From the Regulators

Public oversight should avoid slowing progress in a fast-growing area that brings many benefits

By Andy Blatchford |
Source: The Canadian Press

The head of Canada's financial intelligence unit warns that regulators must grapple with the challenges of emerging financial technologies, some of which he says have been exploited by terrorism and organized crime.

But while it's necessary to safeguard consumers and the country's financial stability from the risks posed by some of these innovations, public oversight should avoid slowing progress in a fast-growing area filled with potential, the director of FINTRAC said Tuesday.

"We do know that crowd funding has been used to finance terrorist activities, we do know that virtual currencies such as Bitcoin have been used to launder money and to finance terrorism," Gerald Cossette, who oversees the Financial Transactions and Reports Analysis Centre of Canada, told a conference in Ottawa.

"Some of these vulnerabilities pose significant challenges, if you wish, to regulators."

Cossette's remarks Tuesday pulled back the curtains back a bit on some of the regulatory concerns surrounding the rapid rise in recent years of disruptive tech advancements in the financial sector — also known as fintech.

Many say the innovations, which help improve the efficiency and convenience of financial services, are revolutionizing how these services are delivered as well as the entire system itself.

Cossette said another major fintech challenge is the emergence of technologies that make it easier for people involved in all aspects of a transaction to remain anonymous.

"Of course, for an organization such as FINTRAC the name of the game is ID," he said during a panel discussion hosted by the Competition Bureau.

"Can you identify who's at the beginning of a transaction and who's at the end of a transaction?"

Bank of Canada senior deputy governor Carolyn Wilkins, who moderated the panel discussion, told the audience that financial-sector innovation can pose a bit of threat from a regulatory point of view.

But she also highlighted how it offers many potential gains.

"For some, it's a huge opportunity — big commercial interests here," she said.

On the one hand, fintech can create opportunities for people to start their own businesses or to use the technology as a way to streamline existing operations and save money.

At the same time, however, Wilkins said fintech means some established companies will see sections of their business models taken apart.

There are also other potential downsides such as risks to the financial stability of the system and money laundering.

"There are just as many potential benefits, whether it's improved access to financial services that could help inclusive, sustainable growth or whether it's greater efficiency," said Wilkins, who has a keen interest in fintech.

"I think that when you look at those different perspectives, you can just imagine how hard it is to get your arms around it from a regulatory point of view."

The Bank of Canada has been doing a considerable amount of work on fintech.

Wilkins herself has said she's participated in meetings that bring together regulators, international organizations, traditional financial institutions and entrepreneurs. The goal has been to explore the potential risks and benefits of fintech, which has expanded considerably in recent years.

In prepared remarks of a speech last June, Wilkins referred to findings that showed in the previous six years about 100 Canadian fintech start-ups had attracted more than $1 billion in funding. She added that in 2015 alone almost $20 billion had been pumped into fintech around the world.

At the time, Wilkins listed examples of fintech innovations, including services like Apple Pay or Google Wallet. In the speech, she also pointed to other technologies such as "robo advisers" that offer investment advice and peer-to-peer lending.