Denis Beau: Between mounting risks and financial innovation - the
fintech ecosystem at a crossroads
Speech by Mr Denis Beau, First Deputy Governor of the Bank of France, at the FinTech
R:Evolution 2022, organised by France FinTech, Paris, 20 October 2022.
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Ladies and gentlemen,
First of all, I would like to thank the France Fintech association and its President Alain
Clot for inviting me to participate again in this important event for the French fintech
ecosystem.
Since we met last year, the macroeconomic environment has changed radically. The
effects of Covid are continuing to disrupt global supply chains; to that, the Ukraine
conflict has added major economic disruption.
This potentially "stagflationary" shock is affecting the fintech sector , not just via its
short-term impact on household and corporate demand, but also via the risk of a
tightening of financing conditions.
Against this backdrop, beyond the observation that the macroeconomic outlook is
darkening, I would first like to talk briefly about the mounting risks to our innovation
ecosystem, before going on to highlight how the Banque de France and ACPR can
help to tackle them.
I- An environment marked by mounting risks
Regarding the rise in risks, I would first like to underline that one of the corollaries of the
digitalisation of the financial sector is an exacerbation of cyber risk . This is currently
the number one operational risk to financial players, even more so in the context of
Russia's war in Ukraine. Cyber risk can jeopardise the stability of the entire financial
system; it also tends to undermine confidence in innovation, which is one of the
cornerstones of our future economic development.
Second, the profound reconfiguration of value chains in the financial sector is raising
two potential risks. First, the risk of excessive fragmentation . Fragmentation can of
course be beneficial as it creates competition - the rise of fintechs is the best proof of
this - but it can also be a source of inefficiency if it leads to a lack of interoperability,
especially in payment solutions and market infrastructures. The second risk is that of a
loss of sovereignty, if essential functions are taken out of the hands of European
players and supervisors. I'm thinking here in particular of data, its usage and location.
Third, the relative youth and indeed immaturity of ecosystems can be a source of
instability - which we need to make sure is limited for the overall financial system.
In this respect, certain economic models appear to be incompatible with the promises
they make, as well as with customer expectations. I would like here to remind you of
and reiterate the warnings issued by the ACPR in July this year regarding "mini-loans"
and instalment payments, and especially on the critical need to clearly inform
customers, verify their solvency and respect usury rates.
As part of our financial stability mandate, we at the Banque de France and ACPR pay
particularly close attention to the exposure of certain business models to an economic
turnaround, their dependency on third-party service providers, and any operational
weaknesses that might emerge: in a dynamic and creative ecosystem, weak links and
contagion effects pose a real risk to the stability of the financial system. Within the
crypto-asset and DeFi ecosystem, the collapse of the Terra-Luna system and its
destabilising knock-on effects, is of course a prime example of this, even if it occurred in
an ecosystem that was disconnected from real finance, and had no impact on the
financial system.
II- How can the Banque de France and ACPR help to tackle these
risks?
In response to these mounting risks, the Banque de France and ACPR can help the
ecosystem to develop along the right path.
A. Future regulation
First, by contributing to the development of to the
regulation that is adapted
transformations under way. Regulation reduces uncertainty and puts all competitors on
a level playing field, so that they are not exposed, for example, to competition from
"rogue" players. Of course, it is possible that certain regulations may unduly hinder
innovation. This is why I would like to remind you here of the importance of dialogue
between authorities and innovators in order to identify real use cases and strike a fair
balance between, on the one hand, the goals of protecting customers and financial
stability, and on the other, operational realities.
On the European regulatory front, several important projects are under way or about to
be launched. I would like to mention two.
1/ First, open finance . In the ongoing discussions in Europe on this issue, I draw at
least two lessons from the directives on payment services: first, the quality of the data
provided via APIs is crucial; second, the issue of paying for access to data should
not be taboo .
Open data can be a formidable innovation driver, for the benefit of consumers: the
ecosystem needs to be ready to seize this opportunity. With this in mind, I encourage
to properly
you to come and talk to the French supervisors (the ACPR and AMF),
identify real use cases and thereby ensure the future regulatory framework is as
relevant as possible.
2/ The second important project: decentralised finance or DeFi . A first milestone has
been reached with the Markets in Crypto-Assets (MiCA) regulation. This will de facto
impose rules on certain DeFi players, via its section on stablecoins. MiCA also lays
some of the groundwork for the next phase, which is the broader regulation of
decentralised finance in general.
Here again, we will contribute to reflections at the European level, drawing on our
dialogue with the French ecosystem. There are a number of questions that we need
to respond to collectively :
Within this ecosystem, which economic models add value for the real economy?
How can we make decentralised finance accessible on a broader scale to the
general public, under conditions that genuinely guarantee trust?
What regulatory approach should we adopt to each of the different "modules" of
decentralised finance, and how can we regulate operations that are sometimes
completely decentralised?
Some of the problems are complex, but we need to find solutions together because
decentralised finance will not develop without a regulatory framework .
B. Our achievements, our action on innovation
Of course, adapting the regulatory framework does not, on its own, respond to all the
challenges. At the Banque de France and ACPR, we firmly believe that, to help meet
them, we also need to play an active part in innovation.
1/ This is why innovation is at the heart of our corporate strategy, with the creation
Its mission is both to catalyse in-house innovations by
of Le Lab, our innovation hub.
supporting all our central bank functions, and to develop links with our ecosystems, be
this the world of research or the economic world.
Our target, and I want to stress this point, is to work more and more with you, through
calls for contributions or thematic hackathons. In a few weeks, the Banque de France
will host a dedicated platform for these challenges .
2/ For us, being a player in innovation also means supporting the tokenisation of
securities by offering the safest and most liquid settlement asset directly on the
blockchain, and improving cross-border and cross-currency payments. This is the
objective of our experiments on a wholesale CBDC. It is what we tested with our first
nine experiments conducted in 2021, which we are now going to take further with three
new experiments in 2022. This is why we are working within the Eurosystem to support
the experiments that will be conducted from 2023 onwards as part of the European Pilot
Regime, by providing payment solutions in tokenised central bank money.
We are also participating actively in the Eurosystem's work on a potential retail CBDC ,
also called the "digital euro", which would be used by the general public in everyday
payments.
3/ I shall finish with an example of the application of our experimentation approach
in the field of supervision. This method also allows the ACPR to respond to several
challenges: encourage supervised players to take advantage of new technologies to
ensure their compliance and the security of the financial system, and prepare the
supervision of the future .
It is with this in mind that in March we launched an experiment in collaborative methods
to combat money laundering and terrorist-financing (AML/CFT). This is a subject that
is in the general interest, the solution to which can be collective, as recently
estimated by the Financial Action Task Force (FATF).
Which is why the ACPR proposed a method of co-construction to economic players,
by organising a Tech Sprint on 13 September this year. Its goal was to examine several
different solutions aimed at pooling data while at the same time keeping it confidential.
The event was a resounding success: 12 teams made up of 23 firms proposed a
broad range of innovative techniques.
The ACPR will continue its work with teams of voluntary banks and technical service
providers, and will share the findings widely.
It is time for me to conclude now with a simple message. Now that we have reached
this crossroads, it is only together that we can find the right path to follow , by
sharing our experience and our expertise.
Our commitment on this is clear: to accompany you so that we can together
contribute to the vitality and resilience of our economy.