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New technologies such as crypto-assets and stablecoins do not yet pose a stability risk to financial markets, but Big Techs’ mounting financial services business will need to be brought under a clearer regulatory framework, a group of central bankers said on Thursday.
“Thus far we have observed that crypto assets do not yet pose a material risk to financial stability,” said Klaas Knot, president of Netherlands Bank and vice chair of the Financial Stability Board, on a panel hosted by the Bank for International Settlements.
“The activities as a percentage of the overall financial activities in the world are still very limited. The volatility that is there in crypto assets, as of yet, have not spilled over to volatility in the other parts of the financial system. It’s relatively contained.”
Other heads of central banks agreed but said they were watching new developments very closely given, how fast the new markets were growing.
Nor Shamsiah Mohd Yunus, governor of the Central Bank of Malaysia, said that, although the proportion of activities to the total financial sector business is still small, “the growth rates are very rapid.”
“Because of the potential for them to grow very fast, it puts us on our toes and [requires] us to be in the state of readiness to regulate and intervene if necessary, if they do pose a risk to financial stability down the road.”
The debate on how to regulate crypto assets and stable coins has been put under the spotlight by the official sector – with regulatory responses spanning from China’s ban on all crypto-asset transactions last month to the US reportedly considering regulating stable coin issuers as banks.
Knot said a global ban on crypto-trading was an unlikely scenario.
“The question of whether this regulation could be so stiff that we will simply ban certain financial activities – that would be a measure of last resort,” said Knot. “It would be so far reaching that that would be left to the competent authorities.”
Meanwhile, the governors also discussed the mounting presence of Big Techs in the financial sector, acknowledging some of the benefits these players were bringing to industry but also warning against new concentration risks.
“It has given rise to financial services that are cheaper, that are more convenient, and they’re also more tailored to users needs,” said Knot.
However, given their large market share and ownership of underlying technology, central banks are also eager to make sure Big Techs’ growing financial services business does not result in a monopoly.
“A level playing field is not against innovation,” said Alejandro Díaz de León, governor of the Bank of Mexico. “Instead, it is a response by policymakers to avoid the trend of having a winner takes all kind of equilibriums.”
François Villeroy de Galhau, governor of the Bank of France, agreed.
“Our role is obviously not to stop innovation. it’s to build trust in innovation. [But] if left unregulated, innovation can decrease financial stability, and there also is the issue of market concentration and of customer protection.”
To regulate both Big techs and crypto markets, governors were supportive of a blended activity- and entity-based approach.
“It is about activities on the one hand, but on the other hand, you can’t find activities, you can only find an entity,” said Knot. “Systemic consequences usually take place at the entity level, not at the activity level.”
One of the solutions for this blended approach would be to put all Big Techs’ financial activity under a single entity.
“The idea of mixing activity-based and entity-based [regulations] can seem technocratic, [but it] could be a realistic approach,” said Villeroy de Galhau.
“If Big Techs, platforms or DeFi [decentralised finance] players become systemic, then they have to organise their financial activities into a separate legal entity or parent-holding company, which is subject to international financial cooperation.
“This is a realistic way [forward], but we are not yet there,” he said.
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