By Antoinette McKain, Chief Executive Officer, Jamaica Deposit Insurance Corporation.
IADI Secretary General Mr David Walker; Executive Director of the Fundo Garantidor de Créditos (FGC), Brazil, Mr André Arantes Loes, our kind host; President and Chief Executive Officer of the Canada Deposit Insurance Corporation and Chairperson of the Regional Committee of North America, Mrs Michèle Bourque; Chief Executive Officer of SEDESA and Chairperson of the Latin America Regional Committee of IADI Mr Alejandro Lopez; and all members of the respective IADI committees and participants good afternoon. I tender an apology on behalf of Mr Noel Nunes of the Deposit Insurance Corporation of Trinidad and Tobago, Chairman of the Caribbean Regional Committee, for his absence and as well for our colleagues from Barbados and the Bahamas.
On behalf of Mr Noel Nunes, I thank the members of the IADI Secretariat, the LARC and the Regional Committee of North America for their efforts in convening this important Forum for the second year. At the 1st Conference of the Americas last year it was acknowledged by Mr Nunes that our various Deposit Insurance agencies were of diverse sizes and somewhat different stages of maturity, but that the sharing of expertise would be mutually beneficial. I would like to continue that theme a bit in this address because even between this year and the last, with the increase in technological innovation and consequent impact on the behaviour of our constituents, it has become so much more important for these collaborations and sharing of expertise to take place.
The Caribbean region is the smallest region by land mass, population and GDP, but its interest in financial stability among the region’s IADI membership and non-members is as significant, as it is for our larger neighbours in the LARC and the North American regions. In particular, the perceptions of the strength and resilience of the financial systems in the Caribbean region becomes more so, as financial services find a home in the digital space and takes on borderless characteristics.
We have learned from the global financial crisis of 2007-2010 that contagion will cross borders both from larger to smaller players and vice versa. With financial technology, financial services can be offered from anywhere, large or small. The epicenter of a financial system crisis, made more profound through the digitization of services and economic activity, will not necessarily be found within the largest national borders.
This discussion is very succinctly captured by Izaguirre, Lymans, McGuire and Grace in their article “Deposit Insurance and Digital Financial Inclusion” in the October 2016 CGAP publication where they identify the rapid scaling of digital stored-value products, such as electronic wallets, prepaid plastic or virtual cards, online transaction accounts and other value storing instruments as emerging products and services to be understood by deposit insurers. These products are seen as important for commerce and economic growth in developing economies. The growth of their use portends that it is the technological advances that will reduce the time and space for inclusion of financial markets participants, expanding the economic pie of many in less developed countries. This allows efficiencies for all economies and ultimately the potential for increased global competitiveness.
In the context of the deposit insurance public policy objectives and mandates these products become important to us because having deposit-like characteristics they require the authorities and deposit insurers and consumers to identify whether they qualify for protection. The authorities recognize that risks are increased where regulatory authorities do not respond timely to promoting effective deposit insurance schemes supported by effective regulation, targeted public education and awareness campaigns and effective resolution regimes where the institutions participating in this expanded value chain may fail.
At the same time, we may be very likely on the brink of a rapid disintermediation for banking and financial services, with the use of technologies that bypass the traditional brick and mortar structures that have come to characterize these services. This may be happening at a greater velocity in some countries but what is certain is that, in the age of the millennial, this is the wave of the future of financial services and this is effectively borderless. Is intermediation taking place as we know it today, and if so, who is intermediating and where is the intermediation taking place, in the cloud or on one’s computer? Are persons aware of whether their holdings of (access to), say, bitcoins or other cryptocurrencies, are or will be protected by regulators? It would then fall under the scope of which regulators, is it banking and financial system regulators or is it technology regulators, or a dedicated government agency, or all of the above, or none at all? Just this month Japanese law makers gave bitcoin recognition as a legal method of payment and the accounting principles are accommodating this on the balance sheets of participating firms, while regulation is running behind. Few countries acknowledge that bitcoin transactions are taking place in their economies and warn of the risks especially where there is no regulatory framework in place. Some countries make its use outright illegal. But unless all countries’ regulatory regimes harmonize as to the use of cryptocurrencies and indeed all electronic stored values and payment methods, risks are increased with regulatory arbitrage opportunities across the globe. This will result in increased contagion risk where the use of these technologies creates bubbles within an economy. There are still a lot of issues to consider, questions we must answer both for the public and its protection, and for governments who will be concerned with security of the services and the impact on their local economies and of course, for taxation purposes.
I recall that this discussion was introduced at the IADI AGM and Conference in Seoul, South Korea last year with the succinct, yet very clear presentation by Mr Gwak Bumgook, the Chairman and President of the Korea Deposit Insurance Corporation. He left us with the question of whether digital money that exists only as data should be protected under a deposit insurance scheme.
This begs the question of whether, the deposit insurer, has any legitimate role or an obligation to offer protection and guarantees against the background that this new means of payment/medium of exchange increases risk due to insufficiently understood and managed changes in the financial ecosystem, that can adversely impact financial system and economic stability. We need to establish this. We can use as a starting point, the Action Plan Methodology approach outlined in the presentations of Maisha Goss Johns of FDIC and Juan Pablo Arango of the Toronto Center.
The importance is that we are all in this together, as regulators and deposit insurers and resolution authorities. The size and the levels of the maturity of our systems are likely to become of less and less relevance because of the technological advances and innovations in financial systems.
In this context for our respective effectiveness we will all have to leverage our experiences harmoniously, and importantly, uniformly.
The basis of our regional participation in forums like this is strongly supported by these developments as well as the more traditional real world issues, that, we as deposit insurers must deal with to be effective participants in promoting financial system confidence and stability.
We look forward to the key presentations on funding and reimbursement, public awareness and banking resolution and reform offered for discussion in this Forum and remain cognizant of how the world is rapidly changing around us.
Thank you for listening.