Digital assets are here to stay. The current market capitalization of cryptocurrencies is estimated at $US 1.6 trillion, while a Statista survey found that nearly one in three Nigerians either owned or used a digital coin.
Until now, technological innovation, accompanied by enabling regulations, has been good for financial inclusion. Mobile banking, digital payments and electronic wallets have allowed huge numbers of disadvantaged groups to benefit from better access to high-quality financial services.
Many view digital assets as having similar game-changing potential for financial inclusion, for instance by bringing down the cost of cross-border payments, or providing new means to save and build wealth. But since they have so far developed largely outside the bounds of regulation, digital assets are inherently risky. Schemes which depend on speculative new investors buying the promises of influencers and promoters rarely end well, and when crypto schemes crash, they crash spectacularly. Without adequate safeguards, they also present risks to financial integrity, or even financial stability.
How can policy makers harness the benefits of digital assets while protecting consumers, who are disproportionately young and in developing countries? I’ve just spent two days discussing this thorny issue with AFI members, peers from standard-setting bodies and the financial inclusion community, at a workshop organized by AFI and the Bank of International Settlements.
While we all had more questions than answers, some conclusions emerged.
Consumer protection can only come from standard-setting bodies and national policy makers thinking outside the box. One speaker in Basel emphasized the need to “shift the control points.” We need to be open to using technology in new ways, for instance using blockchain technology to improve regulation and supervision.
Consumer protection frameworks should be extended where feasible, and providers required to act as part of a responsible ecosystem. Just as vital is building consumers’ digital financial literacy, strengthening society’s understanding of innovative technologies and their inherent risks.
Central Bank Digital Currencies (CBDCs) can potentially provide a safer avenue to reap the benefits of this innovation to address financial inclusion challenges, as has been shown in the Bahamas’ experience with Sand Dollar. CBDCs should however be developed and implemented gradually, with the principle of ‘do no harm’ at the center. They should not be viewed as a silver bullet, nor as a one-size-fits-all solution.
So where do we go from here?
Given the rapid pace of technological innovation, current bottlenecks in terms of technical expertise, and capacity challenges for regulators and supervisors, peer learning and capacity building will be vital.
Forums which bring academics, standard setters, national regulators and providers together to define a common vision will be very helpful. Learning from the global south, where digital assets increasingly play a signficant role in people’s lives, will be crucial.
AFI stands ready to support in all these areas, notably by aggregating the practical knowledge being generated by our members’ policy journeys, and by working with our partners at standard-setting bodies and in the private sector.
We will have to think outside of the box. Young people today are growing up very differently than before, due to the technology they are exposed and used to. They will be the regulators of tomorrow. We need to anticipate what will be required to preserve safe and sound financial systems which will ultimately help financial inclusion.
In conclusion, I am optimistic about where digital assets go next. Their early life has been turbulent, but if policymakers manage to set clear standards and extend the regulatory perimeter in order to mitigate risks, they may yet have a respectable maturity. By confronting the challenges together, we can harness the potential of digital assets responsibly, benefiting financial inclusion and the world as a whole.