Back Matter
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund
  • | 2 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Annex 1. Project Jasper: A Distributed Ledger Technology–based Whole Payment System

Project Jasper built a proof-of-concept system that leveraged a settlement asset issued and controlled by a central bank. The project started by allowing participants to build a settlement capability on a special platform (Ethereum) to demonstrate the ability to exchange a settlement asset between participants. Jasper incorporates a liquidity-saving mechanism that allows participants to coordinate their payments to reduce liquidity needs. Key features of Jasper include the following (see Chapman et al. 2017):

  • Value transfer. A financial market infrastructure was made available through a digital representation of currency known as digital depository receipt (DDR) to represent Bank of Canada deposits. DDRs are issued in the system by the Bank of Canada and are backed one for one by cash pledged to the bank by participants. As DDRs are exchanged for central bank money, there is no increase in money circulating in the banking system. DDRs are then used by participants in the system to exchange and settle interbank payments. Ultimate settlement finality on the books of the Bank of Canada is achieved after exchanging DDRs with the Bank of Canada for Canadian dollars transferred into their respective settlement accounts. For all intents and purposes, these DDRs functioned as cash in the system.

  • Efficiency. Interbank payments were settled using systems that conduct end-of-day netting between participants. However, as volumes and values increased in these systems, central banks became concerned about the risks inherent in netting. Central banks have responded by implementing real-time gross settlement (RTGS) systems, where payments are processed individually, immediately, and with finality throughout the day. Phase 1 of Project Jasper was implemented as a pure RTGS system, with every individual payment on the ledger being prefunded by DDRs in the participant’s wallet. RTGS systems eliminate settlement risk at the cost of an increased need for liquidity. To make RTGS systems less liquidity-demanding, operators around the world have implemented liquidity-saving mechanisms. The most effective liquidity-saving mechanisms are those that support settlement by periodically matching offsetting payments that have been submitted to a central payments queue and settling only the net obligations. However, offsetting algorithms cause delay in settlement, which is unacceptable for some types of payment. Phase 2 of Project Jasper explored the possibility of giving banks the choice of entering payments for immediate settlement or into a queue for netting and deferred settlement.

Annex 2. Financial Technology and Legal Frameworks: The Cases of mexico and mauritius

A regulatory framework could provide the legal certainty to support the organization, operation, functioning, and authorization of firms offering alternative means of access to finance and investment, issuance, and management of electronic payment funds, and the exchange of virtual assets. Regulating financial technology (FinTech) could seek to (1) encourage the development of products and services that are covering segments of the market not provided by traditional financial institutions; (2) provide prudential rules in risk—including corporate governance, accounting, and risk management; and (3) prevent money laundering and the financing of terrorism while protecting users of financial technologies. The cases of Mexico and Mauritius can be useful to contrast emerging legal frameworks across countries and regions.

The Case of Mexico

In Mexico, on March 10, 2018, the law regulating FinTech institutions (“FinTech Law”) became effective. Key aspects of the law included the following:

  • Anti-money laundering and counter-terrorist financing. The law proposes establishing both client and investor identification standards, critical for the integrity and correct functioning of the financial system. To protect investors and clients, FinTech companies will not be allowed to make any guaranteed returns on investment or guarantee the result or success of investments. Also, the initiative prohibits related persons, or those with the power to direct or control a FinTech institution’s management or resolutions, from applying for crowdfunding financing, as well as those officers, partners, board directors, managers, and other individuals imprisoned for over one year for a financial crime.

  • Institutions. FinTech institutions considered under the law include (1) crowdfunding institutions, (2) electronic payment institutions, and (3) virtual asset management institutions. To provide services in Mexico, these FinTech institutions should be legally certified and incorporated as Mexican corporations or limited liability companies.

  • Sandboxes. The Mexican law enables innovative companies to operate using technological tools, models, services, or other means through innovative methods or processes. A two-year temporary authorization will be provided (trial period).

  • FinTech Council. The law also provides for the creation of a FinTech Council, which shall act as a means of consultation, advice, and coordination with the purpose of creating a space for exchanging opinions, ideas, and knowledge between the public and private sector, to learn about the innovations in the field of FinTech and plan their development and regulation.

The Case of Mauritius

Mauritius is using the concept of “regulatory sandbox” to spur innovation in the FinTech industry by accommodating the entry of new entrepreneurs. The country has avoided adopting a prescriptive approach to regulation and has instead developed a regulatory framework that facilitates “testing grounds” for new digital business models that are not protected by current regulation. The purpose of the sandbox is to adapt compliance with strict financial regulations to the growth and pace of innovation, in a way that does not burden the FinTech sector with rules while also ensuring consumer protection (BBVA Bank 2017). The Mauritius government launched the Regulatory Sandbox License (RSL) on October 20, 2016.

Although the RSL covers any innovative industry, most of the recent RSL successful applicants are in the FinTech industry. For instance, SelfKey has obtained an RSL to develop a digital identity wallet service based on Block-Chain. Other licenses have been issued to an online crowdfunding platform, a medical company producing stem cells, and a financial provider of new investment products for the film industry.

References

  • Adam, Christopher S., and Sebastien E. J. Walker. 2015. “Mobile Money and Monetary Policy in East African Countries.” University of Oxford. Unpublished, April.

    • Search Google Scholar
    • Export Citation
  • Andresen, Svein. 2017. “Regulatory and Supervisory Issues from FinTech.” Cambridge Centre for Alternative Finance Conference, June.

  • Aron, Janine, John Muellbauer, and Rachel Sebudde. 2015. “Inflation Forecasting Models for Uganda: Is Mobile Money Relevant?CSAE Working Paper 2015–17, Centre for the Study of African Economies, Oxford, United Kingdom.

    • Search Google Scholar
    • Export Citation
  • Bazot, Guillaume. 2018. “Financial Consumption and the Cost of Finance: Measuring Financial Efficiency in Europe (1950-2007).” Journal of the European Economic Association 16 (1): 12360.

    • Search Google Scholar
    • Export Citation
  • Basel Committee on Banking Supervision. 2017. “Consultative Document. Sound Practices: Implications of Fintech Developments for Banks and Bank Supervisors.” Bank for International Settlements, Basel, Switzerland, August.

    • Search Google Scholar
    • Export Citation
  • BBVA Bank. 2017. “What is a Regulatory Sandbox?” November 20. https://www.bbva.com/en/what-is-regulatory-sandbox/.

  • Beck, Torsten, and Robert Cull. 2014. “Banking in Africa.” In The Oxford Handbook of Banking, Second Edition. Oxford, United Kingdom: Oxford University Press.

    • Search Google Scholar
    • Export Citation
  • Benos, Evangelos, Rodney Garratt, and Pedro Gurrola-Perez. 2017. “The Economics of Distributed Ledger Technology for Securities Settlement.” Staff Working Paper 670, Bank of England, London, August.

    • Search Google Scholar
    • Export Citation
  • Berger, Allen N., Diana Hancock, and Jeffrey C. Marquardt. 1996. “A Framework for Analyzing Efficiency, Risks, Costs, and Innovations in the Payments System.” Journal of Money, Credit and Banking 28 (4): 696732.

    • Crossref
    • Search Google Scholar
    • Export Citation
  • Broeders, Dirk, and Jermy Prenio. 2018. “Innovative Technology in Financial Supervision (SupTech)—The Experience of Early Users.” Financial Stability Institute, FSI Insights on Policy Implementation 9, Bank for International Settlements, Basel.

    • Search Google Scholar
    • Export Citation
  • Cambridge Centre for Alternative Finance. 2017. The Africa and Middle East Alternative Finance Benchmarking Report. Cambridge: Cambridge University.

    • Search Google Scholar
    • Export Citation
  • Central Bank of Kenya. 2017. “Guidance Note on Cybersecurity.” August.

  • Central Bank of Kenya. 2018. “Guidelines on Cybersecurity for Payment Service Providers.” August.

  • Chapman, James, Jonathan Chiu, Sajjad Jafri, and Héctor Pérez Saiz. 2015. “Public Policy Objectives and the Next Generation of CPA Systems: An Analytical Framework.” Discussion Paper 2015–6, Bank of Canada, Ottawa, Ontario, Canada.

    • Search Google Scholar
    • Export Citation
  • Chapman, James, Rodney Garratt, Scott Hendry, Andrew McCormack, and Wade McMahon. 2017. “Project Jasper: Are Distributed Wholesale Payment Systems Feasible Yet?Financial System Review, Bank of Canada, Ottawa, Ontario, Canada, June.

    • Search Google Scholar
    • Export Citation
  • Committee on Payments and Market Infrastructures. 2014. “Non-banks in Retail Payments.” Bank of International Settlements, Basel, Switzerland, September.

    • Search Google Scholar
    • Export Citation
  • Committee on Payments and Market Infrastructures. 2016. “Fast Payments—Enhancing the Speed and Availability of Retail Payments.” Bank of International Settlements, Basel, Switzerland, November.

    • Search Google Scholar
    • Export Citation
  • Committee on Payments and Market Infrastructures, Markets Committee. 2018. “Central Bank Digital Currencies.” Bank of International Settlements, Basel, Switzerland, March.

    • Search Google Scholar
    • Export Citation
  • Di Castri, Simone, Matt Grasser, and Arend Kulenkampf. 2018. “Financial Authorities in the Era of Data Abundance—RegTech for Regulators and SupTech Solutions.” BFA, RegTech for Regulators Accelerators (R2A), Somerville, MA, August.

    • Search Google Scholar
    • Export Citation
  • Dupas, Pascaline, Dean Karlan, Jonathan Robinson, and Diego Ubfal. 2016. “Banking the Unbanked? Evidence from Tree Countries.” NBER Working Paper 22463, National Bureau of Economic Research, Cambridge, MA.

    • Search Google Scholar
    • Export Citation
  • Evans, David S., and Richard Schmalensee. 2016. Matchmakers: The New Economics of Multisided Platforms. Cambridge: Harvard Business Review Press.

    • Search Google Scholar
    • Export Citation
  • Financial Action Task Force. 2015. “Virtual Currencies: Guidance for a Risk-Based Approach.” Paris, France, June

  • Financial Action Task Force. 2018. “Regulation of Virtual Assets.” Paris, France, October 19

  • Financial Stability Board. 2017. “Financial Stability Implications from FinTech: Supervisory and Regulatory Issues that Merit Authorities’ Attention.” June.

    • Search Google Scholar
    • Export Citation
  • Foster, Vivien, and Cecilia Briceno-Garmendia, eds. 2010. Africa’s Infrastructure: A Time for Transformation. Washington, DC: World Bank.

    • Search Google Scholar
    • Export Citation
  • Gartner. 2017. “Gartner Hype Cycle.” www.gartner.com/technology/research/methodologies/hype-cycle.jsp.

  • GSMA Intelligence. 2017. “Global Mobile Trends 2017.” September.

  • Gupta, Sanjeev, Michael Keen, Alpa Shah, and Geneviève Verdier, eds. 2017. Digital Revolutions in Public Finance. Washington, DC: International Monetary Fund.

    • Search Google Scholar
    • Export Citation
  • Gutman, Jeffrey, Amadou Sy, and Soumya Chattopadhyay. 2015. “Financing African Infrastructure: Can the World Deliver?” Brookings Global Economy and Development, Washington, DC, March.

    • Search Google Scholar
    • Export Citation
  • He, Dong, Ross Leckow, Vikram Haksar, Tommaso Mancini-Grifoli, Nigel Jenkinson, Mikari Kashima, Tanai Khiaonarong, Céline Rochon, and Hervé Tourpe. 2017. “Fintech and Financial Services: Initial Considerations.” Staff Discussion Note 17/05, International Monetary Fund, Washington, DC.

    • Search Google Scholar
    • Export Citation
  • Heller, Daniel. 2017a. “Do Digital Currencies Pose a Treat to Sovereign Currencies and Central Banks?” Policy Brief 17-PB13, Peterson Institute for International Economics, Washington, DC.

    • Search Google Scholar
    • Export Citation
  • Heller, Daniel. 2017b. “The Implications of Digital Currencies for Monetary Policy.” European Parliament, Brussels, Belgium.

  • International Finance Corporation. 2011. “Stories from the Field—WIZZIT Micro-Lending Pilot (South Africa).” Washington, DC.

  • International Finance Corporation. 2017. “Blockchain: Opportunities for Private Enterprises in Emerging Markets.” Washington, DC.

  • International Monetary Fund and World Bank Group. 2018. “The Bali Fin-tech Agenda.” IMF Policy Paper, Washington, DC, October.

  • International Telecommunication Union. 2017. Global Cybersecurity Index 2017. Geneva, Switzerland.

  • Internet Society. 2017. “Global Internet Report: Paths to our Digital Future.” Reston, VA, and Geneva, Switzerland.

  • Kasekende, Louis A. 2010. “Developing a Sound Banking System in Sub-Saharan African Countries.” African Finance in the 21st Century 6386.

    • Search Google Scholar
    • Export Citation
  • Keeley, Michael C. 1990. “Deposit Insurance, Risk, and Market Power in Banking.” The American Economic Review 80 (5): 1183200.

  • Khiaonarong, Tanai. 2014. “Oversight Issues in Mobile Payments.” IMF Working Paper 14–123, International Monetary Fund, Washington, DC.

  • Levine, Ross. 2005. “Finance and Growth: Theory and Evidence.” in Handbook of Economic Growth, ed. Philippe Aghion and Steven N. Durlauf, 865–934. Amsterdam: Elsevier.

    • Search Google Scholar
    • Export Citation
  • Lukonga, Inutu. 2018. “Fintech, Inclusive Growth, and Cyber Risks: Focus on MENAP and CCA Regions.” IMF Working Paper 18/201, International Monetary Fund, Washington, DC.

    • Crossref
    • Search Google Scholar
    • Export Citation
  • Macha, Deogratius. 2013. “Mobile Financial Services in Tanzania: State of the Art and Potentials for Financial Inclusion.” Unpublished, University of Dar es Salaam, doctoral thesis.

    • Search Google Scholar
    • Export Citation
  • Mancini-Grifoli, Tommaso, Maria Soledad Martinez Peria, Itai Agur, Anil Ari, John Kif, Adina Popescu, and Celine Rochon, 2018. “Casting Light on Central Bank Digital Currencies.” Staff Discussion Note 18/08, International Monetary Fund, Washington, DC.

    • Crossref
    • Search Google Scholar
    • Export Citation
  • Mas, Ignacio, and Amolo Ng’weno. 2010. “Tree Keys to M-PESA’s Success: Branding, Channel Management and Pricing.” Journal of Payments Strategy & Systems 4 (4): 35270.

    • Search Google Scholar
    • Export Citation
  • Mas, Ignacio, and Dan Radclife. 2011. “Mobile Payments Go Viral: M-PESA in Kenya.” Working Paper 54338, The World Bank, Washington, DC.

    • Search Google Scholar
    • Export Citation
  • Matheson, Tornton, and Patrick Petit. 2017. “Taxing Telecommunications in Developing Countries.” IMF Working Paper 17/247, International Monetary Fund, Washington, DC.

    • Crossref
    • Search Google Scholar
    • Export Citation
  • Ndirangu, Lydia, and Esman Morekwa Nyamongo. 2015. “Financial Innovations and Their Implications for Monetary Policy in Kenya.” Journal of African Economies 24 (Supplement 1): i46–i71.

    • Crossref
    • Search Google Scholar
    • Export Citation
  • Philippon, Tomas. 2016. “The Fintech Opportunity.” Unpublished, Stern School of Business, New York University.

  • Pisa, Michael, and Matt Juden. 2017. “Blockchain and Economic Development: Hype vs. Reality.” Center for Global Development, Washington, DC, July 20.

    • Search Google Scholar
    • Export Citation
  • Ratha, Dilip, Supriyo De, Sonia Plaza, Ganesh Seshan, Nadege Desiree yameogo, and Eung Ju Kim. 2018. “Migration and Remittances: Recent Developments and Outlook.” Migration and Development Brief 30, World Bank, Washington, DC, December

    • Search Google Scholar
    • Export Citation
  • Shapiro, Carl, and Hal R. Varian. 1998. Information Rules: A Strategic Guide to the Network Economy. Cambridge, MA: Harvard Business Press.

    • Search Google Scholar
    • Export Citation
  • Skan, Julian, James Dickerson, and Luca Gagliardi. 2016. Fintech and the Evolving Landscape: Landing Points for the Industry. Dublin, Ireland: Accenture.

    • Search Google Scholar
    • Export Citation
  • Suri, Tavneet, and William Jack. 2016. “The Long-Run Poverty and Gender Impacts of Mobile Money.” Science 354 (6317): 128892.

  • South African Reserve Bank (SARB). 2018. “Project Khokha: Exploring the Use of Distributed Technology for Interbank Payments Settlement in South Africa.” Pretoria, South Africa.

    • Search Google Scholar
    • Export Citation
  • Tirole, Jean. 2017. Economics for the Common Good. Princeton, NJ: Princeton University Press.

  • Weil, David, Isaac Mbiti, and Francis Mwega. 2012. “The Implications of Innovations in the Financial Sector on the Conduct of Monetary Policy in East Africa.” International Growth Centre Working Paper 12/0460, International Growth Centre, London, United Kingdom.

    • Search Google Scholar
    • Export Citation
1

Pisa and Juden (2017) discuss in detail the potential role of blockchain technology in addressing development challenges.

2

In October 2018, the International Monetary Fund and the World Bank Group (2018) launched the Bali FinTech Agenda, a set of 12 policy elements aimed at helping member countries harness the benefits and opportunities of rapid advances in financial technology that are transforming the provision of banking services, while at the same time managing the inherent risks. The Agenda proposes a framework of high-level issues that countries should consider in their own domestic policy discussions and aims to guide staff from the two institutions in their own work and dialogue with national authorities.

1

Both the Middle East, North Africa, Afghanistan, and Pakistan, and Caucasus and Central Asia regions are also reporting progress in the adoption of FinTech. See Lukonga (2018).

2

Mobile money is understood as a digital medium of exchange and store of value facilitated by mobile agents, is stored in mobile money accounts, and is accessible through mobile phones. Mobile money facilitates low-cost and small-scale transactions, expanding access to financial services beyond those offered by alternative financial service providers, including digital banking.

3

The GSM Association defines a mobile agent as a person or business contracted to process mobile transactions for users. Agents usually earn commissions for performing this service and often provide frontline customer service, such as teaching new users how to complete transactions on their phone.

4

Dupas et al. (2016) show that distance to banks acts as a barrier to access financial services.

5

For an analysis of the economic rationale for sector-specific taxes on telecommunications, see Matheson and Petit (2017).

1

A distributed ledger is a distributed database where each node has a synchronized copy of the data, allowing also for (1) decentralization (control of the database is done by all network participants), (2) reliable trust-less environments, and (3) cryptographic encryption. See more at Benos, Garratt, and Gurrola-Perez (2017).

2

See also Figure 4 from the He et al. (2017), which provides a mapping of the major technologies and how they impact financial services.

3

For instance, international payments using cryptocurrencies can be securely received in minutes and can be rapidly settled in the domestic currency. DLT systems such as Ripple can be used to efficiently process foreign payments and can be supported by international banks and payment companies.

4

CLS is a global clearing and settlement system for cross-border foreign exchange transactions. The system is operated by CLS Bank International, which is owned by over 70 global banking and financial institutions. It enables foreign exchange transactions involving the CLS eligible currencies to be settled through the CLS System on a payment-versus-payment basis, thus eliminating the settlement risk in these transactions.

5

For instance, CLS has started using a DLT platform.

6

The Committee on Payments and Market Infrastructures and the Markets Committee recently completed work on central bank digital currencies, analyzing their potential implications for payment systems, monetary policy implementation and transmission, as well as for the structure and stability of the financial system. The report underlines that wholesale central bank digital currencies, combined with the use of DLT, may enhance settlement efficiency for transactions involving securities and derivatives, but central banks should carefully monitor digital innovations (Committee on Payments and Market Infrastructures 2014, 2016; Committee on Payments and Market Infrastructures and Markets Committee 2018).

7

The use of e-money could also affect the production, design, and distribution of currency, which is today a traditional area of responsibility for central banks.

8

FinTech activities may be considered as part of the “shadow banking” sector, that is, financial intermediaries that provide services similar to traditional commercial banks, but outside banking regulations. As the 2007–08 financial crisis demonstrated, the lack of appropriate regulation in the shadow banking sector, and their vulnerable business model, led to rapid contagion to the rest of the financial system.

FinTech in Sub-Saharan African Countries: A Game Changer?
Author: Mr. Amadou N Sy, Mr. Rodolfo Maino, Mr. Alexander Massara, Hector Perez-Saiz, and Preya Sharma