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Parma Bains
Technology plays an increasingly important role in financial services. With the pace of technological inno-vation moving ever faster, the role new technology plays in the provision of financial services is becoming increasingly fundamental. New technology can generate efficiencies for firms, lowering costs that can be passed on to end users. It can increase access to financial services and products for consumers, particularly the most vulnerable; however, new technology can also create new risks and unintended consequences that can harm financial stability, consumer protection, and market integrity. This primer is designed for financial supervisors at central banks, regulatory authorities, and government departments. It adds to existing literature by summarizing key aspects of popular consensus mechanisms at a high level, with a specific focus on how such mechanisms may impact the mandates of supervisors and policymakers when deployed in financial services markets. It could also help inform IMF staff on policy development and technical assistance related to crypto assets, stablecoins, and blockchains.
International Monetary Fund. Monetary and Capital Markets Department
he Hong Kong Special Administrative Region (HKSAR) is among the world’s major fintech hubs, well positioned to develop fintech initiatives from its traditional strengths in financial services. Key factors enabling the HKSAR to emerge as a fintech hub include its presence as an international financial center, its free-flowing talent and capital, a highly developed information and technology communication (ITC) infrastructure, and its most unique trait, a geographical and strategic advantage by proximity to the market in Mainland China.
José Garrido, Ms. Yan Liu, Joseph Sommer, and Juan Sebastián Viancha
This note explores the interactions between new technologies with key areas of commercial law and potential legal changes to respond to new developments in technology and businesses. Inspired by the Bali Fintech Agenda, this note argues that country authorities need to closely examine the adequacy of their legal frameworks to accommodate the use of new technologies and implement necessary legal reform so as to reap the benefits of fintech while mitigating risks. Given the cross-border nature of new technologies, international cooperation among all relevant stakeholders is critical. The note is structured as follows: Section II describes the relations between technology, business, and law, Section III discusses the nature and functions of commercial law; Section IV provides a brief overview of developments in fintech; Section V examines the interaction between technology and commercial law; and Section VI concludes with a preliminary agenda for legal reform to accommodate the use of new technologies.
Nadine Schwarz, Ms. Ke Chen, Ms. Kristel Poh, Ms. Grace Jackson, Kathleen Kao, and Maksym Markevych
The purpose of this note is to assist countries in their understanding and mitigation of the money laundering (ML), terror financing (TF), and financing of the proliferation of weapons of mass destruction (PF) risks related to virtual assets (VAs). This is the first of two Fintech Notes dedicated to VAs and anti-money laundering and combating the financing of terrorism (AML/CFT). This first note is broad in scope. It explains why VAs are vulnerable for misuse for ML/TF/PF purposes and clarifies which assets and service providers should be subject to AML/CFT measures. It discusses the measures that all countries should take, and the type of action necessary in instances of criminal misuse of VA. A second Fintech note focuses on the AML/CFT regulatory and supervisory framework for virtual asset service providers (VASPs). Both notes are based on Financial Action Task Force (FATF) standards and draw heavily on the FATF’s 2019 “Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers.” They aim at providing policy makers and authorities with AML/CFT responsibilities with an overview of the legal and operational considerations that the implementation of a sound AML/CFT framework for VAs and VASPs raises. In some instances, the notes make reference to specific types of VAs, VASPs, and related products. These references are made for illustrative purposes only, and do not constitute an endorsement of the specific VAs, VASPs, and related products. Finally, at the time of drafting, no country had been assessed against the new standards and many country authorities were in the process of establishing how best to incorporate the new standards in their AML/CFT framework. For these reasons, this note does not refer to specific country examples.
Mr. Ghiath Shabsigh, Mr. Tanai Khiaonarong, and Mr. Harry Leinonen
Major transformations in payment and settlements have occurred in generations. The first generation was paper-based. Delivery times for payment instruments took several days domestically and weeks internationally. The second generation involved computerization with batch processing. Links between payment systems were made through manual or file-based interfaces. The change-over period between technologies was long and still some paper-based instruments like checks and cash remain in use. The third generation, which has been emerging, involves electronic and mobile payment schemes that enable integrated, immediate, and end-to-end payment and settlement transfers. For example, real-time gross settlement systems have been available in almost all countries. DLT has been viewed as a potential platform for the next generation of payment systems, enhancing the integration and the reconciliation of settlement accounts and their ledgers. So far, experiments with DLT experimentations point to the potential for financial infrastructures to move towards real-time settlement, flatter structures, continuous operations, and global reach. Testing in large-value payments and securities settlement systems have partly demonstrated the technical feasibility of DLT for this new environment. The projects examined analyzed issues associated with operational capacity, resiliency, liquidity savings, settlement finality, and privacy. DLT-based solutions can also facilitate delivery versus payment of securities, payment versus payment of foreign exchange transactions, and efficient cross-border payments.
Mr. Itai Agur, Jose Deodoro, Xavier Lavayssière, Soledad Martinez Peria, Mr. Damiano Sandri, Hervé Tourpe, and Mr. German Villegas Bauer
Whether in crypto assets or in CBDCs, design choices can make an important difference to the energy consumption of digital currencies. This paper establishes the main components and technological options that determine the energy profile of digital currencies. It draws on academic and industry estimates to compare digital currencies to each other and to existing payment systems and derives implications for the design of environmentally friendly CBDCs. For distributed ledger technologies, the key factors affecting energy consumption are the ability to control participation and the consensus algorithm. While crypto assets like Bitcoin are wasteful in terms of resources, other designs could be more energy efficient than existing payment systems.
International Monetary Fund. Asia and Pacific Dept
This Selected Issues paper discusses correspondent banking relationships (CBRs) pressures on the Republic of the Marshall Island (RMI). RMI’s two banks currently have access to the US financial system. The Bank of the Marshall Islands is a domestic financial institution providing banking services to a substantial portion of the population and operates five branches throughout RMI, including on the Kwajalein Atoll. RMI, through the Trust Company of the Marshall Islands, provides offshore corporate and maritime registry services. Weak implementation of the anti-money laundering and combating the financing of terrorism (AML/CFT) framework by the authorities contributes to CBR pressures in RMI. The termination of BOMI’s CBR with First Hawaiian Bank would be expected to have significant negative economic repercussions without alternative arrangements. The RMI authorities are strengthening the effectiveness of the AML/CFT framework. Additional steps should be taken to further lower the risk of losing the last US dollar CBR. Once the national risk assessment is completed, an action plan should be developed to address the identified risks.