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Searching for a Way Out of the Labyrinth of Digital Financial Innovations - The Trap of Regulatory Challenges in the Digital Financial System

Author

Listed:
  • János Müller

    (Hungarian Banking Association)

  • Ádám Kerényi

    (Centre for Economic and Regional Studies Institute of World Economics)

Abstract

We are monitoring the regulatory tasks and needs in relation to digital financial innovations, which are emerging at a revolutionary pace in the financial system. In the digital age, it is necessary to create the conditions for competitiveness and security in the financial intermediary system. To understand this, we trace the process of how regulators move from a big bang-like market emergence through awakening and recognition to a confrontation triggering a need to act. This is followed by the period of task definition. Effective regulation requires both an analysis of the lessons learned from the period behind us and an outline of a possible vision for the financial intermediary system. A twofold task must be carried out: competitiveness requires the smooth progress of digital development, while the functioning of the financial intermediary system must not be impaired by more favourable operating conditions for digital financial innovations. The principle of "same activity, same regulation" needs to be enforced. Regulation must achieve a balance between these two interests, the absence of which results in regulatory arbitrage and asymmetry. Technological innovations serving payment services, artificial intelligence regulation and data protection need to be controlled. The process of searching for solutions and the desired regulation has been disrupted by the global COVID-19 pandemic, the economic and financial consequences of which have accelerated some stages of this process, while elsewhere they have had a slowing impact.

Suggested Citation

  • János Müller & Ádám Kerényi, 2021. "Searching for a Way Out of the Labyrinth of Digital Financial Innovations - The Trap of Regulatory Challenges in the Digital Financial System," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 20(1), pages 103-126.
    • Handle: RePEc:mnb:finrev:v:20:y:2021:i:1:p:103-126
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    References listed on IDEAS

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    1. Bank for International Settlements, 2018. "Structural changes in banking after the crisis," CGFS Papers, Bank for International Settlements, number 60, december.
    2. Thomas Philippon, 2020. "On fintech and financial inclusion," BIS Working Papers 841, Bank for International Settlements.
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    More about this item

    Keywords

    FinTech/BigTech regulation; arbitrage; asymmetry; data-driven process; vision; taxation; social impacts;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O36 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Open Innovation
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy

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