COVER STORY • Global Governance at a Crossroads – a Roadmap Towards the G20 Summit in Osaka • 7Interview with Shigeru Ariizumi, Deputy Commissioner for International Affairs, Financial
Services Agency, Government of JapanD

igitalization of Financial
Services – a New
Challenge for the G20

By Japan SPOTLIGHT
The Fourth Industrial Revolution is changing the economy and society. Governments will need to tackle
new issues brought about by the digitalization of financial services. Since finance is becoming moreglobalized, it is important to have international discussions and collaboration on these issues. The G20
Summit in Osaka in 2019 would be a perfect venue for this. Japan SPOTLIGHT had an interview with
Shigeru Ariizumi, deputy commissioner for international affairs at the government’s Financial Services
Agency (FSA). He told us how public policy would be changed in dealing with the challenges of financial
digitalization.
(Interviewed on Feb. 6, 2019)

Introduction
JS: First of all, could you introduce

yourself briefly and in particular
your professional background?

would be enormous. With digitalization, we
can accumulate large amounts of data, analyze
and use them. The financial sector, just likeother industries, will benefit from utilizing awide range of data, including non-financial
data. The implications are significant. The
sector will achieve more efficiency in businessby utilizing such data. Also, new entrants fromnon-financial business may bring a dynamicchange in this industry.

Ariizumi: I joined the Ministry of Finance(MOF) in 1988. Since then, I have beenworking mainly in the national budget,international finance and financial sectors. I
am now deputy commissioner for international
affairs at the FSA, my third posting to the FSA
JS: It is often pointed out that
digitalization is progressing muchfrom the MOF in my career. Prior to thismore rapidly in China than in Japan.
assignment which started in summer 2017, I
What do you think about
was working for the ministry’s International
digitalization in Japan in
Bureau. My current job at the FSA is to
Shigeru Ariizumi
comparison to other countries?
represent the Japanese government in
discussions on financial services-related issues in several
Ariizumi: In terms of the number of newly founded FinTech ventures,international fora, such as the G7, G20, IMF and OECD. Since Japan
digitalization in Japan may not be progressing as rapidly as in otheris hosting and chairing the G20 this year, I am in charge of drafting
countries. But business, the public sector and academia in Japan are
the agenda on financial services issues and promoting discussions
all involved in supporting financial ventures. The government’s
on behalf of the host country in the preparation process for the G20
Council on Investments for the Future regards FinTech and afinance track, in collaboration with the MOF.
cashless society as one of the top priority agendas. The FSA issued
the Finance Digitalization Strategy in September 2018. I hope these
Digitalization Transforming Financial
commitments will encourage new players to bring innovation andBusiness
existing financial institutions to improve user convenience through
JS: What do you think about the possible
changes in their business models by collaborating with new players.

consequences of digitalization for financial
business?

Ariizumi: I think the impact of digitalization on financial business
28 Japan SPOTLIGHT • May / June 2019

JS: Are there any specific recent ventures that havegood potential for rapid growth?

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COVER STORY 7

Ariizumi: Yes, in Japan there are a variety of startups which provide
a wide range of financial services. Many of them focus on better
servicing retail consumers such as providing settlements and wiretransfer services. The FSA is keen to support financial innovation by
these ventures and any future emerging firms.

authorities to utilize technology in their supervisory activities).

Policies to Take Advantage of Digitalization

Ariizumi: The FSA believes that in a rapidly evolving world ofdigitalization, it is crucial to engage with important stakeholders to
fully understand the recent trends and developments. To meet thisend, the “FinTech Innovation Hub” was set up within the FSA lastyear which operates as a comprehensive platform to engage andinteract with business, researchers and developers of technologies. It
also annually hosts the “FinTech Summit” which gathers prominent
stakeholders from various fields and from around the globe.

JS: Could you tell us about your policies forencouraging financial digitalization?

Ariizumi: Retail consumers who previously had access to only mass
products could now benefit from more tailored services by use of big
data and technology. For example, insurance companies can utilize
new data to dynamically price insurance premiums. The use of XML
telegrams in settlements will allow firms to comprehensively andsmoothly process finance and settlements.
The FSA is promoting innovation through various initiatives. The
FSA revised the Banking Act in 2017 to lay a legal foundation tofacilitate an Open Application Programming Interface (API) so thatbanks could smoothly grant FinTech ventures access to their systemwith customers’ permission. This opens a window for a safe databased alliance between banks and FinTech companies which has thepotential to realize more convenient and high-quality financial
services. Most Japanese banks are moving towards accepting Open
API, which is a very positive development.
The rapid development in digitalization has also blurred theboundary between financial and non-financial services which has
prompted the FSA to start examining how to transform our legal
system on financial services from entity-based regulations to morefunction-based and cross-sectoral ones. We are engaging withvarious stakeholders including business, the public sector andacademia to further look into this medium to longer-term issue.
There are other policy considerations that deserve attention. For
example, protection of customers’ privacy and cybersecurity havebecome major policy issues in light of digitalization. We also need tobe mindful of its potential to provide easier access and the risk of anincreased digital divide for the elderly or people in the local
community. Concurrently, there will also be a greater need topromote education on such services to enhance customers’ literacy
in IT and finance.
Digitalization also has an impact on the FSA’s operation itself. We
are looking for ways to take advantage of digitalization to become amore effective and efficient organization in terms of regulation(“RegTech”: Regulatory Technology meaning an effort by financial
institutions to use technology in their administrative procedures
such as reporting to regulatory authorities) and supervision(“SupTech”: Supervisory Technology meaning an effort by regulatory

JS: The challenge of digitalization of financial services

seems to be horizontal and you would need tocollaborate with many stakeholders.

International Aspects of the FSA’s Financial
Digitalization Strategy
JS: We would like to ask you about the international

aspects of your policies. First, in promoting basetechnologies for digitalization such as blockchain, AI
and big data, you are promoting international joint
research. Would there be any impediments orchallenges to be overcome to achieve open
innovation?

Ariizumi: I would like to touch on mainly two domains in digitalized
finance: one is crypto-assets, and the other is the underlying
technology which supports them, that is distributed ledger
technology. Assuming that the latter would widely benefit consumers
and the economy, the FSA has been promoting a multilateralinternational research project in this area since 2017. It has pursued
two main themes: the first was the security and vulnerability of thetechnology, and the second was the anonymity and traceability oftransactions.
Financial regulators, including the FSA, have traditionally focusedon regulating specific entities such as banks and securities
companies in order to provide for customer and investor protection
and maintain the stability of the financial system. However, as the
distributed ledger technology aims at providing decentralized
financial services in an open-end model, it may be difficult to identify
any particular entity to regulate. Thus, it becomes important for
financial regulatory authorities to study how it should be engaged insuch a decentralized system.
JS: As FinTech prevails, concerns about cybersecurity

will increase, I assume, given the current situation inwhich national governments are increasingly being
Japan SPOTLIGHT • May / June 201929

COVER STORY 7

involved in cyberattacks. Could you tell us about thecurrent international discussions on this issue?
Ariizumi: This issue is mainly discussed by the G7. There are alreadyseveral publicly available deliverables including fundamental
elements of cybersecurity for the financial sector which were issued
in October 2016. At the G20, we expect to hear about the Financial
Stability Board’s (FSB) work on identifying, assessing and reporting
on best practices relating to a financial institution’s response to, andrecovery from, a cyber incident.
JS: What issues related to finance overall will the FSA

raise at the G20?

Ariizumi: There are three priorities for the G20 financial sector
agenda. One is addressing the risk of market fragmentation, resulting
from inconsistent, incompatible or duplicate regulatory andsupervisory practices. These issues could affect cross-border activity
in the global financial market, and the financial institutions
intermediating the transactions may have to bear additional costs tomeet different regulations. We would hope that discussions at theG20 could find possible processes and approaches to prevent further
proliferation of market fragmentation.
The second is financial innovation. We need to ensure that thepotential benefits of technology in the financial sector can be realized
while risks are mitigated. In addition to addressing various risks ofcrypto-assets, we will embark on a longer-term journey on how we
can make sure that the new distributed financial technology willachieve its full potential.
The third priority is how we can realize financial inclusion in an
aging society.
JS: Could you give us more details about the third

issue?

Ariizumi: We are already starting to witness a rapid progress of
aging across the globe, including in emerging and developing
countries. In Japan, half of the people born in 2007 could live over
the age of 100. The population over 60 years old will exceed 2 billion
globally in 2050 and there will be more aged people in developing
countries than those in developed ones. Given such a background,
we need to assess the impact of aging from the viewpoint of financial
inclusion. There are many issues that may require thoroughdiscussions. For example, what kind of financial services could be
provided for the elderly in light of their physical and cognitive
decline? Given their extended longevity, what kind of financial
services, products and wealth accumulation will best suit their needs
after their retirement? What are the implications of digitalization for
30 Japan SPOTLIGHT • May / June 2019

the elderly? On the one hand, it could provide for easier access tofinancial services and but on the other it could accelerate the digital
divide by a more complex provision of digitalized finance.
As a frontrunner of aging, we believe that this is an issue of
relevance not only for Japan but also for other countries, and it hasreceived broad support from G20 countries including emerging anddeveloping economies.

Rules-based Approach to Digitalized Finance
JS: The G20 must be a forum to promote rules-based

diplomacy, given that the world today is facing acrisis of global governance due to aggressive foreign
policies initiated by the two superpowers. In thedomain of finance, how can we ensure that a rulesbased approach is among the issues for discussion
at the G20?

Ariizumi: There are several issues that could be taken up in thecontext of international financial regulation and one key topic is how
we deal with digitalization. As I mentioned, under the G20 financetrack, the FSA has prioritized technological innovation and will
discuss the issues of crypto-assets and distributed ledger
technology.
JS: You are in charge of work covering the OECD,

which I guess would be a relevant venue for informal
discussions without any obligation to pursue rulesbased diplomacy. Do you have any plans to takeadvantage of the OECD in this light?

Ariizumi: Yes, we expect the OECD to significantly contribute to theG20 process this year. The OECD is an international organization with
ample knowledge and deep and comprehensive expertise on global
issues. In the G20 finance track, there are several key agendas which
we look for and encourage the OECD’s contribution: international
taxation (including digital taxation – tax on the sales and revenues
generated from cross-border transactions), corporate governanceand financial inclusion in an aging society.
JS: Data security is now a crucial international issue.

The US and European Union are increasingly
concerned about data security in China. How do you
think we can pursue a rules-based approach inachieving internationally harmonized data security
rules?

Ariizumi: The issue of data security is becoming very important. In

COVER STORY 7

the past few years, data has become a source of critical value, bothin the private sector as well as in the public sector. On the other
hand, there are several key policy issues that must be considered
including treatment of private business companies’ information andintellectual property rights and data privacy. Some countries havestarted to strengthen the rules on data security, as represented by
the EU’s new General Data Protection Regulation (GDPR). Japan will
also need to think about its data security while taking into accountbusiness and policy developments in other major countries.

Ariizumi: The FSA is very active to enhance bilateral cooperation on
FinTech and has signed a formal Exchange of Letters with eight
financial authorities from seven jurisdictions. Through thiscooperation framework, the authorities introduce FinTech
entrepreneurs which are interested in entering each others’ markets
and support their entrance by providing consultations and advice.
Moreover, through information sharing between authorities, mutual
understanding could be facilitated, and we could be updated onrecent developments in other countries.

JS: On other aspects of a rules-based approach, rule-

JS: Japan hosted the “FinTech Summit” in Tokyo in

making on virtual currencies is under progress.
Could you tell us about this process and also what
Japan should be aiming to achieve by it?

Ariizumi: Japan introduced regulation of virtual currency exchange
providers earlier than other countries. This was in response to theissuance of the Financial Action Task Force’s (FATF) guidance on
virtual currencies. The FATF is an international organization in chargeof anti-money laundering and countering the financing of terrorism.
The bankruptcy of Mt. Gox, the largest virtual currency exchange
service provided at the time in Japan, also prompted its introduction.
Given our experience of regulation and supervision of virtual
currency exchange providers, coupled with lessons learnt fromindividual incidents, the FSA feels it could contribute and lead theinternational rule-making discussions in this field.
There are several risks which the G20 has identified related to
crypto-assets. One important risk is financial stability risk. Since theuse of crypto-assets as a means of payment is still limited, the risk
posed by crypto-assets is limited at the moment. However, there isbroad consensus that we should continue to monitor the usage of
crypto-assets and its implications for the financial system. On risks
of money laundering, the FATF has decided to upgrade the existingguidance on virtual asset service providers to mandatory standards
to be implemented by the member countries.
There are no international rules or guidance on investor protection
and market integrity risks of crypto-assets and the International
Organization of Securities Commissions (IOSCO), an internationalorganization of securities regulators, is currently working vigorouslyon these issues.
Our presidency for the G20 this year is encouraging the work at
the FSB and relevant standard-setting bodies and we expect tangibledeliverables to the G20 in June 2019.

2018. I believe it was organized at Japan’s initiative.
What do you think were the major achievements ofthis international event? Is Japan planning to takeinitiatives on other occasions?

Ariizumi: The “FinTech Summit” is a landmark event not only for theparticipants but also for the FSA to help us learn about the cuttingedge of financial innovation. For regulators, it is very important toensure that the benefits of technological innovation are fully utilized
while risks are mitigated. Therefore, we need to fully understand thetechnology from a forward-looking perspective. This will enable us tomake a sufficient assessment of developments with an appropriate
response. So, financial regulatory bodies including the FSA should
devote resources to understand new business in terms of the future
potential of digitalized finance. To ensure that we are taking a holistic
approach, I think it will be crucial to exchange information and views
with academia, engineers and industry executives globally. The“FinTech Summit” serves as an ideal platform which enables suchkind of interaction.
JS: As you said, the private sector must be an

important player in FinTech. How do you organize
dialogue with private businesses, apart from the“FinTech Summit”?

Ariizumi: The members of the above-mentioned “FinTech Innovation
Hub” are engaged in dialogues with more than 100 FinTech-relatedparties including researchers and engineers working on digitalized
finance. We do our best to keep up with the most recent trends in
FinTech and have a good sense about the new technology that isabout to be introduced by businesses.

JS: International networking and cooperation among

various financial authorities would lead to global rulemaking on digitalized finance. What are you thinking
specifically about this cooperation or networking?

Written with the assistance of TapeRewrite Corporation.

Japan SPOTLIGHT • May / June 201931