of England owns the PRA; it is not a direct British government agency. There are two key regulators in the UK. The Prudential Regulation Authority (“PRA”) is responsible for the financial safety and soundness of banks, while the Financial Conduct Authority (“FCA”) is responsible for how banks treat their clients and behave in financial markets. The PRA supervises around 1,500 financial institutions including banks and insurance companies.2

1 Prudential Regulation Authority, https://www.iasplus.com/en-gb/resources/otherregulatory/pra. 2 Bank of England: What Is the Prudential Regulation Authority?, https://www.bankof england.co.uk/knowledgebank/what-is-the-prudential-regulation-authority-pra.

© The Author(s), under exclusive license to Springer Nature 127 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_9

128

F. I. LESSAMBO

Fig. 9.1 PRA—organization chart

9.2

Mission and Objectives

The Prudential Regulation Authority (PRA) has two primary objectives: a general objective to promote the safety and soundness of the firms we regulate; and an objective specific to insurance firms, to contribute to ensuring that policyholders are appropriately protected. We also have a secondary objective to facilitate effective competition in the markets for services provided by PRA-authorized firms.

9.3

Organizational Structure

See Fig. 9.1.

9.4

Funding

The Prudential Regulation Authority (PRA) is a subsidiary of the Bank of England that performs prudential regulation for over 1,500 major financial institutions located in the UK. These include financial institutions like banks, building societies, major investment firms, and more.

9

9.5

THE PRUDENTIAL REGULATION AUTHORITY

129

Fintech Regulatory and Supervision

The UK financial regulators and policymakers are very receptive to FinTech. FCA Regulatory Sandbox, allows firms to test new products and services in a controlled environment. The Financial Technology (FinTech) industry has grown strongly over the past five years, with revenue forecast to increase at a compound annual rate of 8% over the five years through 2021–2022 to reach £12 billion.3 There is no single regulatory framework, which governs FinTech. FinTech firms which carry on certain regulated activities fall within the ambit of the regulatory bodies, unless an exemption applies, and need to be authorized and regulated by one or more of these bodies: the Financial Conduct Authority (FCA), the Bank of England (BoE), and the Prudential Regulation Authority (PRA). FinTech firms would need to consider whether their activities require authorization, and comply with the relevant provisions and rules. A failure to comply could result in enforcement action being taken by the FCA and/or the PRA and penalties include significant fines and, in cases involving individuals, potential prohibitions from working in the industry. In January 2016, the PRA launched the New Bank Start-up Unit and published a guide to help firms, including fintech companies, understand the regulatory requirements of being a bank, and provide practical information on the application process. The New Bank Start-up Unit Guide (PRA and FCA (2018)) is updated frequently to ensure that firms have the most up-to-date information on regulatory requirements. It also holds frequent seminars to help firms understand regulatory expectations. 9.5.1

Fintech Accelerator: Bank of England (BoE)

The British pioneered the idea of a regulatory sandbox for financial services Financial Conduct Authority (FCA) in 2016.4 The BoE launched

3 IBIS World (2021): Financial Technology in the UK—Market Research Report, https://www.ibisworld.com/united-kingdom/market-research-reports/financialtechnology-industry/. 4 Wolf-Georg Ringe and Christopher Ruof (2020): Regulating Fintech in the EU: The Case for a Guided Sandbox, European Journal of Risk Regulation, 11(3), 607.

130

F. I. LESSAMBO

a Fintech Accelerator in June 2016 to help it harness Fintech innovations for central banking purposes.5 The Fintech accelerator worked with small cohorts of successful applicants on short Proofs of Concept (PoC) in priority areas, such as cyber-resilience, desensitization of data, and the capability of distributed ledger technology. Using an open and competitive application process, the BoE Accelerator helped the central bank create a framework to reach an array of Fintechs who could collaborate directly with different business areas within the Bank. The aim was to be agile: testing the solution and the technology fast and if necessary, failing fast, to prove the concept within an average period of three months. The Accelerator provided the BoE with a number of tangible and intangible benefits; from enabling a faster path to engaging with start-ups and streamlining the product and testing environment, to the development of intelligence on growing market trends, and importantly gaining first-hand experience of a range of new technologies, while evaluating their application both to the Bank’s own functions and in the wider market, through to being a catalyst for innovation within the Bank. 9.5.2

Digital Payment and Lending

Certain payment services are regulated by the FCA under the Payment Services Regulations 2017 (PSRs), which implement Directive (EU) 2015/2366 on payment services in the internal market (PSD2) in the UK. That is, specified payment services are required and must be authorized by the FCA. Moreover, the FCA also regulates the issuance of e-money, which is sometimes provided together with payment services. Likewise, international payments, which are made using money remittance services, fall within the ambit of the PSRs. 9.5.3

Digital Platform Financing

Like traditional banks, digital banks can offer a full range of banking products and services to their customers. Both are licensed to take deposits and 5 World Bank Group (2020): How Regulators Respond to Fintech Evaluating the Different Approaches—Sandboxes and Beyond, p. 27, https://documents1.worldbank. org/curated/en/579101587660589857/pdf/How-Regulators-Respond-To-FinTech-Eva luating-the-Different-Approaches-Sandboxes-and-Beyond.pdf.

9

THE PRUDENTIAL REGULATION AUTHORITY

131

use the deposited money to carry out their banking activities.6 Platforms are two-sided or multi-sided markets, and benefit from network effects that create more value for each participant with increased numbers of other participants.7 9.5.4

Blockchain/Cryptocurrency

In response to the significant attention given to DLT and the growth of crypto assets, the UK Government set up a Taskforce. In July 2019, the FCA published its Final Guidance on Crypto Assets to help firms understand whether, and the extent to which, their crypto asset activities fall within the ambit of the FCA regulation.8 Regulation of digital assets depends on the nature of the assets and the type of activity involved, with decisions as to the regulation that applies being made on a case-bycase basis. Certain activities carried out in relation to digital assets that are within the ambit of the UK regulations would require a firm to be authorized and/or be subject to regulation, including: – – – – –

Firms Firms Firms Firms Firms

issuing or creating digital assets; advising on or buying and selling digital assets; and platforms that facilitate transactions between participants; that provide secure storage for or that hold tokens; and marketing digital asset products and services.

The FCA has categorized crypto assets into three types of tokens: (i) regulated tokens, (ii) security tokens, and (iii) e-money tokens.

6 Johannes Ehrentraud, Denise Garcia Ocampo, and Camila Quevedo Vega (2020): Regulating Fintech Financing: Digital Banks and Fintech Platforms, BIS, pp. 1–39, https://www.bis.org/fsi/publ/insights27.htm. 7 Erik Feyen, Jon Frost, Leonardo Gambacorta, Harish Natarajan, and Matthew Saal (2021): Fintech and the Digital Transformation of Financial Services: Implications for Market Structure and Public Policy, BIS, p. 7. 8 Financial Conduct Authority (2019): Guidance on Cryptoassets—Feedback and Final Guidance to CP 19/3, pp. 1–20, https://www.fca.org.uk/publication/policy/ps19-22. pdf.

132

F. I. LESSAMBO

• Regulated tokens are “security tokens” and “e-money tokens”. The FCA considers a security to refer broadly to an instrument that indicates an ownership position in an entity, a creditor relationship with an entity, or other rights to ownership or profit. Security tokens are securities because they grant certain rights associated with traditional securities. FinTech firms, which carry on a regulated activity involving security tokens, would need to ensure that they are appropriately authorized or exempt. For simplification sake, the FCA has set out a non-exhaustive list of factors that it considers are indicative of a security to assist firms. Conversely, E-money tokens are tokens that meet the definition of electronic money in the E-Money Regulations 2011 (“EMRs”). • Unregulated tokens Anything else falls under the broad category of unregulated token. These are tokens that do not provide rights of obligations akin to specified investments like shares, debt securities, and e-money, such as Exchange tokens, utility tokens. 9.5.5

InsurTech Business Model

InsurTech (FinTech in the insurance industry) firms are regulated depending on the activity they carry out. Two EU directives regulated the InsurTech business: Directive (EU) 2016/97 on insurance distribution,9 and Directive 2009/138/EC on the taking-up and pursuit of the business of insurance and reinsurance.10

9 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32016L 0097&rid=5. 10 https://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:335:0001: 0155:en:PDF.

CHAPTER 10

China Banking Insurance Regulatory Commission

10.1

General

China Banking Insurance Regulatory Commission (CBIRC) is a new agency resulting from the 2018 merger of the China Banking Regulatory Commission (CBRC) and the China Insurance Regulatory Commission (CIRC).1 China Banking Insurance Regulatory Commission (CBIRC) is the main regulatory body that has been overseeing the Chinese banking system since 2018.

10.2

Mission and Objectives

The CBRC mission is to protect fair competition in the banking sector and enhance the industry’s competitiveness, and thereby promoting the safety and soundness of the banking sector and maintaining public confidence in the banking sector. Protecting the interests of depositors and other customers and maintaining public confidence in the banking sector through prudential supervision; increasing public knowledge about modern financial products, services, and the related risks through education and information disclosure; and reducing banking-related crimes to 1 China Banking and Insurance Regulatory Commission (2021), https://www.uschina. org/sites/default/files/2021.4.15_cbirc.pdf.

© The Author(s), under exclusive license to Springer Nature 133 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_10

134

F. I. LESSAMBO

maintain financial stability.2 It is also responsible for monitoring liquidity levels, capital adequacy ratios, reserve ratio requirements, and the prevalence of non-performing loans (NPLs) in domestic banks as well as regulating the insurance market, supervising activities of insurance agencies, and establishing risk control mechanisms for the insurance industry. Under new structural changes to the Chinese government, the People’s Bank of China (PBoC) drafts new laws and rules for the banking and insurance sectors, while CBIRC is in charge of compliance with relevant laws and regulations. Though PBoC is the principal regulator responsible for China’s electronic payment and credit card clearing systems, CBIRC oversees approval for banks’ abilities to offer debit cards and bankbranded credit cards. Moreover, CBIRC oversees state-owned banks, rural credit cooperatives, trusts, and other financial services companies such as cooperative shareholding banks. In practice, the CBRC lacks operational independence, which might impair its ability to execute its legal mandate. That is, the State Council can overturn the CBRC’s decisions.3

10.3

Main Responsibilities

After the merger of the two aforementioned institutions into the CBIRC, the responsibilities of the newly created institution have significantly increased4 : – Regulate and supervise the banking and insurance sectors in China in accordance with laws and regulations; ensure the legal and stable operation of banking and insurance institutions. – Conduct systematic research on the reform and opening up as well as supervisory effectiveness of the banking and insurance sectors; engage in strategic planning for financial reform and development,

2 China Banking Regulatory Commission (2014): 2014 Annual Report publishing, pp. 1–20, http://en.pkulaw.cn/inc/ueditor/net/upload/2018-05-02/10cd3fd9-80844a52-ab76-ebf3e0004f7a.pdf. 3 IMF (2017): People’s Republic of China—Financial Assessment Program, https:// www.imf.org/en/Publications/CR/Issues/2017/12/07/people-republic-of-china-financ ial-system-stabilityassessment-45445. 4 China Banking Regulatory Commission (2014): 2014 Annual Report publishing, pp. 1–20, http://en.pkulaw.cn/inc/ueditor/net/upload/2018-05-02/10cd3fd9-80844a52-ab76-ebf3e0004f7a.pdf.

10

–

–

–

–

–

–

–

–

CHINA BANKING INSURANCE REGULATORY COMMISSION

135

drafting of laws and regulations of the banking and insurance sectors, and the establishment of prudential regulation framework and financial consumer protection framework; formulate relevant rules and regulations of the banking and insurance sectors, and make recommendations for the formulation and amendment of these rules and regulations. Formulate supervisory rules for prudential regulation and financial consumer protection in accordance with the framework of prudential regulation and financial consumer protection; develop operational rules and supervisory rules for microfinance companies, financing guarantee companies, pawnshops, leasing companies, commercial factoring companies, local asset management companies, and other institutions; and establish supervisory framework for the business activities of online lending institutions. License banking and insurance institutions and their business scope in accordance with laws and regulations; review and approve the qualification of senior management of relevant institutions; and formulate codes of conduct for banking and insurance employees. Conduct supervision on banking and insurance institutions in terms of corporate governance, risk management, internal control, capital adequacy, solvency, business operation, and information disclosure, etc. Conduct on-site examination and off-site surveillance on banking and insurance institutions, carry out risk and compliance assessment, protect the legitimate rights of financial consumers, and penalize illegal acts and misconducts. Compile and publish statistical reports of the banking and insurance sectors, make due disclosure in accordance with requirements, and perform the duty of financial statistical work. Establish risk monitoring, control, assessment, and early warning mechanisms for the banking and insurance sectors; track, analyze, monitor, and forecast the banking and insurance operations. Make recommendations for and oversee the implementation of the contingent risk resolution plans of depository financial institutions and insurance institutions. Crack down on illegal financial activities in accordance with laws and regulations, including identifying, punishing, and banning illegal fund-raising activities and conducting relevant coordination work. Provide guidance for and monitor the work of local financial regulatory authorities.

136

F. I. LESSAMBO

– Engage in the activities of international banking and insurance organizations, including the international regulatory standard-setting work for banking and insurance sectors; facilitate international cooperation of the banking and insurance sectors. – Carry out routine administrative work of the supervisory boards of major banks. Perform other responsibilities assigned by the central government.

10.4

Organizational Structure

The Chairman of the CBRC is appointed by the State Council, as are the five vice chairpersons. The Chairman of the CBRC also served as a member of the Central Committee of the Communist Party of China. Major regulatory initiatives and supervisory issues are discussed and decided at the Chairman’s Work Meeting attended by the top management and department heads. The daily supervisory decisions of the CBRC departments and local offices are made by relevant heads, or discussed at the CBRC-level/local-office-level meetings, as the case may be. Decisions on significant initiatives and supervisory issues are subject to approval by superior heads. The head(s) of the supervisory authority is (are) appointed for a minimum term and is removed from office during his/her term only for reasons specified in law or if (s)he is not physically or mentally capable of carrying out the role or has been found guilty of misconduct. The CBRC has also set up expert taskforces dedicated to major tasks or professional fields. For example, borrower rating, debt rating, and market risk expert taskforces comprising members from the Large Commercial Banks Supervision Department and local offices were set up to facilitate the verification and assessment of the Advanced Approach to capital adequacy supervision of large banks. Task forces have also been established to address financial innovation including such issues as wealth management, asset securitization, and credit card business5 (Fig. 10.1).

5 IMF (2017): People’s Republic of China—Financial Assessment Program, https:// www.imf.org/en/Publications/CR/Issues/2017/12/07/people-republic-of-china-financ ial-system-stabilityassessment-45445.

10

CHINA BANKING INSURANCE REGULATORY COMMISSION

137

Fig. 10.1 CBRC organizational chart

10.5

Fintech Regulatory and Supervision

Financial supervision in China is conducted according to the laws and regulations in force. With the enactment of the Law on Securities at the end of 1998, the three major supervision authorities are: the People’s Bank of China (the PBC), the Insurance Regulatory Commission of China, and the Securities Regulatory Commission of China, now supervise the three types of financial institutions and their business activities based on the Law of The People’s Bank of China, the Law of Commercial Banks, the Law of Insurance, and the Law on Securities, respectively. In 2018, China FinTech investments reached USD25.5 billion, ranking first in the world and amounting to about half of the global total of FinTech investments that year.6 China Fintech regulations are based on three principles: (i) financial businesses must be licensed to 6 Viviana Zhu (2021): China’s Fintech: The End of Wild West, Institut Montaigne.

138

F. I. LESSAMBO

operate; (ii) different businesses such as insurance and wealth management must set up firewalls to prevent cross-sector risks; and (iii) the direct link between non-banks and banking information services must be cut. Regulations regarding online payment systems were only issued by the Central Bank in 2010. In December 2019, the PBOC approved the Beijing Fintech Innovation Regulatory Trial, allowing financial institutions holding appropriate licenses to launch trial fintech programs in real-world markets under close regulatory supervision. Licensing requirements vary slightly depending on the geographic coverage of the business (i.e., whether nationwide or limited to a single province). The relevant businesses of the FinTech industry, based on the specific attributes of the corresponding financial services, shall be subject to the supervision of the traditional financial regulatory authorities. In particular: the CBIRC shall be responsible for the supervision of FinTech businesses which rely on services (or similar services) provided by commercial banks (such as Internet banking, Internet lending, P2P lending, etc.) and insurance companies (such as Internet insurance); the CSRC shall be responsible for the supervision of FinTech businesses which are related to investments in the securities markets, such as Internet funds, Internet securities, intelligent investment advisors, etc.; and the PBOC shall be responsible for the supervision of FinTech businesses related to the issuance, circulation, and clearing/settlement of currencies such as third-party payment services, digital currency, etc. In addition, local governments in China also play an important role in regulating the FinTech industry. For P2P platforms and other “quasi-financial businesses” such as financing leasing, financing guarantee and factoring, traditional financial regulatory authorities (i.e., the CBIRC, CSRC, and PBOC) will usually not be directly involved in the regulation, but will delegate the relevant regulatory authority to the local financial regulatory bureaus of local governments. The basic principle is that FinTech shall be used as a technical tool to promote the innovation and development of the financial services industry. 10.5.1

Digital Payments and Lending

The number of people making mobile merchant payments is expected rise to 577 million in 2019 and to almost 700 million in 2022. Chinese giants Alibaba and Tencent pioneered digital merchant payments and have driven the shift away from cash in the Chinese economy, where

10

CHINA BANKING INSURANCE REGULATORY COMMISSION

139

they now account for 90% of the $17 trillion mobile payments market.7 In 2010, the PBOC issued its Administrative Measures on Payment Services Provided by Non-financial Institutions and their Implementation Rules, stating that non-financial institutions must obtain payment business licenses to engage in payment services and are subject to supervision and management by the PBOC. 10.5.2

Digital Financing Platform

Digital Financial Platforms (DFPs) are crucial infrastructure for financial markets and provide massive cost savings for investors. These platforms have grown ever larger and challenged the regulatory and supervisory authorities. In late 2017, a regulatory framework was introduced for crowd-sourced equity funding (CSEF) by public companies from retail investors. 10.5.3

Cryptocurrency

Cryptocurrencies are not legal tender in China, and financial institutions are not allowed to accept cryptocurrencies or provide financial services in relation to them. Chinese authorities have banned all virtual currency trading and speculation. All “cryptocurrency” related business activities are “illegal financial activities” and strictly prohibited, according to a joint announcement by China’s central bank and nine other government departments.8 10.5.4

InsurTech

With the rapid development of Internet technology, the digitalization of insurance sales has led the development trend of the insurance industry in recent years. Only licensed insurance institutions (called “qualified operators”), including insurance companies and certain insurance intermediaries, are allowed to conduct internet insurance business.

7 CGAP (2019): China: A Digital Payments Revolution, https://www.cgap.org/res earch/publication/china-digital-payments-revolution. 8 Leo Xin (2021): China Regulators to Ban Crypto Trading and Speculation, Pinsent Masons, LLP.

140

F. I. LESSAMBO

10.6

Financial Statements

10.6.1

Income Statement

In 2020, the Bank strived to overcome the impact of the COVID-19 pandemic and changes in the external environment, actively implemented the fee reduction and profit concession policy, enhanced financial services for the real economy, actively empowered business with technology, and strengthened risk prevention and control, so as to maintain prudential operation and development. In the year, the Bank realized a net profit of RMB317,685 million, representing an increase of RMB4,324 million or 1.4% as compared to the previous year. Return on average total assets stood at 1.00%, and return on weighted average equity was 11.95%. Operating income amounted to RMB800,075 million, representing an increase of 3.1%, of which, net interest income grew by 2.3% to RMB646,765 million; non-interest income was RMB153,310 million, up by 6.6%. Operating expenses amounted to RMB206,585 million, representing a decrease of 0.6%, and the cost-to-income ratio was 24.76%. Impairment losses on assets were RMB202,668 million, indicating an increase of 13.2%. Income tax expense fell by 5.1% to RMB74,441 million (Figs. 10.2 and 10.3). 10.6.2

Balance Sheet

In 2020, in response to the impact of the pandemic and the complicated development trends externally, the Bank managed assets, funds, and capital in a coordinated manner, and further enhanced its ability to serve the new development paradigm by financial services. The Bank further optimized the asset and liability structure, and continuously improved the operation and management efficiency of assets and liabilities. It coordinated the quality, pace, scale, and price of investment and financing, gave full play to the driving and activating effect of all financial factors, and enhanced the adaptability and universality of financial services for the real economy. Furthermore, the Bank strived to cement the deposit development foundation and improved the stability of deposit growth. It deepened the reform of the market-oriented pricing mechanism, promoted the coordinated development of assets and liabilities in

10

CHINA BANKING INSURANCE REGULATORY COMMISSION

141

Fig. 10.2 CBRC consolidated statement of profit and loss

volume and price, and fully supported the reduction of financing costs of the real economy (Fig. 10.4). 10.6.3

Statement of Cash Flows

Net cash inflows from operating activities amounted to RMB1,557,616 million, representing an increase of RMB1,076,376 million as compared to last year, principally due to the increase of cash inflows resulted from the increase of due to customers. Specifically, cash outflows of operating assets reduced by RMB114,404 million; and cash inflows of operating liabilities increased by RMB1,016,145 million.

142

F. I. LESSAMBO

Fig. 10.3 CBRC comprehensive statement of profit and loss

Net cash outflows from investing activities amounted to RMB1,135,097 million. Specifically, cash inflows were RMB2,105,871 million, representing an increase of RMB264,937 million over last year, mainly due to the increased cash received from the recovery of financial investment; and cash outflows were RMB3,240,968 million, representing an increase of RMB737,348 million, mainly due to the increase in cash payment for financial investment. Net cash outflows from financing activities amounted to RMB46,949 million. Specifically, cash inflows were RMB947,475 million, representing a decrease of RMB343,256 million over last year, mainly due to the decreased proceeds from the Bank’s issuance of debt securities; and cash outflows were RMB994,424 million, representing a decrease of RMB183,433 million mainly due to the decreased payment for repayment of debt securities (Fig. 10.5).

10

CHINA BANKING INSURANCE REGULATORY COMMISSION

Fig. 10.4 CBRC balance sheet

143

144

F. I. LESSAMBO

Fig. 10.5 CBRC statement of cash flows

CHAPTER 11

The Reserve Bank of India

11.1

General

The banking system in India is regulated by the Reserve Bank of India (RBI), through the provisions of the Banking Regulation Act, 1949.1 Reserve Bank of India (RBI), the central bank of India, established in 1935 by the Reserve Bank of India Act (1934). Originally privately owned, the RBI was nationalized in 1949. The bank is headquartered in Mumbai and maintains offices throughout the country. The main purpose of the RBI is to conduct consolidated supervision of the financial sector in India, which is made up of commercial banks, financial institutions, and non-banking finance firms.2 Initiatives adopted by the RBI include restructuring bank inspections, introducing off-site surveillance of banks and financial institutions, and strengthening the role of auditors.

1 Yashika Sood (2020): Banking Regulation in India, https://www.complybook.com/ blog/banking-regulation-in-india. 2 Reserve Bank of India, https://www.rbi.org.in/Scripts/AboutusDisplay.aspx.

© The Author(s), under exclusive license to Springer Nature 145 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_11

146

F. I. LESSAMBO

11.2

Mission and Objectives

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as3 : to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; to have a modern monetary policy framework to meet the challenge of an increasingly complex economy, to maintain price stability while keeping in mind the objective of growth.

The core purpose reflects the Reserve Bank of India are: – to foster confidence in the internal and external value of the Rupee and contribute to macro-economic stability; – to regulate markets and institutions under its ambit, to ensure financial system stability and consumer protection; – to promote the integrity, efficiency, inclusiveness, and competitiveness of the financial and payment systems; – to ensure efficient management of currency as well as banking services to the Government and banks; and – to support balanced, equitable, and sustainable economic development of the country.

11.3

Organizational Structure

The management of the RBI is the responsibility of the central board of directors headed by the governor and consisting of deputy governors and other directors, all of whom are appointed by the government.4 There are four local boards based at Chennai, Kolkata, Mumbai, and New Delhi.

3 Reserve Bank of India, https://www.rbi.org.in/commonperson/English/Scripts/Org anisation.aspx. 4 Reserve Bank of India (2022), https://cleartax.in/s/rbi-reserve-bank-of-india.

11

THE RESERVE BANK OF INDIA

147

Fig. 11.1 RBI organization chart

The day-to-day management of RBI is in the hands of the executive directors, managers at various levels, and the support staff. There are about 2000 employees at RBI, working in 25 departments and training colleges (Fig. 11.1).

11.4

Funding

Since 1949, the government has owned the RBI. Hence, any profit made by it belongs to the government. By simply selling and buying simultaneously, the RBI can generate a profit, which can then be transferred to the government. The RBI had transferred Rs 57,128 crore to the government for the accounting year 2019–2020. The year before, the RBI had, based on the Jalan Committee formula, transferred a record of Rs 1.76 trillion, which included Rs 1.23 trillion as dividend and Rs 52,637 crore of excess provisions. Open market operations, wherein a central bank purchases or sells bonds in the open market in order to regulate money supply in the economy, are a major source of income for the RBI. Apart from the interest received from these bonds, the RBI may also profit from favorable changes in bond prices.

148

F. I. LESSAMBO

11.5

Fintech Regulatory and Supervision

The digital payments market in India is estimated to reach the USD1 trillion mark by 2023.5 Nonetheless, there is no single set of regulations or guidelines, which uniformly govern FinTech products in India. 11.5.1

The Sandbox Approach

Under the regulatory sandbox framework, FinTech companies including start-ups, banks, financial institutions, and any other company collaborating with or providing support to financial services businesses and which satisfies the eligibility criteria will be selected for testing their products in the regulatory sandbox. While FinTech is making good progress, particularly the digital payments and lending space, the same is not true for cryptocurrency, where there has been considerable regulatory resistance. 11.5.2

Digital Payments and Lending

In India, digital lending is primarily undertaken by regulated entities such as banks and non-banking financial companies.6 However, the digital lending landscape involves other entities and platforms that may or may not be regulated and that provide value-added services such as data analytics, underwriting processes, credit modeling, and distribution of credit products. 11.5.3

Digital Financing Platform

With increasing advances in technology and telecommunications infrastructure, several non-banking financial companies (NBFCs) in India have moved to digital platforms for credit products, particularly to small and medium enterprises and retail clients. As of January 31, 2021, there were 9,507 non-banking financial companies registered with the Reserve Bank of India. The vast majority of over nine thousand NBFCs belonged to

5 Shilpa Mankar Ahluwalia (2021): India Digital Payments—A Success Story, The Times of India, https://timesofindia.indiatimes.com/blogs/voices/digital-payments-a-suc cess-story/. 6 GLI (2021): Fintech Laws and Regulations in India, https://www.globallegalinsights. com/practice-areas/fintech-laws-and-regulations/india.

11

THE RESERVE BANK OF INDIA

149

the non-deposit taking category. Large non-deposit taking NBFCs with assets of more than five billion Indian rupees were considered as systemically important. The nearly 300 companies under this category managed more than 80 percent of the total NBFC asset volume.7 Developments in robot-advisories, algorithmic trading, and financial research platforms are at a nascent stage and fall within the jurisdiction of the financial markets regulator, Securities and Exchange Board of India (“SEBI”). 11.5.4

Cryptocurrency

Currently, there is no regulation or any ban on the use of cryptocurrencies in the country. The central bank, in its circular dated April 6, 2018, had prohibited banks from dealing in cryptocurrencies or offering any service to customers on them.8 The circular was challenged in the Supreme Court, which set aside the rules on March 4, 2020. Meanwhile, banks can transact in cryptocurrency, but they will have to go through a whole lot of checks and balances before doing so, including ensuring that the funds are not used for money laundering or financing terrorism. Since cryptocurrencies are not backed by central banks and are decentralized by nature, finding the end use would be difficult.9 11.5.5

InsurTech

InsurTech fundings in the country have increased from a modest base of $11 million in 2016 to $287 million in 2020, according to a report by the India InsurTech Association (IIA).10 While InsurTech in India is currently in the early stages of growth, it has disrupted the traditional supply chain of insurance products in the country. Several players in the insurance sector have collaborated with technology partners and other

7 https://www.statista.com/statistics/1243950/number-of-nbfcs-india/. 8 Subrata Panda (2021): Major Concerns About Cryptocurrencies Conveyed to Govt.:

RBI Governor, Business Standard, https://www.business-standard.com/article/finance/ major-concerns-about-crypto-currencies-conveyed-to-govt-rbi-governor-121060400671_1. html. 9 Anup Roy (2021): Banks Should Not Cite April 2018 Circular for Denying Crypto Services: RBI, Business Standard. 10 Sheersh Kapoor (2021): The Rise of InsurTechs in India—No More the New Kid in Town, Economic Times.

150

F. I. LESSAMBO

FinTech players to offer a range of digital insurance products to their customers. India’s regulators are concerned about the packaging of insurance products with other products to the expense of the customers. These concerns include inadequate disclosure to the customer of the characteristics of the bundled insurance products; restrictions on consumer choice or the freedom to make informed choices or comparisons with other products available in the market; and undue influence over the customers by the provider of the packaged bundled products.

11.6

Financial Statements

11.6.1 See Fig. 11.2.

Fig. 11.2 RBI—balance sheet

The Balance Sheet

11

THE RESERVE BANK OF INDIA

Fig. 11.3 RBI—statement of income

11.6.2

The Statement of Income

See Fig. 11.3. 11.6.3 See Fig. 11.4.

The Statement of Cash Flows

151

152

F. I. LESSAMBO

Fig. 11.4 RBI statement of cash flows

CHAPTER 12

The Bank of “South” Korea

12.1

General

The Bank of Korea was established on June 12, 1950, following the passage of the Bank of Korea Act on May 5 of that year, to serve as the central bank of Korea with the purposes of stabilizing the value of the national currency, promoting the soundness of the banking and credit systems, and developing the Korean economy. The Bank of Korea (BoK) has a reputation as one of the central banks around the world that quietly and competently gets on with its missions.

12.2

Objectives and Missions

The most important mission of the Bank of Korea is its formulation and implementation of monetary policy. This involves controlling the supply and the cost of money so that the economy may grow in a sound manner based on price stability. To this end, the Bank conducts its monetary policy with an emphasis on price stability, while also taking into account such matters as economic growth and financial system stability. The Bank of Korea also has a mandate for maintaining and enhancing financial system stability. To achieve this, the Bank conducts comprehensive monitoring of economic conditions domestically and abroad, of financial market stability, and of the soundness of the financial system. The © The Author(s), under exclusive license to Springer Nature 153 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_12

154

F. I. LESSAMBO

Bank of Korea accepts deposits from and makes loans to banks and other financial institutions, thus serving as the “banker to banks.” It handles the receipt of national revenues and disbursement of national expenditures as the depositary of the Government. The Bank of Korea holds and manages the nation’s foreign reserves appropriately to ensure that they can serve as a safeguard in cases of emergency. It invests the reserves mainly in safe and liquid foreign assets, and strives to improve their profitability insofar as this does not detract from their safety.

12.3

Organizational Structure

The executive of the Bank of Korea consists of executive officers and employees. The executive officers are the Governor, the Senior Deputy Governor, and the five or fewer Deputy Governors. The Governor, appointed by the President on the deliberation of the State Council, represents the Bank. The term of the Governor is four years and he or she may be reappointed for a single consecutive term. The Governor conducts policies formulated by the Monetary Policy Board as the chief executive officer of the Bank. He or she also keeps the Board informed of current matters requiring its attention and provides it with materials and advice necessary for the resolution of its policies. In addition, the Governor may attend and state his or her opinion on matters related to money and credit at the State Council. The Senior Deputy Governor assists the Governor and is appointed by the President upon the recommendation of the Governor. The Deputy Governors are appointed by the Governor and undertake their respective duties in the manner stipulated in the Articles of Incorporation of the Bank of Korea. The term of the Senior Deputy Governor and each of the Deputy Governors is three years and they may be reappointed for a single consecutive term. In terms of its organizational structure, the Bank has 16 departments in its Head Office in Seoul, and 16 branches in major cities. In addition, it has five overseas representative offices in principal international financial centers. The total number of employees was 2,288 as of December 2016 (Fig. 12.1).

12

THE BANK OF “SOUTH” KOREA

155

Fig. 12.1 BoK–organization chart

12.4

Fintech Regulations

The Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) are the major regulatory authorities in the FinTech industry. The FSC is the government regulatory authority, which assumes primary responsibility for rulemaking and licensing. The Financial Supervisory Service (FSS) is South Korea’s integrated financial regulator that examines and supervises financial institutions under the broad oversight of the Financial Services Commission (FSC), the government regulatory authority staffed by civil servants. Although the FSS is an organization under the FSC, which is a governmental body, it is not itself a governmental body. The FSS is a specially legislated supervisory authority staffed by private sector employees who are not part of the government civil service system. This two-tier system is devised to reduce the risk of the government attempting to deprive the freedom and take control of financial companies. 12.4.1

The Sandbox Approach

The most important policy introduced to spur the development of the fourth industrial revolution and new growth industries such as fintech is the Regulatory Sandbox Program, which came into effect on April 1,

156

F. I. LESSAMBO

2019.1 Fintech companies approved by the FSC will be able to test for up to two years, with a one-time, two-year extension possible. Once a system obtains a license after successfully completing the testing period, the company can acquire exclusive operating rights for up to two years, which will prevent other operators from launching the same services in that period.2 12.4.2

Mobile Payments/Digital Payments

Money payment and other online payment transactions are allowed. However, these banks must meet all of the conditions and qualifications for conventional banks under the Banking Act, but the Special Act on Establishment and Operation of Internet-Only Banks (the “Internet-Only Bank Act”) was enacted in 2018 to lower the hurdles further. 12.4.3

Digital Financial Platform

Digital payments is the largest fintech sector in Korea and continues to grow rapidly. According to the Bank of Korea, the daily total transaction value for electronic payment service usage in the second quarter of 2018 was KRW 117.42bn (GBP 77.8 m)—208% up from the same period in 2017 and 568% up from the same period in 20163 (Fig. 12.2). 12.4.4

Robot-Advisor

In August 2013, the Financial Investment Services and Capital Markets Act (“FISCM Act”) allowed for the adoption of a Robot-advisor in discretionary investment businesses. A couple of years later, in April 2019, the FISCM Act extended the range of businesses covered by Robotadvisors to collective investments businesses, which manage assets pooled by inviting two or more persons. The Robot-advisor market is expected to grow rapidly in 2020, following the use of big data and the platform launched by the Financial Security Institute (“FSI”) where data such as financial, telecommunication, and corporation data can be exchanged.

1 Fintech South Korea—Market Intelligence Report (2018), p. 18. 2 Idem. 3 Fintech South Korea—Market Intelligence Report (2018).

12

THE BANK OF “SOUTH” KOREA

157

Fig. 12.2 BoK–digital financial platform growth

Robot-advisors greatly increased the accessibility of general individual investors to investment advisory services, which were only accessed by a few affluent people in the past. 12.4.5

Cryptocurrency

Blockchain is well established in Korea and the variety of applications toward which the technology is being tested is rapidly increasing. Cryptocurrency ICOs are still banned because of multiple cases of fraud, but there are signs that new regulation may be under way that will boost innovation, while providing security in the field. In January 2018, the Korean government banned anonymous trading on domestic exchanges by implementing a real-name system, which requires users to establish accounts under their legal names. On March 25, 2021, the Korean government ratified an amendment to the Act on Reporting and Using Specified Financial Transaction Information, which imposes anti-money laundering obligations on virtual asset service providers (VASP). The Act further requires the registration of all VASPs by September 25, 2021. The legislation provides a regulatory framework for cryptocurrencies and related services and activities, officially legalizing cryptocurrency in South Korea and mandating certain compliance measures. The March 2020

158

F. I. LESSAMBO

amendment requires all Korean virtual asset service providers to do the following4 : – Register an authorized bank account (in line with the 2018 provisions) and provide customers with real-name bank accounts held at the same bank; – Acquire an Information Security Management System (“ISMS”) certification from the Korea Internet Security Agency (“KISA”); – Provide all company details and bank account details to the Korea—Implement expanded Anti-Money Laundering/Know Your Customer (“AML-KYC”) procedures. 12.4.6

InsurTech

The Korean insurance market includes companies that are adopting new technologies and creating new business models to address modern customers’ needs. Mobile transactions are seen as an obvious convenience in Korea and insurance providers recognize the need to join the trend.5 However, insurance companies cannot have FinTech subsidiaries, so they can develop InsurTech only by partnership with FinTech companies. The FSC has recently announced its intention to grant preliminary approval to an additional online-only insurer to stimulate growth.

12.5

Financial Statements

12.5.1

The Balance Sheet

See Fig. 12.3. 12.5.2

Statement of Income

See Fig. 12.4.

4 South Korea and Cryptocurrency- Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology; https://freemanlaw.com/cryptocurrency/south-korea/. 5 Fintech South Korea—Market Intelligence Report, p. 16.

12

Fig. 12.3 BoK–balance sheet

THE BANK OF “SOUTH” KOREA

159

160

F. I. LESSAMBO

Fig. 12.3 (continued)

12.5.3 See Fig. 12.5.

Statement of Changes in Equity

12

THE BANK OF “SOUTH” KOREA

Fig. 12.4 BoK–statement of income

12.5.4 See Fig. 12.6.

Statement of Appreciation of Earned Surplus

161

162

F. I. LESSAMBO

Fig. 12.5 BoK–statement of changes in equity

Fig. 12.6 BoK–statement of appreciation of earned surplus

CHAPTER 13

Indonesia Bank

13.1

General

On July 1, 1953, Bank Indonesia was officially established as the Central Bank of the Republic of Indonesia. As an independent public institution of the state administration, Bank Indonesia is supervised through a number of checks and balances between state institutions in order to ensure accountability in the public implementation of tasks and responsibilities. Bank Indonesia, as the central bank, entered a new chapter of its journey with the enactment of Act No. 23 of 1999 concerning Bank Indonesia, effective from May 17, 1999, as amended by Act No. 6 of 2009. The Bank Indonesia Act confers independent status and position on Bank Indonesia as a state institution to execute its duties and responsibilities, free from interference from the government and/or other parties, subject to supervision and held accountable.

13.2

Objectives and Missions

A key policy objective of Bank Indonesia is maintaining financial system stability in order to support economic stability. Bank Indonesia safeguards monetary stability using interest rates in open market operations. It is also responsible for maintaining a robust payment system. Failure to

© The Author(s), under exclusive license to Springer Nature 163 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_13

164

F. I. LESSAMBO

settle by any one participant will lead to serious risk of disruption in the payment system. Bank Indonesia operates the financial system safety net under the central bank lender-of-last-resort (LoLR) function. The LoLR function is a traditional role exercised by Bank Indonesia as the central bank in crisis management with the primary objective of preventing financial system instability. The LoLR function includes provision of liquidity under normal and crisis conditions. Bank Indonesia’s missions are as follows: – To achieve and maintain Rupiah stability through effective monetary policy and the Bank Indonesia policy mix. – To engage in maintaining financial system stability through effective macro-prudential policy in synergy with micro-prudential policy by the Financial Services Authority (OJK). – To engage in developing the digital economy and finance by strengthening Bank Indonesia payment system policy in synergy with the government and other strategic policy partners. – To support macroeconomic stability and sustainable economic growth by achieving synergy between the Bank Indonesia policy mix, government fiscal policy, and structural reforms as well as other strategic policy partners. – To engage in enhancing financial market deepening in order to strengthen the effectiveness of Bank Indonesia policy and support national economic financing. – To engage in developing the sharia economy and finance from the national level to the regional level. – To build a digital central bank in terms of the policies and institutional arrangements by strengthening the organization, human resources, governance, and reliable information systems as well as a proactive international role.

13

13.3

INDONESIA BANK

165

Organizational Structure

See Fig. 13.1. • The Board of Governors The Bank is led by the Board of Governors, comprising the Governor, a Senior Deputy Governor, and at between four and seven Deputy Governors. Members of the Bank Indonesia Board of Governors (BoG) serve for five years and can be reappointed to the same position for one further tenure. Bank Indonesia board members are proposed and appointed by the President of the Republic of Indonesia based on approval by the People’s Representative Council of the Republic of Indonesia (DPR-RI). To ensure fit and proper candidates, the House of Representatives holds a selection process to explore into the vision, experience, expertise, and integrity of each candidate The Board of Governors Meeting is the bank’s highest decision-making forum. It is held at least once a month to decide

Fig. 13.1 Bank of Indonesia- Organization chart

166

F. I. LESSAMBO

on general policy on monetary affairs, and at least once a week to evaluate policy implementation or to decide on other strategic and principle policy. • The Supervisory Board The Bank Indonesia Supervisory Board (BSBI) was established in accordance with prevailing laws concerning Bank Indonesia in order to assist the supervision function of the People’s Representative Council (DpR). BSBI is directly responsible to DPR and is separate from the organizational structure of Bank Indonesia. The supervision function implemented by BSBI aims to increase Bank Indonesia’s accountability, independence, transparency, and credibility. The supervisory purview of BSBI includes preparing the Annual Financial Statements of Bank Indonesia, operational budget, investment budget, and decision-making procedures concerning operational activities, as well as asset management at Bank Indonesia, including other arrangements tasked by Commission XI of the People’s Representative Council. The supervision function excludes the policies issued by Bank Indonesia. BSBI reports its findings to the People’s Representative Council on a quarterly basis or as requested. In 2020, BSBI performed supervisory actions three times along with 36 recommendations. BSBI consists of five members, led by a chairperson and four members selected by the People’s Representative Council and appointed by the President of the Republic of Indonesia. Candidates are chosen based on integrity, morality, capacity/capability/expertise, professionalism, and experience in terms of economics, finance, banking, or legal affairs for a tenure of three years, with reappointment possible to the same position for one additional period.

13.4

Fintech Regulation

Originally, the supervision and regulation of the Indonesian banking industry was performed by Bank Indonesia. However, after the enactment of Law No. 21 of 2011 on the FSA (FSA Law), the authority to supervise and regulate the Indonesian banking industry (other than monetary policy) was transferred to the FSA. Under the FSA Law, the

13

INDONESIA BANK

167

FSA is responsible for regulating and supervising banks and banking institutions, and bank solvency and prudential aspects.1 The FSA implements an integrated regulation and supervision system for all activities in the financial services sector, including an integrated supervision model for financial conglomerates. Unless otherwise provided, all banking activities require a banking license from the FSA, and the type of banking license required depends on the activities of the bank, which are categorized as either commercial banks, rural banks, investment banks, etc. 13.4.1

Sandbox Approach

In Indonesia, Bank Indonesia (BI) and the Financial Service Authority (OJK) pioneered the approach through BI Regulation No. 19/12/PBI/2017 and OJK Regulation No 13 /POJK.02/2018. According to the latter, fintech providers are given one year to pilot their innovation over a limited period and receive assessments whether they are permitted to fully operate on a larger scale.2 13.4.2

Digital Payments

Digital payments stand as Indonesia’s largest fintech subsector, with 44% of fintech companies in Indonesia comprising of payment service providers. The process began in August 2019 with the introduction of a digital payments system known as the Quick Response Code Indonesia Standard (QRIS), which accelerated the development of Indonesia’s digital payments landscape. The QRIS enables interoperability between disparate digital payment providers, streamlining and uniting their services under one central QR code.3 Total transaction value in the digital payments segment is projected to reach US$72.91bn in 2022, and

1 Emir Nurmansyah, Elsie F Hakim, and Monic Nisa Devina (2022): Banking Regulation in Indonesia: Overview, Thomson Reuters, Practical law. 2 Thomas Dewaran (2021): Regulatory Sandbox for Health Technology in Indonesia, Center for Indonesia Policy Studies, https://www.cips-indonesia.org/post/opinion-regula tory-sandbox-for-health-technology-in-indonesia. 3 Muhammad Arifin Adi Nugroho (2022): A Deep Dive Into Indonesia’s Digital Payments Transformation, https://2c2p.com/blog/indonesia-digital-payments-transform ation.

168

F. I. LESSAMBO

the total transaction value is expected to show an annual growth rate (CAGR 2022–2026) of 12.29% resulting in a projected total amount of US$115.90bn by 2026. By the end of 2020, Bank Indonesia enacted Bank Indonesia Regulation No 22/23/PBI/2020, which aims to set out the basic framework for the payment system industry. To strengthen the overall system, Bank Indonesia issued two new regulations: – Bank Indonesia Regulation No 23/6/PBI/2021 on Payment Service Providers (the “PJP Regulation”) and – Bank Indonesia Regulation No 23/7/PBI/2021 on Payment Infrastructure Providers (the “PIP Regulation”). 13.4.3

Digital Financial Platform

Indonesia has witnessed the rise of so-called Digital Financial Innovation (DFI) companies. DFI companies are supervised by Indonesia’s Financial Services Authority (OJK), which has publicly acknowledged the role of DFI companies in helping to accelerate financial inclusion in Indonesia.4 Under the current framework, a digital bank may be created through (i) the establishment of a new commercial bank that is operated as a digital bank or (ii) the transformation of an existing commercial bank into a digital bank. However, to operate a DFI business in Indonesia, foreign investors must establish a limited liability company and register themselves with the OJK. DFI companies are subject to personal data protection obligations as regulated under the Minister of Communication and Informatics (MCI) Regulation and the OJK Regulation.5 13.4.4

Cryptocurrency

While crypto trading is legal, there is no regulation in Indonesia that specifically covers cryptocurrency. The Indonesia Financial Services Authority has made it clear that financial institutions are prohibited from

4 Andhika Indrapraja, Jeanne Elisabeth Donauw (2021): The Rise of Digital Financial Innovation in Indonesia, https://www.iflr.com/article/b1xw8pp027qyyt/the-rise-ofdigital-financial-innovation-in-indonesia. 5 Idem.

13

INDONESIA BANK

169

using or marketing cryptocurrency. Although crypto assets are still not permitted as payment instruments, companies are welcome to buy and sell crypto as trading commodities in Indonesia. According to the Ministry of Trade, transactions for currencies like Bitcoin (BTC) grew over 14 times from a total of 60 trillion rupiahs ($4.1 billion) in 2020 to a total of 859 trillion rupiahs ($59.83 billion) in 2021.6 13.4.5

Insurtech

Seeking to establish the digital economy and finance as a source of economic growth, Bank Indonesia continues to accelerate payment system digitalization as part of the Indonesia payment system blueprint (BSPI) 2025.

13.5 13.5.1

Financial Statements Statement of Financial Position

See Fig. 13.2. 13.5.2

Statement of Profit & Loss

See Fig. 13.3. 13.5.3

Statement of Cash Flows

See Fig. 13.4.

6 Diaz Praditya (2022): Indonesia’s cryptocurrency community in 2022: An Overview, https://cointelegraph.com/news/indonesia-s-cryptocurrency-community-in-2022-an-ove rview.

170

F. I. LESSAMBO

Fig. 13.2 Bank of Indonesia- Statement of financial position

13

Fig. 13.2 (continued)

INDONESIA BANK

171

172

F. I. LESSAMBO

Fig. 13.3 Bank of Indonesia- Statement of income

13

Fig. 13.4 Bank of Indonesia- Statement of cash flows

INDONESIA BANK

173

174

F. I. LESSAMBO

Fig. 13.4 (continued)

CHAPTER 14

Bank of Canada

14.1

General

The Bank of Canada is a Crown corporation—wholly owned by the federal government—and Canada’s Central Bank. Established in 1934 under the Bank of Canada Act, it is responsible for formulating Canada’s monetary policy and for the promotion of a safe and sound financial system within Canada. The Act stated that the Bank of Canada was created “to promote the economic and financial welfare of Canada.” The BOC and its Governor are responsible for setting monetary policies, printing money, and determining the Canadian banks’ interest rates.

14.2

Bank of Canada Mission and Objectives

The Bank’s main areas of responsibility are: • Monetary policy The Bank influences the supply of money circulating in the economy, using its monetary policy framework to keep inflation low and stable. The objective of monetary policy is to preserve the value of money by keeping inflation low, stable, and predictable. Canada’s monetary policy framework consists of two key components that work together: © The Author(s), under exclusive license to Springer Nature 175 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_14

176

F. I. LESSAMBO

the inflation-control target and the flexible exchange rate. At the heart of Canada’s monetary policy framework is the inflation-control target, which is two percent, the midpoint of a 1 to 3 percent target range. Canada’s flexible exchange rate, or floating dollar, permits us to pursue an independent monetary policy that is best suited to Canada’s economic circumstances and is focused on achieving the inflation target. • Financial system A stable and efficient financial system is essential for sustained economic growth and rising living standards. The Bank promotes safe, sound, and efficient financial systems, within Canada and internationally, and conducts transactions in financial markets in support of these objectives. To that end, the Bank: – provides central banking services, including liquidity and lender-oflast-resort facilities; – oversees and acts as the resolution authority for critical financial market infrastructures; – conducts and publishes analyses and research; and – helps to develop and implement policy.

• Currency The Bank is the sole authority for designing, issuing, and distributing bank notes. Every note is a combination of art and technology. The printing is contracted to Canadian Bank Note Company, a private-sector security printer. Notes are printed 45 to a sheet, cut and inspected, and then delivered to the Bank. • Funds management The Bank is the “fiscal agent” for the Government of Canada, managing its public debt programs and foreign exchange reserves. It provides certain banking services (such as settlement account and collateral services) to direct participants in Canada’s designated payment systems.

14

BANK OF CANADA

177

• Retail payments supervision Under the Retail Payment Activities Act, the Bank is responsible for supervising payment service providers. The aim is to build confidence in the safety and reliability of their services while protecting end users from specific risks. According to the Act, payment service providers may include a variety of entities that perform electronic payment functions, such as payment processors, digital wallets, currency transfer services, and other payment technology companies that offer any of the following services: • • • •

providing and maintaining a payment account; holding funds until the end user withdraws or transfers them; initiating an electronic funds transfer as requested by an end user; authorizing or transmitting instructions about an electronic funds transfer; and • clearing or settling electronic funds transfers

14.3

Bank of Canada- Organizational Structure

Its organizational structure is composed of the Governor, the Senior Deputy Governor, 12 outside directors, and the Deputy Minister of Finance (who has no vote) (Fig. 14.1). • The Governing Council The Governing Council, the policymaking body of the Bank, which is responsible for, leads the Bank of Canada: (i) conducting monetary policy and promoting a safe and efficient financial system. The Governing Council is made up of the Governor, the Senior Deputy Governor, and the Deputy Governors. The Governing Council’s main tool for conducting monetary policy is the target for the overnight rate (also known as the key policy rate). This rate is normally set on eight fixed announcement dates per year. The Council reaches its decisions about the rate by consensus—rather than by individual votes, as is the case at some other central banks.

BANKING AND PAYMENTS Managing Director: Ian Christensen Deputy Managing Director: James Chapman (EFR) Senior Directors: Krystelle Bilodeau Marc Normandeau Senior Special Director: Scott Hendry

FINANCIAL STABILITY Managing Director: Jing Yang Deputy Managing Director: Russ Barnett Senior Directors: Natasha Khan Miguel Molico Yaz Terajima (EFR)

SUPERVISION Managing Director: Carol Brigham Deputy Managing Director: Melanie Achtemichuk Senior Directors: Nikil Chande Éric Chouinard

Executive Director Retail Payments Supervision Ron Morrow

Advisor and Chief of Staff Jill Vardy

HUMAN RESOURCES Managing Director and Chief Human Resources Officer: Alexis Corbett Deputy Managing Director: Katherine Murray Senior Director: Annie Guilbault

COMMUNICATIONS Managing Director: Jeremy Harrison Deputy Managing Director: Nicholas Galletti Senior Director: Annie Portelance

Senior Deputy Governor Carolyn Rogers

Governor Tiff Macklem

CURRENCY Managing Director: Maureen Carroll Deputy Managing Director: Yvonne de Lint Senior Directors: Ted Garanzotis (EFR) Julie Martens

EXECUTIVE AND LEGAL SERVICES General Counsel and Corporate Secretary: Jeremy S. T. Farr Assistant General Counsel: Steve Thomas Deputy Corporate Secretary and Senior Director: Lesley Ryan

CORPORATE SERVICES Managing Director of Corporate Services and Data: Julie Champagne Deputy Managing Director: John Robert Fortin Senior Director: Sahar Nezami Trevor Sabean Chief Security Officer: Peter Lambertucci

AUDIT Managing Director and Chief Internal Auditor: Naomi Belleau

INFORMATION TECHNOLOGY SERVICES Managing Director and Chief Information Officer: Sylvain Chalut Deputy Managing Director: Erin Trudeau Senior Directors: Hisham El-Bihbety Roger Hatch Robert Pichette Ben Sorensen Hajer Zaiem

FINANCIAL SERVICES Managing Director & Chief Financial Officer: Coralia Bulhoes Deputy Managing Director: Adelle Laniel Senior Director: René Lafrance

FINANCIAL AND ENTERPRISE RISK Managing Director, Chief Risk Officer: Michael O’Bryan Deputy Managing Director: Jean-François Tremblay

Chief Operating Officer Filipe Dinis

Managing Director and Chief Internal Auditor Naomi Belleau

January 3, 2023

Fig. 14.1 Bank of Canada- Organization chart (https://www.bankofcanada.ca/wp-content/uploads/2010/07/organi zational_chart_january2023_high_level.pdf)

*Reports to Senior Deputy Governor

ECONOMIC AND FINANCIAL RESEARCH Managing Director: Jim MacGee Senior Research Directors: James Chapman (BAP) Ted Garanzotis (CUR) Stefano Gnocchi (CEA) Cars Hommes (FMD) Yaz Terajima (FSD) Ben Tomlin (INT) Senior Research Officers: Jason Allen Oleksiy Kryvtsov Césaire Meh

INTERNATIONAL ECONOMIC ANALYSIS Managing Director: Harriet Jackson Deputy Managing Director: Jose Dorich Senior Directors: Lori Rennison Subrata Sarker Ben Tomlin (EFR)

Advisors Paul Chilcott* Donald Coletti Mark Hardisty (Toronto) Grahame Johnson Sheryl King (New York) Stephen Murchison* Eric Santor

FINANCIAL MARKETS Managing Director: Stéphane Lavoie Deputy Managing Director: Virginie Traclet Senior Directors: Cars Hommes (EFR) Alexandra Lai Philippe Muller Christopher Reid Harri Vikstedt Lorie Zorn

Deputy Governors Paul Beaudry Toni Gravelle Sharon Kozicki

CANADIAN ECONOMIC ANALYSIS Managing Director: Marc-André Gosselin Deputy Managing Director: Gino Cateau Senior Directors: Brigitte Desroches Erik Ens Stefano Gnocchi (EFR) Alexander Ueberfeldt

General Counsel & Corporate Secretary Jeremy S. T. Farr

BOARD OF DIRECTORS

Bank of Canada – Senior Management Organizational Chart

178 F. I. LESSAMBO

14

BANK OF CANADA

179

• The Executive Council The Bank’s Executive Council is made up of the Governing Council and the Chief Operating Officer. Together, they chart the strategic direction of the Bank. • The Governor As the Bank’s Chief Executive Officer, the Governor ultimately has full control over the business of the Bank. His responsibilities include: – chairing the Board of Directors; – leading the Bank’s Governing Council; and – conducting monetary policy to achieve an inflation target agreed upon by the Bank and the Government of Canada. The independent directors with the approval of the Governor in Council (the federal Cabinet) for a seven-year term appoint the Governor and the Senior Deputy Governor. This allows the Governor to adopt the medium- and longer-term perspective essential to conducting effective monetary policy. • The Senior Deputy Governor The Senior Deputy Governor is the deputy executive of the Bank of Canada, who: – oversees the Bank’s strategic planning and operations; – shares responsibility for the conduct of monetary policy as a member of the Bank’s Governing Council; and – is a member of the Bank’s Board of Directors. – The Board of Directors The Minister of Finance appoints the Board of Directors for a threeyear term, subject to the approval of the Governor in Council. It is composed of the Governor, the Senior Deputy Governor, 12 outside

180

F. I. LESSAMBO

directors, and the Deputy Minister of Finance (who has no vote). Their responsibilities include: – providing general oversight of the management and administration of the Bank; – reviewing the Bank’s general policies (on matters other than monetary policy and for approving the Bank’s corporate objectives, plans, and annual budget); – keeping the Bank informed about prevailing economic conditions in their respective regions; and – appointing the Governor and Senior Deputy Governor. Monetary policy is neither formulated nor implemented by the outside directors.

14.4

Bank of Canada Funding

Money is created in the Canadian economy in two main ways: through private commercial bank loans or asset purchases and through the Bank of Canada’s asset purchases.

14.5

Fintech Regulatory and Supervision

The Canadian financial regulatory system is fragmented with oversight of various parts of the financial system divided among a variety of federal and provincial regulators. The three principal federal regulators of financial institutions are the Office of the Superintendent of Financial Services (“OSFI”); the Canadian Deposit Insurance Corporation (“CDIC”); and the Financial Consumer Agency of Canada (“FCAC”). The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), Canada’s federal anti-money laundering (AML) authority, also regulates certain fintech products and services, including “money services businesses” (MSBs) dealing in fiat and/or virtual currencies. Fintech businesses have been encouraged to engage with staff of the.

14

14.5.1

BANK OF CANADA

181

The Sandbox Approach

The CSA Regulatory Sandbox is an initiative of the Canadian Securities Administrators (CSA) to support fintech businesses seeking to offer innovative products, services, and applications in Canada. It allows firms to register and/or obtain exemptive relief from securities laws requirements, under a faster and more flexible process than through a standard application, in order to test their products, services, and applications throughout the Canadian market on a time-limited basis.1 Applicants can range from start-ups to well-established companies. Firms seeking to apply should provide live environment testing, a business plan, and a discussion of potential investor benefits (including how it will minimize investor risks).2 Firms with innovative business models are invited to contact their local securities regulator to discuss the firm’s business model and applicable securities law issues. The firm’s local securities regulator then analyze each business model, on a case-by-case basis. 14.5.2

Digital Payments

The total transaction value in the digital payments segment is projected to reach US$122.30bn in 2022. The federal government has introduced a new law to begin regulating technology companies offering payment services, aiming to increase trust in financial technology startups and stoke competition with established banks as digital payments become more popular. The Retail Payments Activities Act puts the Bank of Canada in charge of regulating payment services providers in Canada that are not governed by another regulator, as well as foreign companies facilitating payments for Canadian customers. This legislation requires payment service providers operating in Canada to register with the Bank of Canada and meet certain operational requirements, including requirements in respect of safeguarding end-user funds, mitigating operational risk, and reporting requirements. The relevant regulations and guidance have not yet been issued. However, the Bank of Canada has released minutes of meetings of the Retail Payment Advisory Committee and some

1 CSA Regulatory Sandbox—Fast and flexible process for innovative business models (2022), https://www.securities-administrators.ca/resources/regulatory-sandbox/. 2 CSA Regulatory Sandbox—Fast and flexible process for innovative business models (2022), https://www.securities-administrators.ca/resources/regulatory-sandbox/.

182

F. I. LESSAMBO

discussion guides from such meetings. The Federal Advisory Committee on Open Banking also released its final report in August 2021. The report recommended that the federal government implement an open banking system by 2023, based on a hybrid “made-in-Canada” collaborative approach between industry and policymakers. The report suggests the appointment of an open banking lead in the early phase, to be replaced by an entity to administer the open banking system during the second phase. In addition, the report recommended an accreditation system. On the question of liability, the report recommended that liability should flow with the data and lie with the party at fault. Payments Canada launched Lynx, its high-value payment system replacing the Large Value Transfer System (“LVTS”), in September 2021. Lynx will support data-rich payments through ISO 20022 messages. Payments Canada also released a consultation paper on the Pre-Authorized Debits (PAD) Rule, seeking to modernize it. 14.5.3

Crowdfunding

Crowdfunding is the practice of funding a project or venture by raising financial contributions from a number of people, typically through online platforms, to carry out a project, investment, or other endeavors requiring funds. Unlike traditional fundraising methods (e.g., loans from financial institutions), crowdfunding platforms allow individuals or groups to appeal for funds directly from members of the public connected online who may be geographically dispersed. Crowdfunding platforms are often supported by payment service providers, which help these businesses accept payments from customers by connecting them to payment networks for the purposes of transaction authorization, clearing, and settlement. The payment service provider sector is diverse, offering a range of services to their clients. While not all payment service providers are captured under the Act, some of these businesses are already subject to AML/ATF requirements where they meet the definition of an existing reporting entity sector, such as a money services business, or possibly a financial institution.

14

14.5.4

BANK OF CANADA

183

Cryptocurrency

In 2014, Canada became the first nation to establish laws addressing cryptocurrency by amending the Proceeds of Crime and Terrorist Financing Act (PCA) to cover all persons or entities dealing in cryptocurrencies. However, as defined in Section 8 of Canada’s Currency Act, only bank notes issued and coins minted by the Bank of Canada are given the status of legal tender. Under federal law, crypto assets are not regulated per se, but dealers in virtual currency are now subject to reporting and compliance obligations as MSBs under the PCMLTFA. The Ontario Securities Commission (“OSC”) in its 2021 / 2022 Statement of Priorities specifically includes “work with the CSA and IIROC, to strengthen oversight of crypto asset trading platforms to bring crypto firms engaging in dealer or marketplace activities into compliance with securities laws.” IIROC in its 2022 Statement of Priorities also specifically intends to “continue to work with the CSA in ensuring that [crypto asset trading platforms] subject to [securities law] requirements are fully integrated in the Canadian regulatory system.” 14.5.5

Robot-Advice

Robot-advisors were first introduced in Canada in 2014. Since then, Robot-advisors have grown steadfast in their popularity among Canadians over the last decade. Assets under management in the robot-advisors segment are projected to reach US$16.53bn in 2022. In Canada, some robot-advisors register as Portfolio Managers. This means they are bound by fiduciary standards—that means they have to put clients’ interests ahead of their own. Others register with the Investment Industry Regulatory Organization of Canada (IIROC) and follow suitability obligations like disclosing investing risks to their clients. Their custodian generally holds assets. Many are members of the Canadian Investor Protection Fund (CIPF), which protects account assets for up to a million dollars against insolvency. Canadian robot-advisors have received tens of millions of dollars in funding since their inception. Many US robot-advisors do not operate in Canada including Betterment, Wealthfront, the app-based Acorns, Robinhood, and Ellevest.

184

F. I. LESSAMBO

14.5.6

InsurTech

InsurTech is subject to the same regulations as other forms of insurance. The regulation of insurance in Canada is a matter of shared jurisdiction between the provinces and territories and the federal government. Put differently, two levels of government regulate insurance in Canada. Federally, the Office of the Superintendent of Financial Institutions (OSFI) is responsible for the prudential regulation of insurers carrying on an insurance business in Canada. The Insurance Companies Act (Canada) which is overseen by the Federal Minister of Finance governs federal qualification of insurers. The Canadian provinces regulate market conduct activities of insurers, agents, and brokers carrying on business within the particular province. Each province has its own statute and its own government department that regulates insurance activities. Therefore, once established federally, all insurers need to be licensed in each provincial jurisdiction in which they intend to carry on business.

14.6

Bank of Canada: Financial Statements 14.6.1

The Balance Sheet

See Fig. 14.2. 14.6.2 See Fig. 14.3.

The Statement of income

14

Fig. 14.2 Bank of Canada- Balance sheet

Fig. 14.3 Bank of Canada- Statement of income

BANK OF CANADA

185

CHAPTER 15

The Australian Prudential Regulation Authority

15.1

General

Established by the Australian Prudential Regulation Authority Act 1998, APRA is responsible for prudential regulation and supervision of ADIs as well as private health, life and general insurance companies (including reinsurers and friendly societies), and the superannuation (retirement savings) industry (other than self-managed superannuation funds). The Australian Prudential Regulation Authority (APRA) is an independent statutory authority that supervises institutions across banking, insurance, and superannuation and promotes financial system stability in Australia.1 APRA supervises institutions holding approximately $7.7 trillion in assets for Australian depositors, policyholders, and superannuation fund members.2

1 https://www.apra.gov.au/. 2 APRA (2020): Senate Select Committee on Financial Technology and Regulatory

Technology, 1–20, https://www.apra.gov.au/sites/default/files/2020-01/Senate%20S elect%20Committee%20on%20Financial%20Technology%20and%20Regulatory%20Technol ogy.pdf.

© The Author(s), under exclusive license to Springer Nature 187 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_15

188

F. I. LESSAMBO

15.2

Mission and Objectives

APRA’s mission consists of establishing and enforcing prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by institutions we supervise are met within a stable, efficient, and competitive financial system.3 APRA’s primary objective is to protect depositors, insurance policyholders, and superannuation fund members through promoting the prudent management of regulated institutions in each industry and the promotion of financial stability more broadly.

15.3

Organizational Structure

APRA’s governance structure comprises a full-time Executive Group of at least three and no more than five members.4 The Executive Group is responsible and accountable for the operation and performance of APRA. The Executive Group meets formally on a monthly basis, and more frequently as required, to discuss and resolve the major policy, supervisory, and strategic issues facing APRA at the time. It also holds management meetings with APRA’s senior management at least weekly for highlevel information sharing and decisions on more routine supervisory and organizational matters. 15.3.1

Committees

APRA has a number of governance committees that support the Executive Group to oversee APRA’s core functions and capabilities, including the Audit and Risk Committee. 15.3.2

Audit Committee

The role of the Audit and Risk Committee (ARC) is to oversee the adequacy and effectiveness of APRA’s risk management operations, financial and performance reporting responsibilities, systems of internal controls, and compliance with applicable laws and regulations. The ARC 3 The APRA Supervision Blueprint (2015), 1–15, https://www.apra.gov.au/sites/def ault/files/APRA-Supervision-Blueprint-FINAL_0.pdf. 4 https://www.apra.gov.au/apras-organisation-structure.

15

THE AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY

189

is composed of three external (independent) members. The committee is chaired by one of the external members (who also has a casting vote if needed). The ARC is attended by the Chief Internal Auditor, the Chief Risk Officer, and a representative of the Australian National Audit Office. The Chairman of APRA, and other senior APRA executives, may attend by invitation. The ARC usually meets four times per year. An additional meeting is held to review APRA’s Annual Financial Statements. The ARC’s Charter sets out the ARC’s objectives, authority, composition and tenure, roles and responsibilities, reporting, and administrative arrangements (Fig. 15.1).

15.4

Funding

APRA is funded largely by the industries that it supervises. … APRA currently supervises institutions holding $4.5 trillion in assets for Australian depositors, policyholders, and superannuation fund members.5

15.5

Financial Digital Information Supervision

In Australia, APRA, in May 2018, established a new licensing regime, allowing eligible applicants to conduct limited banking business for two years without being subject to the full set of prudential requirements, restricted authorized deposit-taking institutions (ADIs) licensing framework in Australia. APRA’s new licensing regime for financial entities allows restricted ADIs to conduct a limited amount of low-risk business for up to two years. As such, restricted ADIs are expected to have a balance sheet not greater than AUD 100 million and deposits in protected accounts below AUD 2 million on aggregate. After two years, license holders must either meet the full prudential framework or wind up their banking business. The framework is not introducing a new license with relaxed requirements but aims to assist potential new entrants to the banking industry. While the restricted ADI license is not limited to applications from entities with fintech business models, the first such license was granted to a digital bank. In Australia, although there is no fintech-specific licensing regime, so-called marketplace lending providers (MLPs) can use existing regimes linked together with a tailored Australian 5 https://www.transparency.gov.au/annual-reports/australian-prudential-regulation-aut hority/reporting-year/2018-2019-45.

Fig. 15.1

APRA- Organization chart (Source https://www.apra.gov.au/apras-organisation-structure)

190 F. I. LESSAMBO

15

THE AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY

191

Financial Services (AFS) License granted by the Australian Securities and Investments Commission (ASIC) in order to provide crowdfunding services and/or an Australian Credit License if the platform is extending consumer loans. The ASIC Regulatory Sandbox is targeted toward only new unregulated entrants that do not hold a license to carry out a regulated financial service, while in most jurisdictions these initiatives are also open to regulated institutions and technology providers.

15.6

Fintech Regulatory and Supervision

As FinTech and RegTech industries grow and mature, APRA seeks to understand the opportunities and risks they bring to institutions and the system and adapt to maintain sustainable, open, and technology neutral policies and practices.6 Like other regulators in developed countries, the Australian Prudential Regulation Authority (APRA) is receptive to the entrance of fintechs and technology-focused businesses. The Australian Securities and Investments Commission (ASIC) operates an Innovation Hub that assists FinTech start-ups developing innovative financial products or services to navigate Australia’s regulatory system. Besides the APRA, the two other regulators are: (i) the Australian Securities and Investments Commission and (ii) the Reserve Bank of Australia. The RBA oversees the operation of institutional payment systems. ASIC regulates non-cash payment facilities under the Corporations Act 2001. The financial services regulatory regime adopts a technology neutral approach, whereby services can be regulated in order to protect consumers, irrespective of the method of delivery.

6 APRA (2020): Senate Select Committee on Financial Technology and Regulatory Technology, 1–20, https://www.apra.gov.au/sites/default/files/2020-01/Senate%20S elect%20Committee%20on%20Financial%20Technology%20and%20Regulatory%20Technol ogy.pdf.

192

F. I. LESSAMBO

15.6.1

Sandbox Approach

In Australia, the Australian Securities and Investments Commission (ASIC) revealed the first iteration of the sandbox in December 2016.7 Any eligible Fintech company was required to notify ASIC of its intention to offer products and services within the sandbox rules. As time goes by, ASIC took further measures to improve the sandbox, and the government issued new draft legislation and regulations to create an enhanced regulatory sandbox. The new sandbox provides a “lighter touch” regulatory environment to allow additional flexibility to Fintechs that are still at the stage of testing their ideas or products. The key proposed changes include: – Extending the exemption period from 12 to 24 months. – Enabling ASIC to grant conditional exemptions to financial regulations for the purpose of testing financial and credit services and products. – Empowering ASIC to make decisions regarding the conditions under whereby the exemption starts and ceases to apply. – Broadening the categories of products and services that may be tested in the sandbox, to include life insurance products, superannuation products, listed international securities, and crowd-sourced funding activities. – Imposing additional safeguards such as disclosures, information about a provider’s remuneration, associations and relationships with issuers of products, and the dispute resolution mechanisms available. 15.6.2

Digital Payments and Lending

Licensing obligations apply to entities that carry on a financial services business in Australia or engage in consumer credit activities. Financial services business is broadly defined to include any investment or wealth management business, payment service, advisory business (including robot-advice), trading platform, and crowdfunding platform. About 55 million non-cash payments are made in Australia every day, according to government data, with almost half the population using their phones to make payments.

7 World Bank Group (2020): How Regulators Respond to Fintech Evaluating the Different Approaches—Sandboxes and Beyond, p. 21, https://documents1.worldbank. org/curated/en/579101587660589857/pdf/How-Regulators-Respond-To-FinTech-Eva luating-the-Different-Approaches-Sandboxes-and-Beyond.pdf.

15

THE AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY

15.6.3

193

Digital Financing Platform

Digital platforms are becoming the preferred and dominant business model for banks and financial institutions in the future. Digital platforms offer consumers and small businesses the ability to connect to financial and other service providers through an online or mobile channel as an integrated part of their day-to-day activities.8 Any provider of crowdfunding services must hold an Australian financial services (AFS) license. 15.6.4

Cryptocurrency

Cryptocurrency was legalized in 2017, making Australia a fintech industry leader. There are no laws in Australia that have been implemented to specifically regulate cryptocurrencies or crypto assets. That is, cryptocurrencybased businesses are permitted, provided such businesses comply with applicable laws, particularly, the financial services and consumer laws. That is, any entities acting as exchanges to buy and sell digital currency must: (i) register as exchanges; (ii) identify and verify users; (iii) maintain financial records; and (iv) comply with all AML/CTF reporting obligations. Under Australian law, service providers can exchange one cryptocurrency to another. They can also exchange them for other currencies including traditional money. 15.6.5

InsurTech

Insurance product providers are regulated by APRA under the Insurance Act 1973 (for general insurance) and the Life Insurance Act 1995 (for life insurance). Currently, the use InsurTech is concentrated in the Domestic Motor and Householders lines of business, while use in other insurance lines is relatively low. However, future use of InsurTech is expected to increase across almost all insurance lines, especially in the Commercial Motor line of business.9

8 Ian Pollari (2018): The Rise of Digital Platforms in Financial Services; 1–2; https:// assets.kpmg/content/dam/kpmg/xx/pdf/2018/02/kpmg-rise-of-digital-platforms.pdf. 9 APRA (2020): Insights from APRA’s 2020 InsurTech Survey, https://prod.apra.sha red.skpr.live/insights-from-apra%E2%80%99s-2020-insurtech-survey.

194

F. I. LESSAMBO

15.7 15.7.1

Financial Statements Statement of Financial Position

See Fig. 15.2.

Fig. 15.2 Statement of financial position

15

THE AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY

15.7.2

195

Statement of Income

APRA’s total operating expenditure for the 12 months to June 30, 2021, was $196.4 million against an original budget of $205.4 million. The expenditure was lower than the original budget due to the deferral of some activities into the 2021/22 financial year and a rise in the government 10-year bond yield affecting the valuation of staff leave provisions (Fig. 15.3). 15.7.2.1 APRA’s Income APRA’s total income in 2020/21 was $188.9 million, against a budget of $190.8 million. Income was lower than budget due to lower cost recovery activities, lower licensing and other fees, and an under-collection of Financial Institutions Supervisory Levies arising from lower than expected June 2020

Fig. 15.3 Statement of income

196

F. I. LESSAMBO

quarter assets growth in the superannuation industry. Industry levies are raised according to the Financial Institutions Supervisory Levies Collection Act 1998; the Supervisory Levy Imposition Act 1998 relevant to each of APRA has regulated industries; and the Private Health Insurance Supervisory Levy Imposition Act 2016. Following consultation with industry, the relevant Minister determines the levy rates for each regulated industry prior to the beginning of each financial year. Industry levies are based on the costs incurred by APRA in discharging its duties with respect to each sector. For industries APRA regulates, other than private health insurance, the levy rate is applied on the relevant institution’s total assets, subject to a minimum and maximum amount per institution. Exceptions to this are non-operating holding companies and small APRA-regulated superannuation funds, which are levied at a flat rate. For private health insurers, the levies are based on the number of policies held by each insurer at 30 June. Levies are also collected to cover the costs of the National Claims and Policies Database (NCPD) for which a rate is applied to the gross earned premiums of general insurers that contribute to this database. The amount raised for NCPD purposes in 2020/21 was $0.9 million. The total levies collected by APRA also cover certain costs attributable to ASIC, the ATO, the ACCC, and the Gateway Network Governance Body Ltd. Levies collected by APRA in 2020/21, including on behalf of these agencies, were $222.9 million. 15.7.2.2 Reserves The components of APRA’s reserves were subject to the following changes during the year: – APRA’s retained surpluses decreased by $3.2 million to $22.3 million, attributable to an operating deficit from ordinary activities of $7.5 million, a transfer of $3.0 million to the Contingency Enforcement Fund, partially offset by a transfer of $7.3 million from the Revaluation Reserve due to a write back of that reserve for disposed assets. – The Revaluation Reserve decreased by $7.3 million to $0.3 million as noted above, and the Contingency Enforcement Fund was increased by $3.0 million from retained surpluses to $15.0 million, attributable to a planned growth in the size of the fund arising from the BEAR and the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry.

15

THE AUSTRALIAN PRUDENTIAL REGULATION AUTHORITY

197

Because of these movements, total reserves decreased by $7.5 million to $54.2 million. These reserves include contributed equity of $16.6 million, which was unchanged over the year. 15.7.3

Statement of Changes in Equity

See Fig. 15.4.

Fig. 15.4 Statement of changes in equity

198

F. I. LESSAMBO

15.7.4

Statement of Cash Flows

See Fig. 15.5.

Fig. 15.5 Statement of cash flows

CHAPTER 16

The Swiss National Bank

16.1

General

The Swiss National Bank is the Central Bank of Switzerland, responsible for the nation’s monetary policy and the sole issuer of Swiss franc banknotes. Founded in 1906, the SNB is located in Berne and Zurich, with six other offices in the country along with a branch office in Singapore. The central bank acts as an independent body, taking charge of the country’s monetary policy and ensuring national price stability. The SNB has 13 agencies that maintains the supply of Switzerland’s national currency, the Swiss franc (CHF). The bank is managed by its Governing Board and is led by Chairman Thomas Jordan.

16.2

SNB Mission and Objectives

The Swiss National Bank (SNB) conducts the country’s monetary policy as an independent central bank. The SNB equates price stability with a rise in consumer prices of less than 2% per annum. A medium-term inflation forecast serves as the main indicator for monetary policy decisions. The Swiss National Bank implements its monetary policy by setting the SNB policy rate. In so doing, it seeks to keep the short-term Swiss franc money market rates close to the SNB policy rate. In order to influence

© The Author(s), under exclusive license to Springer Nature 199 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_16

200

F. I. LESSAMBO

monetary conditions, the SNB also intervenes in the foreign exchange market, as necessary. The SNB contributes to the stability of the financial system. It fulfills this mandate by analyzing sources of risk to the financial system and identifying areas where action is needed. In addition, it helps to create and implement a regulatory framework for the financial sector and oversees systemically important financial market infrastructures. The SNB acts as banker to the Confederation. It processes payments on behalf of the Confederation, issues money market debt register claims and bonds, handles the custody of securities, and carries out foreign exchange transactions.

16.3

SNB Organizational Structure 16.3.1

The Bank Council

The bank council is responsible for overseeing and controlling the SNB’s business activities. 11 members of the council serve four-year terms. The full terms cannot exceed a total of 12 years. 16.3.2

The Governing Board

The executive and management body of the bank is called the Governing Board. Itis in particular responsible for monetary policy, asset investment strategy, and international monetary cooperation. The Enlarged Governing Board consists of the three members of the Governing Board and their deputies. It is responsible for the strategic and operational management of the SNB. The Federal Council upon recommendation of the Bank Council appoints the members of the Governing Board and their deputies for a six-year term. Re-election is possible. 16.3.3

Departments

The National Bank is divided into three departments. The organizational units of Departments I and III are for the most part located in Zurich and those of Department II in Berne. The scope of business of Department I includes: Economic Affairs, International Affairs, Legal Services, Communications, and Statistics. The scope of business of Department II

16

THE SWISS NATIONAL BANK

201

includes Finance, Risk Management, Financial Stability, Cash, and Security. The scope of business of Department III includes Money Market and Foreign Exchange, Asset Management, Banking Operations, and Information Technology. 16.3.4

The Secretariat General

The Secretariat General is the staff unit of the Governing Board and the Bank Council. It reports to the Governing Board and, in an administrative sense, belongs to Department I. 16.3.5

The Internal Auditors

The Internal Auditors unit reports to the Audit Committee of the Bank Council.

16.4

SNB Funding

The Swiss National Bank is a joint-stock company. As such, it issues shares to private and public investors. There are 100,000 shares that are registered, each with a nominal value of CHF 250. Roughly, the country’s state-owned banks and other public corporations hold half of the SNB’s shares. The remainder of SNB shares is held by private shareholders in the domestic and foreign markets.

16.5

Financial Digital Information Supervision

The Swiss Financial Market Authority (FINMA) is the main regulatory and supervisory authority in Switzerland. FINMA is a functionally and personally independent governmental institution with extensive regulatory competencies. It is mandated to supervise banks, insurance companies, exchanges, securities dealers, collective investment schemes, and their asset managers and fund management companies. Furthermore, it regulates distributors and insurance intermediaries. In short, FINMA is responsible for micro-prudential supervision, that is, the firm-level oversight of financial firms. The regulatory aims pursued by FINMA are the protection of creditors, investors, and holders of insurance policies,

202

F. I. LESSAMBO

as well as safeguarding the proper functioning of financial markets. To achieve these aims, FINMA has a broad range of enforcement tools: It may issue declaratory rulings and prohibitions from practicing a profession, publish supervisory rulings (“naming and shaming”), confiscate profits, appoint an investigating agent, and revoke the respective license. However, unlike financial market authorities in other jurisdictions, FINMA is not authorized to impose fines. In addition to FINMA, the Swiss National Bank (SNB) has certain regulatory competencies that relate to macro-prudential supervision, that is, in respect of the stability of the whole financial system. For instance, the SNB is responsible for designating systemically important banks (SIBs), which means that these banks must meet additional regulatory criteria, or for recommending an increase of capital levels of certain banks (countercyclical capital buffer). Compared to FINMA, however, the regulatory competencies of the SNB can be considered rather narrow. FINMA may: (i) carry out a supervisory review itself; (ii) arrange it to be carried out by an audit agent appointed by FINMA; or (iii) arrange it to be carried out by an auditor appointed by the supervised financial firm. Generally, FINMA does not conduct supervisory activities itself but delegates these tasks to audit agents. This leads to a high participation rate of audit firms in the supervisory process.

16.6

Fintech Regulatory and Supervision

As a traditionally strong financial center with infrastructure close to universities, Switzerland offers ideal conditions for driving innovations in the fintech scene. Years of experience in the banking and insurance sector combined with technological expertise and a well-developed infrastructure provide excellent conditions and a first-class ecosystem for the fintech sector. The Swiss regime is known as a dual supervisory system in the banking regulation, while the SNB being responsible monetary policy and the overall stability of the financial system, and the Swiss Financial Market Supervisory Authority (“FINMA”), the supervisory authority for banks, securities dealers, and other financial institutions such as collective investment schemes and insurance undertakings. As an exception to the dual supervisory system, FINMA has a dedicated supervisory team that is responsible for directly monitoring UBS Inc./UBS Switzerland Ltd and Credit Suisse Group Ltd/Credit Suisse (Switzerland) Ltd, the two largest

16

THE SWISS NATIONAL BANK

203

Swiss banking groups. According to the IFZ FinTech 2020 study, Swiss fintechs have begun to overtake traditional financial companies and have grown by 7% annually. 10% of all global European FinTech enterprises are located in Switzerland, with 46% of them located in Zurich—one of the new FinTech metropolis in Europe. The sandbox regime allows licensefree custody up to CHF1 million, whereas the fintech license regime allows for custody of up to CHF100 million, provided there is no interest paid and no proprietary trading done. FinTech companies in Switzerland benefit from lower corporate and individual tax rates, a sandbox for licensed start-ups and a high number of double taxation treaties and pragmatic authorities. Swiss Fintech companies mainly comprise payment systems, investment and asset management services, stock exchanges, crowdfunding and crowdfunding platforms, insurance companies, insurance technology, and distribution and information platforms in the areas of collective investment schemes, and other financial instruments. The Swiss regulatory framework is continuously being adjusted to address the needs of Fintech providers and to create a suitable environment for applications of distributed ledger technology (“DLT”). The Swiss Parliament amended the BankA with effect from January 1, 2019, to introduce a so-called Fintech license as a new regulatory license category geared toward limited deposit-taking activities, with less stringent requirements compared to the fully-fledged banking license. On September 25, 2020, the Swiss Parliament adopted the new Federal Act on the Amendment of Federal law in light of the developments regarding DLT. On February 1, 2021, the provisions related to the introduction of the DLT-based uncertificated securities and an exemption provision related to the ombudsman’s office affiliation requirement for financial service providers entered into force, while the remaining new provisions and the implementing ordinance entered into force on August 1, 2021. The new regulation improves the environment for blockchain and DLT projects in Switzerland. To ease the Swiss regulatory regime for providers of innovative Fintech, including crowdfunding and crowdlending, electronic payment services, robot-advice, and cryptocurrencies, the regulation provides for the following measures: – Third-party monies accepted on interest-free accounts for the purpose of settlement of customer transactions do not qualify as deposits from the public (and, therefore, do not count toward a

204

F. I. LESSAMBO

potential banking license requirement) if the monies are held for a maximum of 60 days (instead of only seven days, as was the case before the amendment) (art. 5 (3)(c) BankO). – Firms accepting deposits from the public or publicly offering the acceptance of deposits are exempted from the banking license requirement as long as: (i) the deposits accepted do not exceed CHF 1 million; (ii) no interest margin business is conducted; and (iii) depositors are informed, before making the deposit, that the firm is not supervised by FINMA and that the deposit is not covered by the depositor protection scheme (art. 6 (2) BankO). This exemption from the banking license requirement is available to Fintechs as well as any other type of business that fulfills the requirements. It aims at creating an innovation space, a so-called “sandbox.” – The new Fintech license—a license with more lenient requirements compared to the fully-fledged banking license—was introduced by an amendment to the BankA with effect as of January 1, 2019. This regime applies to institutions that hold deposits of less than CHF 100 million. If the customers are protected through additional safeguards, FINMA can approve a higher deposit ceiling on a caseby-case basis. Under this license, the deposits may not be invested and no interest may be paid on them. The holders of a Fintech license are not subject to the depositor protection regime. Further, they are not required to comply with the capital adequacy requirements under the CAO, but instead are subject to the minimum capital requirements under the BankO, i.e., at least CHF 300,000 or 3% of the deposits taken from the public held. Accounting is carried out in accordance with the CO, which is a further relaxation compared to the rules applying to a bank. However, the requirement to be subject to the AMLA remains unchanged compared to the fully-fledged banking license. – The new Federal Act on the Amendment of Federal law, in light of the developments regarding DLT, introduced a new stand-alone license type under the FinMIA for so-called DLT Trading Facilities (DLT-Handelssysteme), i.e., institutions for the multilateral trading in standardized DLT securities. Unlike the licenses for traditional trading venues such as stock exchanges and multilateral trading facilities, the DLT Trading Facility license is a unified license allowing its holder to also provide certain post-trading services that are normally reserved to other financial market infrastructures, such as

16

THE SWISS NATIONAL BANK

205

central custody/depository services as well as clearing and settlement. Furthermore, DLT Trading Facilities are allowed to also admit private individuals and unregulated legal entities to trading instead of regulated participants only. 16.6.1

Sandbox Approach

Switzerland introduced sandbox regulations in 2017. The basic requirements for those who want to operate under the sandbox are compliance with AMLA provisions and affiliation to a self-regulatory organization. The sandbox regimes create an innovation environment allowing providers of fintech financial services to test their business models. – without being subject to licensing because of public deposit and – taking up to an aggregate deposit amount of CHF1 million irrespective of the number of public deposits. Whenever a sandbox-aggregated deposit amount exceeds the threshold of 1,000,000 CHF, then (i) the company needs to the latest within 10 days of such amount being reached informed FINMA; and (ii) start the process for application to become properly authorized or supervised. 16.6.2

Mobile Payment

In general, mobile payments made using smartphones and payment apps are becoming more widely adopted in Switzerland. It is a frequently used option by consumers at the cash register, when sending money to friends, when paying at the parking meter, or when buying items from ecommerce sites. Transactions expected now 228 million mobile payments this year in Switzerland. According to Dietrich, we should expect about 30 million transfers made via mobile payments platforms per month by September 2022. The total transaction value in the Digital Payments segment is projected to reach US$54.43bn in 2022.

206

F. I. LESSAMBO

16.6.3

Money Transfer

According to World Bank data, Switzerland appears to be among the top5 remittance-sending countries globally, with a volume of approximately USD 27.9 billion in 2020 (3,7% of its 2020-GDP). The Swiss authorities seek to provide a more tailored and optimized regulatory environment that supports digital-based solutions for payments /remittances. Transferring the money electronically is the simplest way. The process is broadly similar to using online money transfer services. The main difference is that no one needs to register or provide proof of identification if you already have an account with the Swiss Bank. 16.6.4

Distributed Ledger Technology

Switzerland has made significant progress in improving the framework conditions for digital-based international payments. As of August 1, 2021, a new Federal Law for Blockchain and Distributed Ledger Technology (DLT Framework) came fully into force. One of the key changes that came into force on August 1, 2021, is a license for DLT trading facilities, i.e., financial market infrastructures for DLT securities that can admit other companies and persons to trading in addition to financial intermediaries. The DLT Act introduces the possibility to transfer ledger-based securities exclusively by a technical transfer on a blockchain or distributed ledger, which will be recognized as legally valid even without physical transfer of a document or paper (required for certificated securities) and/or a written assignment (required for simple uncertificated securities) or a booking implemented by a central securities depository (required for book-entry securities). The latter requires, unlike the new ledger-based securities, a regulated institution such as a bank, securities firm, or a central securities depository for creation and transfer. All rights that can be certificated in securities up to now can also be structured as ledger-based securities, i.e., in principle, all contractual rights including, in particular, receivables as well as shares in corporations. Therefore, tokenization has got a lot easier than before the introduction of the DLT Act in February 2021.

16

THE SWISS NATIONAL BANK

207

It is clear that ledger-based rights will be much more than simply tokenizing existing securities or rights, because ledger-based securities will open the possibility to digitalize and atomize the whole lifecycle of a product from its issuance through investor registration, paying out interests or dividends to the redemption of the product. Therefore, there is likely to be huge invention potential in the near future in this segment, and once the digitalization of the product’s lifecycle is reached, ledger-based securities will play out their huge advantages over traditional securities. 16.6.5

InsurTech

Most investors in the Swiss InsurTech market (65%) are from Europe, while 24% are from North America, specifically the United States, 9% are from Asia–Pacific, and 2% are from the Middle East. General insurers, service providers (i.e., actuarial, underwriting, data mining and analysis, etc.), and auto insurers are the main investors in Swiss InsurTech. Most of the InsurTech companies in Switzerland (59%) are concentrated in the business center of the country, Zürich (city) and the surrounding area, and the other 30% of companies involved in InsurTech are in Zug, Basel, and Bern cantons. 16.6.6

Robot-Advice (Online Wealth Management)

With more than CHF 600 million in assets under management (AUM), True Wealth is the largest robot-advisor in Switzerland, followed by the Swissquote Robot-Advisor, with CHF 511 million, according to the analysis. AUM in the robot-advisory segment in Switzerland are projected to reach US$5.85 billion this year, according to Statista, which, when compared to the CHF 2.79 trillion domestically managed by the Swiss asset management industry in 2020, is rather negligible. Swiss investors are lagging behind their European counterparts in embracing investment technology services. Switzerland robot-advisory is behind Germany, France, and the UK, where 17%, 10%, and 14% of investors, respectively, use robot-advisors. According to the analysis, Switzerland is now home to

208

F. I. LESSAMBO

13 Swiss native robot-advisors provided by both traditional financial institutions. Portfolios are constructed based on a customer’s risk tolerance and investment horizon, which are assessed after the investor completes a questionnaire. Depending on the amount invested and the client’s profile, Moneyland.ch estimates that the cost of using a Swiss robot-advisor can be up to ten times lower than that of the most expensive private banking service.

16.7

SNB Financial Statements 16.7.1

See Fig. 16.1.

Fig. 16.1 SNB—Balance sheet

The Balance Sheet

16

THE SWISS NATIONAL BANK

Fig. 16.1 (continued)

16.7.2

Income Statement and Appropriation of Profit

See Figs. 16.2 and 16.3.

209

210

F. I. LESSAMBO

Fig. 16.2 Statement of profit & loss

Fig. 16.3 Statement of appropriation of profit

CHAPTER 17

The Central Bank of Russia

17.1

General

The Central Bank of Russia (CBR) is the leading national authority for banking regulation and supervision. Following the dissolution of Federal Financial Markets Service on September 1, 2013, the CBR consolidated the regulatory powers over financial markets and became the integrated regulator of the Russian financial sector.1 Established by Article 75 of the Constitution of the Russian Federation, the Bank of Russia has special legal status. The Bank of Russia has the exclusive right to issue currency and to protect the ruble and ensure its stability, which is its main function. The Bank of Russia conducts its activities independently from other federal bodies of state power, regional authorities, and local governments.2 In 2013, the Bank of Russia was vested with the powers to regulate, exercise control of, and supervise the financial markets.3 As a

1 Anton Dzhuplin and Dina Kravchenko (2021): Banking Regulation in the Russian Federation: Overview, Thomson Reuteres, Practical Law, https://uk.practicallaw.thomso nreuters.com/w-023-9296?transitionType=Default&contextData=(sc.Default)&firstPage= true. 2 https://www.cbr.ru/eng/about_br/. 3 https://www.cbr.ru/eng/about_br/.

© The Author(s), under exclusive license to Springer Nature 211 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_17

212

F. I. LESSAMBO

mega-regulator, the Bank of Russia creates conditions for the development of all sectors of the financial market and for the stability of the financial system as a whole. This objective determines its approaches to the supervision and regulation of credit institutions, insurance companies, pension funds, microfinance organizations, and other financial market participants.

17.2

Mission and Objectives

According to Article 3 of the Bank of Russia Law, the Central Bank’s main task consists of (i) maintaining financial stability, (ii) promoting the development of the Russian banking system, and (iii) ensuring an efficient and uninterrupted functioning of the payment system. Besides these core tasks, the CBR is encrusted with other missions pursuant to Article 4 of the Ban of Russia Law, inter alia, to: • regulate the banking industry; • issue cash and organize cash circulation; • organize and exercise foreign exchange regulation and control this pursuant to federal legislation; • set up procedures for effecting settlements with international organizations, foreign states, legal entities, and natural persons.

17.3

Organizational Structure

The organizational structure of the CBR comprises the central apparatus, 60 regional branches, 19 national banks, 1325 cash settlement centers, 13 banking schools, a center of training methods in Tver, a personnel training center at Klyazma, and 20 organizations accountable to the CBR. The CBR is made of 26 departments and is managed by a board of directors. The Bank of Russia Board of Directors is the collective executive body of the Bank of Russia, composed of the Governor of the Bank of Russia and 14 board members working in the Bank of Russia on a full-time basis. The State Duma appoints members of the Board of Directors for a term of five years at the proposal of the Governor of the Bank of Russia, with the agreement of the President of the Russian Federation4 (Fig. 17.1). 4 https://www.cbr.ru/eng/about_br/dir/.

Fig. 17.1 CBR—Organizational chart (Source https://www.cbr.ru/Content/Document/File/105256/scheme_eng. pdf)

17 THE CENTRAL BANK OF RUSSIA

213

214

F. I. LESSAMBO

17.4

Funding

As part of the financial support to credit institutions, the Bank of Russia invests in them through the Banking Sector Consolidation Fund and acquires (on a temporary and indirect basis) shares in the equity of such banks. The Bank of Russia owns a 57.58% stake in Sberbank, the country’s leading commercial bank. The Bank of Russia owns as well 100% stake in Russian National Reinsurance Company (RNRC), biggest national reinsurance company.

17.5

Fintech Regulatory and Supervision

In Russia, technical innovations affect virtually all banking products and activities. However, the competition from non-banks is less severe than in AEs since big banks are developing their own digital services, implementing new instruments and platform solutions, and improving their business processes. Therefore, traditional banks still dominate financial services, and new actors pose no serious threat to their profitability. However, in the future, the role of fintech and big tech companies may become more important.5 Nonetheless, the CBR is catching up with new financial technology to live up to its core missions. 17.5.1

Sandbox Approach

The CBR has recently introduced the sandbox regulation. The Bank of Russia’s regulatory sandbox is a mechanism for piloting and modeling processes of new financial services and technologies, which require changes in legal regulation, in an isolated environment.6 In the context of the implementation of the Guidelines for Financial Technology Development for 2018–2020, the Bank of Russia launched the regulatory sandbox in April 2018; it means that innovative financial technologies and services can be piloted in the financial market. High-priority pilot projects include

5 BIS (2020): Financial markets in EMEs – what has changed in the last two decades, Central Bank of the Russian Federation, p. 263. 6 Bank of Russia: Regulatory Sandbag, https://www.cbr.ru/eng/fintech/regulatory_s andbox/.

17

THE CENTRAL BANK OF RUSSIA

215

big data and machine learning technologies, mobile technologies, artificial intelligence, biometric technologies, distributed ledger technologies, open interface solutions, digital profile technologies, etc. The pursued objectives are: • Piloting innovative financial services without risks of violating Russian laws. • Analyzing risks associated with innovative financial services and developing approaches for their mitigation. • Determining the expediency of the implementation of innovative financial services and creating the relevant regulatory environment. The main Fintech regulator remains the Central Bank of Russia, which has shown an open-minded approach toward new financial technologies and maintains an informative website in English. Digital innovations are encouraged through sandbox regulation, and overall fintech regulation, which is not overly cumbersome but attempts to reflect the emerging challenges adequately. The Central Bank plans to unite all the existing registers of financial organizations and create a Unified Register, which will record information about all companies entitled to provide financial services. 17.5.2

Digital payments and lending

The Central Bank of Russia is the main regulator for e-money operators, as well as for almost all other financial market participants. The legal framework for e-money operators in Russia was introduced in 2011, by the “National Payment System” (NPS) adopted on June 27, 2011.7 The Federal Law on the National Payment System regulates cash and electronic payments. Thus, intra-banks payments and payments via QR-codes are allowed, as well as online invoicing and payments to participating businesses. Between 2010 and 2018, the number of cash-free transactions in Russia has increased by 30 times, from 5.7 to 172 transactions per individual per year. The market is expected to grow, further outpacing

7 Buzko Roman and Egor Larichkin (2020): Regulation of E-money Operators in Russia, https://www.buzko.legal/content-eng/regulation-of-e-money-operators-in-russia.

216

F. I. LESSAMBO

Western European countries.8 Moreover, the Federal Law “On National Payments System” (the Law on NPS) sets out a rather detailed legislative framework with respect to payment services. The NPS provides for certain rules with respect to operations of payment aggregators, as well as provision of payment services through special mobile software, which is covered by the newly added legal definition of “payment application.9 ” 17.5.3

Digital Platform Financing

On July 20, 2020, the law setting forth the status and procedure for operation of financial platforms—online platforms for financial transactions—came into force along with the amendments to certain legislation related to the Law. Financial institutions allowed to conduct financial transactions on a financial platform include credit and non-credit financial institutions. The Law provides that the following financial transactions can be executed on a financial platform: – transactions for the provision of banking, insurance, and securities market services; – transactions with financial instruments (including the acquisition, redemption, and exchange of investment units in accordance with the amendments introduced to Federal Law No. 156-FZ on Investment Funds dated November 29, 2001); and – transactions for the provision of other financial services which may be provided by the rules of the financial platform, and further establishes that such financial transactions do not include bank account and deposit agreements entered into for business purposes.10 The Central Bank of Russia must approve a potential CEO of the operator of the financial platform prior to his/her election or appointment. The operator of the financial platform is not a party to the financial transactions, but must facilitate the payment through a special operator’s

8 Buzko Roman and Egor Larichkin (2020): Regulation of E-money Operators in Russia, https://www.buzko.legal/content-eng/regulation-of-e-money-operators-in-russia. 9 Chambers and Partners (2020): An Introduction to Russia. 10 Natalia A. Drebezgina (2020): Russia Adopts Law on

Debevoise & Plimpton.

Financial Platforms,

17

THE CENTRAL BANK OF RUSSIA

217

account and the exchange of documents required for the execution of financial transactions. The operator of the financial platform acts in accordance with the rules registered by the Central Bank of Russia. The rules must contain requirements for the financial platform participants, types of possible transactions, terms and conditions of the services agreement, and other terms of business. The operator of the financial platform: – must be a non-credit financial institution; – must be established as a joint-stock company and have its own funds of at must be included by the Central Bank of Russia in the register of operators of the financial platforms; – may not also act as a credit or another non-credit financial institution, but may act as a trading institution, depositary (including specialized depositary), registrar, or investment platform operator; – must have ownership or other legal title over its principal and backup hard and software facilities located in Russia securing its smooth operation and safety of data (including by making back-up copies); and – must comply with the Central Bank of Russia’s requirements for the protection of information and inform the Central Bank of Russia of any occurrence and/or attempts to execute transactions on the financial platform without an expression of will by the financial platform participants.11 The operator of the financial platform provides information on financial transactions executed on the financial platform to the registrar of financial transactions, who provides such information to consumers identified by the unified system of identification and authentication and other persons provided by the Law.12

11 Natalia A. Drebezgina (2020): Russia Adopts Law on Financial Platforms, Debevoise & Plimpton; https://www.debevoise.com/insights/publications/2020/07/rus sia-adopts-law-on-financial-platforms. 12 Natalia A. Drebezgina (2020): Russia Adopts Law on Financial Platforms, Debevoise & Plimpton; https://www.debevoise.com/insights/publications/2020/07/rus sia-adopts-law-on-financial-platforms.

218

F. I. LESSAMBO

17.5.4

Blockchain/ cryptocurrency

Formally, cryptocurrencies, such as Bitcoin or Ethereum, are not currently regulated by any special law and thus remain legally unsettled. On July 31, 2020, the Russian President signed the law on digital financial assets (DFA),13 digital currency, which permits the sale and purchase of DFAs, as well as the exchange of DFAs for other DFAs or for other digital rights, including DFAs issued pursuant to foreign law or digital rights that include both DFAs and other digital rights. Nonetheless, the ability to exercise the rights attaching to such securities represented by DFAs must be carried out in compliance with the Securities Market Law, subject to special regulation set out by the Law. The Bank of Russia has issued a notice asking stock exchanges in the country to avoid listings of foreign and local companies involved in cryptocurrency. However, the notice does not include the central bank digital currencies (CBDCs) or any authorized digital assets issued in Russia. Put differently, digital currency is not a legal means of payment in Russia, and the Russian ruble remains the only official monetary unit. Recently, the regulator suggested banning cryptocurrency trading in Russia, as well as mining.14 As of January 1, 2021, cryptocurrency owners whose transactions amount exceeds 600,000 rubles ($7,757) in a calendar year will be required to report their crypto transactions and wallet balances to the Russian tax authorities. 17.5.5

InsurTech

The insurance sector in Russia is regulated at the federal level. The principal source of regulation is Law No. 4015–1 “On Organization of Insurance in the Russian Federation” dated November 27, 1992. Insurance-related activities in Russia are subject to mandatory licensing.

13 The law defines DFAs as “digital rights comprising money claims, ability to exercise rights under negotiable securities, rights to participate in the equity of a non-public stock company and right to claim transfer of negotiable securities set in a resolution on the DFA issue”. 14 Anna Baydakova and Tracy Wang (2022): Russia to Regulate Crypto, Dispelling Fears of Ban; CoinDesk, https://www.coindesk.com/policy/2022/02/09/russia-to-lic ense-crypto-exchanges-tax-large-transactions/.

17

THE CENTRAL BANK OF RUSSIA

219

Currently, there are about 350 insurance organizations, including insurance, mutual insurance, and reinsurance companies and brokers, which are listed in the register maintained by the Central Bank.

17.6

Financial Statements

The financial statements were compiled on the basis of the annual accounting statements of the Bank of Russia, including its regional branches and other units in the structure of the Bank of Russia as a legal entity; accounting registers; and information set out in Bank of Russia regulations on accounting in the Bank of Russia and other Bank of Russia regulations. These financial statements do not include the financial statements of credit institutions and other organizations, operating in Russia and abroad, where the Bank of Russia holds equity stakes and/or whose activities it controls, as well as of legal entities established by the Bank of Russia. Under Russian law, the Bank of Russia is not required to compile consolidated financial statements that include the financial statements of credit institutions and other organizations where it holds equity stakes and/or whose activities it controls, as well as of legal entities established by the Bank of Russia. 17.6.1

The Balance sheet

See Fig. 17.2. 17.6.2

The Statement of income

See Fig. 17.3. 17.6.3 See Fig. 17.4.

Statement of Capital, Funds, and Profit Allocation

220

F. I. LESSAMBO

Fig. 17.2 CBR—Balance sheet

17

Fig. 17.3 CBR—Statement of income

THE CENTRAL BANK OF RUSSIA

221

222

F. I. LESSAMBO

Fig. 17.4 CBR—Statement of capital, funds, and profit allocation

CHAPTER 18

Brazil Central Bank

18.1

General

The three entities primarily entrusted with the role of regulating and overseeing financial institutions in Brazil, including banks, are the CMN, the Central Bank, and the Brazilian Securities Commission (CVM). The CMN was created by the Banking Law and is the highest authority in the Brazilian financial system. The Banco Central do Brasil (BCB), federal authority and member of the National Financial System, was established in December 1964, with the promulgation of the Law No. 4,595.1

18.2

Mission and Objectives

The BCB’s mission is to ensure the stability of the currency’s purchasing power and a solid and efficient financial system. The BCB seeks to ensure the soundness of the SFN and to regulate the functioning of banking and non-banking entities in Brazil. To fulfill its task, the BCB2 :

1 https://www.bcb.gov.br/en/legacy?url=https:%2F%2Fwww.bcb.gov.br%2Fingles%2Fn orms%2FLAW4595EN.asp. 2 BCB (2016): Functions of the Central Bank of Brazil, 1–31, https://www.bcb. gov.br/conteudo/home-en/FAQs/FAQ%2011-Central%20Bank%20of%20Brazil%20Func tions.pdf.

© The Author(s), under exclusive license to Springer Nature 223 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_18

224

F. I. LESSAMBO

– authorizes entities to operate; – regulates the functioning of these entities; and – performs monitoring and supervision procedures of these entities. Moreover, the BCB is responsible for the smooth functioning of the foreign exchange market, the relative stability of exchange rates, and the equilibrium of the balance of payments.

18.3

Organizational Structure

The BCB is managed by the board of directors composed of a Governor and Deputy Governors3 (Fig. 18.1).

18.4

Funding

In Brazil, the National Monetary Council issued a 2018 resolution that introduced direct credit companies (Sociedades de Crédito Direto, SCD) as a new type of financial institution. SCDs are restricted to conducting their lending business exclusively on the basis of an electronic platform. SCDs require a license by the Central Bank of Brazil, are subject to prudential supervision, and must meet requirements, inter alia, on minimum capital and on funding. The resolution defines SCDs as financial institutions that engage primarily in lending, financing, and acquisition of receivables exclusively through electronic channels. SCDs may also provide additional services, such as credit analysis, loan collection, insurance distribution, and electronic money issuance. Since March 2020, SCDs have also been permitted to issue credit cards. SCDs are not allowed to raise funds from the public, except by issuing shares, and must operate on the basis of their own capital. However, they are allowed to sell or assign the originated loans to other financial institutions, securitization companies, and credit rights investment funds. To date, the Central Bank of Brazil has authorized 25 institutions to operate as SCDs. Most license holders, with the exception of QI Tech, fund their lending

3 https://www.bcb.gov.br/content/config/Documents/orgchart/orgchart_jul 2019_eng.pdf.

18

BRAZIL CENTRAL BANK

225

Fig. 18.1 Organizational chart

activities almost exclusively with their own capital; the rest represent liabilities incurred by selling or assigning originated loans to other financial institutions. In Brazil, in April 2018, the National Monetary Council issued a new resolution that introduced peer-to-peer loan companies (sociedade entre pessoas, SEP) as a new type of financial institution, whose operation requires a license by the Central Bank of Brazil. The resolution defines SEPs as financial institutions that: (i) direct funds collected from creditors to debtors; (ii) operate exclusively on the basis of an electronic platform; and (iii) are prohibited from using own

226

F. I. LESSAMBO

capital to fund loans and from retaining any credit risk. SEPs may also provide additional services such as credit analysis, loan collection, and distribution of insurance products and issuance of electronic money. For non-sophisticated investors, a maximum limit of BRL 15,000 applies per debtor in a given SEP. SEPs are subject to comprehensive disclosure requirements and minimum capital requirements (BRL 1,000,000).

18.5

Fintech Regulatory and Supervision

Oversight on compliance with regulations applicable to Fintech companies is conducted by the Central Bank of Brazil (CBB), the National Monetary Council (NMC), the Transferable Securities Council (TSC), the Federal Reserve Authority, and the National Data Protection Authority of Data (NDPA). The Central Bank of Brazil regulates financial institutions, money, credit, payments, and exchanges, in accordance with guidelines issued by the Conselho Monetário Nacional (CMN). The Securities and Exchange Commission regulates the financial markets. The insurance sector falls within the ambit of the Private Insurance Superintendence (SUSEP). Brazil is experiencing an increase in Fintech over the last decades. The first regulation of Fintech companies in Brazil was enacted under Law 12,865, of 2013, which created the Brazilian Payment System (SPB) that comprises two Fintech categories: payment arrangement institutions and payment institutions.4 This law also granted to the National Monetary Council and to the Central Bank of Brazil the power to issue rules to regulate these companies. The move is promoted by the regulator agencies with the creation of the CVM’s Fintech Hub of Innovation in Financial Technologies. 18.5.1

Sandbox Approach

On May 15, 2020, the CVM published an instruction to regulate the constitution and operation of its regulatory sandbox, an experimental environment that allows the participation of legal entities to test models

4 ECIJA (2021): Fintech in LATAM: A Comparative Law Review; https://ecija.com/ en/sala-de-prensa/fintech-sector-latam/.

18

BRAZIL CENTRAL BANK

227

of innovative businesses in activities related to the securities market.5 Brazilian fintech operates in 12 different sectors: payments, financial management, credit and loans, investment, insurance, funding, digital banks, debts, cryptocurrencies and distributed ledger technology (DLT), exchange, multiservice, and techfin. According to Inside Fintech Report 2020, the fintech sector in Brazil raised US$1.9 billion throughout the year, overcoming the values presented in 2019, when the publication showed that US$1.1 billion was raised. Even though Fintech companies have existed in Brazil since the beginning of 2010, it was only from April 2018 that those companies became subject to specific legislation. In general, Brazilian legislation does not provide a specific type of operating license for fintechs. Rather, the nature of the services offered by these companies determines whether their businesses require any particular authorization or if there are specific rules for such activities. 18.5.2

Digital Payment and Lending

The total transaction value in the digital payments segment amounts to US$47,546 million in 2019, with a Compound Annual Growth Rate (CAGR) of 12.3% from 2019 to 2023, resulting in a prospective of US$75,526 million by 2023.6 Payment services must comply with the rules regarding the Brazilian payment system (SPB), created by Law No. 10,214/2001, and the supervision of BCB. On September 1, 2020, the BCB published Resolution No. 1/2020, which implemented PIX, an instant payment system scheme. PIX is a new instant payment method launched by BCB with the aim of making the cost of payment and transfer transactions cheaper. Financial institutions and authorized payment institutions with more than 500,000 active customers are required to participate in the instant payment infrastructure and, consequently, of SPI, to settle instant payment transactions whenever they involve a transfer between instant payment accounts from different SPI participants. Any organization that collects money from third parties for loans or intermediate transactions of this nature must be registered and 5 Alexei Bonamin, Marcela Waksman Ejnisman, Carla do Couto Hellu Battilana (2012): The Financial Technology Law Review: Brazil; https://thelawreviews.co.uk/title/the-fin ancial-technology-law-review/brazil. 6 An Overview of the Brazilian Payment System (2019), direito rio.fgv.br, Policy paper N0. 7.

228

F. I. LESSAMBO

authorized to operate as a financial institution according to Brazilian law and is subject to the supervision and regulation of BCB. 18.5.3

Digital Platform Financing

Robot-advisers and investment-based crowdfunding platforms are regulated by CVM and companies that operate in these sectors must observe the rules issued by CVM. Brazilian authorities have legally recognized investment-based crowdfunding as a possible fundraising option for small companies. It is expected that equity crowdfunding can be immensely powerful in supporting entrepreneurs, and allowing more Brazilians to invest in promising start-ups at home. 18.5.4

Cryptocurrency

There is, currently, no specific regulation in Brazil for blockchain technology.7 That is, Brazilian law does not recognize or establish a concept for blockchain or any of its applications, including cryptocurrencies. However, there is a pending debate between the government and the society over the use of cryptocurrency and blockchain technology. In this respect, the Bill 2303 of 2015 is still under analysis and many court decisions have been issued with various criteria related to these subject matters.8 More, initial Coin Offerings—at least those that intrinsically take on the functional characteristics of a security—may be subject to the Capital Markets Law and the Brazilian Securities Exchange Commission (CVM) regulatory framework. 18.5.5

InsurTech

Brazil has recently offered a regulatory sandbox to a limited number of insurance companies supervised by the Brazil Insurance Superintendent (SUSEP). The sandbox approach is designed to enable start-ups in the insurance industry to test new products and services and to encourage 7 Alexei Bonamin, Marcela Waksman Ejnisman, Carla do Couto Hellu Battilana (2012): The Financial Technology Law Review: Brazil, https://thelawreviews.co.uk/title/the-financ ial-technology-law-review/brazil. 8 ECIJA (2021): Fintech in LATAM: A Comparative Law Review, https://ecija.com/ en/sala-de-prensa/fintech-sector-latam/.

18

BRAZIL CENTRAL BANK

229

development of new ways to provide traditional insurance services. On August 26, 2019, SUSEP adopted Circular No. 592 authorizing “on demand” insurance policies, thus permitting issuance of policies with flexible terms affording coverages on a monthly, daily, or even hourly basis. The so-called on demand insurance policies are sold by digital means, thus allowing insureds to turn coverages on and off. Circular N0. 592 has opened the door to basic insurance for mobile devices, bikes, motorcycles, and other personal valuables such as smartphones and tablets. These regulatory changes reflect SUSEP’s intent to adapt to the increasing use of smartphones by consumers and to usher in the digital insurance era, which, in turn, hopefully leads to more affordable products.9

18.6

Financial Statements

18.6.1

The Balance Sheet

See Fig. 18.2. 18.6.2

The Statement of Income

See Fig. 18.3. 18.6.3

The Statement of Change in Equity

See Fig. 18.4. 18.6.4

Statements of Cash Flows

See Fig. 18.5.

9 Thomas F. Morante and Yani R. Contreras (2020): Insurtech Regulatory Developments in Latin America, American Bar Association.

230

F. I. LESSAMBO

Fig. 18.2 Balance sheet

18

Fig. 18.3 Statement of income

BRAZIL CENTRAL BANK

231

232

F. I. LESSAMBO

Fig. 18.4 Statement of changes in equity

Fig. 18.5 Statement of cash flows

CHAPTER 19

Central Bank of Argentina

19.1

General

The Central Bank of Argentina (BCRA) was created as a mixed private– public institution because of the monetary and banking reform of 1935. Among its duties, the BCRA was in charge of issuing notes and coins in its exclusive character of issuer, regulating the amount of lending and money, accumulating international reserves, controlling the banking system, and being the financial agent of the government. The monetary authority was thus vested with powers to act as “lender of last resort” and to adopt countercyclical policies to mitigate economic fluctuations. The Central Bank became a fully state-run institution in 1946 with the main goal of fostering economic development. It thus sought to reduce the number of loans being channeled to speculative activities and to redirect resources to finance productive activities.

19.2

Missions and Objectives

The primary role of the bank is to have an influential hold over the country’s exchange rate, especially with the United States Dollar. The BCRA, as with the central banks of many countries, is responsible for the production of banknotes and coins. Argentinean banknotes are distributed in the

© The Author(s), under exclusive license to Springer Nature 233 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_19

234

F. I. LESSAMBO

typical scale seen in stronger currencies such as the Euro and the USD, despite the slightly depreciated value of the Argentinean Peso.

19.3

Organizational Structure and Governance

A board containing a Governor, two Deputy Governors, and eight directors runs the Bank. The Head Governor is responsible for managing affairs with third parties, while the Deputy Governors are attributed with an assistant position. In the case that the Head Governor is temporarily unavailable, one of the Deputy Governors will take his/her place. All of the Governors and directors are members of the board of directors, which is responsible for assuring financial growth for the economy of Argentina (Fig. 19.1). 19.3.1

The Governor

The Governor is in charge of managing the Central Bank and he legally represents it before third parties; he acts on behalf of the Board of Directors and calls for and chairs its meetings; he ensures compliance with the BCRA’s Charter, other national laws, and Board Resolutions; and he performs all other duties entrusted to him as the Bank’s main executive authority (BCRA Charter, Sect. 10). He is a member of the Board of Directors. 19.3.2

The Deputy Governor

To perform the duties as assigned or delegated by the Governor and to substitute the latter in case of absence, impediment, or vacancy (BCRA Charter, Sect. 13). He is a member of the Board of Directors. 19.3.3

The Board of Directors

The Board of Directors formulates the Bank’s monetary and financial policy; takes part in any decision affecting the monetary and foreign exchange markets; sets general policies related to economic order and expansion of the financial system; establishes the denominations and characteristics of bills and coins; authorizes the opening of new financial or foreign exchange institutions and revokes their license; and lays down rules for organizing and managing the Bank.

BCRA—Organizational chart (Source https://www.bcra.gob.ar/Pdfs/Institucional/ORG_BCRA_i.pdf)

CENTRAL BANK OF ARGENTINA

Fig. 19.1

19

235

236

F. I. LESSAMBO

19.3.4

The Comptroller

To supervise BCRA compliance with Charter provisions and other applicable regulations, reporting to the Board, the Executive and the National Congress.

19.4

FinTech Regulations

The banking industry is subject to strict regulations and controls, mainly provided by the Financial Institutions Law (FIL), which has been regulating banking activities in Argentina since 1977. At the same time, the FIL places the supervision and control of the Argentine banking system on the BCRA, pursuant to the BCRA Charter Law. Currently, there are no laws, rules, or regulations specifically governing the establishment or the conduct of regulatory sandboxes in Argentina for the banking and finance regulatory market. The CBAR has created an innovation bureau to discuss developments and new technologies that are incorporated into the financial. One of the BCRA’s powers is to regulate the financial system and enforce the Law on Financial Institutions and such regulations as may be consequently adopted. Further, the BCRA is empowered to supervise all financial and foreign exchange activity through the Superintendence of Financial and Exchange Institutions.1 19.4.1

Sandbox Approach

In April 2022, Argentina launched its fintech innovation hub, a first step toward issuing cryptocurrency and fintech regulation at a later stage. The initiative is expected to bring the public and private sectors together as the regulator interacts with fintech companies that operate in the capital markets sub-segment. The regulatory National Securities Commission (CNV) has created the new “hub” to act as a bridge between private entities and regulators with the aim of “offering answers on legal and regulatory issues” for start-ups operating in the fintech and crypto fields.

1 Regulatory Consistency Assessment Programme (“RCAP”)—Assessment of Basel Large exposures regulations—Argentina (2019); Basel Committee on Banking Supervision; https://www.bis.org/bcbs/publ/d481.pdf.

19

19.4.2

CENTRAL BANK OF ARGENTINA

237

Mobile Payments

In 2016, the Central Bank issued regulations creating a legal framework for mobile payment platforms (MPPs), which obligated local banks to provide their customers with electronic means for making wire transfers or electronic payments to third parties associated with the platforms through any electronic device, irrespective of the kind of entity receiving the funds or the clearing system used. Pursuant to these regulations, financial institutions and banks had to give their customers the option to use MPPs through e-wallets, mobile points of sale, and payment buttons, guaranteeing the technology neutrality to third parties that intended to develop MPP solutions. 19.4.3

Payment Service Providers and Payment Accounts Definitions

On January 9, 2020, the Central Bank issued Communiqué “A” 6859, regulating for the first time the activity of PSPs in Argentina. The regulation defines PSPs as legal entities that, without being financial institutions or banks, serve at least one function in a “retail payment scheme” within the overall framework of the Argentine payment system, such as offering payment accounts. In addition, the regulation provides that: – “retail payments” include transfers of funds or payments of high and low amounts, with the exception of those made by banks among themselves and with the Central Bank, which are considered “wholesale payments”; – “payment schemes” are systems of commercial, technical, and/or operational rules that make transfers of funds possible, involving at least three parties: a payer, a receiver, and one or more PSPs. The following are not considered “retail payment schemes”: (1) “payment schemes” regulated by the Argentine Securities and Exchange Commission (Comisión Nacional de Valores) for primary placement and/or secondary trading, and/or clearing and/or settlement of securities; and (2) “payment schemes” for the purpose of withholding and/or collecting and settling amounts to cancel taxes or other obligations to any of the state levels or agencies; and

238

F. I. LESSAMBO

– every “payment scheme” must have an administrator to define its rules and to be responsible for compliance with applicable regulations. The regulation provides that: – customer funds credited to payment accounts offered by PSPs must be available at all times—immediately upon demand by the customer—for an amount at least equivalent to that credited to the payment account. To this end, the systems implemented by PSPs must always be able to identify and individualize the funds of each customer; – for transactions on their own account (e.g., payment to suppliers or of salaries), PSPs must use an “operational” bank account separate from the bank account in which the PSP customers’ funds are deposited; – 100 percent of the customers’ funds must be deposited, at all times, in the customers’ bank account in pesos with an Argentine financial institution or bank; and – at the express request of the PSP’s customer, the funds credited to payment accounts can be applied to investments in “mutual funds” (fondos comunes de inversion or FCIs) in Argentina. Such investment must be immediately shown as a debit in the relevant payment account, and at all times, the amounts invested in the FCIs must be reported separately from the balance of the payment account. Moreover, the new regulation provides that PSPs must: (1) register themselves with the payment service providers registry held by the Central Bank and (2) comply with the PSP reporting obligations to be established by the Central Bank. Last but not least, the regulation specifically provides that PSPs must give access to their facilities and documentation to Central Bank personnel and provide the Central Bank with the necessary tools for real-time consultations and reporting, under terms to be defined by the Central Bank for each type of PSP and according to their operation volume.

19

19.4.4

CENTRAL BANK OF ARGENTINA

239

Crowdfunding

Law 27.349 regulates equity Crowdfunding or capital for Entrepreneurial Capital Support 1 (the “Entrepreneurial Capital Support Law”). In November 2021, the Central Bank established a regulatory regime for peer-to-peer crowdlending platforms, which entered into force on January 3, 2022. Crowdlending platforms must enlist in the registry created by the Central Bank for that purpose, which does not imply authorization to carry out financial intermediation operations, attract public resources, carry out advertising, or use denominations reserved for financial entities. However, crowdlending platforms cannot assume the credit risk for transactions between investors and borrowers, nor guarantee—directly or indirectly—the obligations agreed between the parties through the platform. Moreover, crowdlending platforms must not commit to repay the credit to investors, nor acquire or buy the credit negotiated in their platform. 19.4.5

Cryptocurrency

Though cryptocurrencies are not prohibited, the Argentinian government has promulgated regulations with respect to cryptocurrencies, particularly in the areas of taxation and anti-money laundering. Neither the Central Bank nor the CNV has issued binding legal regulations regarding crypto assets. However, in 2014, the Central Bank, through a press release, expressly asserted that cryptocurrencies are not legal tender in Argentina. Nonetheless, in 2017, the CNV issued a report stating that the initial offerings of cryptocurrencies or tokens (ICOs) could be considered, on a case-by-case analysis, as “securities.” Last but not least, the 2017 amendments to the Income Tax Law require that profits derived from the sale of digital currency are considered income and subject to taxation. 19.4.6

19.5

Financial Statements

19.5.1 See Fig. 19.2.

InsurTech

The Balance Sheet

240

F. I. LESSAMBO

Fig. 19.2 Balance sheet

19.5.2 See Fig. 19.3.

Statement of Income

19

Fig. 19.2 (continued)

CENTRAL BANK OF ARGENTINA

241

242

F. I. LESSAMBO

Fig. 19.3 Statement of income

19

19.5.3

CENTRAL BANK OF ARGENTINA

Statement of Change in Equity

243

244

F. I. LESSAMBO

19.5.4

Statement of Cash Flows

CHAPTER 20

Central Bank of Mexico

20.1

General

Banco de México was created on September 1, 1925. Its creation ended a long period of monetary instability and anarchy, dating back to the beginning of the nineteenth century, and during which a system of diverse issuing banks operated. Banco de México’s ultimate modernization phase began with its autonomy in April 1994. Banco de Mexico’s autonomy means that no authority can demand credit from it, hence guaranteeing its uninterrupted control over the amount of money (banknotes and coins) in circulation. It is Mexico’s central bank, monetary authority, and lender of last resort. The Bank of Mexico is autonomous in exercising its functions, and its main objective is to achieve stability in the purchasing power of the national currency.

20.2

Missions and Objectives

The main goal of Banco de México is to preserve the value of Mexico’s currency in the long term in order to improve Mexicans’ well-being. Its main objective is to maintain a low and stable inflation.

© The Author(s), under exclusive license to Springer Nature 245 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_20

246

F. I. LESSAMBO

20.3

Organizational Structure and Governance

See Fig. 20.1. 20.3.1

Governing Board

Paragraph seven of article 28 of the Mexican Constitution establishes that in order to strengthen Banco de México’s autonomy, the central bank is managed by officials appointed by the President and confirmed by the Senate. If the latter is in recess, the Permanent Commission of the legislative branch appoints central bank top officials. The Governing Board is comprised of five members appointed according to the abovementioned procedure. Paragraph seven of article 28 of the Mexican Constitution also states that Board members are appointed for staggered periods, in order to enhance their autonomy in office. As stated in Banco de México’s Law, Board members remain in office for the following periods: a. Governor: six-year period, starting on January 1, of the fourth year of each presidential term.

Fig. 20.1 Banxico—organization chart

20

CENTRAL BANK OF MEXICO

247

b. Deputy Governors: eight-year period. To be replaced or reappointed every two years, on the first, third, and fifth years of each presidential term. The members of the Governing Board can be appointed more than once, as long as they fulfill the age requirement set in article 39, fraction I, of Banco de México’s Law, of being not older than 65 years at the time they begin their term in office. 20.3.2

The Board of Directors

The board of directors is the body in charge of performing and approving all actions required to fulfill the bank’s purpose (with the sole exception of those expressly reserved for the shareholders’ meeting); it has all the necessary powers and authority to represent the bank and lead its business. 20.3.3

The Audit Committee

The audit committee is the body entitled to follow up on the internal and external audit processes of the institution, as well as with the internal comptroller. It ensures that accounting and financial information is generated in accordance with the applicable requirements and accounting principles. The members of this committee are selected for their aptitude and professional reputation.

20.4

Fintech Regulations

The main banking regulators in Mexico are the SHCP and the Comisión Nacional Bancaria y de Valores (CNBV). The CNBV is an independent agency of the Secretaría de Hacienda y Crédito Público (SHCP). In addition to the CNBV, other relevant regulators in the Mexican banking sector are: – The Institute for the Protection of Bank Savings (“IPAB”), which is the main supervisory authority in the protection of bank savings.

248

F. I. LESSAMBO

– The National Commission for the Protection and Defense of Financial Services’ Users, which mainly protects financial services’ customers. – The National Insurance and Bonds Commission, which is responsible for the operation, organization, and supervision of insurance companies and bonds activities. – The National Commission of the Retirement Savings System (“CONSAR”), which is in charge of regulating the Mexican retirement savings system. The Mexican government published the “Law to Regulate Financial Technology Institutions” or “FinTech Law” on March 9, 2018, which was reformed on May 20, 2021. The Fintech Law mainly regulates the rendering of financial services through technological platforms and innovative instruments, such as crowdfunding, electronic payment mechanisms, cryptocurrencies, and a regulatory sandbox for innovative technologies in the financial sector. 20.4.1

Mexico Sandbox Approach

Mexico adopted an umbrella law on Fintech on March 9, 2018,1 following months of consultation among public and private sector stakeholders—including banks, non-bank financial institutions, the Mexican Fintech association, banking association, and academic institutions—and the approval from the bicameral legislature of Mexico. The Law sought to give further framing (and restriction) to Fintechs focused on certain activities—particularly in payments, crowdfunding, and those using virtual assets as part of their business model. In essence, the Law introduces a general regulatory framework, which is aimed to be adapted to the constantly evolving sector using secondary regulation to cover the detail

1 World Bank Group (2020): How Regulators Respond to Fintech Evaluating the Different Approaches—Sandboxes and Beyond, p. 44; https://documents1.worldbank. org/curated/en/579101587660589857/pdf/How-Regulators-Respond-To-FinTech-Eva luating-the-Different-Approaches-Sandboxes-and-Beyond.pdf.

20

CENTRAL BANK OF MEXICO

249

of the implementation. The Mexican Banking and Securities Commission (CNBV), the Mexican Central Bank (Banxico), the Ministry of Finance and Public Credit (SHCP), and other financial regulators were required to publish the corresponding enabling regulations within 6, 12, and 24 months period following the Fintech Law’s effective date. The secondary legislation provides the flexibility necessary to adapt regulation to the changing environment without necessitating a change in law. Its introduction has positioned Mexico as a progressive and attractive environment encouraging for Fintechs, which can develop in a considered manner. The Law builds on six governing principles: i. facilitating financial inclusion and innovation, ii. ensuring consumer protection, iii. safeguarding financial stability, iv. fostering competition, and v. protecting against anti-money laundering and combating the financing of terrorism vi. neutral approach to supervision via technology. 20.4.2

Lending

General lending activities in Mexico are not a regulated matter under applicable law and can be carried out by any person within the Mexican territory. However, certain financing activities are regulated in Mexico; which would require certain registrations and/or authorizations from Mexican financial regulators and will be subject to the supervision of such regulators. 20.4.3

Crowdfunding

Crowdfunding (IFC) is regulated under the new FinTech law. Transaction value in the Crowdfunding segment is projected to reach US$3.29 m in 2022. Under the Fintech Law, crowdfunding business is permitted to2 :

2 Jason Mikula (2022): Mexico Passed A “Fintech Law,” But Regulatory Headaches Remain, https://fintechbusinessweekly.substack.com/p/mexico-passed-a-fintech-law-butregulatory.

250

F. I. LESSAMBO

– facilitate collective debt financing (e.g., peer-to-peer lending model, comparable to Prosper in the United States) – facilitate collective equity financing (e.g., crowdfunded equity model, comparable to WeFunder in the United States) – facilitate collective financing of co-ownership or royalties (e.g., fractional real-estate investing, comparable to Fundraise in the United States) 20.4.4

Cryptocurrency

Mexico’s central bank has been reluctant to approve the use of crypto and banned banks from taking crypto deposits. However, Mexico’s Law to Regulate Financial Technology Companies, enacted in March 2018, includes a chapter on operations with “virtual assets,” commonly known as cryptocurrencies. Mexico’s Central Bank is granted broad powers under the Law to regulate virtual assets, including. – specifying those virtual assets that financial companies are allowed to operate within the country, defining their particular characteristics, and establishing the conditions and restrictions applicable to transactions with such assets; and – authorizing financial companies to perform transactions with virtual assets. Financial companies that carry out transactions with virtual assets must disclose to their clients the risks applicable to these assets [59]. At a minimum, these companies must inform their clients, in a clear and accessible manner on their respective websites or through the means that they utilize to provide services, of the following: – A virtual asset is not a legal currency and is not backed by the federal government nor by Mexico’s Central Bank; – The value of virtual assets is volatile; and – Technological, cybernetic, and fraud risks are inherent in virtual assets.

20

20.4.5

CENTRAL BANK OF MEXICO

251

InsurTech

InsurTech is a portmanteau of “insurance” and “technology,” and refers to the use of technology innovations designed to squeeze out savings and efficiency from the current insurance industry model. InsurTechs are companies that sell insurance through a digital platform, offering auto insurance, home insurance, life insurance, and health insurance, among other products. In Mexico, the InsurTech industry is experiencing major growth. The number of InsurTech start-ups increased at a year-on-year rate of 46% in 2020.3

20.5

Financial Statements 20.5.1

Balance Sheet

See Fig. 20.2. 20.5.2

Statement of Income

See Fig. 20.3. 20.5.3

Statement of Changes in Equity

See Fig. 20.4.

3 Francisco Casanueva (2021): White Paper- The Insurtech Landscape in Mexico, p. 10, https://www.endeavor.org.mx/articulos_data_lab/insurtech-en-mexico/The-Ins urTech-Landscape-in-Mexico-Endeavor-Whitepaper.pdf.

Fig. 20.2

Banco do Mexico—Balance Sheet

252 F. I. LESSAMBO

20

CENTRAL BANK OF MEXICO

Fig. 20.3 Banco do Mexico—Statement of income

253

Fig. 20.4

Statement of changes in equity

254 F. I. LESSAMBO

CHAPTER 21

The Saudi Arabia Monetary Authority

21.1

General

The Saudi Arabia Monetary Agency (SAMA) is the banking regulator, and is responsible for reviewing an application for a banking license, but the Minister of Finance grants such licenses after approval by the Council of Ministers.1 The parent entity of a foreign bank may apply to establish branches within the Kingdom. The SAMA is one of the biggest players in the international banking system, and a member of the Core Principles Liaison Group of the Basel Committee on Banking Supervision.2

21.2

Mission and Objectives

Pursuant to Article 3 of the SAMA’s charter, its core objectives and functions are3 :

1 https://www.saudilegal.com/saudi-law-overview/banking. 2 Felix I. Lessambo (2013): The International Banking System—Capital Adequacy, Core

Businesses, and Risk Management, Chapter 9: The Saudi Arabia Monetary Authority, Palgrave Macmillan. 3 IMF (2006): Staff Country Reports; https://www.elibrary.imf.org/view/journals/ 002/2006/199/article-A999-en.xml.

© The Author(s), under exclusive license to Springer Nature 255 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_21

256

F. I. LESSAMBO

– dealing with the banking affairs of the Government; – minting and printing the national currency (the Saudi Riyal), strengthening the Saudi currency, and stabilizing its external and internal value, in addition to strengthening the currency’s cover; – managing the Kingdom’s foreign exchange reserves; – managing the monetary policy for maintaining the stability of prices and exchange rate; – promoting the growth of the financial system and ensuring its soundness; – supervising commercial banks and exchange dealers; – supervising cooperative insurance companies and the self-employment professions relating to the insurance activity; – supervising finance companies; and – supervising credit information companies.

21.3

Organizational Structure

See Fig. 21.1.

21.4

Fintech Regulatory and Supervision

SAMA is the overseeing authority that governs all financial activities, such as payment processing gateways, e-wallets, Open Banking policies, and sandbox programs. The Saudi Central Bank and the Capital Market Authority (“CMA”) established Fintech Saudi as part of the Financial Services Development Program. In Saudi Arabia, financial transactions are governed by the same laws, whether fintech or conventional. For fintech companies to enter the market in Saudi Arabia, they will be required to obtain the necessary licenses from SAMA, the CMA, or both, depending on the activities the fintech company wishes to carry out. However, Fintech Saudi identified eight activities that do not require licensing by either SAMA or the CMA. These are: – – – –

aggregation of publicly available financial information; back-office bank operations; enhancing bank’s customer experience; personal management;

Fig. 21.1 SAMA—organization chart (Source https://www.sama.gov.sa/en-us/about/pages/organizationstructure. aspx)

21 THE SAUDI ARABIA MONETARY AUTHORITY

257

258

F. I. LESSAMBO

– Regulation technology (regtech), which involves the use of technology to support financial organizations to comply with financial services regulations. Fintechs can develop regtech solutions that do not conduct regulated activities but support financial organizations to remain compliant; – gamification; and – Reward-based crowdfunding since 2020. 21.4.1

The Sandbox Approach

Fintech Saudi aims to support fintech innovation and provide the optimal ecosystem for fintech entrepreneurs and start-ups to grow and thrive in the Saudi market. In 2018, SAMA launched Fintech Saudi and the establishment of the regulatory sandbox for experimental permits to carry out fintech activities. In 2020, SAMA approved the introduction of new laws governing the fintech sector, notably debt-based crowdfunding and payment service provider (PSP) activities.4 21.4.2

Digital Payment and Lending

To achieve growth in the payments sector in a manner consistent with its soundness and efficiency, SAMA has developed supervisory and regulatory frameworks for payment and financial settlement systems and services. SAMA has established the Governance and Oversight Board and the Payment Systems and Companies Control Department to assume supervision and control of payment systems and companies subject to SAMA’s supervision and governance. SAMA starts issuing licenses for non-banking financial actors (FinTech companies). In January 2020, SAMA introduced the Payment Service Provider Regulations (“PSP Regulations”),which requires digital payment providers to secure a license prior to starting any operation.5 The payment services regulated by 4 Fasih Sandhu (2021): State of Open Banking in Saudi & SAMA’s FinTech Regulatory Sandbox; https://www.linkedin.com/pulse/state-open-banking-saudi-samas-fintech-regula tory-sandbox-sandhu. 5 Suhaid Hammad (2021): FinTech Laws and Regulations- Saudi Arabia, ICLG.com.

21

THE SAUDI ARABIA MONETARY AUTHORITY

259

SAMA’s PSP include direct debits, credit transfers, the execution of payment transactions, acquiring payment transactions, issuing electronic money, issuing payment instruments, money remittance, account information services, payment initiation services, cash placement/withdrawals relating to payment accounts and the operation of such accounts, and any other activity designated as a payment service by SAMA. 21.4.3

Digital Platform Financing

The Finance Companies Control Law governs funding and financing activities in Saudi Arabia. The Finance Companies Law further provides that entities cannot partake in funding activities without acquiring the required licenses from SAMA, and such financing activities must adhere to sharia principles. In January 2021, SAMA issued its rules for practicing debt-based crowdfunding activities, which seek to permit companies to engage in crowdfunding, subject to SAMA’s licensing regulations under the Finance Companies Control Law.6 The rules for practicing debt crowdfunding activity have set the minimum paid-up capital for the facility wishing a license to five million Saudi riyals, with the authority of the Central Bank to raise or reduce the minimum capital according to market conditions. 21.4.4

Cryptocurrency

Cryptocurrencies are outside the scope of the regulatory framework and are not traded by financial institutions locally. That is, financial institutions, namely banks, are not permitted to deal with cryptocurrency, unless permitted by SAMA. While SAMA has warned the public of risks of cryptocurrencies, and that they are not legal tender, small businesses and merchants accept Bitcoin. In 2021, SAMA began using blockchain technology in its activities in the banking sector and to keep pace with market trends. SAMA has also developed its own cryptocurrency (Aber), with the United Arab Emirates in its efforts to issue a monitored cryptocurrency that

6 Idem.

260

F. I. LESSAMBO

can be used by the public and banks between the two countries. The Saudi Arabian Monetary Authority (SAMA), the Kingdom’s central bank, announced in June 2020 that it deployed blockchain technology to deposit a part of the SR 50 billion ($13.3 bn) liquidity package into the banking sector as part of the central bank’s active role in providing credit facilities.7 The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) issued a Spot Crypto Asset Framework composed of guidance that regulates initial coin/token offerings and other crypto asset activities. The framework contemplates a financial services permission to carry on the regulated activity of operating a crypto asset business. The framework is designed to address the full range of risks associated with crypto asset activities, including risks relating to money laundering and financial crime, consumer protection, technology governance, custody, and exchange operations. The new ADGM crypto framework instills proper governance, oversight, and transparency over crypto asset activities. 21.4.5

InsurTech

In 2021, SAMA released its first draft of InsurTech rules. The draft rules aim to enable InsurTech companies to execute their work in accordance with a regulatory framework that features flexibility of commitment, inclusiveness of organizational fundamentals, and innovation.8 Such rules ensure protecting customers’ rights in InsurTech companies and encouraging fair competition in providing technical solutions and services to consolidate, stabilize, and develop the sector.

21.5 21.5.1

Financial Statements Statement of Financial Position

SAMA’s assets declined at the end of 2020 compared to the end of 2019. Total assets decreased by 3.5% (SAR 66.0 billion) to SAR 1.8

7 Tarek Ghazal (2020): Saudi Banks Will be Using Blockchain Technology for Money Transfers, https://www.trade.gov/market-intelligence/saudi-arabia-blockchain-tec hnology. 8 https://insurtechnews.com/aggregator/saudi-central-bank-drafts-new-insurtech-reg ulations?n=5fafc79697528080b39c91193677312547f4997f&u=code-web.

21

THE SAUDI ARABIA MONETARY AUTHORITY

261

trillion in 2020 compared to an increase of 0.7% (SAR 12.9 billion) in 2019. Foreign assets accounted for the bulk of SAMA’s total assets, which witnessed a decrease this year. These foreign assets continued to be invested primarily in foreign securities, which fell by 6.6% (SAR 79.5 billion) in 2020 compared with a drop of 0.04% (SAR 0.4 billion) in 2019. Furthermore, SAMA deposits with banks operating abroad fell by 22.0% (SAR 88.2 billion) in 2020 compared to a decline of 1.4% (SAR 5.7 billion) in 2019. Currency backing decreased by 1.7% (SAR 4.5 billion) to SAR 256.9 billion in 2020 against a rise of 7.4% (SAR 18.0 billion) in the preceding year. As for liabilities, government deposits and reserves accounted for 23.6% of SAMA total liabilities at the end of 2020 compared with 27.7% at the end of the preceding year. The government current account increased by 30.6% (SAR18.2 billion) to SAR 77.9 billion in 2020 against a decrease of 18.1% in 2019. In contrast, the government reserves fell by 23.6% (SAR 110.9 billion) to SAR 358.7 billion in 2020 compared with a drop of 4.1% (SAR 19.9 billion) in the preceding year. However, deposits of government funds and institutions grew by 41.8% (SAR 40.5 billion) to SAR 137.5 billion in 2020 against a decrease of 17.1% (SAR 19.9 billion) in the preceding year. SAMA bills and repos also increased by 52.8% (SAR 65.5 billion) to SAR 189.5 billion compared with an increase of 6.6% (SAR 7.7 billion) in 2019 (Fig. 21.2). 21.5.2 See Fig. 21.3.

Statement of Revenues and Expenses

262

F. I. LESSAMBO

Fig. 21.2 Statement of financial position

21

Fig. 21.2 (continued)

THE SAUDI ARABIA MONETARY AUTHORITY

263

264

F. I. LESSAMBO

Fig. 21.2 (continued)

21

THE SAUDI ARABIA MONETARY AUTHORITY

Fig. 21.3 Statement of revenues and expenses

265

CHAPTER 22

The Central Bank of Turkey

22.1

General

The Central Bank of the Republic of Turkey (CBRT) is an independent agency, operating under the terms and conditions of the 1970 CBRT Law No. 1211, as amended on April 25, 2001 by the Law No. 4651.1 The CBRT was established as a joint stock company on June 11, 1930. It is composed of the Head Office and the Banknote Printing Plant in Ankara, and 21 branches all around the country. The Bank has a total of 18 departments. As of April 2001, with Law No. 4651, the Central Bank of the Republic of Turkey (TCMB) was granted independence. The Banking Law No. 5411, which entered into force on November 1, 2005 (Banking Law), provides the legal framework regarding banking activities to ensure the reliability and stability of financial markets and to promote the effective functioning of loan markets.

1 IMF (2022): Special Data Dissemination Standard- Turkey International Reserves and Foreign Currency Liquidity; https://dsbb.imf.org/sdds/dqaf-base/country/TUR/ category/ILV00.

© The Author(s), under exclusive license to Springer Nature 267 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_22

268

F. I. LESSAMBO

22.2

Missions and Objectives

The Central Bank of the Republic of Türkiye is primarily responsible for steering the monetary and exchange rate policies in Türkiye. The primary objective of the Central Bank is to achieve and maintain price stability. Price stability refers to an inflation rate low enough to be ignored in economic decisions. The Bank determines at its own discretion the monetary policy that it will implement and the instruments that it will use to achieve this objective. This means that the Bank has instrument independence. In addition, the Central Bank is responsible for keeping the gold and foreign exchange reserves of Türkiye and managing these reserves for the good of the country. Finally yet importantly, the Central Bank of the Republic of Türkiye is responsible for establishing payment and securities settlement systems to ensure fast and secure transfer and settlement of funds and securities; and for introducing necessary regulations to ensure the uninterrupted operation and oversight of the existing or future systems.

22.3

Organization Governance 22.3.1

The Governor

The Governor is appointed for a term of four years by a decree of the President of the Republic. The Governor may be reappointed upon the expiration of this term. The Governor is required to have received a higher education and to have acquired knowledge and experience in the fields of finance, economics, and banking. He is, as the most senior executive officer, administers and represents the Bank within the country and abroad. The Governor is entrusted with the following powers: – To ensure the enforcement of the provisions of the CBRT Law and the decisions made by the Board, – To take necessary measures to carry out the duties with which the Bank is entrusted by the CBRT Law and to submit proposals to the Board whenever the Governor may deem necessary.

22

22.3.2

THE CENTRAL BANK OF TURKEY

269

The Board

The Board is composed of the Governor and six members to be elected by the General Assembly. The term of office of Board members is three years. The Governor is the Chairman of the Board. One-third of the board members are replaced each year. The members who are to leave the Board at the end of the first and second years are determined by drawing names. Members whose terms of office have expired may be re-elected. The Board duties and powers include: – To make decisions concerning the monetary policy to be implemented and monetary policy instruments to be utilized in compliance with the monetary policy strategy and inflation target, – To set forth regulations and to make decisions on the replacement of banknotes in circulation, as well as their withdrawal from circulation and their destruction, – To establish procedures and conditions and to enact the necessary regulations regarding open market operations, foreign exchange operations, rediscount, and advance operations as well as rediscount and advance interest rates, reserve requirements and liquidity requirements, other monetary policy operations and instruments, the management of gold and foreign exchange reserves of the country, – To make decisions pertaining to the issues stipulated in paragraphs (I) and (III) of Article 40, – To make decisions regarding the establishment of payment, securities transfer, and settlement systems on conditions that shall promote their soundness and effectiveness; to determine the procedures and conditions of payment methods and instruments; to draw up regulations regarding the surveillance and supervision of clearing houses, – To determine the procedures and conditions for requesting information and collecting statistics, – To enact regulations and to render decisions pertaining to the establishment of branches, representative offices, liaison offices and the appointment of correspondents, and the Banknote Printing House, – To decide on issues concerning provisions and reserves and to determine the procedures and conditions regarding the transfer of the balance remaining after the allocation of profit to the Treasury,

270

F. I. LESSAMBO

– To prepare the budget, annual report, balance sheet, income statements, and the agenda of the General Assembly of the Bank, – To submit proposals to the General Assembly for amending the Articles of Association of the Bank and increasing the capital, – To approve the regulations on the administration, organization, services, and personnel of the Bank, – To take decisions on the purchase or acquisition of real property needed by the Bank, as well as on the sale, donation and barter and other transactions when necessary, of real property owned by the Bank, – To decide on donation, amicable settlement, release, waiver, and cancellation of the amounts and values, which are not within the scope of powers that it shall delegate to other governing bodies of the Bank, – To approve the annual cadres of the Bank’s personnel, – To take decisions and set forth regulations on issues submitted by the Office of the Governor for examination and approval, apart from the ones subject to the approval of the Monetary Policy Committee pursuant to this Law. 22.3.3

The Monetary Policy Committee

The Monetary Policy Committee is chaired by the Governor and composed of the Deputy Governors, a member to be elected by and from among the board members and a member to be appointed with the approval of the President of the Republic on the recommendation of the Governor. The Deputy Minister of Treasury and Finance or a unit chief to be designated by the Minister may participate in the meetings without having the right to vote. When the term of office of the Governor, Deputy Governor, or a Board member comes to an end, his/her membership in the Monetary Policy Committee expires as well. The member to be appointed is required to have studied monetary policy matters and hold an academic degree in one of the fields of economics, business administration, banking and finance, to have worked in his/her field for at least ten years and to have adequate experience and knowledge. Its duties and powers include:

22

THE CENTRAL BANK OF TURKEY

271

– To determine the principles and strategy of monetary policy in order to achieve and maintain price stability, – To determine the inflation target together with the Government within the framework of the monetary policy strategy, – To provide information to the public in line with the principles set forth, and provide information to the Government within specified periods by preparing reports regarding monetary policy targets and its implementations, – To take necessary measures in order to protect the domestic and international value of Turkish Lira and to establish the exchange rate policy in determining the parity of Turkish Lira against gold and foreign currencies jointly with the Government. The Monetary Policy Committee sets forth, which decisions will be published, together with the procedure of publishing. The issues to be announced by the Monetary Policy Committee are published immediately in the Official Gazette. Monetary Policy Committee decisions are executed by the Governor and are provided to the Board. 22.3.4

The Executive Committee

The Executive Committee is composed of the Deputy Governors and chaired by the Governor. Deputy Governors are appointed by a decree of the President of the Republic for a period of four years. Deputy Governors may be reappointed upon the expiration of this term. In cases where the Governor is unable to chair, the Deputy Governor assigned by him/her shall preside over the Executive Committee. Its duties and responsibilities include: – To prepare proposals to be submitted to the Board, by examining in advance the issues subject to Board decision, when deemed appropriate by the Governor; – To draw up regulations on the administration, organization, and services of the Bank; – To render decisions on issues made subject to the decision of the Executive Committee by regulation; – To ensure coordination in the operations of the Bank;

272

F. I. LESSAMBO

– To perform duties related to the appointment, salary, dismissal, and retirement of personnel other than those appointed by the Board. 22.3.5

The General Assembly

The General Assembly of the Bank is composed of the shareholders who are registered in the share book of the Bank. The General Assembly convenes each year on a date specified in the Articles of Association. Each person owning ten shares or representing this number of shares is entitled to one vote. Those who are not shareholders may not represent more than one vote by proxy at the General Assembly. The Governor acts as the chairman of the General Assembly. Its Duties and Powers include: – To examine the annual report submitted by the Board and the report of the Auditing Committee, – To examine and approve the balance sheet and the income statements of the Bank, – To release members of the Board and the Auditing Committee, – To increase the capital, – To amend the Articles of Association of the Bank, – To render a decision concerning the liquidation of the Bank. 22.3.6

The Auditing Committee

The Auditing Committee is composed of four members to be elected by the General Assembly. In the event that a member of the Auditing Committee leaves the post, the other members of the Auditing Committee shall elect in his/her place a person who meets the requirements for election to hold office until the first meeting of the General Assembly. The term of office of the Auditing Committee members is two years. Its duties and powers include: – The Auditing Committee supervises all the operations and accounts of the Bank. – The Office of the Governor is obliged to provide all information and documents requested by the Auditing Committee.

22

THE CENTRAL BANK OF TURKEY

273

– The Auditing Committee, having no administrative power, submits its opinions in writing to the Board and presents a copy thereof to the Presidency of the Republic. – The Committee submits a report to the General Assembly to be drawn up on the operations and accounts of the Bank at the end of the year (Fig. 22.1).

Fig. 22.1 CBTurkey- Organization Chart

274

F. I. LESSAMBO

22.4

The CBRT Ownership and Funding

The CBRT is a joint stock company. Its capital of 25.000 Turkish liras are divided into 250.000 shares. As per the Central Bank Law of Turkey, these shares are divided into four classes: – Class A shares are allocated solely to the Turkish Ministry of Finance and Treasury. – Class B shares are allocated to national banks operating in Turkey. – Class C shares are allocated to banks other than national banks and privileged companies. – Class D shares are allocated to Turkish commercial institutions and to real and legal persons of Turkish nationality. As of the end of 2018, class A shares constituted 55.12% of CBRT’s capital, whereas class B, C, and D shares constituted 25.74%, 0.02%, and 19.12%, respectively.

22.5

Fintech Regulation and Supervision

The Banking Regulation and Supervision Agency (BRSA) was established in 2000 as an independent and central supervisory authority to supervise the establishment, management, and activities of banks and other financial institutions.2 As of January 1, 2020, the Central Bank has been authorized to oversee payment companies and electronic money companies, instead of the BRSA. Through an amendment dated November 22, 2019, the Central Bank has become the primary regulator of the payment systems sector. Fintech industry has been attracting lots of attention from market players and regulators. FinTech has been a key innovator for payment systems and money collection and transfer (including pre-paid cards, digital wallets, etc. Regulators strive to safeguard a fair and level playfield for all market participants along with the Finance Office, which has communicated plans, which aim to encourage investments in the sector. Moreover, the Competition Authority’s game-changing report on

2 Presidency of the Republic of Turkiye—Finance Office (2022): Banking Regulation and Supervision Agency, https://www.cbfo.gov.tr/en/banking-sector/banking-regulationand-supervision-agency.

22

THE CENTRAL BANK OF TURKEY

275

the sector is of special importance as the Authority signals rigid enforcement standards with the purpose to open payment systems markets for new entrant fintech companies. 22.5.1

The Sandbox Approach

The Istanbul Financial Center brings together all the stakeholders of the financial services ecosystem. There are developments as well with its wider regulatory sandbox. The Turkish digital strategy for 2023 (Turkey’s 2023 Industry and Technology Strategy) highlights how it intends to develop its technological capabilities. The center will help to establish a network of entrepreneurs and investors to help entrepreneurs share their experiences and get matched with investors. The center will also provide a regulatory sandbox environment for fintech companies to gain real-time experience and for regulatory authorities to detect regulatory needs and improvements.3 22.5.2

Digital Payment

FinTech is widely used in payment-related activities (i.e., internet and mobile banking systems are well-established with a high market penetration rate) in Turkey. Payment entities can commence operations upon obtaining a license granted by the Central Bank (which was previously granted by the BRSA). According to the June 2021 Digital, Internet, and Mobile Banking Statistics published by the Banks Association of Türkiye, the number of active digital banking customers has reached 70.3 million.4 The Law on Payment and Securities Settlement Systems, Payment Services and Electronic Money Companies No. 6493, which entered into force on June 27, 2013 (Law on Payment Systems), provides the legal framework regarding payment and securities settlement systems, payment services and relevant entities, and electronic money companies. The following entities fall within the ambit of that Law:

3 Orkun Bayram, Isilay Talay, Mete Feridun (2022): Can Fintech Promote Sustainable Finance? Policy Lessons from. the Case of Turkey, MDPI, https://www.mdpi.com/2071-1050/14/19/12414. 4 Digital, Internet and Mobile Banking Statistics (The Banks Association of Türkiye— September 2021.

276

F. I. LESSAMBO

– Payment companies are entities that are authorized to provide payment services. – Electronic money companies are entities that are authorized to issue electronic money (or e-money). E-money is defined as a monetary value, issued in exchange for funds by an e-money company, stored electronically and accepted as a payment tool by persons other than the issuer. Under the Law on Payment Systems, the following payment services can be conducted by payment entities: – transactions regarding management of a payment account, including crediting and debiting of amounts to that account; – money transfers, including direct debiting from the account and regular payment made with a payment card; – issuance and acceptance of a payment instrument; – transfer of money; – making of payments via an electronic communication device; and – intermediary services for payment of invoices. The prerequisites for obtaining an operation license for conducting payment service activities and/or e-money entities include: – Establishment of a joint stock company with a minimum paid-in capital (ranging from TRY1 million to TRY2 million for payment entities and TRY5 million for e-money entities); – Employing sufficient number of qualified persons; – Owning required technical infrastructure; – Ensuring adequate risk management; – Information security and business continuity; – Forming an open and transparent organizational structure. 22.5.3

Digital Lending

There is no specific legislation regarding the use and application of FinTech on marketplace lending activities (including B2B, B2C, C2C, peer-to-peer lending, and so on). Lending activities are highly regulated in Turkey on a national level by the BRSA. Thus, no B2B, B2C, C2C,

22

THE CENTRAL BANK OF TURKEY

277

or peer-to-peer lending platforms are currently active in Turkey and no such activity may be conducted under the current legislation. Nonetheless, crowdfunding activities and platforms are permitted and regulated on a national level by the CMB. Moreover, crowdfunded project entities are carved out of the definition of “issuer” and are not required to issue a prospectus or offering circular to launch crowdfunding campaigns. They are also exempt from extensive book keeping and disclosure requirements that are applicable to public entities and issuers, which also help to develop and support the crowdfunding industry. Additionally, as of October 3, 2019, technology or production start-up companies can apply to crowdfunding platforms to raise capital in return for equity. Such platforms are regulated on a national level by the CMB. 22.5.4

Blockchain and Cryptocurrency

Blockchain-related activities and cryptocurrency-related transactions are currently not regulated under Turkish law. Under the BRSA statement released on November 25, 2013, “Bitcoin and other cryptocurrencies were not e-money as defined under the Law on Payment Systems and therefore, were not regulated and audited by BRSA.” Nonetheless, recently the BRSA is leaning toward a more positive approach to the use of blockchain in the financial sector: – Blockchain-based digital central bank money is intended to be introduced; – Istanbul Clearing, Settlement and Custody Bank has developed a new blockchain-based transfer infrastructure platform: BiGa, which be used for transfer of any digitalized asset other than gold, as it is designed as a transfer infrastructure platform; – Cryptocurrency exchanges and Bitcoin ATMs have become available in Turkey.

278

F. I. LESSAMBO

22.5.5

Robot-Advice

In Turkey, unlike other countries, there is no legal regulation specifically regarding robot-advisory or automatic consultancy.5 Investment companies must still sign framework agreements with their customers, open accounts in their name, and acquire registration numbers from the Central Securities Depository. Leveraged transactions (sale and purchase through leverage of foreign exchange, precious metals, and other assets designated by the CMB) are conducted on electronic platforms. 22.5.6

InsurTech

The insurance sector has engaged to some extent with FinTech, for example, adopting mobile applications helping customers to compare insurance products, manage policies and providing certain data. Noteworthy FinTech solutions in the insurance sector have been introduced by the Insurance Information and Monitoring Center established within the Insurance Association of Turkey. In general, insurance activities are regulated on a national level by the Ministry of Treasury and Finance. All insurance and reinsurance companies must obtain an operating license from the Ministry of Treasury and Finance to operate in Turkey. Additionally, certain transactions of insurance companies are subject to the Ministry of Treasury and Finance’s approval, such as share transfers. Once established, the Insurance and Private Pension Regulation and Supervision Agency assumes responsibility for the insurance industry.

22.6 22.6.1

Financial Statements Balance Sheet as of December 2020

see Fig. 22.2 22.6.2

Profit and Loss Statement

See Fig. 22.3

5 Cigdem Ayozger Ongun, Volkan Akbas, and Selin Çetin (2021): Law Business Research, Turkey, pp. 257–67.

22

Fig. 22.2 Balance Sheet

THE CENTRAL BANK OF TURKEY

279

280

F. I. LESSAMBO

Fig. 22.2 (continued)

22

Fig. 22.3 Statement of profit and Loss

THE CENTRAL BANK OF TURKEY

281

CHAPTER 23

The South African Reserve Bank (SARB)

23.1

General

The South African Reserve Bank (SARB) is the central bank of South Africa. The SARB is responsible for bank regulation and supervision in South Africa.1 The SARB is also responsible for certain supervisory responsibilities of co-operative banks established in terms of the Cooperative Banks Act, 2007 (Act No. 40 of 2007). The SARB’s approach to financial system stability places considerable reliance on market forces to achieve financial system stability. Intervention, if any, should be at the minimum level needed to contain systemic risk. Safeguarding of financial system stability requires adequate information about the behavior of financial market participants, regardless of the institutional arrangements. Its primary purpose consists of achieving and maintaining price stability in the interest of balanced and sustainable economic growth. In conjunction with other institutions, it also plays a pivotal role in ensuring financial stability. Section 224 of the Constitution states: The South African Reserve Bank, in pursuit of its primary objective, must perform its functions independently and without fear, favor or prejudice,

1 https://www.resbank.co.za/en/home.

© The Author(s), under exclusive license to Springer Nature 283 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_23

284

F. I. LESSAMBO

but there must be regular consultation between the Bank and the Cabinet member responsible for national financial matters.

23.2

Mission and Objectives

The primary purpose of the Bank is to achieve and maintain price stability in the interest of balanced and sustainable economic growth in South Africa.2 Together with other institutions, it also plays a pivotal role in promoting financial stability. Among other functions, the SARB is responsible for: • formulating and implementing monetary policy; • promoting financial stability; • regulating and supervising the banking and insurance industry through the Prudential Authority; issuing banknotes and coins; • managing the official gold and foreign-exchange (FX) reserves of the country; • undertaking data analysis and research; • ensuring the effective functioning of the National Payment System; • administering the country’s remaining exchange controls; and acting as banker to the government.

23.3

Organizational Structure

See Fig. 23.1

23.4

Funding

Since its establishment, the SARB has had private shareholders.3 Today, it has more than 800 shareholders and its shares are traded on an overthe-counter share transfer facility (OTCSTF) market coordinated within the Bank. Only the shareholders who reside in South Africa are entitled to vote at the AGM and they are allowed one vote for every 200 shares held.4 There is no limitation on shareholding, except for the provision 2 https://www.resbank.co.za/en/home/about-us. 3 https://www.resbank.co.za/en/home/about-us/shareholder-information 4 https://www.resbank.co.za/en/home/about-us/shareholder-information

23

THE SOUTH AFRICAN RESERVE BANK (SARB)

285

Fig. 23.1 SARB—Organizational chart

of the South African Reserve Bank Act that no shareholder shall hold, or hold in aggregate with his, her, or their associates, more than 10 000 of the total number of 2 000 000 issued shares. After allowing for certain provisions, payment of company tax on profits, transfers to reserves, and dividend payments of not more than 10 cents per share to shareholders, the surplus of the Bank’s earnings is paid to the South African government. The Bank’s operations are therefore not driven by a profit motive but serve the best interests of the people of South Africa. The SARB uses interest rates to influence the level of inflation.5 … The repo rate is so called because banks give the SARB an asset, such as a Government bond, in exchange for cash. They can later repurchase (repo) that asset at a lower price, which reflects the interest they paid (i.e., the repo rate) to have the cash.

23.5

Fintech Regulatory and Supervision

The SARB is the main regulator of banking and payment services in South Africa. Its mandate has recently been extended to cover the regulation

5 SARB Monetary etary-policy

Policy,

https://www.resbank.co.za/en/home/what-we-do/mon

286

F. I. LESSAMBO

of prudential requirements for all financial services institutions in South Africa through its Prudential Authority function. 23.5.1

The Sandbag Approach

In 2016, SARB and other financial regulators in South Africa launched the Intergovernmental Fintech Working Group (IFWG) Innovation Hub to respond to the fintech-driven changes in the financial sector and to promote responsible innovation in the sector. The Innovation Accelerator aims to provide a collaborative, exploratory environment for financial sector regulators to learn from and work with each other on emerging innovations in the industry. Outcomes of these coordinated efforts will be shared on the IFWG Innovation Hub website. 23.5.2

Digital Payment and Lending

In South Africa, non-banks are currently required to partner with a bank to offer payment services. In order to relax this constraint and open the market to broader competition, giving non-banks the power to clear and settle certain transactions is currently under consideration. The SARB regulates the payment system industry under the National Payment System Act 1998. The payment systems industry has been a major focus of FinTech activity in South Africa. A number of banks and non-bank players have introduced payment platforms and applications that enable money transfers. Non-bank players must have formal authorization from the Payment Association of South Africa (PASA) to participate in the payment system. While non-bank players can provide the technology and technical infrastructure for payment transactions, only South African-registered banks can issue cash and electronic money (emoney). Nonetheless, Sect. 52 of the Bank Act of 1990 allows non-banks to enter into arrangements with licensed banks so that they can offer payment-related services.6 FinTech is also starting to gain a foothold in peer-to-peer consumer and business lending. Lending platforms that are hosted offshore currently dominate the alternative lending market, but South African-developed platforms are starting to make their presence 6 David Geral, Bright Tibane and Kirsten Kern, (2020): FinTech in South Africa: overview, Practical Law, Thomson Reuters; https://uk.practicallaw.thomsonreuters.com/ w-014-7399?transitionType=Default&contextData=(sc.Default).

23

THE SOUTH AFRICAN RESERVE BANK (SARB)

287

felt, and there is growing interest in the lending of cryptocurrencies for a return. There has been a significant growth in alternative funding through digital platforms (crowdfunding), mainly for the funding of small businesses and charitable causes. South Africa has also seen an increase in the number of initial coin offerings (by local and offshore issuers) and the establishment of cryptocurrency exchanges. 23.5.3

Digital Platform Financing

Crowdfunding is not specifically regulated in South Africa. However, crowdfunding activities may be subject to existing regulation under South Africa’s general financial services regulatory frameworks.7 Within the last two years, there has been a significant growth in alternative funding through digital platforms (crowdfunding), mainly for the funding of small businesses and charitable causes. 23.5.4

Robot-Advice

Assets under management in the Robot-advisors segment are projected to reach US$6.43bn in 2022. While it is now common for traditional FSPs in South Africa to use computer algorithms to automate their financial advice process and to embed this into their overall digital strategy, the degree to which the automation has been implemented differs among providers.8 Nonetheless, market players have observed that most clients still require a human “nudge” such as a phone call or webchat with an adviser to complete an investment decision online. The path forward would require some sort of partnership between traditional FSPs and advice platforms in order to give confidence to market players across the spectrum.

7 Bright Tibane, Claire Franklyn, David Geral (2021): First-step analysis: fintech regulation in South Africa; https://financialregulationjournal.co.za/2021/05/14/first-step-ana lysis-fintech-regulation-in-south-africa/. 8 Morne Fischer, James Alt, Andrew Warren (2018): Automation of financial advice SA’s readiness for automated financial advice. P.24; https://www2.deloitte.com/con tent/dam/Deloitte/za/Documents/financial-services/Deloitte%20Robo%20Automated% 20Advice_June%202018.pdf.

288

F. I. LESSAMBO

23.5.5

Cryptocurrency

Cryptocurrencies are currently not regulated. South Africa’s financial regulator is planning to unveil a regulatory framework covering cryptocurrencies early next year to help protect vulnerable members of society from highly risky assets. The South African Reserve Bank policy aims to have cryptocurrencies classed and treated as financial assets to balance investor protection and innovation.9 23.5.6

InsurTech

Insurers do not necessarily use InsurTech directly. However, the scope of insurance legislation is broad enough to apply to InsurTech. The applicable legislation has broad deeming provisions that allow the PA to deem a person’s conduct as insurance business conducted in South Africa, which requires licensing by the PA. The Insurance Act 2017, which came into effect on July 1, 2018, has repealed and replaced a number of the provisions of the Long-Term Insurance Act 1998 and the Short-Term Insurance Act 1998 (including the registration requirements).10 In addition, the FAIS will also regulate InsurTech. The PA and the FSCA are the regulators of the South African insurance industry.

23.6

Financial Statements

Net investment income of the SARB, derived mainly from foreign investments and accommodation to banks, increased by R5.8 billion (2018: R76.8 million decrease). Operating costs increased by R1.8 billion (2018: R0.1 billion), mainly attributable to the cost of new currency. The net result of these factors was a profit after taxation of R4.6 billion (2018: R1.4 billion) for the year ended March 31, 2019.

9 Gareth Jenkinson (2022): Bitcoin not a currency? South Africa to regulate crypto as financial asset, https://cointelegraph.com/news/bitcoin-not-a-currency-south-africa-toregulate-crypto-as-financial-asset. 10 Patrick Bracher (2020): Insurance and reinsurance in South Africa: overview, Practical Law, Thomson Reuters.

23

23.6.1

THE SOUTH AFRICAN RESERVE BANK (SARB)

289

The Statement of Financial Position

The Group’s total assets increased by R131.0 billion (2018: R12.2 billion decrease), largely as a result of increases in gold and foreign-exchange reserves of R122.8 billion (2018: R25.2 billion decrease) and investments of R11 billion (2018: R2.1 billion). Total liabilities of the Group increased by R121.6 billion (2018: R13.9 billion decrease) largely as a result of increases in the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) (used for the currency revaluation of foreign assets and liabilities which is for the SA government’s account) of R91.4 billion (2018: R37.2 billion decrease), and foreign deposits of R20.6 billion (2018: R4.7 billion decrease). The increase in both total assets and total liabilities was mainly as a result of a weaker rand and a higher South African rand (ZAR) gold price. The contingency reserve increased by R5.0 billion (2018: R1.8 billion) due to the profit after taxation achieved for the year as well as the impact of the transition to International Financial Reporting Standards Framework (IFRS) 9 Financial Instruments (IFRS 9) (Fig. 23.2). 23.6.2

Statement of Profit and Loss

See Fig. 23.3. 23.6.3

Statement of Cash Flows

See Fig. 23.4 23.6.4 See Fig. 23.5

Statement of Change in Equity

290

F. I. LESSAMBO

Fig. 23.2 Statement of financial position

23

THE SOUTH AFRICAN RESERVE BANK (SARB)

Fig. 23.3 Statement of profit and loss

291

292

F. I. LESSAMBO

Fig. 23.4 Statement of cash flows

23

THE SOUTH AFRICAN RESERVE BANK (SARB)

Fig. 23.5 Statement of changes in equity

293

CHAPTER 24

Sandbox and Innovation Test Bed Case Study

24.1

General

In a rapidly evolving world, regulatory bodies often have trouble keeping up with the pace of business and technology innovation—especially when it comes to fintech. To allow for innovation while protecting potential customers, Banks and financial regulators have designed “regulatory sandboxes.” A regulatory sandbox is a controlled environment that allows entrepreneurs, regulators, and other players in the fintech industry to test out new financial products or services without being too constrained by inappropriate regulations.1 Sandboxes are relatively new initiatives; thus, their results and impacts have yet to be tested. Sandboxes enable innovators to trial new products, services, and business models without some of the usual rules applying. Regulatory sandboxes are policy instruments that facilitate small-scale, live testing of innovations in a controlled marketlike environment. Sandboxes are typically employed in cases where the emerging technology is potentially disruptive. It allows the testing of innovative technologies and business models that are not fully compliant with current rules and regulations, by providing temporary suspension of certain mandatory provisions or requirements for those who participate in 1 Leah Ngari (2021): Regulatory Sandboxes in Africa; https://empowerafrica.com/reg ulatory-sandboxes-in-africa/

© The Author(s), under exclusive license to Springer Nature 295 Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4_24

296

F. I. LESSAMBO

the sandbox.2 The sandbox enables innovators trailing innovative business models by providing them with temporary exemptions to rules covered in the existing regulatory framework. For instance, it allows licensed companies to test peer-to-peer energy trading (e.g., household to household), without requiring peers to fulfill the obligations of an energy company. A sandbox environment can help regulators to identify crosscutting regulatory issues in a supervised environment which, in turn, may call for coordination with other regulators with different mandates. Conversely, Innovation test beds are programs that provide access to physical or virtual environments in which companies or public sector stakeholders can test, develop, and introduce new products, services, processes, organizational solutions, and business models, typically in collaboration with multiple stakeholders. Testbeds tend to include substantial investments and provide direct funding. Innovation test beds and regulatory sandboxes differ in terms of the level of involvement and support services or facilities offered by the regulator.3

24.2

Regulatory Sandbox and an Incubator

The primary difference between a regulatory sandbox and an incubator is that a regulatory sandbox is primarily focused on testing against regulation, while an incubator would provide much wider services including business support services, which may include guidance surrounding business models. Regulatory sandboxes do not aim to deregulate or reduce safety and protection standards. The Regulatory Sandbox does therefore provide participants with regulatory clarity for innovations that do not neatly fit within existing frameworks and access to funding. The goal here is not only to test digital innovations under real-life conditions, but also to allow legislators to gain knowledge for creating regulation in the future. Sandbox participants will typically require regulatory relief granted 2 Cristina Rosemberg, Xavier Potau, Samuel Leistner (2020): Regulatory Sandboxes and Innovation Testbeds, Inter-American Development Bank, p. 9. https://publicati ons.iadb.org/publications/english/document/Regulatory-Sandboxes-and-Innovation-Tes tbeds-A-Look-at-International-Experience-in-Latin-America-and-the-Caribbean.pdf. 3 Cristina Rosemberg, Xavier Potau, Samuel Leistner (2020): Regulatory Sandboxes and Innovation Testbeds, Inter-American Development Bank, https://publications.iadb. org/publications/english/document/Regulatory-Sandboxes-and-Innovation-Testbeds-ALook-at-International-Experience-in-Latin-America-and-the-Caribbean.pdf.

24

SANDBOX AND INNOVATION TEST BED CASE STUDY

297

by financial sector regulators in order to test their innovative product or service within the Sandbox.

24.3

Examples of Sandbox Throughout the G-20

See Fig. 24.1. 24.3.1

Sandboxes in the United States

The fintech regulatory framework is very fragmented in the United States largely because its federalized system under which each of its 50 states sets its own rule. Nonetheless, in July 2018, the federal Consumer Financial Protection Bureau (CFPB) set up an “office of innovation.” – In 2018, Arizona became the first US state to set up a so-called regulatory sandbox for fintech start-ups—essentially a test environment in which early-stage companies that are innovating in the financial sector are given limited access to the market under regulatory supervision, without having to be fully licensed. Arizona’s regulatory sandbox, which is administered by Attorney General Brnovich’s office, allows participants to avoid typical regulations for two years, with an option for a one-year extension.

Fig. 24.1 Sandboxes by world bank regions (Source WBG (2020): Number of sandboxes by world bank regions)

298

F. I. LESSAMBO

– On March 26, 2019, Kentucky governor Matt Bevin signed House Bill 386 into law, enacting the first InsurTech sandbox in the country. The law allows companies to test and develop innovative InsurTech programs that are not yet subject to, or protected by, existing regulations. Companies are allowed to submit applications for their insurance innovations to a “regulatory sandbox,” which will allow successful applicants to beta test their programs within a structured regulatory framework.4 The law defines “beta test” as “the phase of testing of an insurance innovation in the regulatory sandbox through the use, sale, license, or availability of the insurance innovation by or to clients or consumers under the supervision of the department.” If a company’s application is accepted, the state Department of Insurance will issue a “limited no-action letter” that sets forth the conditions for the beta testing and provides a temporary regulatory “safe harbor” for the innovation, so long as the applicant adheres to the terms of the letter. If the innovation complies with the terms of the letter during a one-year beta testing period and satisfies certain requirements, it will be offered an extended no-action letter. Among the requirements for an extended no-action letter are that the innovation benefits consumers and that regulatory and/or statutory barriers prevent its continued use.5 – In 2021, North Carolina became the 10th6 state to offer a regulatory sandbox. North Carolina’s new regulatory sandbox is expected to make the Tar Heel State a more attractive place to launch and invest in new companies, technologies, and services (Fig. 24.2).

4 A beta test is the phase of testing of an insurance innovation in the regulatory sandbox through the use, sale, license, or availability of the insurance innovation by or to clients or consumers under the supervision of the department. 5 Laura Foggan, Rachael Padgett (2019): Kentucky Enacts First US Insurtech Sandbox; https://www.crowell.com/NewsEvents/AlertsNewsletters/all/Kentucky-Enacts-First-USInsurtech-Sandbox. 6 In addition to Arizona and North Carolina, regulatory sandboxes have also been created in Florida, Hawaii, Kentucky, Nevada, Utah, Vermont, West Virginia, and Wyoming.

24

SANDBOX AND INNOVATION TEST BED CASE STUDY

299

Fig. 24.2 Sandboxes themes by world bank regions (Source WBG (2020): Sandbox themes by WBG region)

24.3.2

Sandboxes in the European Union

European banks are seeking to test out new technologies, solutions, and business models but are constrained by the existing regulatory framework which does not allow low-risk and low-scale experimentation to take place under less stringent rules. The EU is promoting regulatory sandboxes as a way of helping start-ups to bring challenging technologies to the market, and is launching a platform to connect national sandboxes for financial services, to make cross-border testing a possibility.7 As of 2020, European countries have opened 21 innovation hubs and 5 regulatory sandboxes to help companies roll out innovative services in the financial sector.8

7 Ian Mundell (2022): The Ecosystem: challenging tech? There’s a sandbox for that, https://sciencebusiness.net/news/ecosystem-challenging-tech-theres-sandbox. 8 Valdis Dombrovskis (2020): EU Framework for Experimentation, European Banking Foundation, https://www.ebf.eu/priorities/innovation-cybersecurity/eu-framew ork-for-experimentation/.

300

F. I. LESSAMBO

Example 5G Test Network Finland is open and evolving innovation ecosystem supporting 5G evolution and Beyond 5G technology research and validation, vertical industry product development and pioneer company experiments. The 5G Test Network Finland first phases focused on the first 5G releases (up to Rel-15) technologies, development of separate test beds, and some vertical use case proof-of-concepts. The 5G Test Network Finland was first established in 2015 to manage the various testing facilities within the 5th Gear Program. The program has developed academic and commercial testing facilities for advanced applications, products, and services that rely on 5G technology. 5G Test Network facilities in the northern city of Oulu, Finland offer unique possibilities for testing your 5G technology, components or new services in real time. With its two closely located premises at the University of Oulu and VTT Technical Research Centre of Finland, 5GTN caters for the most demanding needs for 5G trials. By providing a platform on which to test new 5G enabled technology, the 5G Test Network Finland aims to make Finland a leader in all aspects of 5G. Similarly, the UK 5G Test beds and Trials Program is designed to coordinate the development of 5G services and applications in a common framework. It aims to foster the 5G ecosystem in the United Kingdom, build sustainable business cases in 5G, create the necessary conditions to exploit 5G efficiently, and promote UK leadership in 5G R&D. The 5GTNF is a network of testing sites with 5G-capable networks to test new 5G applications and services in a controlled environment prior to commercialization. The program aims to provide an ecosystem of testing and research facilities and to coordinate regulatory and technical work in Finland to ensure that there is a cohesive approach to 5G development. There are 60 partners across different projects that operate as part of the 5GTNF ecosystem. Finland has a long history with communications technology and is a frontrunner both in terms of innovative telecoms businesses and in terms of usage of mobile telecommunications networks.

24

24.3.3

SANDBOX AND INNOVATION TEST BED CASE STUDY

301

Sandbox in the United Kingdom

Since 2017, the UK launched the regulatory sandbox as a means of experimenting with ways of mitigating barriers where an innovator’s plans did not readily fit with the rulebook. The sandbox has a key role to play in enabling trials and supporting innovators in launching new low-carbon products and services. Example 1 Ofgem Innovation Lin Ofgem’s Innovation Link launched the regulatory sandbox service in February 2017. It enables innovators to trial new products, services, and business models without some of the usual rules applying. Ofgem is an electricity and gas regulator in the United Kingdom. Ofgem’s Innovation Link is a regulatory support program for the United Kingdom’s power sector. The sandboxes enable innovators to trial new products, services, and business models without some of the usual rules applying. Innovation Link further offers advice on how innovative business models could fit into existing regulation via a fast-frank-feedback service. Engaging with innovators through the sandbox process has provided valuable input to regulatory policy development. Innovators are required to maintain a risk management plan and to provide regular updates during the trial. At the end of each trial, the innovators produce a report on what has been learnt.

Example 2 NHS Test Beds program The competition to select a new set of Test Beds was launched in March 2018. The National Health Service (NHS), the UK health provider, which is regulated by the Medicines, Healthcare Products Regulatory Agency (MHRA), and National Institute for Health and Care Excellence (NICE), runs the Test Beds Program. Seven test beds across the UK were developed to serve as real-world sites to test combinatorial innovations that integrated new digital technologies, care models, and health informatics, as part of the NHS Five-Year Forward View (5YFV) plan. The technologies tested

302

F. I. LESSAMBO

are approved and do not require approval by the regulators. However, the outcomes from the program have helped to inform regulatory gaps with respect to digital technologies (such as algorithms and digital platforms). Establishing and maintaining information governance arrangements is a crucial part of the setup and successful operation of digital innovation projects like Test Beds.

24.3.4

Sandboxes in Asian-Pacific region

Example: Bank Negara Malaysia’s Thematic eKYC Sandbox Track569 Bank Negara Malaysia (BNM) 57 introduced a specialized thematic track for its sandbox. Termed a specialized sandbox, it is intended to accelerate innovations with clear potential to improve financial services. The specialized sandbox streamlined the application processes for thematic innovations, while the broader sandbox continued to provide wider coverage for other innovative solutions. The first specialized sandbox focused on eKYC and digital onboarding in an attempt to evolve KYC regulation historically performed in person. Under the specialized sandbox, two fintech companies and seven banks tested new eKYC technologies. One of the first participants of the regulatory sandbox, MoneyMatch— an online cross-border remittance service provider—offered peer-to-peer remittance services and tested digital onboarding by conducting multiple video conferences to verify potential clients. The firm created a platform to match individual buyers and sellers of currencies with a focus on SMEs who do many cross-border transfers over the course of one day. For verification, MoneyMatch used AI-powered third-party facial recognition. Using the sandbox for a controlled rollout and to test the effectiveness of the eKYC process, MoneyMatch successfully graduated in June 2019, exiting BNM’s eKYC sandbox and receiving approval to operate and use its new KYC methods within the Malaysian market.

9 World Bank (2020): Global Experiences from Regulatory Sandboxes, Fintech Note N0. 8, https://openknowledge.worldbank.org/bitstream/handle/10986/34789/GlobalExperiences-from-Regulatory-Sandboxes.pdf?sequence=5&isAllowed=y.

24

SANDBOX AND INNOVATION TEST BED CASE STUDY

303

Fig. 24.3 Sandboxes innovation hubs, and Regtech Labs (Source WBG Research)

24.3.5

Sandboxes in Latin America

Example: IRESUD10 The IRESUD project seeks to supply the power grid with electricity generated using photovoltaic technology in urban areas. IRESUD is a project led by the National Commission of Atomic Energy and the National University of San Martin, in Argentina. The purpose of the project is to introduce technologies in the country associated with connection to the electricity network, in urban and peri-urban areas, of distributed photovoltaic solar systems, contemplating technical, economic, legal, and regulatory issues, to contribute to the diversification of the energy matrix in the medium term from a renewable source such as solar energy (Fig. 24.3).

10 Critina Rosenberg, Aaron Vinnick, Felix Dikskal (2020): Regulatory Sandboxes and Innovation Testbeds: A Look at International Experience in Latin America and the Caribbean, at: https://www.researchgate.net/publication/343856457.

304

F. I. LESSAMBO

Sandboxes, Innovation Hubs, and Regtech Labs around the World (April 2020).

24.4

Cross-Border Sandbox Coordination

Cross-border sandbox coordination supports fintech firms to achieve scale, but the harmonization required from different jurisdictions has proven to be a high threshold to cross. Regional and cross- border sandboxes can have benefits for firms, such as support for reciprocal licensing arrangements, but their functioning in practice is still being tested.11

24.5 Global Financial Innovation network---The Global Sandbox In early 2018, the United Kingdom’s Financial Conduct Authority (FCA) proposed a global sandbox for firms to test innovative products, services, or business models across more than one jurisdiction. The Global Financial Innovation Network (GFIN) was formally launched in January 2019 by an international group of financial regulators and related organizations, including the World Bank Group, with the aim of creating a platform for shared knowledge and experiences. GFIN currently has a network of over 60 members and observers committed to supporting financial innovation. One of the considerations when setting up GFIN was the need for regulatory cooperation and collaboration on common challenges or policy questions facing firms across different jurisdictions. In response, a cross-border pilot work stream provided innovative firms with an efficient way to interact with regulators across different national jurisdictions. In January 2020, GFIN released a report on the lessons learned from the cross-border testing pilot. Prior to the launch of the pilot, market demand was unknown; however, it became clear with the volume of applications received that demand for the pilot was very strong. The GFIN members selected 8 firms from a set of 40 applications to develop a suitable testing plan. However, the lack of a streamlined application process for the various sandboxes proved too a high threshold for firms to cross.

11 World Bank Group (2020): Global Experiences from Regulatory Sandboxes, p.14; https://documents1.worldbank.org/curated/en/912001605241080935/pdf/Glo bal-Experiences-from-Regulatory-Sandboxes.pdf.

24

SANDBOX AND INNOVATION TEST BED CASE STUDY

305

Based on the pilot testing phase, GFIN identified improvements for the testing experience, including launching a GFIN website as a single mechanism to better communicate with the market and to share information about cross-border testing more effectively; producing a publication with information on the types of activities that can receive support, to improve the application process for regulators and firms; and developing a single online application form with a set of common questions to collect information relevant to all jurisdictions/regulators. The members strongly believe that cross-border cooperation through the network will both help facilitate firm testing through the pilot project and enable the regulatory community to develop an increasingly collaborative approach going forward.

Glossary of Terms

– The Financial Action Task Force (FATF), the international standard setter in this area, defines anti-money laundering and countering the financing of terrorism (AML/CFT) measures. The BCBS regularly issues guidance to facilitate banks’ compliance with their obligations in this area. – Artificial intelligence refers to the simulation of human intelligence in machines that are programmed to think like humans and mimic their actions. The term may also be applied to any machine that exhibits traits associated with a human mind, such as learning and problem solving. – BigTech refers to large globally active technology firms with a relative advantage in digital technology. These firms usually provide web services (search engines, social networks, e-commerce, etc.) to end users over the Internet and/or IT platforms or they maintain infrastructure (data storage and processing capabilities) on which other companies can provide products or services. – BigTech: The major technology companies such as Apple, Google, Amazon, and Facebook, which have inordinate influence. – Bitcoin is a digital currency that was created in January 2009. Also, known as a cryptocurrency, Bitcoins are not backed by any country’s

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4

307

308

–

–

–

– –

– –

–

–

–

–

GLOSSARY OF TERMS

central bank or government. They offer the promise of lower transaction fees than traditional online payment mechanisms and is operated by a decentralized authority, unlike government-issued currencies. Blockchain are distributed digital ledgers of cryptographically signed transactions that are grouped into blocks. Each block is cryptographically linked to the previous one (making it tamper evident) after validation and undergoing a consensus decision. Crowdfunding is the practice of funding a project or a venture by raising money through the collective effort of a large number of people who each contribute a small amount. Crypto asset are digital assets, which utilize cryptography, peer-topeer networking, and a public ledger to regulate the generation of new units, verify the transactions, and secure the transactions without the intervention of any intermediary. Crypto-token represents a particular fungible and tradable asset or a utility that is often found on a blockchain. DeFi is a shortened version of decentralized finance. This term refers to financial transactions that happen without a “middleman,” like the government, a bank, or another financial institution. Digital bank or internet banks operate primarily via the internet. Digital credit refers to loans accessed through a digital channel, via a mobile device, or a third-party agent. It is an emerging way of accessing electronic money with backend customer evaluation and automated customer interactions. Digital banking: Electronic banking services developed by optimizing the use of customer data in order to serve customers faster, easier, and in accordance to their needs. The service can be carried out completely independently by customers with due regard to security aspects. Digitalization is the use of digital technologies to change a business model and provide new revenue and value-producing opportunities; it is the process of moving to a digital business. Distributed ledger technology (DLT): A digital system for recording the transaction of assets in which the transactions and their details are recorded in multiple places at the same time. Unlike traditional databases, distributed ledgers have no central data store or administration functionality. Electronic Banking: A service that allows an account holder to obtain account information and manage certain banking transactions

GLOSSARY OF TERMS

–

–

–

–

–

–

– –

–

309

through a personal computer via the financial institution’s website on the Internet. A service that allows an account holder to obtain account information and manage certain banking transactions through a personal computer via the financial institution’s Website on the Internet. Electronic funds transfer: A method of transferring funds between banks, businesses, or individual people. Two types of EFT are the automated clearinghouse (ACH) network and wire transfers. Emerging market: A group of countries with rapidly developing economies as reflected in the development of financial market and industrialization. E-money: Electronic money is a form of currency used for electronic transactions by storing in banking computer systems, digital databases, etc. These are highly accessible in international transactions and are backed by a central authority as fiat currency. E-payment: Paying for goods or services on the internet. It includes all financial operations using electronic devices, such as computers, smartphones, or tablets. E-payments come with various methods, like credit or debit card payments or bank transfers. Equity crowdfunding in India: In India, Equity Crowdfunding is Illegal. To issue equity shares in India, companies need to comply with the provisions of The Companies Act, 2013. … The types of entities that are allowed to set up internet-based Crowdfunding Platforms to enable online solicitation from such investors, and the different associated aspects. Exchange tokens are not issued or backed by any central authority and are intended to be designed to be used as a means of exchange. E-wallet: A digital wallet securely stores users’ payment information, passwords for numerous payment methods and websites on an electronic device. This software-based e-wallet system enables users to purchase and transact easily. For example, M2P’s forex cards can hold up to 24 currencies, allowing customers to make payments easily. The FDIC is a federal government agency that helps to ensure the stability of the US financial system and protects bank customers. If you deposit your money into an FDIC-insured bank account, your money is protected up to $250,000 per depositor, for each account ownership category, in the event of a bank failure.

310

GLOSSARY OF TERMS

– Fiat money is government-issued currency. If you are in the United States, that means the US dollar. – Fintech is technology-enabled financial innovation, which is changing the way financial institutions provide—and consumers and businesses use—financial services. FinTechs seek to use technology as a means to enable, enhance, or disrupt financial services across key areas such as banking, payments, lending, and investing. – FinTech Sandbox: FinTech or API sandbox is a regulated environment for innovators to test their products in real time. Sandbox helps to reduce systemic risks before entering the market and facilitates fintechs to innovate better services and products. – Inflation: Economic conditions signified by fast price increase which causes lower purchasing power. There are two types of inflation: cost-push inflation and demand-pull inflation. – Initial coin offering (ICO): A type of fundraising that is primarily done by crowdfunding. In an ICO, a quantity of cryptocurrency is sold in the form of “tokens” (“coins”) to speculators or investors, in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum. – InsurTech: InsurTech (Insurance + Technology: aims to improve efficiency and reduce costs for customers and companies by offering online services to research, compare policies, etc., without needing a physical visit. – Macro-prudential: Financial regulation approach that aims to mitigate overall financial system risks. – Micro-prudential: Financial regulation approach related to individual financial institution management to avoid harming its business sustainability. – Minting is how a file, such as a JPEG or GIF, is recorded to a blockchain. After an NFT is minted, it can be sold or traded. – Online banking: A service that allows an account holder to obtain account information and manage certain banking transactions through a personal computer via the financial institution’s website on the Internet. – P2P: Peer-to-peer (P2P) lending enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the intermediary. Firms that facilitate peer-to-peer lending have greatly increased its adoption as an alternative method of financing. P2P lending is also known as social lending or crowdlending.

GLOSSARY OF TERMS

311

– Procyclicality involves situations such as excess provision of credits by banks during upswings in the economy and the high level of deleveraging that happens during downturns in the economy when capital positions are endangered. – Regulatory sandbox is a regulatory approach, typically summarized in writing and published, that allows live, time-bound testing of innovations under a regulator’s oversight. A regulatory sandbox usually refers to live testing of new products or services in a controlled environment. The sandbox creates an environment for businesses to test products with less risk of being “punished” by the regulator. – Robot-advisor: Digital platforms that provide automated, algorithmdriven financial planning services with little to no human supervision. A typical robot-advisor collects information from clients about their financial situation and future goals through an online survey, and then uses the data to offer advice and/or automatically invest client assets. – Utility tokens: Tokens that provide holders with access to a current or prospective product or service but do not grant holders rights that are the same as those granted by specified investments. – Wire transfer: A transfer of funds from one point to another by wire or network such the Federal Reserve Wire Network.

Bibliography

Andreas Fuster, Matthew Plosser, Philipp Schnabl, and James Vickery (2019): The Role of Technology in Mortgage Lending. The Review of Financial Studies, 32(5), 1854–1899. Andrei V. Vlasov (2017): The Evolution of E-Money. European Research Studies Journal, 20(1), 215–224. Anup Roy (2021): Banks Should Not Cite April 2018 Circular for Denying Crypto Services: RBI, Business Standard. Arner Douglas, Janos Barberis, and Ross Buckley (2016): The Evolution of FinTech: A New Post-Crisis Paradigm? University of New South Wales Law Research Series, University of Hong Kong Faculty of Law Research Paper No. 2015/047, UNSW Law Research Paper No. 2016–62. Bandura Romina and Sundar Ramanujam (2021): Developing Inclusive Digital Payment Systems, Center for Strategic and International Studies, https:// www.csis.org/analysis/developing-inclusive-digital-payment-systems. Baydakova Anna, Tracy Wang (2022): Russia to Regulate Crypto, Dispelling Fears of Ban, CoinDesk, https://www.coindesk.com/policy/2022/02/09/ russia-to-license-crypto-exchanges-tax-large-transactions/. Bert-Jan Butijn, Damian A. Tamburri, and Willem-Jan van den Heuvel (2020): Blockchains. ACM Computing Surveys, 53(3). https://doi.org/10.1145/336 9052. BIS (2020): Financial Markets in EMEs – What has Changed in the Last Two Decades, Central Bank of the Russian Federation, p. 263. BIS (2014): Committee on Payments and Market Infrastructures, 1–6, https:// www.bis.org/cpmi/charter.pdf. © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4

313

314

BIBLIOGRAPHY

Bloomberg (2021): New Cryptocurrency Rules to be Introduced in South Africa in 2022. Bonamin Alexei, Marcela Waksman Ejnisman, Carla do Couto Hellu Battilana (2012): The Financial Technology Law Review: Brazil, https://thelawreviews. co.uk/title/the-financial-technology-law-review/brazil. Buzko Roman and Egor Larichkin (2020): Regulation of E-money Operators in Russia. Buckley Ross, Douglas W. Arner, and Janos N. Barberis (2016): The Evolution of Fintech: A New Post-Crisis Paradigm? University of New South Wales Law Research Series, file:///C:/Users/NBPLCO~1/AppData/Local/Temp/SSRNid3044280.pdf. Buzko Roman and Egor Larichkin (2020): Regulation of E-money Operators in Russia, https://www.buzko.legal/content-eng/regulation-of-e-money-operat ors-in-russia. Casanueva Francisco (2021): White Paper- The Insurtech Landscape in Mexico, p. 10, https://www.endeavor.org.mx/articulos_data_lab/insurtech-en-mex ico/The-InsurTech-Landscape-in-Mexico-Endeavor-Whitepaper.pdf. Chambers and Partners (2020): An Introduction to Russia. Center Forward (2018): FinTech and its Role in the Future of Financial Services. Clark Paul T. (2020): The Fintech War Between the States and the OCC is Redefining What it Means to be a Bank in the United States. Claudia Sheedy (2019): Fintech Goes Mainstream and Transparent. CA Today. https://www.icas.com/news/fintech-goes-mainstream-and-transparent. Cohen Dan and John ReVeal (2021): Beneficial Owner New Account Rules: What FinTech AML Program Managers and Their Financial Institutions Need to Know, https://www.fintechlawblog.com/2018/04/beneficial-owner-newaccount-rules-what-fintech-aml-program-managers-and-their-financial-instituti ons-need-to-know/. Drebezgina Natalia A. (2020): Russia Adopts Law on Financial Platforms, Debevoise & Plimpton, https://www.debevoise.com/insights/publications/ 2020/07/russia-adopts-law-on-financial-platforms. Dylan Yaga Peter Mell Nik Roby Karen Scarfone (2018): Blockchain Technology Overview, US Department of Commerce. EBA (2019): EBA publishes revised Guidelines on outsourcing arrangements, https://www.eba.europa.eu/eba-publishes-revised-guidelines-on-out sourcing-arrangements. EBI (2021): Fintech Regulation and the Licensing Principle, https://ebi-europa. eu/events/fintech-regulation-and-the-licensing-principle/. Erik Feyen, Jon Frost, Leonardo Gambacorta, Harish Natarajan, and Matthew Saal (2021): Fintech and the Digital Transformation of Financial Services:

BIBLIOGRAPHY

315

Implications for Market Structure and Public Policy, BIS Papers, No. 117, https://www.bis.org/publ/bppdf/bispap117.htm. Foggan Laura and Mark Meyer (2019): Insurance/Reinsurance – Navigating Insurtech Regulation without a Map, Crowell Moring. FSB (2021): Promoting Global Financial Stability- Annual Report, p. 10. Galloway Ian (209/2010): Peer-to-Peer Lending and Community Development Finance. Federal Reserve Bank of San Francisco, 21(3), 18–39. Hernandez Will (2019): Fintech Lenders Taking More Market Share from Banks, Survey Finds. American Banker. Ibai Puente González and Uría Menéndez (2017): Banking Regulation in Spain: Overview-Corporate Governance. Thomson Reuters, Practical Law. IBIS World (2021): Financial Technology in the UK - Market Research Report. IMF (2018): The Bali Fintech Agenda: A Blueprint for Successfully Harnessing Fintech’s Opportunities, https://www.imf.org/en/News/Art icles/2018/10/11/pr18388-the-bali-fintech-agenda. Indermit Gill (2021): Global Regulatory Database to Help Policymakers Unlock Fintech’s Potential, World Bank Blog, https://blogs.worldbank.org/psd/glo bal-regulatory-database-help-policymakers-unlock-fintechs-potential. Jarvis David (2021): Four Fintech Trends to Watch in 2022 and Beyond, Fintech Futures- North American Edition. Johannes Ehrentraud, Jermy Prenio, Codruta Boar, Mathilde Janfils, and Aidan Lawson (2021): Fintech and Payments: Regulating Digital Payment Services and E-money, BIS. Kukuh Setiawan and Nadia Maulisa (2019): The Evolution of Fintech: A Regulatory Approach Perspective, Atlantis Press. And Advances in Economics, Business and Management Research, vol. 130. Jarvis David (2021): Four Fintech Trends to Watch in 2022 and Beyond, Fintech Futures- North American Edition. Jünemann Michael, Johannes Wirtz, and Timo Förster (2021): ECSPR - Current Crowdfunding Models under the Crowdfunding Regulation, https://www. twobirds.com/en/insights/2021/germany/ecspr-current-crowdfundingmodels-under-the-crowdfunding-regulation. Krahnhof Philippe and Cam-Duc Au (2020): The Role of Robo-Advisors in the German Banking Market - Critical Analysis on Human versus Digital Advisory Services, International Conference, Brussels, Belgium, Institute for Technology and Research, ISSN: 978–93–89732–92–4, https://www.res earchgate.net/publication/342549761_The_Role_of_Robo-Advisors_in_the_ German_Banking_Market_-_Critical_Analysis_on_Human_versus_Digital_A dvisory_Services. Lehtimäki and Palmu (2019): Central Bank Communication and Monetary Policy Predictability under Uncertain Economic Conditions. Journal of

316

BIBLIOGRAPHY

Central Banking Theory and Practice, Central bank of Montenegro, 8(2), 5–32. McKinsey Global Payment Report (2018): A Dynamic Industry Continues to Break New Ground. Luke Deer, Jackson Mi, and Yu Yuxin (2015): The Rise of Peer-to-Peer Lending in China: An Overview and Survey Case Study. Association of Chartered Certified Accountants. Milena Vuˇcini´c (2020): Fintech and Financial Stability Potential In uence of FinTech on Financial Stability, Risks and Benefits. Journal of Central Banking Theory and Practice, vol. 2, p. 49. Moodley Andrew J. (2019): Digital Transformation in South Africa’s Short-Term Insurance Sector: Traditional Insurers’ Responses to the Internet of Things (IoT) and Insurtech. The African Journal of Information and Communication (AJIC), 24, p. 9. Mondragón Tenorio Edgar (2021): Advantages and disadvantages of Fintech companies, BBVA, https://www.bbva.ch/en/news/advantages-and-disadvant ages-of-fintech-companies/. Morante Thomas, Yani R. Contreras (2020): Insurtech Regulatory Developments in Latin America, American Bar Association. Naveen Joshi (2021): Seven Applications of Robot-Advisors in Fintech, BBNTimes.com, https://www.bbntimes.com/technology/7-applications-ofrobo-advisors-in-fintech. OCC (2016): Exploring Special Purpose National Bank Charters for Fintech Companies (December 2016), available at, https://www.occ.treas.gov/ topics/responsible-innovation/comments/special-purpose-national-bank-cha rters-for-fintech.pdf. Pablo Martin-Acena (2018): The Bank of Spain, 1782–2017: A History, Cambridge University Press, pp. 172–205. Philippon Thomas (2020): On Fintech and Financial Inclusion, BIS Working Papers No. 841, 1–19, https://www.bis.org/publ/work841.pdf. Pollari Ian (2018): The Rise of Digital Platforms in Financial Services, 1– 2, https://assets.kpmg/content/dam/kpmg/xx/pdf/2018/02/kpmg-riseof-digital-platforms.pdf. Radostina Parent (2020): Regulatory Sandboxes and Innovation Hubs for FinTech - Impact on Innovation, Financial Stability and Supervisory Convergence, p. 34, https://www.europarl.europa.eu/RegData/etudes/STUD/ 2020/652752/IPOL_STU(2020)652752_EN.pdf. Robert Bartlett, Adair Morse, Richard Stanton, and Nancy Wallace (2018): “Consumer-lending Discrimination in the Era of FinTech” Working paper. Sabina Reminskaya (2020): CNMV and Crowdfunding in Spain, https://lender kit.com/blog/crowdfunding-in-spain/.

BIBLIOGRAPHY

317

Saal (2021): Fintech and the Digital Transformation of Financial Services: Implications for Market Structure and Public Policy, p. 7, BIS. SEC (2020): FinHub Specialized Unit to Become Stand-Alone Office, https:// www.sec.gov/news/press-release/2020-303. SEC (2020): Strategic Hub for Innovation and Financial Technology (FinHub), https://www.sec.gov/finhub. Sheersh Kapoor (2021): The Rise of InsurTechs in India - No More the New Kid in Town, Economic Times, https://bfsi.economictimes.indiatimes. com/news/insurance/the-rise-of-insurtechs-in-india-no-more-the-new-kidin-town/86416353. Shilpa Mankar Ahluwalia (2021) India Digital payments- A success story, The Times of India, https://timesofindia.indiatimes.com/blogs/voices/dig ital-payments-a-success-story/. Stijn Claessens, Jon Frost, Grunt Turner, and Feng Zhu (2018, September): FinTech Credit Markets across the World: Size, Drivers and Policy Issues. BIS Quarterly Review. Subrata Panda (2021): Major Concerns about Crypto Currencies Conveyed to Govt: RBI Governor, Business Standard, https://www.business-standard. com/article/finance/major-concerns-about-crypto-currencies-conveyed-togovt-rbi-governor-121060400671_1.html. Tobias Adrian (2021): BigTech in Financial Services, IMF, https://www. imf.org/en/News/Articles/2021/06/16/sp061721-bigtech-in-financial-ser vices. Wolf-Georg RINGE and Christopher RUOF (2020): Regulating Fintech in the EU: The Case for a Guided Sandbox. European Journal of Risk Regulation, 11(3), 607. Xin Leo (2021): China Regulators to Ban Crypto Trading and Speculation, Pinsent Masons, LLP. Zetzsche Dirk A., William A. Birdthistle, Douglas W. Arner, and Ross P. Buckley (2020): Digital Finance Platforms: Toward a New Regulatory Paradigm. University of Pennsylvania Journal of Business Law, 23(1), 285. Yaga Dylan, Peter Mell Nik Roby Karen Scarfone (2018): Blockchain Technology Overview, US Department of Commerce, https://nvlpubs.nist.gov/nistpubs/ ir/2018/nist.ir.8202.pdf. Zhu Viviana (2021): China’s Fintech: The End of Wild West, Institut Montaigne.

Index

B Balance sheet, 11, 12, 62, 64, 67, 89, 110, 123, 140, 150, 158, 184, 189, 208, 219, 229, 239, 251, 270, 272, 278 Bali agenda, 19, 21 Bank (of) Brazil, 224–226 Canada, 175, 177, 179–181, 183 France, 97 Italy, 103, 106–108 Russia, 211, 212, 214–219 South Korea, 153, 154, 156 Spain, 115, 116, 120, 122 Turkey, 274

C Committee on Payments and Market Infrastructures (CPMI), 38 Commodity Futures Trading Commission (CFTC), 46, 53, 54, 60

Comptroller of the Currency, 44, 45, 48, 49, 60, 62, 67 Concentration, 7, 8 Consumer Financial Protection Bureau (CFPB), 25, 46, 49–51, 297 Crowdfunding, 11, 12, 18, 46, 59, 86–88, 98, 108, 109, 122, 182, 191, 192, 203, 228, 239, 248, 249, 258, 259, 277, 287 Crowdlending, 86, 87, 98, 122, 239 Crypto asset, 15, 86, 109, 131, 169, 183, 193, 260 Cryptocurrency, 15, 44, 60, 61, 98, 139, 148, 157, 168, 169, 183, 193, 218, 228, 236, 259, 277, 287

D Decentralization, 6, 24 Deutsche Bundesbank, 81, 82, 86

© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 F. I. Lessambo, Fintech Regulation and Supervision Challenges within the Banking Industry, Palgrave Macmillan Studies in Banking and Financial Institutions, https://doi.org/10.1007/978-3-031-25428-4

319

320

INDEX

Digital payment, 10, 11, 18, 108, 138, 148, 156, 167, 181, 192, 215, 227, 258 Digital platform, 5, 13, 14, 130, 148, 193, 251, 287, 302 Distributed ledger technology (DLT), 52, 130, 203, 206, 227

E European Banking Authority (EBA), 19, 73–79

F FAFT, 41 Financial Crimes Enforcement Network (FinCEN), 54–57, 60 Financial inclusion, 6, 21, 22, 45, 46, 70, 168, 249 Financial stability, 7–9, 17, 18, 21–23, 27–30, 33, 34, 37, 38, 45, 69, 70, 74, 79, 82, 85, 93, 103, 107, 134, 188, 212, 249, 283, 284 Financial statements, 62, 89, 96, 110, 123, 140, 150, 158, 166, 169, 184, 189, 194, 208, 219, 229, 239, 251, 260, 278, 288 Fintech accelerator, 130 agenda, 20 regulation, 10, 16, 17, 44, 45, 57, 61, 86, 96, 97, 107, 120, 137, 148, 155, 166, 203, 215, 226, 236, 247, 249, 258 supervision, 43, 44, 77, 120, 129, 138, 148, 180, 191, 202, 214, 226, 256, 274, 285

I Income statement, 140, 209, 270, 272

Innovation test bed, 296 InsurTech, 14, 61, 100, 110, 123, 132, 139, 149, 158, 169, 193, 207, 239, 251, 260, 288 International Association of Deposit Insurers (IADI), 36, 37 International Association of Insurance Supervisors (IAIS), 34

M Mobile payment, 86, 87, 139, 156, 205, 237 Money laundering, 7, 39–41, 55, 149, 157, 180, 239, 249, 260 Money transfer, 108, 206, 276, 286

O Online banking, 4, 121

P Payment services, 59, 80, 82, 86, 97, 99, 108, 121, 130, 138, 139, 181, 203, 216, 227, 258, 275, 276, 285, 286 Prudential Regulation Authority (PRA), 127–129, 187 Canada, 184 United Kingdom, 127, 128

R Reserve Bank of India (RBI), 145–148 Risk financial, 9, 70 macro-financial, 8, 9 managerial, 9 micro-financial, 9 Robot-advice, 278, 287

INDEX

S Sandbox coordination, 304 innovation, 56, 204, 248, 295, 296, 299, 301, 302 Saudi Arabia Monetary Agency (SAMA), 255, 256, 258–261 Statement (of) cash flows, 141, 151, 169, 198, 229, 232, 244, 289, 292

321

changes in equity, 160, 162, 197, 232, 251, 254, 293 financial position, 169, 194, 260, 262, 289, 290 income, 151, 158, 184, 195, 219, 229, 231, 240, 242, 251, 253 Swiss National Bank (SNB), 199–202 T Transparency, 7, 41, 44, 73, 104, 108, 166, 260