FinTech and its Regulatory Framework in Japan - … 6_Takashi... · FinTech and its Regulatory Framework in Japan The opinions expressed in this presentation do not necessarily reflect

Takashi Hashimoto

Bank of Japan

September 28, 2017

FinTech and its Regulatory Framework in Japan

The opinions expressed in this presentation do not necessarily reflect the views of the Bank of Japan.

For Participants Only

Speaker

1

Takashi Hashimoto Director, Payment and Settlement Systems Department and Center for Information Technology Studies Bank of Japan

• BOJ established FinTech Center on April 2016.

I have engaged in FinTech area since 2016.

• Director of Japan’s ISO/TC68 (Technical Committee of financial service) secretariat.

Agenda

2

1. New Elements of FinTech 2. FinTech in Japan 3. FinTech Regulatory Framework in Japan

4. Future of Regulation

Agenda

3



New Elements of FinTech

4

Blockchain and Distributed Ledger Technology

・Born as basic technologies of “bitcoin”

・By technologies, every participants can share the same ledger in an internet environment.

Artificial Intelligence（AI) and Big-data analytics

・facilitating tailor-made financial services

（e.g., protecting elderly people from financial fraud）

・potential for various applications (eg., AML/CFT, cost-reducton)

Smartphones ・Smartphones and mobile phones are spreading rapidly worldwide,

also in emerging and developing countries where financial

infrastructure has been underdeveloped.

・Smartphones, which are inherently “personalized” tools, has become

new access tools for various financial services.

Digital Innovation and FinTech would…

5

Globalize,

- Financial inclusion: Mobile phones have become popular also in emerging and developing economies where bank branches are underdeveloped. Digital Innovation enables people to access to financial services through those devices.

Personalize, and

- Digital Innovation and FinTech facilitate more “customized” and “personalized” services through smartphones, AI and big-data analysis.

- Smartphones and mobile phones are typical “personalized” tools.

Virtualize financial services.

- Digital Innovation enables the provision of financial services without “physical (brick

and stone)” infrastructure, such as branches and ATMs.

- Through relying on (a) cloud computing, (b) blockchain and DLTs for book-keeping,

(c) smartphones and internet for customers’ access, and (d) AI and big-data analysis

for investment and risks management, a “virtual” bank can be established, at least

technically.

Agenda

6



7

FinTech in Japan at a glance

FinTech-related services are growing, but not yet widespread.

People are not worrying about inconvenience of using cash.

Finance is the “bank-dominated” industry. Banks have already

provided safe and highly advanced services for several decades.

As a result, banks find their systems as “legacy.”

FinTech start-ups relatively prefer to collaborate with Banks, rather

than competing against each other. They are not regarded as

disrupters.

Regulators are changing their mind-set to foster innovation.

Virtual currencies has been at the center of discussion in media.

Massive Investment in FinTech

• China exceeds North America FinTech investment

8 Source : Accenture

Global FinTech Investment Growth

0

5

10

15

20

25

2010 2011 2012 2013 2014 2015 2016

OthersEuropeNorth AmericaAPAC(Ex. China)China

(Bil. USD)

Investment in FinTech

Investment amount is very low vs. China

9

10,031

216 500

140 154 63 96

0

2,000

4,000

6,000

8,000

10,000

12,000

中国香港インドオーストラリア日本シンガポールその他

Ant Financial Services Group：$4.5B

Lufax：$1.2B

JD.com：$1B

investment （1 mio $）

According to Accenture, Top 10 investments are in

China and account for 82% of total APAC

（Source）Accenture (based on Accenture data, graphed by Bank of Japan)

China HK India Australia Japan Singapore Others

10

Public perception of FinTech

Have used Know, but have never used

Not familiar and have never used

Mobile payments 4% 5% 91%

Personal financial management 1% 4% 95%

Virtual currencies 1% 5% 94%

Social lending/P2P crowd funding Less than 1% 4% 95%

Source: Consumer Affairs Agency of Japan

11

19.4

1.7

0 5 10 15 20 25

Sweden

South Africa

UK

Brazil

Canada

Australia

Turkey

Korea

Mexico

US

Saudi Arabia

Singapore

Russia

Euro area

Switzerland

India

Hong Kong

Japan

Largest denomination 2nd3rd 4th5th 6th & below

（％）

(Amount of banknotes and coins) / GDP

Cash is still king in Japan

Japanese people tend to use “off-line” financial services

12

（注）カード決済金額は、クレジットカード、デビットカード、電子マネーによる決済金額の合計。

Online financial services are not actively used.

Only 20% of individuals use internet banking including mobile solutions.

Reasons for not using the internet banking services are:

(i) ATM is satisfactory (61%);

(ii) Security concern (56%); and

(iii) Cumbersome registration/procedure (24%).

Penetration might especially low for senior generation.

Credit/Debit/Prepaid cards

Many cards are held by individuals but not very much used

13

▽ Card holdings per person（year 2015）

(Source) BIS

Credit/Debit/Prepaid cards Many cards are held by individuals but not very much used

14

▽ Card settlement amount

（per capita, per GDP）（year 2015） Card settlement amount per GDP is 10% in Japan vs. 81% in China

(Source) BIS

15

Government’s Growth Strategy 2017

Cashless Payment Ratio in Japan

16

Agenda

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FinTech regulatory framework in Japan

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Business Regulation (relevant laws)

Payment and Settlement

Lending

Investment/Asset management service

Virtual Currency

Banking Act

Payment Services Act

Financial Instruments and Exchange Act

Payment Services Act

Money Lending Business Act

Installment Sales Act

Banking <License>

*only banks are allowed to take

deposits

Credit Card <Registration>

E-money/Prepaid Card, Funds Transfer <Registration>

Money Lending Business <Registration>

Virtual Currency Exchanges

<Registration>

Securities firms, Invest Management Business

<Registration>

Robo-Advisor Crowd Funding

PtoP Lending

JFSA’s initiatives

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1. Amendments to the Banking Act

First amendment (effective from April 2017) is to relax 5% ownership cap to

enable financial groups to invest in IT start-ups easily.

Second amendment (effective next year) is to foster open innovations covering

regulations of Electronic Payment Intermediate Service Providers.

2. Introduction of regulatory framework for virtual currency exchanges

For regulatory/supervisory purpose, the Payment Services Act (PSA) was

amended in 2016 and the amended Act provides definitions of a “virtual

currency.”

3. FinTech Support Desk

One-stop service for FinTech related inquiries

4. Cooperation with overseas authorities

“FinTech Bridge” with UK, Singapore and Australia

International joint research project on blockchain

FinTech Support Desk

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JFSA has established “FinTech Support Desk” since Dec

2015 to support FinTech start-ups via the one-stop channel.

4 working days on average to respond to inquiries.

Around 80% of inquiries are regarding legal interpretation

and clarification.

Banking Act, Payment Services Act and Financial

Instruments and Exchange Act have been at the center of

discussion.

Currently no “regulatory sandbox,” but planned

Cooperation with overseas authorities

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1. To facilitate and support overseas business of FinTech companies,

JFSA has signed FinTech cooperation agreements with Singapore MAS and UK

FCA (plus recently Australia SIC) to facilitate the sharing of best practices to

promote financial innovation.

The regulators will provide guidance and support for FinTech businesses wishing

to enter the respective markets to obtain relevant authorization.

2. To analyze potential benefits and challenges regarding DLT,

JFSA launched an international joint research project. BOJ, the University of

Tokyo, MIT, MAS and Bank of Canada joined a preparatory meeting in March.

(Topics to be discussed)

• Response to risks entailed in blockchain transactions for consumer protection

• Securing privacy and confidentiality in blockchain transactions

• Issues in applying blockchain technology to settlement

• Countermeasures to errors in trading programs that use blockchain technology

Self regulatory approach

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1. Japanese Bankers Association (JBA) published an interim report on

open API this March after discussions with a variety of stakeholders.

The report emphasized the importance of standardization regarding API in order

to ensure information security and consumer protection, and to facilitate

collaboration between financial institutions and FinTech companies.

2. The Center for Financial Industry Information Systems (FISC)

published a report on FinTech this June in line with the report by JBA.

FISC is a public interest incorporated foundation to address information security

issues, and the contributors are of wide range including financial institutions,

insurance companies, securities firms, computer manufacturers and

telecommunications companies.

FISC also released a tentative “check list” for API connection for further input

from the industry.

Agenda

23



Future of regulation

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To facilitate unbundling and rebundling of functions

・From entity-based to function-based regulations?

‐ What to protect? Deposits, payment and settlement, or credit creation?

‐ Level playing field among different entities with similar functions?

‐ Managing conflicts of interest within a group with diverse functions?

‐How best to protect customer information?

To respond to changes in the shape of the financial network

・From banking style regulations to capital market style regulations?

To achieve both innovation and customer protection

・Regulatory sandbox and informed consent?

Source: Will FinTech create shared values? Speech by Mr. Mori, Commissioner, Financial Services Agency,

at the Annual Tokyo Conference of the Center on Japanese Economy and Business, Columbia Business School

May 25, 2017, Tokyo

Future of regulation

25

To reduce and contain systemic risks

・Any systemic implication from FinTech new entrants?

・What if platform companies with rich personal information?

To tackle emerging risks

・Different types of cyber threats or operational risks?

To facilitate dialogues with newcomers…

・Shall we work in T-shirts and jeans?

Appendix : BOJ initiative for FinTech

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BOJ’s Initiatives

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Establishment of BOJ FinTech Center (Apr. 2016）

Establishment of FinTech Network within BOJ

FinTech Forums

・First Forum（Aug. 23, 2016) “FinTech and Information Security”

・Second Forum（Nov. 8, 2016) “Open Innovation in Financial Services”

・Third Forum（Feb. 28, 2017）”Utilization of DLT in financial businesses”

Collaboration with Academia ・Joint Conference held by University of Tokyo and

BOJ (Nov.18, 2016)“FinTech and the Future of Money”

Speeches by BOJ Governor Kuroda ”Innovations in Payments and FinTech” (Mar. 17, 2016)

“Information technology and Financial Services” (Aug.23, 2016)

“Digital Innovation and FinTech” ‘Dec. 5, 2016)

- Other BOJ officials also made many speeches on FinTech.

BOJ’s FinTech Center

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Message from Governor Kuroda on the occasion of the establishment of the FinTech Center

April 1, 2016

FinTech is gaining considerable attention in recent years as it applies new technologies -- including those of

information and communications -- to innovative financial services.

Considering that finance is closely associated with information, developments in information technology and its

application can broaden the frontiers of financial services. In addition, such developments have the potential to

improve the efficiency of financial services, and further bring a wide range of benefits to the economy as a whole

through promoting new economic activities.

In order to bring new products and services to life, the interaction of knowledge and creativity is extremely

important. To foster FinTech and maximize its contribution to the economy as a whole, constructive and

interactive communication among a wide range of players, including those affiliated with traditional finance

industry and academic community, is required. Bearing this in mind, the Bank today established the FinTech

Center within its Payment and Settlement Systems Department.

The Bank aims to reinforce its efforts in which the developments of FinTech will contribute to enhancing financial

services and achieving sustainable growth of Japan's economy. The Bank will also endeavor to play an active

role as a catalyst for promoting interaction among financial practices and innovative technologies, research and

study, and the needs of the economic society. The Center will serve as a hub for such interaction. I hope that a

wide range of parties involved in financial innovations and FinTech will give support to and take full advantage of

the Center's activities.

Haruhiko Kuroda

Governor of the Bank of Japan

FinTech Center/Network

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Other Relating Dept.

FinTech Network

Institute for Monetary and Economic Studies

Center for Information Technology studies

Cryptographic Technologies, Digital Currencies, Biometric Authentication, International Standardization

Payment and Settlement Systems Dept.

FinTech Center

Distributed Ledger Technology, Open API, Reforming Payment Systems

Financial Stability and Bank Examination Dept.

Center for Advanced Financial Technology

IT of Financial Institutions, Credit Scoring by using data of Financial EDI Network

FinTech Center established in April 2016 acts as a catalyst for promoting interaction among financial practices and innovative technologies, research and study, and the needs of the economic society.

BOJ has also established a “FinTech Network” comprised of a wide range of departments to promote the sharing of information and expertise relating to FinTech within the Bank. FinTech center functions as the secretariat.

Key Issues:

How will payment instruments be in future?

How will new payment instruments influence economy, finance and central banking?

Should the central bank issue its digital currencies (CBDC)?

Joint Conference on “FinTech and the Future of Money”

Summary of the discussions is available here:

http://www.boj.or.jp/en/announcements/release_2

017/rel170208a.htm/

The Financial Services Agency and Nikkei (financial newspaper company) co-hosted the first “FinTech Summit” in September 2016, aiming to support the growth of FinTech “ecosystem”.

Last week, the second “FinTech Summit” was held. The event was hosted by not only Financial Services Agency and Nikkei, but FinTech Association of Japan.

Deputy Prime Minister Aso made an opening remarks. BOJ also participated in the summit actively as a moderator and a panelist on both FinTech Summit.

FinTech Summit

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Joint research with the ECB on DLT On 7 December 2016, BOJ and ECB announced to launch a joint research project to

study possible use of distributed ledger technology for market infrastructures.

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• Objective: Deepening our understanding of DLT

• Key Question: How DLT would settle interbank transactions?

• Points of evaluation

– Performance:

How quickly can we process payment instructions given real volume?

– Smart contract :

Can we replicate Liquidity Saving Mechanism?

– Availability:

How resilient against node failures or DoS attacks?

• DLT platform used: Hyperledger Fabric v0.6.1-preview

Application of DLT to Interbank Payments: Overview

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Using “smart contracts” (chaincode), Liquidity Saving Mechanisim, such as (i) centralized queuing, (ii) bilateral offsetting, and (iii) event driven settlement were programmed.

Bilateral

Offsetting

Settlement

Payment instruction Successful*

Unsuccessful

Time driven

Event driven

Centralized

Queue

*Including single gross settlement.

Unsuccessful

Monitoring

and queue

management

Multilateral

Offsetting

Successful*

A multilateral offsetting

algorithm runs eight times

a day.

LSM (Liquidity Saving Mechanism)

34

Smart Contract

34

• Complex business flows such as queuing and offsetting functionalities can be implemented in a DLT arrangement by using smart contracts.

• Trade-off: Increase in the number of validating nodes and transaction volume results in longer latency between payment request and ledger update.

• We provide quantitative results:

Performance exercise showed encouraging evidence -- particularly in the cloud computing environment -- in which the speed of processing payment transactions could be regarded as quick as that of the current system.

Resiliency exercise also showed that the effects of the DoS-like attack could be contained.

• Looking ahead, it is important to revisit the same set of questions with the new Fabric and possibly with other platforms.

• The ECB and the Bank of Japan released joint report on distributed ledger technology including the main findings of the joint project, Project Stella.

see: http://www.boj.or.jp/en/announcements/release_2017/rel170906a.htm/

Summary of Findings

35

Takashi Hashimoto

Director

Payment and Settlement Systems Department

Bank of Japan

[email protected]

mailto:[email protected]

mailto:[email protected]

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FinTech and its Regulatory Framework in Japan - … 6_Takashi... · FinTech and its Regulatory Framework in Japan The opinions expressed in this presentation do not necessarily reflect