By Michael Magrath, Director of Global Regulations & Standards at OneSpan
2020 was a formative year for the world of finance. Before the impact of the coronavirus, it was relatively standard practice for one provider to be called a ‘fintech’ firm and others an ‘institution’ or ‘traditional’ bank. This definition between the two has steadily eroded over the past 12 months, as every single financial services firm has had to adjust to a socially distanced, predominantly digital model. When it comes to consumers, we have all become used to using digital platforms for the majority of our banking activities, whether we used them before or preferred to manage our finances in branch.
This shift in consumer behaviour has not only increased our familiarity with these digital applications – it has also opened the eyes of governments, regulators, central banks and other international monetary bodies to the incredible potential of a more digital financial ecosystem to provide better security, customer experiences, and remote banking capabilities. The pandemic has been the catalyst that will help many previously ‘pie-in-the-sky’ ideas and concepts evolve into practical applications.
Today, we’re going to do a deeper dive into three particular areas continue to dominate the world of finance: the rise of blockchain as the basis for mainstream financial instrument, the growing trend towards open finance initiatives across Europe, and upcoming standards for digital identities.
Blockchain for Central Banks
Over the past weeks and months, newspapers and social media have been awash with news of the Bitcoin boom – and with good reason. Back in 2009 when Satoshi Nakamoto mined the first ever block of Bitcoin, nobody ever could have anticipated that, one day, a single coin would be worth in excess of $40,000 USD, or that you would be able to use it to buy a Tesla. According to the Judge Business School at Cambridge University, Bitcoin mining now accounts for more energy consumption than the whole of country of Argentina.
However, the real power of blockchain – the technology that underpins cryptoassets like Bitcoin – is now being realised. Central Bank Digital Currencies (CBDCs) rose to prominence in 2020 with monetary institutions across the world launching consultations and reports about their viability. Some countries, including Sweden and China, launched full-scale prototype currencies and have now began piloting the tech. Most notable, in October the Bahamas launched the world’s first CBDC, the Bahamian Sand Dollar.
The question now is why consider switching the foundations international monetary system in favour of a blockchain solution? First and foremost, the technological framework on which traditional currencies are built is extremely old – much of the code was written in the 70s. As a result, it is slow, inefficient, and expensive. With a CBDC leveraging blockchain, financial entities would be significantly better connected, making the movement of money both cheaper and faster.
There are also benefits associated with preventing money laundering enabling fairer taxation. With a CBDC, regulators are able to track transactions far more effectively, eliminating opportunities for currency to be laundered or tax to be avoided. In addition, if money is stolen or defrauded from a consumer, under a digital currency, it would be extremely easy to track down the stolen revenue, return it to its rightful owner, and hold the criminals to account.
With discussions, consultations and trials underway internationally, it is very likely that we will see the first full-scale implementations of a CBDC before the end of 2021.
The Rise of Open Finance
Open finance had always been a long-term ambition for many countries, and the need for a simpler, more accessible way for consumers to view and control their finances has only been accelerated by COVID-19.
In the UK, the Open Banking initiative successfully brought about interbank data sharing to improve competition and openness in the financial sector. One major upshot of this is that now consumers are able to view balances across several different banks all within one application. This has led to the emergence of tools like auto-investment roboadvisors that can round up your purchases and invest the difference into your ISA or a savings account. The UK is now pushing on, with numerous discussions within the regulator and industry to expand the remit of Open Finance and extend it to things like pensions, mortgages, insurance and savings.
The UK set a trend which has now begun to spread across Europe and beyond. In October 2020, the Consumer Financial Protection Board (CFPB) in the United States issued an Advanced Notice of Proposed Rulemaking on consumer authorised access to financial data. This is an indication that 2021 will be the year that the US begins to undertake serious policy discussions and could implement elements of open banking as early as 2022. Similarly, in September last year, the European Union announced their ‘digital finance package’, which sets out general lines on how Europe can support the digital transformation of finance in the coming years. The European Commission will launch a comprehensive review of PSD2 toward the end of 2021 and plans to introduce legislation for a new ‘Open Finance’ framework by mid-2022. Additionally, Canada’s Department of Finance held consultations on open banking with industry stakeholders at the end of 2020 meaning 2021 could be very interesting for Canadians.
With the cogs now in motion, it is highly likely that there will be significant progress in implementing open finance across the globe in 2021. Its impact on the way that consumers interact with their providers will be significant, and the ways in which it will boost competition and break down international barriers cannot be understated.
Digital Identity Standards
With the decline of in-branch interactions between financial institutions and their customers and rise of digital payments, account opening and other applications, the need for simple, secure digital identities has become clear. Across Europe and beyond, regulators and governments have been considering what this means from a legislative perspective.
Last June, the European Telecommunications Standards Institute (ETSI) published new standards regarding electronic signatures and infrastructures. The new standards define types of identity verifiers and other technical information regarding electronic ‘know your client’ (e-KYC) measures and safeguards. Similarly, in March 2020, the Financial Action Task Force (FATF) published its Guidance on Digital Identity, which outlines details on the best way to apply customer due diligence to digital ID systems for remote identity verification during onboarding as well as authentication for financial transactions. In November, the Pan-Canadian Trust Framework (PCTF) v1.0 was launched by the Gigital Identity and Authentication Council of Canada (DIACC) for alpha testing with an expectation of launch in the PCTF in 2022. In December, Hong Kong launched a new digital identity platform, ‘iAM Smart’. The platform enables residents of Hong Kong to securely conduct government and commercial transactions online.
As we move further into 2021, the work on digital ID continues to progress. In February this year, the UK Government published a new draft trust framework (alpha version) that lays out a set of rules organizations should follow, including the principles, policies, procedures and standards governing the use of digital identity. This ongoing momentum, underpinned by COVID-19 and social distancing, indicates that this year, we will see a significant uptake in the development and deployment of digital identity tools, spurred by the support and oversight of regulators internationally. Additionally, the United Nations Commission on International Trade Law (UNCITRAL) has been developing a Model Law on Identity Systems for the past several years and it was reported during February’s IdentityNorth Workshop that UNCITRAL is close to finalizing a set of rules to govern identity systems internationally. The Model Law would be available to nations around the work to adopt.
2021 is already proving to be an extremely exciting year for the world of finance, and its set to continue on this trajectory. It is especially reassuring to see financial regulators looking towards new initiatives and technologies to drive the financial ecosystem forwards. Internationally, they have taken a collaborative approach, engaging with the financial services industry to build the best solutions for customers at speed and with great efficiency. It is very likely that, by the end of the year, the way that finance works will have fundamentally changed for the better.
