Digital finance innovation is driving new regulatory models to support participation and inclusion. A range of stakeholders and interest groups, the digital finance industry, merchants and consumers alike are co-responsible to ensure enabling environments are created to ensure the evolution, inclusion, benefits of, and their participation in the latest digital finance offerings.
Today digital finance is a new and emerging area of finance that encompasses the areas of financial technology, digital payment systems, digital financial products such as digital derivatives, digital securities, digital carbon credits, and a wide variety of digital forms of traditional financial products.
Hybrid digital finance (and regulation)
What this implies is a ‘hybridization’ of technologies and meshing of centralized, decentralized and centralized platforms and delivery channels. There are a number of reasons why this dual economy is likely to emerge, including the ease with which bitcoin can unite global consumers and merchants, the low cost of bitcoin payments, the openness of consumers to new innovations and the growing influence of technology companies according to Gareth Murphy, director of markets for the Central Bank of Ireland speaking at the recent BitFin 2014: Digital Money and the Future of Finance Conference in Dublin.
He envisions a hybrid Bitcoin-Fiat future where “The existence of a ‘euro-denominated economy’ and a ‘virtual currency economy’ raises the prospect of an internal balance of payments between two sub-economies where suppliers may prefer one currency over another as a means of payment (for different goods and services).”
He continues: “Multi-currency economies are not unusual. For example, the US dollar is accepted in many economies alongside the local legal tender. Also, there are a number of regional currencies in existence in parts of France and Switzerland that aim to encourage transactions in local goods and services. But unlike these examples, rapid advances in information and mobile technology suggest that such a virtual currency could evolve. The factors behind this might include:
- the ease with which transactions can occur between counter-parties located anywhere in the world;
- the relatively low cost of effecting payment and transmitting funds;
- the fact that many large technology companies are household names that are recognisable and trusted; and
- the possibility of engaging a large market with a broad demographic span, particularly in terms of age, which is open to new innovations” (with reference to the success of M-PESA in Kenya that shows the potential for this technology to reach a large market).
Gareth Murphy summed up the future challenges for service providers and regulators from a Eurocentric perspective as follows:
- who is transacting (to address AML concerns)?
- how safe is the payments infrastructure?
- how much economic activity is denominated in virtual currencies?
- to what extent is the ‘virtual currency economy’ connected with the ‘euro-denominated economy’?
- how do we distinguish between transactional activity and speculative/investment activity?
And from a monetary policy perspective, there is also the fundamental question of understanding the supply of the virtual currency and its impact as a form of money.”
In conclusion, there is a lot of work ahead for many players at many levels to address and deliver the promise of digital finance 2.0.