Bank of Canada Says Regulation Needed to Check Fintech Risks

Bank of Canada Senior Deputy Governor Carolyn Wilkins wants to help companies develop new technologies such as digital currencies and ensure they meet tough standards to protect consumers and avoid market crashes.

“Authorities should support innovation, but the bar will be high, especially for core financial services,” Wilkins said in the text of a speech she’s giving Friday in Calgary. “I worry that players not covered currently by regulation could become important to the system even if they never take on bank-like risks.”

Canada’s central bank is responsible for overseeing systems that transfer large amounts of money between financial institutions, and for supplying bank notes. The bank is already studying the concept of a digital currency and is running an experiment using so-called distributed ledger technology to see whether it could be used to move money between commercial banks.

“Like many other central banks, we are also researching the conceptual merits of issuing electronic money ourselves,” Wilkins said. She also said it’s “highly unlikely” that a currency such as bitcoin will replace money backed by governments, and “the most that could happen is that national currencies and digital currencies coexist.”

Wilkins said the central bank is already consulting with fintech entrepreneurs. She gave more details on her statement earlier this week that the Bank of Canada is working with the nation’s largest commercial lenders, Payments Canada and the R3 consortium, a group of more than 40 banks including Barclays Plc and JPMorgan Chase & Co., to better understand the mechanics of the blockchain.

“The plan is to build a rudimentary wholesale payment system to run experiments in a lab environment,” Wilkins said. “Because it cannot be used anywhere else, it is a different animal altogether from a digital currency for widespread use.”

Before embracing any new system, regulators must ensure that consumers and financial markets are protected, and there are rules preventing money laundering and terrorist financing, Wilkins said.

Competition regulators must also guard against a market becoming dominated by a few companies, she said. She noted Apple and Google are companies with large and loyal followings that are moving into financial services, without saying they were causing any regulatory problems.

“While it is important to filter out the hype surrounding fintech, I am convinced that it could have a net positive impact on the financial system,” she said. “When a payment system grows to be prominent or systemically important, the Bank of Canada’s job is to oversee it.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE