fintech and blockchain icons on financial technology background

Innovations such as blockchain technology, crowdfunding and peer-to-peer lending pose novel risks and benefits to the financial system, suggests a new report published Thursday by the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system.

The report from the Basel, Switzerland-based organization examines the implications of decentralizing the financial services system through fintech innovation. For example, technologies such as blockchain could move clearing and settlement functions from a central authority to a diverse, dispersed set of participants.

This trend could have benefits for the financial services system, the report suggests, by reducing the systemic importance of certain institutions, enhancing competition and diversity.

Yet decentralization could also pose new risks, the FSB warns. Decentralization could make accountability and legal liability less clear, create new sorts of concentration risks and exacerbate market trends (such as increasing volatility in the provision of credit).

Additionally, decentralization could make regulation more difficult — by expanding opportunities for regulatory arbitrage and undermining traditional supervision of centralized financial institutions.

Ultimately, these new risks could undermine confidence in the financial system, the report says.

“A more decentralized financial system may reinforce the importance of an activity-based approach to regulation, particularly where it delivers financial services that are difficult to link to specific entities and/or jurisdictions. Certain technologies may also challenge the technology-neutral approach to regulation taken by some authorities,” the report states.

To get ahead of these risks, the FSB recommends that regulators expand their horizons and engage with a broader group of players, including technology-sector firms that have limited interaction with financial regulators.

“This should help avoid the emergence of unforeseen complications in the design of decentralized financial technologies at a later stage,” the report says.