Establishing the right regulatory template for the advent
of digital money is crucial. The implications of this complex, multiparty world of digital financial services for banks, governments and regulators are far reaching.
Indeed, regulators everywhere are concerned about the systemic impact of non-regulated entities that operate in parallel to established banks, particularly for retail financial services customers. As non traditional methods of payment and virtual currencies proliferate, and issuers of digital currencies get closer to real money in the decade ahead, their cries will get louder.
Although too early to determine exactly how such a template should look, some governments are taking the steps to lead the way. With blockchain technology and cryptocurrencies turning value into just one more type of data, enabling money to flow as freely as data in the process, it’s hard to know where the regulator’s line should be drawn and which parts of the existing
financial services industry should be protected.
As the internet of things gets under way, unleashing
a potential surge in machine-to-machine transaction growth, the perception of value may be transformed and moved around in fundamentally different ways.
Quite possibly, in the not-too-distant future, consumers may be buying devices for the home that make purchases on their behalf without any secondary configuration by the house owner. If that machine automatically performs the transaction and transfers the funds, who is responsible for them? Should standard forms
of regulation apply — such as know your customer, anti-money laundering and consumer protection? And if so, how?
The problem is compounded in the digital universe where
value is increasingly likely to come in multiple forms in order to take advantage of greater flexibility and lower costs than processing transactions in national currencies.
While regulators understand their place in regulating
fiat currency, what skills are required and how much
regulation is needed for these new forms of money, and the proliferation of them, in the decade ahead? In the case of distributed ledger (or blockchain) technology, which allows a direct transaction between two entities, the traditional transfer of value within an economy could be disrupted. A transaction and a medium of exchange can occur without the need to use regular money, reducing costs and improving transaction times at a stroke. Such transactions have already been piloted by global financial institutions, including Barclays, Goldman Sachs and UBS, for transaction settlement and corporate trade finance businesses. The World Economic Forum estimates that four-fifths of the world’s commercial banks will have
initiated projects using the technology in 2017.
With central banks around the world also exploring the use of blockchain for creating their own digital currency,
tmoney-aises fundamental questions around who should have access to central bank money and what it means
when they do. They will also be forced to address the implications for the wider economy of the return to a (digital) gold standard, and where they sit in regulating money, both old and new.
Regulators will need to be innovative in their thinking and tread a careful line to avoid the creation of a parallel financial system that might later pose a risk to consumers, at the same time making sure they don’t stifle innovation just as the digital age reaches its height.
The approach of governments in Sweden, Estonia and Dubai, among others, toward blockchain shows how an enhanced role for regulators in the digital economy might look. Cracking the right regulatory code will require a progressive approach that involves closer collaboration with a broader range of stakeholders — including banks, businesses, start-ups and national government — than previously necessary. It will also have to acknowledge consumer preferences for existing payment channels and reassure them that new channels are robust enough to withstand being hacked.