Abstract of the supporting message from Mr. Guo Shuqing (Chairman of China Banking & Insurance Regulatory Committee & Deputy Governor of Peoples Bank of China) as delivered by Dr. Fan Wenzhong with keynote speech
On behalf of The Hon Guo Shuqing, Dr. Fan paid tributes to the Alliance of Financial Stability with Information Technology. The Alliance is an international 3rd-party organization which was founded based on the experience gathered from the KYC fintech application initiated by the Macau SAR.
On the subject of Digital KYC, several key points worth mentioning which include: (1) The importance of setting the digital regulatory standards, (2) Development as well as the respective regulatory policies of Internet Finance of China, (3) RegTech & SupTech revolution based on Big Data analytics, namely, i) regulatory bodies in the future will become digital, ii) regulatory reports will assume a more enhanced presentation format, iii) off-site regulatory structure will gradually replace on-site one.
CBIRC will continue its dialogue with financial and fintech entities in an effort to achieve better regulatory results and will give its full support to the Alliance.
Abstract of Luncheon Address of Mr. Arthur Yuen, Acting Chief Executive, HKMA
Besides being the premier international financial centre in Asia, Hong Kong is moving into the next level of smart banking. And while new technologies bring about enhanced conveniences for the customers through a wide spectrum of online services, the banking and finance industry is presented with new challenges, especially in terms of KYC compliance. And the setting of technology standards across different jurisdictions, while apparently of particular importance, is no easy task. For cross-border standards setting, 5 overarching principles should be observed: (1) Technological relevance and robustness, (2) Respecting local legal and regulatory circumstances, (3) Transparency, (4) Technology and application neutrality, and (5) Efficiency.
And HKMA is supportive of establishing effective standards to promote financial stability and safety as pursued by the Alliance.
Welcome Speech of Mr. James Lau, Secretary for Financial Services and the Treasury, Hong Kong SAR
Following is the speech by the Secretary for Financial Services and the Treasury, Mr James Lau, at the Financial Stability and Fintech Forum 2018 organised by the Alliance for Financial Stability with Information Technology (AFS-IT) (May 9):
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.
Summary of Keynote Speech by Mrs. Fanny Law, Chairperson of Science & Technology Parks, Hong Kong SAR
It is the ambition of the Hong Kong SAR Government to turn Hong Kong into an innovative center and fintech development has become of the top priorities. Hong Kong Science & Technology Parks plays a very important role in reaching that ambitious goals. Uniquely positioned, Hong Kong is actively involved in a number of economic development initiatives spearheaded by the Central Government, namely the Belt & Road Initiative as well as the Greater Bay Area Economy. The Science & Technology Parks will continue to play an active role in supporting the government to realize the goal of transforming Hong Kong into a hub for biomedical research base as well as Artificial Intelligence & Robotics, etc., so to further consolidate its role as “Super-Conductor” for the future economic development of China.
Summary of Keynote Speech by Mr. Stephen Wong, Privacy Commissioner for Personal Data
Hong Kong is the first in the region to have a single and comprehensive set of privacy laws to regulate the entire cycle of personal data. In terms of KYC compliance, there have been complaints launched which would question whether such practice is legally consistent with the respective laws and regulations governing personal data privacy. The collection of personal data for KYC compliance must therefore take into consideration factors such as legitimacy, pragmatic and not excessive, voluntary vs. obligatory, regulatory environment (i.e. AML-CFT) as well as accountability.
Chairman's Welcome Remarks by Mr. Anselmo Teng, Co-Chair, AFS-IT
Good morning, distinguished guests, ladies and gentlemen,
On behalf of the Alliance for Financial Stability with Information Technology (the AFS-IT) and the co-organisers of the Forum, the China Economic Information International, the China Law Research Society, I would like to extend a warm welcome to all of you to this Inaugural Financial Stability and FinTech Form 2018.
We have the honor of the presence of the following heads of delegation:
• Dr. Fan Wen Zhong, Director-General, International Department, CBIRC;
• Mr. James Lau, Hong Kong Secretary of Financial Services and the Treasury;
• Mr. Zaki Mohidin, Head of Fintech, Brunei Monetary Authority;
• Her Excellency Serey Chea, Assistant Governor of National Bank of Cambodia;
• Mr. Yosamartha, Assistant Director, Financial Technology Office, Bank Indonesia;
• Ms. Phothichanh Thammatheva, Deputy Director-General of Banking Supervision, Bank of Laos;
• Mr. Zaw Naing, Director General of Financial Regulatory Department, Ministry of Planning and Finance, the Republic of the Union of Myanmar;
• Ambassador William J Lima, Special Envoy to China, the Republic of the Philippines;
• Ms. Sirituda Panomwon Na Ayudhya, Assistant Governor of Payment Systems Policy & FinTech, Bank of Thailand;
• Mr. Tran Thanh Huan, Consul General of the Socialist Republic of Vietnam in Hong Kong;
• Mrs. Fanny Law, Hong Kong Executive Council member and Chairperson Science Park Hong Kong;
• Mr. Wilson Vong, Executive Director of the Board of Directors of Monetary Authority of Macau
A big welcome to all of you!
At this point, I have the honor to inform all of you that the Asia Group on Money Laundering, the APG, has sent the following Statement of Support to the AFS-IT and the Forum.
It reads,
“The Asia Pacific Group on Money Laundering welcomes the establishment of the Alliance for Financial Stability with Information Technology and its mission, especially in the promotion and strengthening of standards, processes and arrangements to counter money laundering and illicit fund transfers ,through cooperation with central banks and monetary authorities in Asia.”
I believe that all of us are very much encouraged and motivated by the above statement, in particular towards our coordinated efforts in AML and CFT, especially in the era of fast developing digital economies and financial sectors.
As we all know, the importance of financial stability is well recognized and is also the objective pursued by the international community through close co-ordination and co-operation. The endorsement by G20 in 2016 towards a more effective and a more stable and resilient international financial architecture is a clear indicator that financial stability has drawn global focus and emphasis.
Financial regulators across the globe undoubtedly regard financial security and stability as top priority. Apart from consistently monitoring the financial system and paying attention to macro economic as well as financial development, regulators also focus on systemic risks which affect financial stability; risks incurred as a result of money laundering and the financing of terrorism activities, as well as other potential risks which may pose threat to the stability of the financial system, including those brought about by financial innovation through the application of financial technology.
The rapid development of information technology across the globe is transforming the way the financial system operates. While new businesses have been developed using fintech, the financial sector is also faced with challenges in the era of internet and digitalisation.
A challenge for regulators everywhere is to allow enough “space” for value-adding fintech innovations - such as technology applications that enable better and more effective financial services. Equally, a proactive approach is needed to prevent excessive risk from fintech activities such as fraudulent transactions, money-laundering, terrorist funding and illicit fund transfers.
Part of the solution lies in providing a platform for regular dialogue, collaboration and information sharing between private-sector fintech innovators, financial service providers, industry associations, public sector regulators, standards-setting bodies and institutions of higher learning. Increased cooperation and cross-border coordination amongst regulators and supervisory bodies is also key to reducing and mitigating risks around regulatory fragmentation and arbitrage.
Established in Hong Kong in early 2018, the non-profit making Alliance for Financial Stability with Information Technology (the “Alliance”, also abbreviated as “AFS-IT”) is conceived of as an autonomous platform for industry professionals primarily to identify, map, evaluate and address digital challenges to the stability of financial systems by exploring and applying practical technology solutions. A focal point is the promotion and strengthening of standards and measures to counter money laundering and terrorist funding, and to reinforce cyber security so as to ensure the robustness and cyber-resilience of digital financial transactions.
Financial professionals from or had worked in Hong Kong and Macau are valued as Alliance founders, not least because the two Special Administrative Regions are located at the starting point of the Belt and Road’s southern arc, also known as the “21st Century Maritime Silk Road”. The diverse capabilities of Hong Kong and Macau are pivotal to achieving China’s Belt and Road objectives. These capabilities include Hong Kong’s experience as an international financial centre operating at world standard and Macau’s experience in implementing effective online monitoring of cross-border financial activities through KYC technology and thus deterring cross-border money laundering activities.
As the digital revolution in finance accelerates across China, the wider Asian region and beyond, the Alliance exists to provide a non-governmental platform for international collaborative efforts by central banks and monetary authorities, financial regulators, professionals and technology experts to strengthen systemic stability and market security.
The Alliance’s principal role is to create a supportive environment where public and private-sector finance players can engage in open but secure dialogue on the future direction and likely impacts of fintech. They can also share experiences about applying policy initiatives and technology solutions to address specific finance challenges. Whilst the operational headquarters of the Alliance will be located in both Hong Kong and Macau, its activities will involve different stakeholders across multiple financial centres.
While we are looking forward to the great presentations which follow, the three panels which follow are equally worth your attention. We will have the panel of industry leaders, which focuses on “Asia’s Progress towards Next-generation KYC Technology”, followed by “The Regulatory Insights” panel which focuses on “Innovation vs Stability in Asia: Tackling Finance’s Practical Challenges”. The last panel of the Forum is of a forward looking panel as the panelists will discuss along the topic of “Imagining the Future for KYC”.
Ladies and gentlemen, I hope that I have conveyed the introduction of the Alliance for Financial Stability with Information Technology, as well as the importance and relevance of the theme of this Forum. The Statement of Support from APG is particularly encouraging. Once again, thank you all for your presence. It is great to see you all here to participate in this event. I wish that all participants will have productive discussion throughout the day.
Thank you!
