Digital money changes everything

The rapid surge of digitalisation, fintech innovation, and the emergence of cryptocurrencies has led to a profound transformation in the banking and financial regulatory landscape. Traditional banking models have been reshaped as tech-driven solutions offer more streamlined and accessible services, altering customer expectations and challenging conventional norms. 

Fintech start-ups have introduced innovative payment methods, lending platforms, and investment tools, prompting regulators to adapt frameworks to ensure consumer protection, data security, and market stability. Moreover, the rise of digital assets such as cryptocurrencies, central bank digital currencies (CBDC), stablecoins, and non-fungible tokens (NFT) has spurred debates about their regulatory classification, taxation, and potential impact on monetary systems, urging governments and financial watchdogs to develop new regulatory measures that balance innovation with risk management. 

During The Asian Banker Future of Finance Summit, held this year in Bangkok, Thailand, leaders in the financial industry and regulators sat down in a roundtable to discuss how the financial industry at large has been affected by the introduction of digital assets and what role traditional banks and regulators should play in the coming years. 

Gordian Gaeta, member of the international advisory council at The Asian Banker, highlighted that traditional bankers and regulators have expressed satisfaction with the current level of response and security measures. However, he noted that non-bank entities have viewed this as complacency. He urged non-bank representatives to outline their strategies for outperforming traditional banks and suggested that regulators and traditional banks share their responses to these emerging challenges. 

Jirayut Srupsrisopa (Topp), founder and group CEO of Bitkub, said: “We’ve been discussing how to humanise the blockchain technology so that the end users can have a better experience.” He identifies two main challenges within the industry: one is the communication gap that exists among various stakeholders such as industry players, regulators, government bodies, and policymakers. 

Another challenge he pointed out is the need for standardisation to rebuild trust. Topp raised questions about how to establish consistent regulations worldwide, particularly concerning stablecoins, Bitcoin, and altcoins classified as securities. 

Reflecting on recent events, he compares two philosophies guiding future financial platforms. The first involves rapid actions, apology-driven, and corner-cutting strategies observed on platforms like Binance and FTX, which he believes might lead to future complications. 

The second philosophy, represented by platforms like Coinbase, advocates for meticulous regulation adherence from the outset, trading efficiency for robust corporate governance and customer protection. 

He concluded: “We have to work closely in fostering innovation, while also protecting customers and investors. We must find this balance between both worlds, find the right sweet spot.” 

Howard Davies, chairman of NatWest Group, noted that while the UK government aims for a crypto-friendly environment, banks exercise caution due to complex anti-money laundering issues. He pointed out the increasing consumer-centric approach of regulators, demonstrated by the upcoming ‘consumer duty unit’, that will require banks to ensure the suitability of products for customers. 

He anticipates challenges with cryptocurrencies, as assessing customers’ ability to withstand the volatile nature of these investments requires intricate analysis. He said that certain volatile assets might not be appropriate for individuals with limited funds. Given this, banks might need to prevent such customers from accessing cryptocurrencies to avoid regulatory scrutiny for facilitating unsuitable investments. 

In the UK, Davies foresees a distant relationship between banks and cryptocurrencies, with stringent regulations leading banks to make it challenging for customers to move funds into crypto assets due to associated regulatory risks. 

Davies is also chairman of the International Advisory Council at the China Securities Regulatory Commission, and former chairman of the UK’s Financial Services Authority.

Takeshi Kito, vice-chair of the Fintech Association of Japan and committee member of the Government of Japan’s Regulatory Sandbox, outlined Japan’s progress in the cryptocurrency and blockchain sectors. 

In 2017, the Japanese regulator JFSA designated cryptocurrencies as crypto assets with the status of a payment method. This decision enabled companies with crypto exchange licenses to engage in group transactions and conduct exchanges involving fiat money. 

In 2020, a new framework for security tokens, akin to investment tokens, was introduced, leading to Japanese financial institutions facilitating public offerings of security tokens, including real estate-backed tokens totalling a significant 300 million, as well as six storage bond offerings. 

Kito highlighted the collaborative efforts between the industry and regulators that have driven the development of the crypto market in Japan. He pointed out that the stablecoin regulations enforced this year reflect the ongoing evolution of Japan’s crypto industry. 

Barney Frank, former chairman of the House Financial Services Committee in the US Congress and co-author of the Dodd-Frank Act, offered insights on the potential interplay between the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) with regards to cryptocurrencies. He emphasised the need for a legal definition of stablecoin in the US, suggesting that its establishment is a prerequisite for integrating cryptocurrencies into the economy. 

Frank anticipates an agreement on stablecoin qualifications, leading to permission for its varied uses. He identified two key areas of concern: the first is stablecoins becoming a form of currency, while the second revolves around investor protection, an area being led by SEC chief Gary Gensler, who also led CFTC leadership. This shift is prompted by the desire to address the past volatility and uncertainties associated with cryptocurrencies. 

Gaeta questioned the necessity of involving banks and regulators in a crypto-based economy, asserting that crypto assets can be used directly without banking intermediaries in this evolving landscape. Frank replied: “The regulators have essentially won the banks against getting involved with crypto.”

Kobsak Duangdee, secretary general of the Thai Bankers’ Association, pointed out that Thailand has restrictions on banks’ ability to directly engage in cryptocurrencies, but said that banks continue to explore CBDC. Thailand has already introduced a wholesale CBDC and plans to launch a retail CBDC in the third quarter of the year. 

Duangdee emphasised a phased exploration approach for cryptocurrencies. He mentioned that while the Bank of Thailand (BoT) is implementing open banking policies to enhance inclusivity and pricing transparency, commercial banks in Thailand are undergoing transformation to adapt to global changes. He cited the European Central Bank as an example of this trend. He acknowledged challenges related to digital assets, particularly the investor’s level of understanding regarding associated risks. 

He said: “The important thing is to level the playing field between banks and non-banks.” He also highlighted Thailand’s efforts to support the digital ecosystem, including digital payment systems, digital identifiers, signatures, and regulations for digital documents. 

He underscored the need to focus on digitising trade beyond just payments, saying: “Banks are now moving forward to support the digital economy. Every country is now moving toward a digital economy.” 

Kumardev Chatterjee, metaverse technology thought leader, noted the legal complexity of cryptocurrencies globally, pointing out the lack of standardised regulatory frameworks and interoperability. He outlined the diverse global stance on crypto regulation, touching on the US, Europe, the UK, and Southeast Asia. Chatterjee highlighted the shift in the banking industry’s resistance to cryptocurrencies, particularly in Southeast Asia, due to the enthusiasm for new banking services among the younger population, and reminded the audience that Southeast Asia has a larger youth population compared to most Western countries. He emphasised the importance of bringing banking to customers in a virtual context.

Sebastien Avot, Deutsche Bank’s (DB) head of distribution and credit solutions and trade finance for financial institutions in Asia Pacific, emphasised the importance of staying relevant in a dynamic industry. With the financial landscape undergoing changes over the past decade, he underscored the need for institutions like DB, present in Asia for half a century, to be vigilant observers and not passive bystanders. Waiting too long risks falling behind in the face of relentless competition from new players like digital and crypto-focused banks. 

Avot championed the idea of strategic engagement with partners, highlighting the essence of partnership in the industry. He acknowledged that traditional banks may find it easier to establish these partnerships compared to fintech disruptors, but outlined DB’s proactive efforts in collaborating with fintechs through acquisitions and engagement to transform the industry. As a significant player in global clearing and payments, DB also bears the responsibility of ensuring secure and compliant transactions. 

Avot also discussed the integration of technologies like artificial intelligence (AI) and machine learning to manage risk, compliance, and sanctions effectively. He recognised that fintechs and disruptors can contribute valuable innovation to these banking functions. 

Somprawin Manprasert, FEVP, chief economist, and chief strategy officer at Siam Commercial Bank (SCB), highlighted the bank’s investment in technology and digital banking, enabling it to establish a separate group to engage in innovative and riskier ventures while safeguarding traditional banking operations. 

He acknowledged that despite the trend towards digitalisation, there remains a substantial role for what he calls “new traditional banking”. He emphasised that digitalisation and open banking hold the potential to bridge gaps, particularly in Thailand, where financial inclusivity is a concern. 

SCB created a distinct group specialising in technology, digital banking, virtual banking, and new financial services to branch away from traditional banking practices. This separation enables the bank to focus on riskier investments while maintaining its core banking operations. The current focus of traditional banking in Thailand centres on optimising cost-efficient services and minimising customer-related risks, while also acknowledging the significance of adopting an omni-channel approach, a major consideration for SCB. 

Duangdee noted a prevailing law in Thailand that prohibits banks from sharing customer data with external entities to safeguard customer information. However, he explained that the BoT is now advocating for an open architecture concept. He said: “The BoT has been working on the idea of open architecture to allow the non-bank sector to use the infrastructure built by banks more and more to allow better access into this architecture that we have been building.”

Davies said that the open banking concept in the UK did not stem from banking regulators but was initiated by the Competition and Markets Authority. The authority perceived a lack of competition in the banking sector, and challenges in switching banks or sharing data for financial management. Consequently, they introduced requirements allowing aggregators to access customer data from multiple banks with permission. While the process of switching accounts in the UK has become more efficient, the impact of aggregators hasn’t been substantial, primarily due to limited interest among those with multiple bank accounts and customer reluctance to entrust data to unfamiliar aggregators. 

Davies said that this push has spurred banks to be more proactive in managing customers’ finances. For instance, banks are now more inclined to alert customers about potential unauthorised overdrafts and offer guidance on managing their money more effectively. This shift has prompted a restructuring of overdraft pricing and an enhanced approach to customer service. 

Barbaros Uygun, chief executive officer at Mox Bank, acknowledged the challenges posed by inefficiencies in the global banking infrastructure, mentioning the need to tackle both backend and frontend inefficiencies. He explained Mox’s strategy to create efficiencies in backend operations through a service model that streamlines processes and benefits customers. On the front end, Uygun emphasised their focus on financial inclusion and customer autonomy, offering better transparency, fairness, and control. 

He envisions this approach challenging the system and bringing value to society. When asked about encroaching on traditional players’ market share, Uygun said that Mox has acquired half a million clients in two years without open banking, relying on a greenfield approach. He believes open banking adds another layer of financial freedom, though basic needs like savings, payments, daily banking, and lending are already addressed by their technology-driven model. 

He highlighted Mox’s cost-effective service model, that is a third of a traditional bank’s per customer cost, and he expects this to improve further. This efficiency enables the bank to offer value to society while utilising existing technology, regardless of advanced features like AI or open banking. 

Wanna Noparbhorn, managing director at National ITMX, clarifies its role as an infrastructure provider rather than a platform within the industry. She delved into the significance of its latest project involving open infrastructure to support open banking in alignment with BoT’s strategic roadmap. The initiatives aim to foster competition and inclusivity among various players in the payment ecosystem. 

She described ITMX’s stance on data security in open banking infrastructure, saying: “We could compare that to building a highway. We have to ensure that every car and every transportation type could use this infrastructure; and the data are the drivers and passengers inside the cars. We have to make sure that passenger identities are kept secret while they are using the highway.”

She stressed that their infrastructure does not aggregate data; instead, it facilitates secure data movement from point to point, with a focus on preserving data origination points. 

Topp drew a distinction between evolution and revolution in the financial sector. He likens some traditional banking processes to an old computer that needs a reboot to resolve temporary issues. On the other hand, he perceives a bigger revolution with the development of decentralised finance (DeFi) and cryptocurrencies, calling them the internet of finance. 

Topp acknowledges that traditional players will remain but recognises that the significance of this evolution will depend on their ability to adapt and align with these revolutionary changes. He added: “The way I see it, everyone in this room is the establishment. They are the established order that the new disruptors are trying to tear down. If you guys don’t evolve, if you guys don’t adapt to the new technology and to the new way of thinking, you guys are going to fall by the wayside.”

Kobsak Pootrakool, Bangkok Bank’s director and SEVP, reflected on the financial revolution, urging stakeholders to comprehend the direction of this transformation. He highlighted the dual perspectives of regulators and bankers, with the former striving to balance efficiency and stability. He drew attention to the pivotal role of stability, which is crucial for the economy’s soundness and overall financial system regulation. 

Acknowledging the challenge faced by regulators worldwide in embracing decentralised finance while ensuring control, Pootrakool emphasised the dual aims of regulation and innovation within the central bank. He believes that while fintech innovations may emerge, the goal should be to channel payments through the banking system to preserve central control.

Emmanuel Daniel, founder of The Asian Banker, initiated a new angle of discussion by pointing out the varying regulatory approaches across Southeast Asia, with Singapore focusing on banks and the Philippines welcoming non-bank payment giants. He said that fintechs and non-bank entities need to be integrated into the banking ecosystem, using the example of TransferWise transitioning from a simple cross-border payment infrastructure in Europe to requiring bank engagement in Singapore.

Gaeta commented on the contrasting perspectives among the panellists; some aligned with traditional banking and technological integration, while others ventured into revolutionary approaches. He pointed out the significant integration gap, where most banks would still decline a $100 million transfer to a crypto asset. He emphasised the regulation of exchanges and organisations but not underlying assets, creating a regulatory conundrum when trying to merge these two spheres.

Daniel concurred, acknowledging the irreversible nature of the crypto phenomenon and likening it to nuclear energy due to its substantial global market value. He also underscored the engagement of traditional institutions with decentralised finance and fintechs, that is effectively erasing the boundaries between these sectors.

The roundtable offered several important takeaways:

• CBDC will radically change the landscape of the financial industry as it would directly connect the central bank to the individual, thus eliminating the need for banks;
• Central banks all over the world are unprepared for this scenario, and thus they are pushing banks to be included in the mix even if it creates an unnecessary step;
• Digital assets are here to stay, and they will increasingly play bigger roles in the evolution of the financial industry;
• Regulators must carefully balance stability and innovation, especially in the next few years while both digital centralised assets and decentralised assets are being introduced into the landscape;
• Macro-economic policies are still shaped by fiat and the policies around it, but this might not be for long.