Building Regulatory and Supervisory Technology Ecosystems: For Asia’s Financial Stability and Sustainable Development

Abstract

Over the past 50 years, the financial sector has become one of the most digitalized, globalized, and regulated sectors of the global economy. Since the late 1960s, with the advent of the first ATM and the handheld calculator, finance has rapidly digitized and globalized in developed markets and most recently in emerging markets and developing countries. The landscape of the financial services sector has also gone through significant transformation in the years since the 2008 global financial crisis, with finance dominated by three interrelated themes: the crisis itself; tremendous increases in financial regulation; and the application of a range of new technologies to finance such as big data, artificial intelligence, cloud infrastructure, and blockchain. These developments have created regulatory challenges that call for new approaches to ensure effective regulation.

This paper focuses on the evolution, role, and development of the use of technology in regulation, compliance, and financial infrastructure design in finance that have aided this effort. Regulatory technology (regtech) refers to the use of technology—particularly information technology—for regulatory implementation, compliance, and monitoring; it is used by regulators, supervisors, market participants, infrastructure providers, and others. In other words, regtech encompasses the industry’s use of technology to address regulation and compliance requirements, and supervisors’ use of technology for supervision of regulatory and compliance requirements (often called supervisory technology or suptech). It also refers to policy makers’ and regulators’ implementation of regulatory systems and requirements in the context of the technological design of financial infrastructure, including through their interactions with market infrastructure providers.

While regtech has developed to its greatest extent in finance, it can and increasingly does form a part of any regulated industry, including health care, energy, transport, travel, and an increasing range of other areas, particularly sustainable development.

The paper first highlights the interaction of industry use of technology in compliance and risk management; regulator and supervisor use of technology for supervision, monitoring, and enforcement; and the use of technology to embed regulatory requirements and systems into financial infrastructure. This is the regtech ecosystem, transforming finance and its regulation.

Second, it highlights that this idea of using technology for regulatory, supervisory, and compliance purposes is, in fact, not new but has been evolving in particular since the 1980s, and even before in the context of the development of technological infrastructure for finance.

Third, this paper highlights the necessity of using an ecosystem approach in designing regtech strategies and the fundamentals of designing an optimal architecture, alongside the policy considerations required for an integrated regtech and suptech ecosystem. This approach can accelerate the development of a transparent and harmonious ecosystem that supports the primary financial regulatory objectives of financial stability, financial integrity, fairness and investor and consumer protection, and market efficiency.

Finally, the paper introduces key policy frameworks that can enable ecosystem relationships at national, regional, and international levels, while showcasing vital agile data management and standardization frameworks. It also highlights the importance and key elements of supporting, creating, and building a local innovation ecosystem. It proposes ways for policy makers and regulators to build a regtech/ suptech strategy that engages policy makers, regulated institutions, financial infrastructure operators, and ecosystem builders. These can bring all of these parties together in a cohesive manner to support sustainable development and financial stability.