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ForewordCompared to Western countries, fintech in Asia is advancing at an almostblinding speed. In the People’s Republic of China, it has become increasinglydifficult to use cash and even credit cards. By contrast, in the United States, manypeople are still using checks. Although there is tremendous excitement aroundprivate sector innovations in fintech, the ultimate question of how far and how fastthe financial system evolves ultimately lies with regulators and the official sector.If one learns nothing else from the long history of money, it is that the private sectormay innovate, but eventually the government sector regulates and appropriates.1Of particular interest to investors worldwide is if and when central banks will enterthe fintech fray with their own digital currencies, potentially flattening private sectorentrants, much as governments once did in turn to private coinage and laterprivately issued paper currencies.The banking sector is perhaps as nervous about government entry into the digitalcurrency space as it is about the intrusion of big tech into the financial sector, mostfamously in Facebook’s planned 2020 launch of its Libra currency. Will the adventof retail central bank digital currency lead to a massive shrinkage in bank demanddeposits as consumers turn to the safety and simplicity of government-provideddigital assets? Yet, although it has long been well known that central banks havebeen hard at work in planning new regulations for fintech and in designing theirown e-currencies, until now most efforts have been shrouded in secrecy. Thus, thepresent volume is quite remarkable in that officials and researchers from a broadswath of international financial institutions and Asian central banks have comeforth with their perspectives on the regulation of fintech in general, and the futureof central bank digital currencies in particular. Moreover, the volume is generallywritten at a level than can easily be absorbed and digested by practitioners,students, and journalists, not to mention of course researchers in the field. As such,the book provides a well-balanced overview of the research efforts of major Asiancentral banks in the field of central bank digital currency and fintech. It should serveas an excellent introduction to the major policy issues in this rapidly developing areafor policy makers, academics, think tank researchers, and students.1Rogoff, K. 2016. The Curse of Cash. Princeton, NJ: Princeton University Press.xi

xiiForewordOne fundamental takeaway from the book is that regulators are going to look hard atthe extent to which new digital assets bring genuine new functionality that is usefulto consumers but not simply an end-run around existing regulations on financialassets. Another is that the introduction of retail central bank currencies is likelyto come gradually in stages, as officials want to be sure that there is a balanceddevelopment of fintech that creates opportunities for new financial intermediationand not just new transactions media.A critical question raised by this book is how central banks and financial authoritieswill be able to coordinate regulation so that fintech developments in one countrydo not undermine fiscal and monetary objectives in others. The prospect of aChinese digital central bank currency with global ambitions raises the issue ofinternational coordination just as much as the regulation of private currencies,such as the Libra.It is indeed welcome that so many of the participants in this project have beenwilling to be so transparent in their perspectives and ideas, perhaps giving somehope that the seeds of international coordination on digital central bank currencyand fintech might actually be there.Kenneth RogoffThomas D. Cabot Professor of Public Policy, Harvard University

List of ContributorsMarlene Amstad is an economics and finance professor at the Chinese University ofHong Kong, Shenzhen, and co-director of its Center for Financial Technology.Kantitat Areechitranusorn is an assistant director at the Payment and BondDepartment, Bank of Thailand.Sukarela Batunanggar is deputy commissioner at the OJK Institute, IndonesiaFinancial Services Authority.Hongyi Chen is a senior adviser at the Hong Kong Institute for Monetary andFinancial Research.Sally Chen is a resident representative for Hong Kong, China, at the InternationalMonetary Fund (IMF).Giulio Cornelli is a research analyst at the Bank for International Settlements.Vukile Davidson is a member of the secretariat at the Financial Stability Board.David Emery is a senior manager in the Payments Policy Department, Reserve Bankof Australia.Tarhan Feyzioglu is a division chief at the IMF.Jon Frost is a senior economist at the Bank for International Settlements.Leonardo Gambacorta is head of Innovation and the Digital Economy at theBank for International Settlements.Manuk Ghazanchyan is an economist at the IMF.Yuksel Gormez is a senior economist at the Central Bank of Turkey.Souvik Gupta is an economist at the IMF.Bihong Huang is a research fellow at the Asian Development Bank Institute (ADBI).Chris Ip is an assistant economist at the Hong Kong Institute for Monetary andFinancial Research.Sarwat Jahan is a senior economist at the IMF.Juan Manuel Jauregui is a senior economist at the IMF.Byoung-Ki Kim is a principal economist at the Bank of Korea.Tidiane Kinda is a senior economist at the IMF.xiii

xivList of ContributorsMichinobu Kishi is an associate director-general in the Payment and SettlementSystems Department, Bank of Japan.Ohik Kwon is an economist at the Bank of Korea.Bernia Lee is an officer at the Hong Kong Monetary Authority.Vipichbolreach Long is a special appointee at the IMF.Elena Loukoianova is a deputy division chief at the IMF.Peter J. Morgan is a senior consulting economist and vice chair of research at ADBI.Alexandros Mourmouras is a division chief at the IMF.Masahiro Nozaki is a senior economist at the IMF.Kyoko Oishi is a member of the secretariat at the Financial Stability Board.Jongik Park is an economist at the Bank of Korea.Simon Paroutzoglou is a research analyst at the IMF.Tahsin Saadi Sedik is a senior economist at the IMF.Vijak Sethaput is a deputy director at the Financial Market Department,Bank of Thailand.Sayuri Shirai is a visiting scholar at ADBI.Cormac Sullivan is a research analyst at the IMF.Chananun Supadulya is a deputy director at the Office of Corporate Strategy,Bank of Thailand.Kasidit Tansanguan is a deputy director at the Office of Corporate Strategy,Bank of Thailand.Yvonne Tsui is a senior manager at the Hong Kong Monetary Authority.Wipat Wattanasiriwiroj is a deputy director at the Payment and Bond Department,Bank of Thailand.Ruihui Xu is an assistant researcher at the Research Institute, People’s Bank of China.Zhong Xu is director general at the Research Bureau, People’s Bank of China.Jiae Yoo is an economist at the IMF.Longmei Zhang is a deputy resident representative for the People’s Republicof China at the IMF.Feng Zhu is a senior research director at Luohan Academy.

Chapter 1Introduction and OverviewMarlene Amstad, Bihong Huang, Peter J. Morgan, and Sayuri Shirai1.1 Introduction“The most important financial innovation that I have seen the past 20 years is theautomatic teller machine” (New York Post 2009). This was famously remarkedin 2009, following the global financial crisis of 2007–2008 by Paul Volcker, theformer governor of the United States (US) Federal Reserve System. While thejury is still out on its long-term impacts, the development of financial technology,or “fintech”, over the past decade is nowadays commonly seen to have alreadyradically altered the financial system, and promises to have much greater impactin coming years. This is particularly the case in Asia. Two aspects stand out in theAsian context: (a) the implications of fintech for financial inclusion; and (b) theresponse by central banks and regulators.1.2 Fintech and Financial InclusionFintech is broadly defined as advanced technology to improve and automatedelivery and use of financial services to consumers and businesses. It covers a broadlandscape from digital currencies and payment systems (e.g., mobile phone wallets,cryptoassets, remittance services) to asset management (e.g., internet banking,online brokers, robo-advisors, cryptoasset trading, personal financial management,mobile trading) to alternative finance (e.g., crowdfunding, peer-to-peer [P2P]lending, online balance sheet lending, invoicing, and supply chain finance).Fintech has become recognized as a promising tool to promote financial inclusion,i.e., access to financial products and services for previously excluded householdsand small firms, especially in developing and emerging economies. In Asia, fintechhas already brought substantial benefits to households and firms by bypassing thetraditional “bricks and mortar” banking system and making a variety of financialservices available either at lower cost or specifically to those who previously did nothave access to them because of their low income, missing credit information, orremote location.1

2Central Bank Digital Currency and Fintech in AsiaPerhaps most notably, the development of internet-based platforms for alternativefinance, including P2P lending and crowdfunding, has revolutionized the accessof individuals, startup ventures, and small and medium-sized firms to finance.The use of artificial intelligence and big data to assess the credit risks of thosewith insufficient traditional data has also contributed to financial inclusion.Certain applications, such as the use of blockchain to bring down the cost ofremittances, are already having a significant impact.Reflecting this role of fintech, the Group of Twenty’s (G20) Financial InclusionAction Plan was updated at the 2014 G20 Leaders’ Summit in Brisbane, Australiato include a commitment to implement the G20 Principles for Innovative FinancialInclusion under a shared vision of universal access (BIS and WBG 2016). In 2018,the International Monetary Fund (IMF) and the World Bank developed the BaliFintech Agenda (IMF 2018), which advances key issues for policy makers and theinternational community to consider as individual countries formulate their policyapproaches.1.3 The Challenges for Central Banks and RegulatorsAt the same time, the fintech revolution brings with it a host of potential new risksto financial system stability and challenges for consumer protection. Its broad scopeaffects central banks and regulatory and supervisory authorities alike. Will bankslose a substantial amount of funds to competing platforms? Will they shrink theirbalance sheets accordingly, with possible negative effects on economic activity?If banks lose lending business and deposits as a source of funding, will this cutinto their profits, potentially making them less stable? If individuals and firms shiftfrom central bank fiat currencies to using cryptoassets for transactions, will thisthreaten the effectiveness of monetary policy and also reduce central banks’ abilityto monitor transaction flows? If P2P lending platforms go bust, could this alsoundermine financial stability?Cryptoassets could be used as a way to try to circumvent laws against moneylaundering and terrorist financing. If fintech services are not sufficiently regulatedand consumers sufficiently educated, they may suffer unexpected losses, overlyhigh service costs, and loss of privacy of their personal data. The use of artificialintelligence and big data to make credit decisions could lead to the risk ofdiscriminating against consumers.

Introduction and OverviewSo far, most studies conclude that in terms of size, fintech has not yet reached a scalethat could plausibly threaten financial system stability. Nonetheless, central banks areactively studying potential risks and strategic responses. In some Asian economies,payments have largely moved to noncash modes, heightening the need for a regulatoryresponse by the relevant authorities. One key question is whether central banks shoulddevelop their own digital currencies (central bank digital currencies, or CBDCs), and,if they do, whether such currencies should be made available to retail depositors oronly in the interbank (wholesale) market. On the one hand, CBDCs could providedepositors with a new safe asset and give central banks even greater capacity to monitortransactions. On the other hand, it is debated whether this would put central banks indirect competition with private banks for retail deposits, which could undermine theprivate banks’ retail base. It remains an ongoing subject of research by central banks.Financial innovations also force regulators to keep pace in order to fulfill their supervisorymandates. The key is to balance zero tolerance of illicit behavior and concerns aboutfinancial stability with allowing innovation to take place. Many regulatory authoritieshave adopted the approach of “regulatory sandboxes” to monitor the development ofnew financial products and services before finalizing their approval and appropriateregulations.This book provides a thorough introduction to principles and developments relatedto CBDCs and fintech in Asia. The first part of the book covers CBDC theory,regulatory aspects, economic digitalization, financial inclusion, and the role for smalland medium-sized enterprises (SMEs). In the second part, selected case studiesoffer an in-depth review of recent fintech developments in major Asian economiesincluding Australia; the People’s Republic of China; Hong Kong, China; Indonesia;Japan; the Republic of Korea; and Thailand. The book is based on a joint conferenceat the Shenzhen Finance Institute of the Chinese University of Hong Kong, Shenzhenwith the Asian Development Bank Institute (ADBI).1.4 Chapter SummariesPart I Digital Currency and Fintech Principles and FoundationsChapter 2, “Money and Central Bank Digital Currency” by Sayuri Shirai, providesan overview of the concepts and features of both central bank and private sectormoney and focuses on their actual performance in selected developed and emergingeconomies. In addition, the chapter touches on newly-emerged private sector money3

4Central Bank Digital Currency and Fintech in Asiaor digital coins (cryptoassets) that utilize distributed ledger technology (DLT),such as Bitcoin. The chapter also focuses on the potential application of DLT tocentral bank money issued to the general public or financial institutions, as well asSweden’s initiative to issue deposit accounts and prepaid payment methods to thegeneral public.Chapter 3, “Regulating Fintech: Objectives, Principles, and Practices”, by MarleneAmstad, provides an overview and key elements on the ongoing debate of whetherand how to regulate fintech. It reviews the objectives of financial regulation (investorprotection, market integrity, and safeguarding financial stability) in the context ofrecent fintech developments, and covers three guiding principles many regulatorsfollow (legal certainty, technology neutrality, and proportionality). The chapter endswith a synopsis of current fintech regulatory practices (ignore or wait-and-see;same risk, same rules [“duck typing”]; coding or dedicated regulation).Chapter 4, “SME Finance in Asia: Recent Innovations in Fintech Credit, TradeFinance, and Beyond”, by Giulio Cornelli, Vukile Davidson, Jon Frost, LeonardoGambacorta, and Kyoko Oishi, gives an overview of recent trends in the financing ofSMEs in Asia. While SMEs are an important contributor to employment and grossdomestic product in Asia, they often face significant credit constraints. Recently,in the context of Asia’s rapidly digitalizing economy, both incumbents and newentrants are developing innovative means of providing SME finance. This includesthe growth of fintech credit, big-tech providers, and new initiatives in trade finance.Chapter 5, “The Digital Revolution in Asia and Its Macroeconomic Effects”,by Tahsin Saadi Sedik, Sally Chen, and colleagues at the IMF, presents an overviewof Asia’s digital landscape, based on some key findings related to the rates ofdigitalization, automation, and e-commerce. It also depicts the relationshipbetween both traditional and digital finance and analyzes the macroeconomicimplications of digitalization in terms of productivity and policy. The platform-basedeconomy and fintech are identified as new economic growth drivers, althoughfinancial inclusion still needs to be improved across most countries in the region.Policy makers can help boost economic productivity by launching social safetynets, digital identification, adaptation of technology in tax systems, and appropriatelegislation for P2P platforms.Chapter 6, “Money and Finance in the Digital Age: Some New Developments”,by Feng Zhu, discusses fintech credit and digital currencies by reviewing severalkey issues in these two areas of the ongoing fintech revolution. It argues that therise and the recent decline of platform-based credit intermediation demonstrates

Introduction and Overviewthat such innovations may benefit society, but their emergence might bring somenew risks as well. Big tech may prove to be a healthier, more reliable, and moresustainable business model. Private cryptoassets cannot yet be considered moneysince they face some notable technological constraints on fulfilling their corefunctions, as well as a perceived trust deficit. However, they raise the issue of whatconstitutes money, and whether privately issued money can bring additional valueto society. CBDCs may be a solution to the rising expectations for a new form ofmoney in the digital age.Part II Digital Currency and Fintech Applications in AsiaChapter 7, “Fintech and Central Bank Digital Currency in Australia”, by David Emery,describes Australia’s fast real-time retail payments system called the New PaymentsPlatform (NPP), which was launched in February 2018 by a consortium of13 financial institutions, including the Reserve Bank of Australia. The NPP operateson a 24/7 basis and allows financial institutions to provide immediate fundsavailability to payment recipients, even when the payer and payee have accountswith different financial institutions. The author argues that there is no strong casefor the Reserve Bank of Australia to issue a retail CBDC given that the safer NextGeneration Banknote series is available and the safer NPP, whose deposits areprotected by the Financial Sector Claims Scheme, is running.Chapter 8, “Regulating Fintech for Sustainable Development in the People’sRepublic of China”, by Zhong Xu and Ruihui Xu, reviews regulations and supportiveapproaches of the PRC government for ensuring the sustainable developmentof fintech. The rapid rise of fintech in the PRC inevitably has generated financialrisks. For the prevention

8egulating Fintech for Sustainable Development R 153 in the People’s Republic of China y Zhong Xu and Ruihui Xub 8.1 Introduction 153 8.2 Fintech Landscape in the PRC 154 8.3 Fintech Regulation Framework in the PRC 158 8.4 The PRC’s Fintech Regulatory Measures 161 8.5 Ensuring Healthy an