but from other banks which leverage fintech better. regulation of fintech 9. as fintech is transforming the financial landscape, the nature of regulation has to adjust. the sheer diversity in the functions performed by fintech firms, necessitates a widening of the regulatory perimeter. the approach to regulation also needs to adapt to the type of entity being regulated. while similar activities should attract uniform regulation in most cases, such activity based regulation might be less effective than entity - based regulation when one is dealing with financial activities by bigtech firms. cybersecurity risks are likely to overshadow financial risks for all. systemic risks, operational risks and risks affecting competition are of prime importance when dealing with large financial market infrastructure entities or bigtech. countries need to overcome the legislative and regulatory deficits in dealing with concerns surrounding privacy, safety and monetisation of data. regulations pertaining to data issues needs to adapt to a world where boundaries between financial and non - financial firms is getting increasingly blurred or geographical boundaries are no longer a constraint. ( bis papers no 117 33 ) 10. it is virtually impossible for legislation to keep in step with the fast mutating fintech landscape. until legislation catches up, regulation has to adapt to ensure that the financial system absorbs digital innovation in a non - disruptive manner. regulation is sometimes defined as the process of slowing down change to give time for a system to adapt and evolve. the job of the regulator is not easy when a given financial service, performed by well - regulated financial firms, changes to include non - financial firms in a constantly reconfiguring financial value chain. similarly, there are frictions for a non - financial firm to get used to financial regulation. the social benefits of a new technology or its impact on customer needs to be well understood by all stakeholders – regulators, existing financial firms as well as innovating fintech entities. slowing down the process of change, which attracts the criticism of stifling innovation – is often the best way to ensure customer protection. 11. as digitisation is promoted by public policy, the industry is often characterized by the rise of dominating entities, whether bigtech or infrastructural entities. this raises competition and concentration risks. there is no clear answer to how such issues are to be resolved – limits on market share, for example, might open up the market to new players but it could also stifle incentives to innovators. regulators also need to improvise

of the borrower and the lender arise at different points in time – borrower needs money after a month but the saver has money now. this later gap is bridged by banks through provision of liquidity services – a bank would take a deposit from the saver now and lend to the borrower after one month. banks are uniquely placed to provide this service because they can create money and credit and thereby act as liquidity providers to the economy. 5. similarly, in the field of payments, the area in finance where fintech is the most impactful, banks are uniquely placed since all digital payments transactions are transfer of money from one bank account to another. all other payment service providers facilitate transfer of money from one bank account to another, and in that sense play a supporting role. 6. now it is easier to see why financial technology, while it can improve the efficiency of intermediation, cannot replace the core nature of financial intermediation. it can bridge the spatial gap but not the temporal gap, in our terminology. for instance, one would still need a bank to warehouse the liquidity risk as no other entity can create credit and money. put another way, any fintech entity that provides such liquidity services is effectively functioning as a bank and 1 / 4 bis central bankers'speeches therefore should be subjected to the same legal / regulatory / supervisory regime that a bank is subjected to. this is one reason why in almost all countries, entities other than banks are not allowed to directly deal in deposit or deposit - like money. 7. this understanding of the limitations of technology prepares us better to manage the change that fintech is causing in banking and finance. it would also enable an effective approach to regulating fintech and the fast - mutating financial system. 8. the benefits of technology in improving efficiency and reach of the financial system, as well as the concomitant benefits for economic growth and financial inclusion call for a systematic nondisruptive adoption and encouragement of such technology in the financial system. because fintech can improve the efficiency of intermediation by driving down costs, sachetising of products and services, improving customer service and expanding the reach of financial services, it poses a challenge to the incumbents and forces them to adapt or change the way financial intermediation takes place. the ideal approach is for fintech companies to be considered as enablers and partners by banks or other financial institutions. competition for banks comes not from fintech firms