Speech by SFST at Financial Stability and FinTech Forum 2018 (English only)
Anselmo (Co-chair of the AFS-IT, Mr Anselmo Teng), Ambassador Lima (Philippines Special Envoy to China, Mr William Lima), Anthony (Honorary Chairman of the AFS-IT, Mr Anthony Neoh, SC), Clarie (Co-chair of the AFS-IT, Mrs Clarie Lo), Dr Fan (Director-General of International Department, China Banking and Insurance Regulatory Commission, Dr Fan Wenzhong), Fanny (Chairperson of the Hong Kong Science and Technology Parks Corporation, Mrs Fanny Law), Elsie (Deputy Director, Hong Kong Special Administrative Region Basic Law Committee of the Standing Committee of the National People's Congress, Ms Elsie Leung), distinguished guests from overseas, ladies and gentlemen,
Good morning. I'm very excited to be here today at the inaugural forum of the Alliance for Financial Stability with Information Technology.
The fact that so many of you have travelled so far to come join the Forum here suggests a collective recognition of the importance of Fintech developments and their possible impacts on financial stability.
Fintech is important not just for the countless applications that we see on the shelf today. I believe what matters more are the underlying tools for Fintech developments - they are A for artificial intelligence, B for big data, C for cloud computing and D for distributed ledger technology (DLT) or blockchain as it is commonly known, plus M for mobile devices. From these emanate applications catering to an increasingly tech savvy cohort of users who have increasingly heightened demand for mobile transaction capabilities. And these tools form the backbone of applications like advanced algorithm trading, peer-to-peer payments, crowd funding, robotics, big data based credit assessments and cryptocurrencies, which in turn feed into the development of Insurtech, Wealthtech, Banktech, Regtech and so forth.
So the various Fintech tools have enabled the provision of financial services, and also the development of innovative financial products that contest the franchises of the existing financial service providers. On the plus side, this has helped with financial inclusion, decentralisation of risks and reduction of frictional inefficiencies in the current predominantly intermediated financial scene. On the other side of the equation, Fintech also brings about disruption, disintermediation, displacement and possibly disfranchisement in the long term, especially for those existing service providers or products that are less competitive or are not adapting fast enough to the new tech world.
The Fintech proponents would argue that everyone would need to wake up to the new world order and survival is for the fittest. After all, consumers are getting a better and faster deal. With all these clear benefits, why should the regulators or authorities be worried?
The stark reality is that Fintech actually raises a wide range of issues, which could affect financial security, integrity and stability to various extents. It is very timely that the Alliance has convened the forum today to look at the interplay between financial stability and Fintech. The Financial Stability Board and various international bodies including the IMF have been mulling over these issues and have published various research papers and reports. There is a general recognition that greater multilateral co-operation would be needed so that regulatory arbitrage would be reduced and financial stability would be better safeguarded. At today's forum, we have many distinguished regulators and industry experts addressing KYC (know your customer), Regtech and other challenges and opportunities presented by Fintech.
Let me just take a few minutes to share some observations to illustrate the crucial importance of these Fintech tools. I am not going to talk much about Fintech and financial stability because this is what you experts will be deliberating today together with the speakers and panelists. So mine are more general observations. Back in the mid-19th century we had the industrial revolution, involving first steam engines and then electricity generation, which led to mechanisation and mass manufacturing. In the 1960's we saw a third wave of industrial revolution in the shape of computerisation and information processing. And now the fourth wave comes on the wings of the A, B, C, D and M tools that I mentioned. This is of course my characterisation and these tools affect not just financial services but the economy as a whole.
Take artificial intelligence first. The theoretical physicist Professor Stephen Hawking, who passed away in March this year at the age of 76, said in December 2014 that, "The development of full artificial intelligence could spell the end of the human race … It would take off on its own, and re-design itself at an ever-increasing rate. Humans, who are limited by slow biological evolution, couldn't compete and would be superseded." Three years later, in 2017, upon seeing the take-off of AI, Hawking then said, "The genie is out of the bottle. We need to move forward on artificial intelligence development but we also need to be mindful of its very real dangers. I fear that AI may replace humans altogether. If people design computer viruses, someone will design AI that replicates itself. This will be a new form of life that will outperform humans."
That sounds ominous but let me use the game of Go, played by AI machines, to illustrate what I see in Hawking's warnings. You probably have read about AlphaGo having sweeping victories over at least 17 top Go world masters. AlphaGo learnt to play Go by studying the top games played by world masters. Hawking's worry about AI replicating itself and becoming out of control can be illustrated in a modest way by AlphaGo Zero, the successor of AlphaGo, which actually beat AlphaGo and, please note here, AlphaGo Zero was trained without any data from real human games. So it was trained with an AI machine playing against itself. And both AlphaGo and AlphaGo Zero learnt to excel in Go by relying on the "look ahead" method and the "intuition" method. The latter is what is much closer to human thinking, whereas the former is more a computational capacity question.
Now imagine an AI machine that is trained to win in certain derivatives trading, and this machine invents new ways to win as it perfects its algorithm trading. What if such wins actually could destabilise the underlying asset for the derivative in question. This may be a forex rate, an interest rate, a commodity price, a stock market index or a host of other assets. Now some speculators might wish to do just that in order to make a kill in the market. But if an AI could do this many, many times faster and better than conventional speculative play, would this not be a cause for regulatory concern? Of course, one can see that my above analogy is merely illustrative, but I don't think this is that fictional. And if we all think that this is just too wild a thought, that is precisely already a recipe for the looming of financial instability, I would submit.
Let me turn now briefly to blockchain, and probably the word that comes to your mind is Bitcoin, which is a leading example of the many applications of DLT to the creation of cryptocurrencies in the world today. I have recently seen a number like 1,600 brands of such cryptocurrencies, but the number keeps going up because a cryptocurrency can be created at any time. Bitcoins are favoured by some due to their anonymity, but experts will argue that sending or receiving Bitcoins still requires a pseudonym, or in crude terms a nickname. But it is indeed possible to make Bitcoin transactions highly anonymous and this flags then a problem with anti-money laundering and counter-terrorist financing.
And this in turn raises the question whether Bitcoin or cryptocurrency transactions should require counterparties to go through a KYC process. KYC should be a non-issue if the blockchain is crafted for a permissioned environment where the participants have been duly screened. But KYC is a real challenge or perhaps near impossibility when the likes of Bitcoin blockchain are crafted in a permissionless environment, which can be joined by anyone of whatever origin or affiliation. And this is a question that regulators may need to come to grips with sooner rather than later.
So there are indeed many problems generated by Fintech tools and applications. While embracing Fintech, governments and regulators need to harness the risks and challenges that come hand in hand. With concerted efforts, this Alliance for Financial Stability with Information Technology can do much to foster an exchange of views and collaboration to tackle such Fintech issues, as well stated by Anselmo in his opening remarks. The Alliance aims to promote regional and wider co-operation, otherwise regulatory arbitrage would just negate the efforts of individual jurisdictions and bite at the Achilles' heel in the global financial chain. Let me again wish you all the best at today's forum and in your future endeavours. Thank you very much.
Ends/Wednesday, May 9, 2018
Issued at HKT 12:21
Issued at HKT 12:21