Fintech poses “serious” challenge to governance, says former PBoC deputy

The former deputy governor of the People’s Bank of China (PBoC), Li Dongrong, has called for improved global governance of the fast-growing fintech sector – with the aim to better manage risks and ensure new financial services are created for the benefit of societies as a whole rather than for a select few.

“Fintech has brought new challenges for international financial governance,” Dongrong, who is president of the National Internet Finance Association of China, told the International Finance Forum in Guangzhou. “We need to take some of these challenges quite seriously.”

China took a relatively laissez-faire approach to fintech regulation until the last five years. This facilitated the rapid development of mobile payments, with more than 500 million people making mobile payments worth $12.77 trillion in the first 10 months of last year. But problems related to peer-to-peer loans (made to more than 100 million individuals in China) and so-called cryptocurrency IPOs led to a tightening up of rules, which coincided with efforts to tackle problems in shadow banking more generally.  

Dongrong says China’s regulators have been “monitoring what was happening” in terms of the positive developments linked with fintech, but also “reacting” when issues arise. “If regulation lags too far behind, fintech could veer off course,” he said, adding that there is a need for “cleansing” so “there is a better environment to grow moving forwards”.

“Fintech needs to be a responsible innovation,” said Dongrong. “We cannot just focus on the short-term effects and overlook the delayed risks that may arise.”

Dongrong added that while each country needs to establish its own fintech governance structures to meet specific national development needs, this should not be done in a way that encourages regulatory arbitrage. 

“There may be a race to the bottom, when countries give priorities to developing the financial sector,” said Dongrong. “We have seen organisations moving to regulatory havens in the name of innovation. We have seen this within China too – companies moving to areas where regulation is lighter.”

Dongrong also noted the interconnection between different financial infrastructures in countries is increasing, which he said has resulted in “the accumulation” of risks “growing exponentially”. This combined with a “digital divide” between those with access to fintech services and those without, can increase risks and make them more complicated and harder to manage.

International effort

Dongrong said some efforts to enhance international coordination are already under way. The IMF and World Bank provided “an in-depth analysis of the opportunities and risks” and offered “practical advice” on how to deal with them during their November meetings in Bali, Indonesia, Dongrong said.

“We can leverage organisations like the World Bank and the IMF and enhance international fintech development assessment and risk monitoring to deal with a regulatory race to the bottom and regulatory arbitrage,” the former PBoC official said. “We need to deepen cooperation between countries to share information, to deal with risks and to handle crises so that the capability of cross-border regulation and cooperation can be raised.”

Another effort is to promote international rules, such as those established under the International Organization for Standardization (ISO).

Dialectic approach

Dongrong believes national regulators need to look at fintech ‘dialectically’. “We need to embrace it but also to be cautious and prudent; to contain risks while seeking the benefit of its economic and social value,” he said.

He also stressed the need for fintech to benefit all.

China is particularly developed in mobile payments, internet lending, online supply chain financing and poverty alleviation efforts. Countries, such as the UK and Singapore, have experimented with new regulation through sandboxes and innovation accelerators to provide a robust policy environment for fintech development.

“Fintech needs to serve the development of the real economy. We want to use technology to make finance more inclusive, we want to include micro businesses and poor people,” Dongrong added.

As a result there is a need for policymakers to offer more public education on fintech and ensure financial institutions meet their public obligations.

Despite this, however, the World Bank’s World Development Report 2016: Digital Dividends pointed out that there is still a digital divide, with worldwide some four billion people not having internet access and two billion people still not in possession of a mobile phone.

“Domestic digital divides can be as big as the international divide. This can cause the polarisation of the abilities for different people to benefit from fintech,” said Dongrong.

Blockchain blockage

While the PBoC has conducted extensive research on the use of distributed ledger technology, there appears to be no rush in an attempt to embrace blockchain into mainstream Chinese payments.

Dongrong said while there was “room for improvement” in Chinese clearing and settlement “the current system has withstood the test of history”. “It is reliable and has effective scale.

“The use of blockchain has pointed to a new direction,” he said. “But even the best technology needs to be tested by reality and be able to move from experiments from labs to large-scale adoption.”