As the financial industry stands on the brink of transformation due to rapid technological advancements, regulators are urged to prepare for a faster financial system. Innovations such as blockchain, AI, and digital payments promise significant changes but also pose challenges that must be managed carefully.
The Financial Stability Board (FSB) is focusing on technological innovation to harness its benefits while safeguarding financial stability. According to a recent address, "financial activities have evolved over centuries," with each period marked by both opportunity and risk. The current wave of innovation is more technological than financial, impacting services beyond traditional finance.
Financial systems rely on three key parameters: risk management, information processing, and trust. Regulation has emerged as essential to maintaining these parameters. The FSB has released reports highlighting vulnerabilities similar to traditional finance in new technologies like AI and crypto-assets.
"Tokenisation of real estate can cause liquidity mismatches," posing risks during market stress. Additionally, "multi-function crypto-asset intermediaries often engage in highly leveraged trading," increasing potential losses in volatile markets. New technologies also bring operational risks; for instance, a 2023 incident where a major tokenisation platform faced a smart contract bug disrupted market operations.
The FSB's primary principle is that if economic activities remain unchanged despite innovations, similar regulations should apply. Technology neutrality allows the market to decide on innovations without hindering advancements. However, determining when risks are 'the same' can be complex.
Regulators face several challenges: swiftly including new entrants within regulatory frameworks, investing in knowledge and resources to understand emerging technologies, addressing legal uncertainties surrounding innovations like crypto assets, and preparing for a faster-moving financial system.
Authorities must adapt quickly as institutions leverage technology for automation and faster service delivery. Regulators need strategies to identify and respond rapidly to systemic stresses or failures that could emerge quickly.
The FSB emphasizes that massive overhauls aren't necessary since underlying risks remain consistent with known regulation methods. However, swift adaptation is crucial for global markets' coherence and preventing fragmentation due to unregulated activities evading oversight.
"The FSB is in a unique position given our broad membership," providing an opportunity for developing internationally agreed policy responses ensuring benefits outweigh potential risks from slow reactions by regulators worldwide.
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