The increase in distributed ledger technology (DLT) poses a risk of market fragmentation in the EU, but regulation should not hamper development, according to Mario Draghi, president of the European Central Bank.
Speaking on financial innovation at the Economic and Monetary Affairs Committee on 29 May, Draghi said the ECB is monitoring fintech developments “to better understand its impact, to assess the risks and to adjust the regulatory environment and supervisory approaches where needed”.
The activity in DLT is a development that could affect the processing of payments and securities, he said.
“Given the rapid pace of development in this field, there is a need to constantly monitor and assess potential new or more pronounced risks resulting from the application of new technology such as DLTs to payment, clearing and settlement infrastructures in particular.”
“One such possible risk is an increase in market fragmentation if different DLT approaches were to become firmly established in parallel in different member states.”
Draghi also noted the increase of non-banks and the rise of innovation in financial services providers, suggesting that regulators must be prepared to assess new risks that may come to light.
He said: “It is … essential to assess and adapt the prudential framework to cater for the increased role of non-banks and financial innovation, ensure the existence of a level playing field for both new and existing players, and provide supervisors with adequate tools to address new risks.”
Finally, he addressed the issue of “heightened cybersecurity concerns”, saying cyber risk has “long been a priority for national and European supervisory authorities”.
Although fintech developments can improve efficiency, reduce costs and lead to better products in the financial sector, Draghi suggested it also poses new potential risks and “new regulatory questions”.
He added: “It is in all our interests to rise to this challenge.”
“As fintech involves the entire financial sector, different regulatory responses are likely to be needed. Depending on the nature of the fintech activity, those responses may need to encompass prudential, consumer protection and other regulation—but, at the same time, they should not hamper healthy developments.”
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