At the dawn of the financial sector’s digital transformation, before having CBDCs in each developed country, regulators must be capable of seeing the big picture of such a process and find the balance between action and inaction. These are some of the opinions of Linardo Martinčević, Advisor in the Office of the Governor and FinTech coordinator within the Croatian National Bank (CNB), and that of Péter Sajtos, Head of Digitalization Policy Department within the Central Bank of Hungary. They are two of the financial experts invited to the Unchain Fintech Festival on the 13th and 14th of July in Oradea to discuss the industry’s evolution.
Unchain Fintech Festival, the first event dedicated to fintech and blockchain in the CEE Region, will bring together stakeholders from the business landscape, international experts in payments, loans, insurance, personal finance, e-commerce, banking, and more. Among the speakers there will be fintech industry professionals from different parts of the world, (e.g. Poland, Sweden, Japan). One of the most interesting topics is the implementation of CBDCs (Central Bank Digital Currency) by countries, and also the way regulators should act to create a legislative framework suitable for the adoption of CBDCs on a large scale.
“Some of the start-ups and innovators see that the legislation is not suitable yet for this digital journey. There are, however, a lot of requirements that the Central Bank has to evaluate the necessity of, analyzing both the overall picture as well as considering, financial intermediation options”, explains Péter Sajtos, Head of the Digitalization Policy Department within the Central Bank of Hungary.
Financial intermediation is at stake
It has been almost three decades since the first digital currency was utilized on a larger scale. E-gold was first introduced on the market in 1996, being used rapidly by millions of users, before the USA government shut it down in 2008. Therefore, e-gold and other coins were disruptive elements in the market, subsequently disappearing. However, introducing a digital fiduciary currency as retail public money is a topic that requires special attention from the government and regulators, as its aim is to become an everyday instrument.
CBDCs implementation would mean, grosso modo, safe, cheaper, and faster payments as well as cross-border payments. However, it would also imply some risks for the economy, in general, and for financial stability, in particular.
“On the one hand, it could be interpreted as the duty of Central Banks to provide sovereign money to the public which is secure, cheap, widely acceptable, convenient, and inclusive. But, on the other hand, one of the major threats to its success could be the attractiveness of the CBDC, which may destabilize the financial system by stripping banks of their deposit base. If such disintermediation reduces banks’ abilities to do one of their main activities, i.e., to provide credits, then we, as central bankers, would need to find a way to put the money back into the system. Whether directly, which is always politically sensitive, or indirectly, by further expanding our balance sheets and potentially creating even more moral hazards”, states Linardo Martinčević regarding the risks that could arise with the implementation of CBDCs.
Nevertheless, the advantages of CBDCs are also to be taken into consideration as digital money would be a valuable tool for fostering competitive, more resilient and innovative payment systems. Moreover, it would also generate a change in the collective mentality, according to Péter Sajtos, who considers that CBDCs and stablecoins are the elements that could gear up the industry for reaching the next level because “they can refresh thinking of financial services in a digital way”.
Regulators must know when to take action and when not to
To prepare the ground for this new reality, the biggest challenge of regulators remains to decide when to stand aside and allow innovation to happen and, respectively, when to intervene to manage, regulate or even stop it.
”Finding the right balance and acting timely is one of the most challenging tasks we face”, says Martinčević, adding that the Croatian National Bank had moments when it only observed the developments in the market, but also times when it acted. For example, when seeing citizens’ growing interest in crypto assets, the bank issued statements to these consumers about the risks involved in such digital transactions.
Similarly, the Central Bank of Hungary published recommendations regarding the digital transformation of credit institutions last year, focused on topics that had to be taken into account to establish good case practices, according to the Head of the Digitalization Policy Department within this bank. Sajtos points out that banks need to assume an active role in nurturing the market players’ acquisition funnel: ”The bank regulators have to be open-minded for innovation, that is an important lesson, I believe. We believe that our role and task is to highlight the need for digitalization and innovation”.
Hubs that host innovation
To arrange the development of fintech solutions that digitalize financial systems, both the Central Bank of Hungary and the Croatian National Bank have created innovation hubs that represent reference points, where market players can receive support in applying the regulatory framework within the bank’s areas of competence and also receive essential information for this development. According to Martinčević, such hubs represent a good starting point for identifying the best case practices, and also for aligning various regulatory approaches.
Péter Sajtos and Linardo Martinčević will be present in the panel with commercial banks and industry players in two weeks, at Unchain Fintech Festival, in Oradea.