KLRI : KOREA LEGISLATION RESEARCH INSTITUTE

Ⅰ. Backgrounds and Purposes

▶The acceleration of digitalization and rapid changes in the financial sector after COVID-19

○After COVID-19, all social digitization took place, and changes in the financial sector are remarkable. However, although the new changes have the advantages of efficiency, convenience, and various services in the financial sector, problems such as increased risk, confusion in competition order, and the need for consumer protection, including system risk,

-In particular, the establishment and supervision of new financial policy directions due to the combination of big tech and finance become a major problem. In addition, problems such as market disturbance, consumer damage, and risk management due to the increase in the use of digital assets such as stable coins appear. Meanwhile, the issuance of digital currency, a legal currency, was promoted at the central bank level.

○The combination of big tech and finance, the diversification of digital financial services, the spread of stable coins, and the issuance of digital currency at the central bank level were discussed with interest at the international organization level.

-Discussions at the international organization level do not provide specific and detailed methods and means, but they suggest the direction of financial policy, and the responses of each country are not much different from those of international organizations.

-Therefore, the purpose of this study is to examine the discussion of digital finance in international organizations, trends of each country, and responses in Korea, and to obtain implications.

 

Ⅱ. Major Content

▶Discussion and Legal Policy Implications of Digital Finance in International Organizations

○With COVID-19, the digital economy is rapidly deepening. Since COVID-19, non-face-to-face digital financial transactions using the Internet or apps have increased significantly. The newly formed digital economy can be organized into profits according to size, externalities of networks, and data-driven financial services.

○The combination of big tech and financial institutions is one of the distinct changes in the digital economy. The combination of big tech and finance differs by model of each country. In the U.S.A payment is centered on payment, while in China, Big Tech enters the entire scope of banks, insurance, and investment.

-Big Tech goes through the stages of birth, growth, and maturity, of which it expands to financial services at the stage of maturity. And at this stage, the consumer is stuck because of the conversion cost.

▶Digital Financial Supervision and Regulation

○Digital financial supervision and regulation are required. Competition restrictions, system risks, and cyber risks caused by big tech are the main targets of digital financial supervision. Regulatory sandboxes are also a combination of supervisory and growth policies, which are a process to identify risks in advance and establish appropriate regulations for them through regulatory sandboxes.

○Financial alienation is a negative aspect of digitalization. Digital finance has two sides. On the one hand, it supports the use of financial services by young people who lack credit information, but on the other hand, market exclusion may occur during the economic recession due to a data-oriented process.

▶Major Issues in Combining Big Tech and Incumbent Finance

○Competition restriction regulations and level playing field issues may be raised Big Tech can use its superior position in the network to determine the terms and prices of transactions on its own. The efficiency of the financial market can be improved in the short term, but consumer rights infringement may occur along with the negative impact of the market system in the long term.

-The superior position of Big Tech appears to be a high bargaining power for financial institutions and an abuse of the superior position for consumers.

○Protection of personal information and protection of financial consumers are also issues. One of the characteristics of digital finance is data-centered financial services, and the proportion of data in financial services is absolute. There is a possibility of abuse of personal information. In the case of Europe, personal information protection policies are implemented based on GDPR. Financial consumer protection, especially investor protection, is also key.

-A relatively low level of regulation is applied to Big Tech, and financial advertisements may be bypassed through Big Tech. The possibility of consumer damage due to false advertisements.

○Risk control and financial system stability are required. Big Tech's third-party services – cloud, network services, etc. – can transfer non-financial sector risks to the financial sector. The transferred financial risk can spread to system risk.

-Separate financial supervision of third-party service providers (TPPs) is required.

○Discussions are underway on how to supervise big tech and finance if financial services are combined. The key is to choose either entity-based supervision or activity-based supervision. Entity-based supervision means license-oriented supervision, and activity-based supervision focuses on activities regardless of license. The new flow of discussion is a form of supervision that combines entity-based supervision and activity-based supervision.

-Entity-based supervision is easily combined with the traditional supervision method in that it uses the traditional supervision method. However, the traditional method of supervision is limited to supervision of new types of convergence services.

-Activity-based supervision has the advantage of being able to supervise by including new convergent services. However, given that financial supervision is fundamentally based on licenses, it is necessary to grasp the nature of each activity and integrate it with Line Sense. In this case, there is a limit to the early warning of the financial crisis or preemptive intervention of the financial supervisory authorities.

○It is difficult to promote the formation of a new supervisory system at once. Therefore, a step-by-step approach is required. It is desirable to go through the stages of disclosing information in the short term, establishing standards for behavior in the medium term, and forming a hybrid regulation system in the long term. Digital Financial Supervision and Regulation

▶Major Issues in Digital Legalization

○Central banks in each country are promoting the issuance of central bank digital currency (CBDC) in competition with private digital currency and monetary policy reasons. CBDC has advantages such as financial inclusion, ease of access to the payment settlement system, implementation of an efficient payment settlement system, and securing the resilience of the payment settlement system.

○Service supply method can be divided into a general type that is central bank alone and a medium type or mixed type according to functional sharing with the private sector. However, there are some limitations in introducing digital currency. First, lack of precedent, second, public support, third, legal issues, fourth, cybersecurity, fifth, technical uncertainty.

▶Regulations and Issues for Virtual Assets

○The key to regulation and supervision of Stablecoin is the lack of redeemable assets, cybersecurity, money laundering, and terrorist financing. In particular, regulations on money laundering are being set very actively. This is due to the fact that the anti-money laundering system is already firmly established internationally.

-Need information to address these issues. In particular, the obligation of the remitter and the obligation of the recipient are established in the transmission/reception relationship. In other words, the obligation to store and monitor information on transmission and receipt and to report suspicious transactions is imposed.

▶Trends in the European Union

○The European Union announces its digital finance strategies. The strategy is: first, creating a digital single market for financial services; second, setting up a regulatory framework that promotes innovation; third, solving the risks of data analytics in Europe.

-Specific policy directions are the establishment of a digital identity system, data sharing, formation of clear and understandable tools for cryptographic assets, and digital resilience.

-The core principles of digital regulation in the European Union can be summarized as "same activity, same risks, same rules".

○Regulation of private digital assets in terms of finance and taxation. In order for financial institutions to broker cryptocurrency assets, they must obtain approval from the financial authorities. And if the cryptocurrency asset is an investment asset, an investment manual must be issued.

○For CBDC, Digital Euro, whether to charge negative interest in relation to issuance and the holding quantity limit per individual has emerged as an important issue. Both of these are intended to limit the storage function of the CBDC and enhance the exchange function.

▶Trends in the United States

○The U.S. introduced supervision of third-party service providers in view of financial dependence on big tech increases risk. The subject of regulation is the subsidiary institution and subsidiary of the Federal Deposit Insurance Corporation, and the subject of examination is the payment process, accounting, data processing, etc. For Big Tech, bills are being proposed to introduce competition regulations.

○Emphasizes responsibility for digital assets along with fostering digital assets. The main thing is the Presidential Executive Order, Ensuring Responsible Development of Digital Assets. Regarding stable coins, prevention of the transfer of risks arising from coins, such as coin-run, is being discussed as the main focus.

○Anti-money laundering issue is an important issue when it comes to digital assets. Regulatory measures, including the Treasury Department's guidelines, are already being implemented and promoted. Under state law regulations, New York State implements license-based virtual asset regulations.

○CBDC, or Digital Dollar, the Federal Reserve faces some important policy questions. CBDC's impact on financial inclusion, full employment and price stability, financial stability, digital economy between countries, whether anonymity is provided, prevention of illegal finance, and cyber resilience.

-In addition, the design deals with the issue of interest payment, whether there is a limitation on the quantity, the agency performing the brokerage function, and whether there is a conflict between the design principles.

▶Trends in the United Kingdom

○Discussions on digital financial regulation in the UK are focusing on improving regulations through regulatory sandboxes rather than regulations. In the UK, a regulatory reporting group has been formed in which major financial groups improve regulations with supervisory authorities to discuss regulations

-The UK is the first country to start financial regulatory sandboxes and operates a regulatory sandbox system for various periods of time, and a flexible regulatory sandbox system that varies depending on the nature of the technology.

○Regarding the central bank digital currency, it presents several goals that CBDC can contribute to. First, supporting a flexible payment environment, second, eliminating the risks associated with creating new forms of personal funds, third, competition, efficiency and innovation in payments, fourth, meeting future demand in the digital economy, fifth, improving availability and usefulness of central bank money, and better cross-border services. Meanwhile, discussions on private digital assets are underway around stable coins.

▶Trends in Japan

○Japan's digital regulation and supervision focus on regulation through the creation of new licenses and financial consumer protection through them. Japan enacted a law on the provision of financial services and established a financial service brokerage business that provides various kinds of products and services in one stop. The financial service brokerage business is a means to regulate Big Tech, which actually performs the brokerage function of finance in combination with financial institutions, by including it in the license system. This is directly related to financial consumer protection.

-Measures have been implemented for financial service brokers to introduce a registration system and secure customers' right to claim damages. It also regulates concurrent jobs.

-On the other hand, conduct regulations are also imposed on financial service brokers. Prohibition of title lending, duty of sincerity, duty of explaining important matters, prohibition of acceptance of user property, etc.

○For digital currency, private digital assets are regulated around Stablecoin. Currently, research is being conducted centering on the working group, and these studies aim to revise related laws and regulations, such as the Act on the Settlement of Funds in the future.

-Discussions on regulatory supervision of decentralized finance are also actively taking place. Looking at the mid-term issue of the Financial Services Agency's Research Council on Responding to Digital Distributed Finance, it is necessary to achieve user protection, money laundering and terrorist financing, and stability in payment in order for stable coins to be used flexibly.

○In the case of CBDC, the Bank of Japan has completed the first stage of the experiment and is testing the operation in conjunction with the private payment system. Review some issues in this regard. First, dealing with the effects of banks' financial intermediary functions or financial crisis, second, promoting innovation through coexistence with private payment services, third, user protection, fourth, anti-money laundering, and preventing terrorist financing.

▶Trends in China

○Currently, it is in the digital stage of China – the 3.0 stage of financial science and technology. The supervision of digital finance is centered on the Financial Stability and Development Committee of the State Council, which is linked to financial authorities, the National Internet Information Office, and the Ministry of Industry and Information Technology.

○China has changed its regulations from a post-supervision system to a pre-supervision system due to various accidents in P2P, and recently, it has issued notifications on digital supervision in earnest. Major ones include the presentation of prevention of virtual currency transaction risks, blockchain information service management regulations, notification of virtual currency mining activities, and notification of preventing and handling speculative risks of virtual currency transactions.

○Digital cryptocurrency assets are focused on preventing money laundering. In the case of CBDC, China revised the People's Bank of China Act to lay the legal basis for issuing CBDC. For CBDC a pilot operation test has been completed in Shenzhen, Sungdo, and Soju. It is currently in the trial application stage of application.

○Regarding big tech regulations, anti-trust guidelines, data safety laws, and personal information protection laws in the platform economy area of the State Council Anti-trust Committee have been strengthened. In addition, the Bank Insurance Organization's method of supervision and evaluation of consumer rights protection, credit information business management, and network safety review methods are promulgated.

-Anti-trust guidelines in the platform area of the Office of State Anti-trust Committee are the most important matters of Big Tech competition restriction regulation.

-The People's Bank of China has issued some opinions to promote normative and healthy sustainable development of the platform economy. In addition, a notification on the need for banking financial institutions to do well in protecting personal financial information is issued.

○Regulatory sandboxes are not being promoted in earnest. However, the State Council attempted a system similar to a regulatory sandbox, focusing on some areas - Beijing. On the other hand, there are changes such as promoting regulatory sandboxes for financial innovation in Guangdong, Hong Kong, and Macau, centering on supervisory authorities such as the People's Bank of China.

○Strengthen consumer protection-related regulations such as the Bank Insurance Organization's method of supervision and evaluation of consumer rights protection management and punishment of consumer rights violations in relation to financial market stability and financial consumer protection.

 

Ⅲ. Expected Effects

▶Use as basic data for legislation and financial policy

○The study is to summarize the recent years of rapid discussions related to digital finance, focusing on international organizations. Research on digital finance is very active in each research institute, but there is no data summarizing the trends of international organizations and major changes and trends in major countries.

-As a result of the research review, discussions by international organizations are being used mainly in cases in other countries. This is the same for our country. Through discussions between the relevant international organization and major countries, the direction of legislative and financial policy in Korea can be diagnosed and implications can be found.

▶Use as basic data for practical and academic research

○The results of the study can be used as basic data for academic and practical research. Many studies on digital finance include comparative studies, but reference is being made selectively in necessary areas. Through the results of this study, it is possible to see the international trends of international organizations and major countries, and it can be used in the specific contents of the study as well as setting the direction of the study.