The views expressed in these remarks are those of the speaker in his role as FSB Secretary General and do not necessarily reflect those of the FSB or its members.
Good afternoon, and thank you for inviting me to speak here today.
As technology advances at what can feel like an unprecedented pace, the financial industry stands at a crossroads. Innovations related to blockchain, AI, and digital payments promise to revolutionize financial services. Yet, the fundamental principles of finance—risk management, reliable information, and trustworthy counterparts— must remain our bedrock.
Today, I will explore how this perspective underpins the FSB’s work focused on technological innovation, helping us harness the benefits of innovation while safeguarding financial stability.
Financial activities have evolved over centuries, marked by repeated financial innovations like double book entry accounting or interest rate swaps, and technological innovations like the telegraph and the internet. Each period of innovation is marked by opportunity and risk. The innovations we’re seeing today I’d argue are more technological than financial – many of the new technologies we’re dealing with are broader than financial services and have implications far beyond financial stability.
Yet these technological changes are promising to transform financial services. What are the financial stability implications and challenges of these changes and how should we manage them?
The basic economic activities of the financial system in funding the real economy remain virtually unchanged, healthy finance is governed by the three key parameters I have mentioned concerning Risk management, Information processing, and Trust.
Financial risk-taking is essential for healthy economic outcomes, such as borrowing to build a factory, a farmer hedging against the risk their crop prices decline at harvest, or seeking investment for new ideas.
Managing these risks safely requires company’s ability to repay a loan or price a commodity contract. However, an asymmetry of information is common in financial markets. For example, between savers and borrowers because each saver cannot know all the relevant information for each borrower to make a sound decision to invest or lend their money. Financial intermediaries manage this information asymmetry by conducting due diligence and monitoring risks.
The financial system relies on trust. We can often trust large participants in the financial system because maintaining a strong reputation as a trustworthy intermediary is more profitable than betraying that trust.
But risk must be proportionate to risk appetite, information must be reliable and trust is ever fragile. The history of finance is replete with booms, busts, and panics disclosing what can go wrong.
Regulation has emerged because it has repeatedly been found to be needed to make these three parameters work, I am tempted to say that regulation has been found to be necessary to finance, just as oil is necessary to a car. But I know that if I say that, someone will point out that electric cars don’t need oil. Could technology do away with the need for regulation? I very much doubt it, so perhaps the analogy does not work so well but you get the point. The FSB has recently released several reports on AI, tokenisation, and crypto-assets. These reports highlight that the underlying vulnerabilities are similar to traditional finance: Tokenisation of real estate can cause liquidity mismatches, as tokens trade quickly while underlying assets remain illiquid, posing significant risks during market stress. Multi-function crypto-asset intermediaries often engage in highly leveraged trading, increasing the risk of substantial losses and erratic behaviour by them in volatile markets. These new technologies also pose higher operational risks, such as the 2023 incident where a major tokenisation platform experienced a smart contract bug, freezing millions of dollars’ worth of assets and disrupting market operations. These innovations also affect financial stability through interconnectedness, confidence effects, and wealth effects. For example, AI-driven trading algorithms can amplify herding behaviour, as seen during the 2024 market correction when simultaneous sell-offs exacerbated market volatility
Behind each technological innovation, we find familiar risks.
The FSB’s primary principle to address innovation is that if the underlying economic activities are the same, the risks are likely to be the same, and similar regulations should apply. The second principle is technology neutrality, allowing the market to decide on innovations. These principles, although valid, are challenging in practice.
Calculating when risks are the ‘same’ is complex. The risks of investing in bitcoin are not the same for a well-advised pension fund as for ill-advised retail investors. Technology neutrality means allowing innovation that complies with existing regulations while not hindering technological advancements. But if innovation shifts more risk onto uninformed clients, maintaining “technology neutrality” might be seen as a shift in prioritising financial stability over consumer protection – that may not seem neutral to those uninformed clients.
As difficult as the details can be in practice, one thing is surely clear in an age where information processing is at the heart of technological innovation: these innovations increase the speed at which risks, information, and trust are managed.
For example, a sudden drop in a tokenized asset’s value can immediately impact portfolios globally. AI may cause herding behaviour, with potentially larger proportions of market participants adjusting their portfolios in similar ways at the same time, leading to larger swings in asset prices.
AI could also bring opportunities that automate and speed up much of the activities that financial intermediaries offer to assemble, analyse, and interpret information to make decisions for their customers and clients. The prevalence of more immediate financial information could reinforce or magnify the speed of risk transmission.
Finally, as the speed of risk and information increases, so does the speed at which trust can be won or lost. Money can move rapidly into or out of projects, causing significant asset price swings or faster bank runs, as seen with Credit Suisse and Silicon Valley Bank. And let’s not forget the potential for social media to accelerate future deposit runs or runs on similar non-banks that offer immediate liquidity through the propagation of information, including rumours or false information.
I would offer four observations for regulatory authorities to tackle technological innovation in financial services and overcome these challenges:
First, new technologies often bring new entrants, requiring swift regulatory inclusion. Regulators need to act quickly to bring these actors inside the regulatory perimeter, as seen with crypto-assets. We often get the argument that regulation needs to adapt to innovation and not the other way around. This argument goes that we must lift the regulatory burden off innovators not familiar with financial regulation so that they can innovate. I don’t want to disparage this argument entirely, but it is incumbent on those who make this argument to also chart out the path for innovators to come into the regulated space. It seems to me there is more thinking to be done on the issue of how to facilitate innovative entry into highly regulated sectors, like financial services.
Second, regulatory authorities need to invest in knowledge, people, and resources to understand, assess, and supervise emerging technologies. While FSB’s work in these areas, and the reports we publish are a crucial step, it is equally important that the regulators and supervisors who interact with financial institutions daily are equipped with the knowledge and tools to understand and manage the impact of these new technologies. This is not trivial. To a significant degree, much day-to-day supervision still relies predominantly on physical scrutiny of paper records and in-person interviews. Regulatory data reporting continues to follow a very 20th-century model. Looking forward, the process of becoming a skilled regulator will still require a deep understanding of financial risks, but the regulator’s skillset must surely expand with the pace of financial innovation. I suspect more regulators will need to better understand blockchain technology, data science, and AI models to effectively regulate and supervise their financial institutions. We should be clear that whatever additional challenges technology brings, it also brings potential solutions. The way we traditionally construct our regulatory budgets, financing, and recruitment may not be well suited to meeting these challenges, but the solutions are there in the very same technology that concerns us. We should clearly grasp the need to invest and to innovate in the RegTech and SupTech space.
Third, even if finance is still doing the same things it always did, the fact that it does it in apparently new ways that can cause significant legal uncertainty. We have seen many jurisdictions get caught up, for example on the issue of whether crypto assets are, legally, securities or not. This problem often interacts with the previous two: where there is uncertainty as to how to balance the facilitation of innovation with the protection of customers and the system, we see a hesitation to act to clarify legal obligations. That hesitation has become a significant part of the pattern of responses to technological innovation in finance services and can be closely related to the inherently longer cycle for legislative or rule changes to catch up with technological innovation.
Perhaps that hesitation does little harm to financial stability when the innovators are having limited success, but we have already seen the pace of innovation in the communications and social media space being extremely fast and if certain network connections and certain degrees of scale are achieved, mass adoption and dominant market players emerge prior to effective regulatory frameworks. A similar hesitation to eliminate legal uncertainty combined with network effects could give rise to a quiet build up of financial stability risks right under our noses. No one should play with a loaded gun and that may be the case if governments are to delay addressing the build up of risks in major financial markets.
Finally, authorities need to prepare for and understand the risks of a financial system that moves faster than we’re used to. As financial institutions improve their capabilities and leverage technological innovation to automate processes and offer services with faster speeds, regulators need to consider how they too can identify and measure risks that move faster, respond faster to build ups of leverage or liquidity imbalances in the system or as we saw with Silicon Valley Bank and Credit Suisse – respond to failures and systemic stress that emerge very quickly. In particular, regulators and policy makers need to be prepared to manage crises that emerge in days or hours instead of weeks and months, and where the flow of information to the markets is nearly instantaneous. The crisis weekend may be a thing of the past in the near future.
Financial regulatory systems do not need massive overhauls or drastic changes to respond to these emerging technologies because the underlying risks are the same – we know how to regulate and supervise these risks. What is apparent, however, is that regulators need to be prepared to swiftly understand, respond, and adjust their frameworks and oversight of these emerging technologies, so that our financial systems can harness the benefits of these new technologies while containing the risks.
Failure to respond swiftly can lead to fragmentation across global financial markets, for example as we’re seeing with some crypto-asset activities that evade regulations and choose to operate without obtaining regulatory approvals. The FSB is in a unique position given our broad membership to develop internationally agreed policy responses, share information, and build capacity to help financial regulators become more agile and prepare for a faster financial system. Our members, and the broader financial regulatory community, must remain committed to implementing internationally agreed policies and recommendations to address these risks and work together to ensure the benefits of financial innovations outweigh the potential risks if we are too slow to react.