In early September, the central bank and seven other ministries and commissions called a halt to all types of token issuance and financing, including initial coin offerings (ICOs), and reiterated that virtual currencies used in financing do not have monetary attributes. For a time, major virtual currencies fell, and ICOs were no longer popular.
In this regard, Sun Guofeng, director of the People's Bank of China's Financial Research Institute, said in an interview with China's Financial Times that ICO is actually suspected of illegal issuance of token tickets, illegal issuance of securities, illegal fundraising, financial fraud, pyramid schemes and other illegal and criminal activities. Therefore, it is necessary and timely to stop ICO at this time.
However, Sun Guofeng also believes that this does not prevent related financial technology companies, industry organizations, and technology companies from continuing to research blockchain technology. Blockchain itself is a good technology, and blockchain technology research is not only possible through ICO , but can also be conducted through various technologies.
Therefore, it is necessary to distinguish between blockchain technology and ICO. Blockchain technology can be applied to many fields and scenarios, including some social management scenarios. Blockchain and ICO should not be equated . We need to further broaden the vision of research and development of blockchain technology.
Since the beginning of this year, the price of virtual currencies, mainly Bitcoin, has skyrocketed, and ICO has also become very popular. However, seven ministries and commissions of the central bank issued a document to pour cold water on virtual currencies. Bitcoin fell by nearly 2,000 yuan within 20 minutes after the announcement, and Ethereum and Litecoin also plummeted by 10%.
Not only China, but other countries and regions have also begun to regulate ICO and virtual currencies. After the central bank and seven ministries issued a document, the Hong Kong Securities and Futures Commission issued a relevant regulatory statement on ICO in the region the next afternoon.
The Russian Central Bank also issued a statement saying that digital cryptocurrencies are still immature and that people need to be wary of the potential risks of ICOs.
The U.S. Securities and Exchange Commission announced in July this year that it had regulatory authority over ICOs. After halting the ICO issuance of four over-the-counter companies, it issued a statement in August warning people to beware of ICO scams.
The strong risk characteristics of financial technology call for strong supervision
Reporter: What do you think are the main risks in the current development of financial technology? Recently, the central bank and seven other ministries and commissions have stopped initial coin offerings (ICOs) financing, and some people in society have doubts about blockchain technology. What do you think about this?
The financial attributes of FinTech itself determine that it has strong risk characteristics. From the current risk perspective, one is the risk from FinTech itself. The other is that FinTech has factors that increase the financial risk of the financial system. On the one hand, FinTech makes financial risks more hidden, spreads faster, and has a wider impact, increasing financial systemic risks; on the other hand, FinTech increases the "disintermediation risk" of the financial industry. In addition, FinTech also involves the issue of financial consumer protection. In general, FinTech still has strong risk characteristics and supervision must be strengthened.
Sun Guofeng: The financial attributes of financial technology itself determine that it has strong risk characteristics. From the current risk point of view, the first is the risk from financial technology itself. The main manifestation is that technical risks are more prominent. Since financial technology is widely used, once the technology itself has problems, it will affect the entire financial system, thus triggering financial risks. In addition, it also manifests as the risk of big data application. It goes without saying that the application of big data is an important part of financial technology. In some aspects of big data credit granting and credit investigation, it can improve the efficiency of financial services and play a very good role in financial pricing. However, big data may generate risks in the process of collection, transfer and use, affecting the entire financial system.
Second, there are factors in financial technology that increase the financial risks of the financial system. On the one hand, financial technology makes financial risks more hidden, spreads faster, and has a wider impact, increasing financial systemic risks. For example, the "e-zubao" incident. In the past, many financial risks were confined to a certain region. Now financial technology and Internet technology can easily make the range of individuals that may be affected by risks very wide and spread faster; on the other hand, financial technology increases the "disintermediation risk" of the financial industry. There is a complete financial regulatory framework for the flow of bank funds, but now a lot of funds flow through financial technology companies. The degree of supervision of some of these funds is relatively weak, which may bring risks. There is also the risk of regulatory arbitrage. Since many businesses in the financial technology industry are in a relatively vague area and the boundaries are not clear, there may be regulatory arbitrage problems, which are specifically manifested in regulatory arbitrage between different regulatory agencies and cross-border regulatory arbitrage.
In addition, financial technology will also involve the issue of financial consumer protection. Currently, a lot of financial big data is generated from Internet platforms, and some financial technology companies and Internet companies are often a group. In the process of transmitting data through Internet platforms to the financial field, it is possible to damage consumers' right to know, privacy, and choice of big data. For example, after the data obtained from e-commerce trading platforms and social networks is transferred to the financial field, it may be used to analyze personal credit status and affect personal borrowing behavior. However, when consumers were on e-commerce trading platforms and social networks, they did not authorize these platforms to analyze their personal credit status. In fact, this may involve the violation of consumers' privacy. Therefore, strengthening the protection of financial consumers is also the focus of preventing financial risks.
Overall, financial technology still has strong risk characteristics and supervision must be strengthened.
As for stopping ICO, in fact, ICO is suspected of illegal sale of token tickets, illegal issuance of securities, illegal fund-raising, financial fraud, pyramid schemes and other illegal and criminal activities. At present, stopping ICO is very necessary and timely . However, this does not prevent related financial technology companies, industry institutions, and technology companies from continuing to study blockchain technology. Blockchain itself is a good technology. Blockchain technology research is not only through ICO, but also through various technologies. Therefore, it is necessary to distinguish blockchain technology from ICO. Blockchain technology can be used in many fields and scenarios, including some social management scenarios. Blockchain and ICO should not be equated. It is necessary to further broaden the vision of research and development of blockchain technology.
Micro-functional supervision should be combined with macro-prudential management
Reporter: What experiences do you think are worth learning from in foreign countries in terms of fintech regulation? What suggestions do you have for improving fintech regulation in my country?
China's financial technology supervision should focus on the combination of micro-functional supervision and macro-prudential management. Micro-functional supervision adopts penetrating supervision. According to the financial characteristics of financial technology and the categories of related businesses, relevant regulatory authorities shall supervise to achieve full coverage of supervision and avoid regulatory gaps. Macro-prudential management is to incorporate financial technology into the macro-prudential management framework and improve the centralized system of customer reserve funds of payment institutions. Moreover, it is very important to include systemically important financial technology companies into the macro-prudential management framework.
Sun Guofeng: The characteristics of my country's financial system and financial market determine that the risks of financial technology in my country may be more prominent. At present, the international financial technology regulatory model can be roughly divided into two categories. One category is some relatively small open economies and international financial centers, such as the United Kingdom and Singapore. Since these countries have relatively small markets, the risks and hidden dangers of financial technology development are not very prominent. At the same time, they are responsible for the development of international financial centers and will take some incentives, including the introduction of regulatory sandboxes. The other category is some large economies with particularly large financial markets, such as the United States and China. In this context, the application and development of financial technology relies on the Internet. If the number of users is large enough and the market is large enough, it is very likely to achieve profitability.
China and the United States have similarities in that both countries are relatively large, have large populations, and have large financial markets. In addition, China has obvious unique advantages. It has more Internet users than the United States, especially a higher mobile smartphone share than the United States. In addition, China has a large demand for the development of financial technology and strong motivation. However, the United States has some leading advantages in the development of financial technology in technology, and its supervision is strict. Although China is clearly ahead in the application scenarios of financial technology, there are also gray areas in supervision. It is particularly important that personal data protection is not as perfect as that in the United States. Of course, this may be conducive to the rapid development of financial technology in the early stages of development, but today, it is necessary to improve the relevant regulatory system as soon as possible, and the phenomenon of personal data privacy being damaged due to unclear laws and regulations should not be allowed to occur.
Therefore, in my opinion, some of the US financial technology regulatory experience is worth learning from China, especially its penetrating supervision and functional supervision. In the United States, no matter what form financial technology appears, it is included in the corresponding financial regulatory system according to the nature of the financial business involved. For example, P2P, some businesses involve changes in property rights and are regulated by the US Securities and Exchange Commission. The US Treasury Department regulates money service institutions. Each state has a money transmission law, which requires money transmission to be registered with the state government regulatory agency. In addition, the United States also has the Federal Consumer Protection Act and the Federal Financial Consumer Protection Bureau to protect the legitimate rights and interests of relevant consumers from the perspective of behavioral supervision.
As for the regulatory sandbox, as an international experience, it is not ruled out that it can be piloted in some areas, but it is not suitable for widespread implementation in China. The main problem of China's financial technology is still insufficient supervision. From international experience, the implementation of the regulatory sandbox is some start-up companies, and the financial technology lacks the motivation for self-development and needs to be encouraged. On the contrary, China's market is relatively large, and financial technology institutions are relatively easy to make profits and have strong motivation for self-development. In this context, if the regulatory sandbox is implemented again, China may encounter many large, medium and small FinTech institutions applying, and the regulatory sandbox may not be able to accommodate so many institutions.
In summary, China's financial technology supervision should focus on the combination of micro-functional supervision and macro-prudential management. Micro-functional supervision adopts penetrating supervision. According to the financial characteristics of financial technology and the categories of related businesses, relevant regulatory authorities shall supervise to achieve full coverage of supervision and avoid regulatory gaps. Macro-prudential management is to incorporate financial technology into the macro-prudential management framework and improve the centralized system of customer reserve funds of payment institutions. The risks of the financial technology industry are highly contagious, and financial technology may cause liquidity risks. Some financial technology companies related to third-party payments collect customer reserve funds. Once risks occur, it may have a greater impact on bank liquidity. Therefore, there should be a risk reserve management for the customer reserve funds of third-party payment institutions.
It is also important to include systemically important fintech companies in the macro-prudential management framework. For example, fintech giants, with their rich product lines, have collected a large amount of data, objectively forming data monopolies and data oligopolies, creating information islands, and are not conducive to the healthy and orderly development of the industry. Take the newly established China UnionPay as an example, it actually solves the problem of data monopoly. In the past, some fintech companies related to third-party payments handled related clearing business in banks, and the specific situation of the capital flow of fintech companies could not be seen from the bank side. Now that China UnionPay has been established, all online payment businesses involving bank accounts accepted by payment institutions from June 30 next year will be processed through the China UnionPay platform. Third-party payment institutions cannot directly connect to banks for online payment business. This will help management understand and grasp the relevant data generated by third-party payment institutions and banks, thereby breaking the data monopoly.
Sustainable development of regulatory technology requires the promotion of moderate internalization of regulatory costs
Reporter: With the rapid development of financial technology, traditional regulatory methods are difficult to fully adapt to the needs of the new situation. In recent years, regulatory technology has been widely used in the field of financial technology supervision. Could you please introduce the development of regulatory technology internationally? What suggestions do you have for promoting the development of regulatory technology in my country?
China needs to develop regulatory technology. First, it needs to promote the standardization of big data, which is the basis for big data analysis and the application of artificial intelligence. Second, it needs to formulate relevant industry rules and standards, effectively regulate market entry and exit, and provide an orderly and fair competition environment for the financial technology industry. Third, it needs to strengthen relevant research on data analysis, cooperate with international organizations and central banks of various countries, and jointly promote it. In addition, in this process, it is also necessary to establish a sustainable regulatory technology development mechanism and promote the moderate internalization of regulatory costs, which is conducive to solving the problem of regulatory incentive and constraint mechanisms, alleviating the problem of unfairness in financial supervision, and building a fair, orderly and competitive new financial technology ecosystem.
Sun Guofeng: Regulatory technology can be defined as the organic combination of technology and regulation, so that technology can be used by financial institutions to meet regulatory compliance requirements. Regulatory technology originated in developed economies, especially after the international financial crisis, and began to develop gradually, mainly due to factors on both the supply and demand sides. From the demand side, after the financial crisis, regulatory authorities in various countries strengthened supervision, and the cost of financial institutions complying with regulatory laws increased. In order to avoid high fines due to non-compliance with regulatory compliance, financial institutions initially hired a large number of people, but the cost expenditure rose rapidly, and then began to gradually introduce regulatory technology means to meet the compliance requirements of regulatory authorities through technological methods. Of course, after regulatory technology develops to a certain extent, regulatory authorities are also developing regulatory technology to avoid regulatory technology circumvention in some areas where supervision is not in place.
At present, China's financial technology supervision is actually an inclusive supervision, which easily leads to insufficient motivation for financial institutions to develop regulatory technology to meet regulatory compliance requirements. Therefore, under the current conditions, in order to better identify and control financial risks, regulatory authorities are more likely to introduce high technology to improve the ability to identify, prevent and resolve risks. From the supply side, the vigorous development of new technologies such as big data, cloud computing, and artificial intelligence in the past two years has made the development of regulatory technology technically feasible.
Only when both supply and demand conditions are met can the development of regulatory technology be sustainable. In fact, China's supply factors are similar to those in the world, but the demand factors mainly come from the insufficient development demand of financial institutions and financial technology companies, but the demand of China's financial regulatory authorities is very strong. This is mainly due to the rapid development of China's financial industry, the large scale of the financial market, and the large number of cross-market and cross-industry cross-products, so the task of financial risk prevention is relatively heavy. In order to deal with financial risks, it is necessary to strengthen supervision. If it is only based on manual supervision, the cost is relatively high and it is not sustainable. From past practice, it is often not until the financial risks are exposed that the signs are discovered, and then the relevant situation and relevant data are understood.
In the past, this passive approach to responding to financial risks is obviously not suitable for the current need to prevent and control financial risks. Therefore, it is necessary to introduce high-tech means and adopt regulatory technology methods to identify financial risks in real time, providing a very good foundation for preventing and resolving financial risks. For example, risk monitoring now mainly relies on data reported by financial institutions. In the future, with the development of regulatory technology, under the premise of data standard integration, regulatory authorities can directly capture the lowest-level data containing multi-dimensional information from financial institutions and financial technology companies in real time and generate analysis indicators, which not only ensures the authenticity of relevant indicators, but also ensures timeliness. On this basis, using big data analysis, artificial intelligence and other methods to discover risk hazards is equivalent to establishing a long-term mechanism for preventing systemic financial risks.
The reason why systemic financial risks are difficult to prevent is that they involve both the time axis, which may produce herd effects and procyclical behavior, and the space axis, which easily causes risks to spread. Whether it is the time axis or the space axis, the relevant transmission is difficult to predict. After the financial crisis, central banks in various countries have been exploring and trying to predict and warn systemic financial risks, including establishing some large economic models for analysis, but it is difficult to accurately track and warn systemic risks. Perhaps predictions based on big data may be more accurate or more effective.
China needs to develop regulatory technology. First, it needs to promote the standardization of big data, which is the basis for big data analysis and artificial intelligence applications . At present, relevant departments of the People's Bank of China are actively promoting related work in comprehensive statistics of the financial industry and financial standardization. Some industry associations and self-regulatory organizations are also promoting relevant data standards. Second, it is necessary to formulate relevant industry rules and standards, effectively regulate market entry and exit , and provide an orderly and fair competition environment for the financial technology industry. Third, it is necessary to strengthen relevant research on data analysis, cooperate with international organizations and central banks of various countries, and jointly promote it .
In addition, in this process, it is necessary to establish a sustainable regulatory technology development mechanism to promote the moderate internalization of regulatory costs, which will be conducive to solving the problems of regulatory incentive and constraint mechanisms, alleviating the unfairness in financial supervision, and building a new financial technology ecosystem that is fair, orderly and competitive.
At present, there are three main development paths for regulatory technology: First, financial regulatory authorities independently research and develop financial technology systems. Second, financial regulatory authorities outsource the research and development of regulatory systems. Third, financial technology companies conduct research and development, and regulatory authorities and third parties conduct evaluations, which can be promoted after use to form a regulatory technology system that adapts to the entire industry. Regardless of the development path, cost investment is required. If the regulatory authorities bear this cost entirely, it will actually be paid by taxpayers in the end, which is not fair. Therefore, it is necessary for the entire financial technology industry to share part of the cost of regulatory authorities developing regulatory technology. As for the way to share costs, we can actively explore innovations, such as through super data platforms, relying on equity as a link, or through industry self-regulatory organizations and model innovations, to contribute to the construction of regulatory technology systems.
