The Financial Stability Board has published a report on the use of decentralized financial technologies and the implications these may have for financial stability, regulation and governance. The report has been delivered to G20 Finance Ministers and Central Bank Governors ahead of the G20 meeting on June 8-9, 2019.
According to the FSB, "decentralization of financial services" means the reduction or elimination of intermediaries that have traditionally been involved in the provision of financial services. Examples of decentralization technologies include distributed ledger technology and peer-to-peer lending platforms. Financial services that may benefit from these technologies include payments and settlements service providers, trade finance, capital markets and the lending sector.
The FSB report considers the risks of such technologies to financial stability to be:
- Concentration of risk due to the use of similar technology and operation of such technology by a relatively small group of participants;
- Greater procyclicality (i.e., correlation between the financial system and the real economy), because, for instance, peer-to-peer lending platforms may exhibit larger swings in provision of credit than financial institutions when changes emerge in the real economy;
- Diffused or unclear responsibility and accountability, particularly where systems are permission-less or participants remain anonymous;
- Recovery and resolution challenges, given existing approaches may not be appropriate for such technologies; and
- Other operational and legal risks, particularly where permission-less systems involve large networks of anonymous users.
The report also considers the governance and regulation of technological development, including public policy implications such as the use of financial technology to engage in misconduct, difficulties around enforcement and jurisdictional uncertainty. The report concludes by proposing areas for G20 discussion, which include regulatory approaches and financial supervision of financial technology.
View the FSB's report.