FinTech and its Regulatory Framework in Japan

Transcription

1 For Participants Only FinTech and its Regulatory Framework in Japan Takashi Hashimoto Bank of Japan September 28, 2017 The opinions expressed in this presentation do not necessarily reflect the views of the Bank of Japan.

2 Speaker Takashi Hashimoto Director, Payment and Settlement Systems Department and Center for Information Technology Studies Bank of Japan BOJ established FinTech Center on April I have engaged in FinTech area since Director of Japan s ISO/TC68 (Technical Committee of financial service) secretariat. 1

3 Agenda 1. New Elements of FinTech 2. FinTech in Japan 3. FinTech Regulatory Framework in Japan 4. Future of Regulation 2

4 Agenda 1. New Elements of FinTech 2. FinTech in Japan 3. FinTech Regulatory Framework in Japan 4. Future of Regulation 3

5 New Elements of FinTech Blockchain and Distributed Ledger Technology Born as basic technologies of bitcoin By technologies, every participants can share the same ledger in an internet environment. Artificial Intelligence(AI) and Big-data analytics facilitating tailor-made financial services (e.g., protecting elderly people from financial fraud) potential for various applications (eg., AML/CFT, cost-reducton) Smartphones Smartphones and mobile phones are spreading rapidly worldwide, also in emerging and developing countries where financial infrastructure has been underdeveloped. Smartphones, which are inherently personalized tools, has become new access tools for various financial services. 4

6 Globalize, Digital Innovation and FinTech would - Financial inclusion: Mobile phones have become popular also in emerging and developing economies where bank branches are underdeveloped. Digital Innovation enables people to access to financial services through those devices. Personalize, and - Digital Innovation and FinTech facilitate more customized and personalized services through smartphones, AI and big-data analysis. - Smartphones and mobile phones are typical personalized tools. Virtualize financial services. - Digital Innovation enables the provision of financial services without physical (brick and stone) infrastructure, such as branches and ATMs. - Through relying on (a) cloud computing, (b) blockchain and DLTs for book-keeping, (c) smartphones and internet for customers access, and (d) AI and big-data analysis for investment and risks management, a virtual bank can be established, at least technically. 5

7 Agenda 1. New Elements of FinTech 2. FinTech in Japan 3. FinTech Regulatory Framework in Japan 4. Future of Regulation 6

8 FinTech in Japan at a glance FinTech-related services are growing, but not yet widespread. People are not worrying about inconvenience of using cash. Finance is the bank-dominated industry. Banks have already provided safe and highly advanced services for several decades. As a result, banks find their systems as legacy. FinTech start-ups relatively prefer to collaborate with Banks, rather than competing against each other. They are not regarded as disrupters. Regulators are changing their mind-set to foster innovation. Virtual currencies has been at the center of discussion in media. 7

9 Massive Investment in FinTech China exceeds North America FinTech investment (Bil. USD) Global FinTech Investment Growth Others Europe North America APAC(Ex. China) China Source : Accenture 8

10 Investment in FinTech Investment amount is very low vs. China investment (1 mio $) 12,000 10,000 10,031 According to Accenture, Top 10 investments are in China and account for 82% of total APAC 8,000 6,000 Ant Financial Services Group:$4.5B Lufax:$1.2B JD.com:$1B 4,000 2, 中国 China 香港 HK India インド オーストラリア Australia Japan 日本 Singapore シンガポール Others その他 (Source)Accenture (based on Accenture data, graphed by Bank of Japan) 9

11 Public perception of FinTech Have used Know, but have never used Not familiar and have never used Mobile payments 4% 5% 91% Personal financial management 1% 4% 95% Virtual currencies 1% 5% 94% Social lending/p2p crowd funding Less than 1% 4% 95% Source: Consumer Affairs Agency of Japan 10

12 Cash is still king in Japan Japan Hong Kong India Switzerland Euro area Russia Singapore Saudi Arabia US Mexico Korea Turkey Australia Canada Brazil UK South Africa Sweden (Amount of banknotes and coins) / GDP 19.4 Largest denomination 2nd 3rd 4th 1.7 5th 6th & below (%) 11

13 Japanese people tend to use off-line financial services Online financial services are not actively used. Only 20% of individuals use internet banking including mobile solutions. Reasons for not using the internet banking services are: (i) ATM is satisfactory (61%); (ii) Security concern (56%); and (iii) Cumbersome registration/procedure (24%). Penetration might especially low for senior generation. 12

14 Credit/Debit/Prepaid cards Many cards are held by individuals but not very much used Card holdings per person(year 2015) (Source) BIS 13

15 Credit/Debit/Prepaid cards Many cards are held by individuals but not very much used Card settlement amount (per capita, per GDP)(year 2015) Card settlement amount per GDP is 10% in Japan vs. 81% in China (Source) BIS 14

16 Government s Growth Strategy

17 Cashless Payment Ratio in Japan 16

18 Agenda 1. New Elements of FinTech 2. FinTech in Japan 3. FinTech Regulatory Framework in Japan 4. Future of Regulation 17

19 FinTech regulatory framework in Japan Business Regulation (relevant laws) Payment and Settlement Lending Banking Act Banking <License> *only banks are allowed to take deposits Payment Services Act E-money/Prepaid Card, Funds Transfer <Registration> Installment Sales Act Credit Card <Registration> Money Lending Business Act Money Lending Business <Registration> Investment /Asset manageme nt service Financial Instruments and Exchange Act Securities firms, Invest Management Business <Registration> Robo-Advisor Crowd Funding PtoP Lending Virtual Currency Payment Services Act Virtual Currency Exchanges <Registration> 18

20 JFSA s initiatives 1. Amendments to the Banking Act First amendment (effective from April 2017) is to relax 5% ownership cap to enable financial groups to invest in IT start-ups easily. Second amendment (effective next year) is to foster open innovations covering regulations of Electronic Payment Intermediate Service Providers. 2. Introduction of regulatory framework for virtual currency exchanges For regulatory/supervisory purpose, the Payment Services Act (PSA) was amended in 2016 and the amended Act provides definitions of a virtual currency. 3. FinTech Support Desk One-stop service for FinTech related inquiries 4. Cooperation with overseas authorities FinTech Bridge with UK, Singapore and Australia International joint research project on blockchain 19

21 FinTech Support Desk JFSA has established FinTech Support Desk since Dec 2015 to support FinTech start-ups via the one-stop channel. 4 working days on average to respond to inquiries. Around 80% of inquiries are regarding legal interpretation and clarification. Banking Act, Payment Services Act and Financial Instruments and Exchange Act have been at the center of discussion. Currently no regulatory sandbox, but planned 20

22 Cooperation with overseas authorities 1. To facilitate and support overseas business of FinTech companies, JFSA has signed FinTech cooperation agreements with Singapore MAS and UK FCA (plus recently Australia SIC) to facilitate the sharing of best practices to promote financial innovation. The regulators will provide guidance and support for FinTech businesses wishing to enter the respective markets to obtain relevant authorization. 2. To analyze potential benefits and challenges regarding DLT, JFSA launched an international joint research project. BOJ, the University of Tokyo, MIT, MAS and Bank of Canada joined a preparatory meeting in March. (Topics to be discussed) Response to risks entailed in blockchain transactions for consumer protection Securing privacy and confidentiality in blockchain transactions Issues in applying blockchain technology to settlement Countermeasures to errors in trading programs that use blockchain technology 21

23 Self regulatory approach 1. Japanese Bankers Association (JBA) published an interim report on open API this March after discussions with a variety of stakeholders. The report emphasized the importance of standardization regarding API in order to ensure information security and consumer protection, and to facilitate collaboration between financial institutions and FinTech companies. 2. The Center for Financial Industry Information Systems (FISC) published a report on FinTech this June in line with the report by JBA. FISC is a public interest incorporated foundation to address information security issues, and the contributors are of wide range including financial institutions, insurance companies, securities firms, computer manufacturers and telecommunications companies. FISC also released a tentative check list for API connection for further input from the industry. 22

24 Agenda 1. New Elements of FinTech 2. FinTech in Japan 3. FinTech Regulatory Framework in Japan 4. Future of Regulation 23

25 Future of regulation To facilitate unbundling and rebundling of functions From entity-based to function-based regulations? What to protect? Deposits, payment and settlement, or credit creation? Level playing field among different entities with similar functions? Managing conflicts of interest within a group with diverse functions? How best to protect customer information? To respond to changes in the shape of the financial network From banking style regulations to capital market style regulations? To achieve both innovation and customer protection Regulatory sandbox and informed consent? Source: Will FinTech create shared values? Speech by Mr. Mori, Commissioner, Financial Services Agency, at the Annual Tokyo Conference of the Center on Japanese Economy and Business, Columbia Business School May 25, 2017, Tokyo 24

26 Future of regulation To reduce and contain systemic risks Any systemic implication from FinTech new entrants? What if platform companies with rich personal information? To tackle emerging risks Different types of cyber threats or operational risks? To facilitate dialogues with newcomers Shall we work in T-shirts and jeans? 25

27 Appendix : BOJ initiative for FinTech 26

28 BOJ s Initiatives Establishment of BOJ FinTech Center (Apr. 2016) Establishment of FinTech Network within BOJ FinTech Forums First Forum(Aug. 23, 2016) FinTech and Information Security Second Forum(Nov. 8, 2016) Open Innovation in Financial Services Third Forum(Feb. 28, 2017) Utilization of DLT in financial businesses Collaboration with Academia Joint Conference held by University of Tokyo and BOJ (Nov.18, 2016) FinTech and the Future of Money Speeches by BOJ Governor Kuroda Innovations in Payments and FinTech (Mar. 17, 2016) Information technology and Financial Services (Aug.23, 2016) Digital Innovation and FinTech Dec. 5, 2016) - Other BOJ officials also made many speeches on FinTech. 27

29 BOJ s FinTech Center Message from Governor Kuroda on the occasion of the establishment of the FinTech Center April 1, 2016 FinTech is gaining considerable attention in recent years as it applies new technologies -- including those of information and communications -- to innovative financial services. Considering that finance is closely associated with information, developments in information technology and its application can broaden the frontiers of financial services. In addition, such developments have the potential to improve the efficiency of financial services, and further bring a wide range of benefits to the economy as a whole through promoting new economic activities. In order to bring new products and services to life, the interaction of knowledge and creativity is extremely important. To foster FinTech and maximize its contribution to the economy as a whole, constructive and interactive communication among a wide range of players, including those affiliated with traditional finance industry and academic community, is required. Bearing this in mind, the Bank today established the FinTech Center within its Payment and Settlement Systems Department. The Bank aims to reinforce its efforts in which the developments of FinTech will contribute to enhancing financial services and achieving sustainable growth of Japan's economy. The Bank will also endeavor to play an active role as a catalyst for promoting interaction among financial practices and innovative technologies, research and study, and the needs of the economic society. The Center will serve as a hub for such interaction. I hope that a wide range of parties involved in financial innovations and FinTech will give support to and take full advantage of the Center's activities. Haruhiko Kuroda Governor of the Bank of Japan 28

30 FinTech Center/Network FinTech Center established in April 2016 acts as a catalyst for promoting interaction among financial practices and innovative technologies, research and study, and the needs of the economic society. BOJ has also established a FinTech Network comprised of a wide range of departments to promote the sharing of information and expertise relating to FinTech within the Bank. FinTech center functions as the secretariat. Financial Stability and Bank Examination Dept. Center for Advanced Financial Technology IT of Financial Institutions, Credit Scoring by using data of Financial EDI Network Payment and Settlement Systems Dept. FinTech Center Distributed Ledger Technology, Open API, Reforming Payment Systems Other Relating Dept. Institute for Monetary and Economic Studies Center for Information Technology studies Cryptographic Technologies, Digital Currencies, Biometric Authentication, International Standardization FinTech Network 29

31 Joint Conference on FinTech and the Future of Money Key Issues: How will payment instruments be in future? How will new payment instruments influence economy, finance and central banking? Should the central bank issue its digital currencies (CBDC)? Summary of the discussions is available here: 017/rel170208a.htm/

32 FinTech Summit The Financial Services Agency and Nikkei (financial newspaper company) co-hosted the first FinTech Summit in September 2016, aiming to support the growth of FinTech ecosystem. Last week, the second FinTech Summit was held. The event was hosted by not only Financial Services Agency and Nikkei, but FinTech Association of Japan. Deputy Prime Minister Aso made an opening remarks. BOJ also participated in the summit actively as a moderator and a panelist on both FinTech Summit. 31

33 Joint research with the ECB on DLT On 7 December 2016, BOJ and ECB announced to launch a joint research project to study possible use of distributed ledger technology for market infrastructures. 32

34 Application of DLT to Interbank Payments: Overview Objective: Deepening our understanding of DLT Key Question: How DLT would settle interbank transactions? Points of evaluation Performance: How quickly can we process payment instructions given real volume? Smart contract : Can we replicate Liquidity Saving Mechanism? Availability: How resilient against node failures or DoS attacks? DLT platform used: Hyperledger Fabric v0.6.1-preview 33

35 Using smart contracts (chaincode), Liquidity Saving Mechanisim, such as (i) centralized queuing, (ii) bilateral offsetting, and (iii) event driven settlement were programmed. LSM (Liquidity Saving Mechanism) Smart Contract Payment instruction Successful * Bilateral Offsetting Event driven Monitoring and queue management Unsuccessful Centralized Queue Time driven Unsuccessful A multilateral offsetting algorithm runs eight times a day. Settlement Multilateral Offsetting Successful * *Including single gross settlement. 34

36 Summary of Findings Complex business flows such as queuing and offsetting functionalities can be implemented in a DLT arrangement by using smart contracts. Trade-off: Increase in the number of validating nodes and transaction volume results in longer latency between payment request and ledger update. We provide quantitative results: Performance exercise showed encouraging evidence -- particularly in the cloud computing environment -- in which the speed of processing payment transactions could be regarded as quick as that of the current system. Resiliency exercise also showed that the effects of the DoS-like attack could be contained. Looking ahead, it is important to revisit the same set of questions with the new Fabric and possibly with other platforms. The ECB and the Bank of Japan released joint report on distributed ledger technology including the main findings of the joint project, Project Stella. see: 35

37 Takashi Hashimoto Director Payment and Settlement Systems Department Bank of Japan