The world has changed dramatically over the past few decades with the introduction of technology, and the financial sector has experienced a similar transformation. In this digital age, anything seems conceivable. These days, active internet users from one nation can affect stock markets in another. International innovation can be stifled by national rules, and in this digital age, nimble start-ups can replace established financial institutions. In the virtual world, where links appear to link indefinitely, a minor shock to the system, however, might have an exponentially huge impact on the entire ecosystem. In addition to dangers, there are many of options. Ordinary people will be able to engage in this international financial ecosystem by democratising and decentralising financial institutions.
Regulation
The importance of the regulatory environment in the current highly interconnected financial services ecosystem has never been greater. Many non-traditional players benefit from greater independence and a hands-off posture from regulators because traditional institutions are extensively controlled. Where control is present but is not inhibiting innovation, the proper level of regulatory supervision should be effective. Structure-based regulation must be replaced by pursuit-based regulation, to put it more succinctly and simply.
Investors and financial systems are greatly at risk from financial institutions that are neither fully nor partially regulated. There shouldn’t be an insufficient amount of entity- and activity-based regulation, moving away from the traditional regulations; this doesn’t necessarily indicate that too many or too few laws have an impact on the financial ecosystem. Regulators must comprehend how differently digital business models operate from conventional banking institutions.
It will be more crucial than ever to concentrate on activity-based supervision when it comes to both non-traditional participants and the traditional financial sector as a whole given the pace of innovation. Since the Great Financial Crisis of 2008, structure-based regulation has mostly been put into place. Examples of internationally recognised entity-based regulation are Global Systemically Important Banks (GSIB) and Systemically Important Financial Institutions (SIFI). Regulations that are unrelated to the company type should be created if large IT companies decide to enter the finance market. We can close the regulatory holes we’ve observed by taking steps to elaborate activity-based oversight to include new actors.
Security
It can be very challenging to spot weaknesses before they develop into major issues in a world with complicated digital supply chains. This raises concerns about the security of banks, insurance providers, and fintech firms. Any of these organisations run the risk of losing their security and reputation if there is a weak link. Nowadays, third parties and intermediaries are involved, thus contact between parties does not happen directly. It becomes very difficult to keep track of things and hold people accountable in the entire ecosystem when there are so many links and layers of interaction involved.
The ultimate objectives of the regulatory organisations are to promote maximum financial stability, safe transactions, and consumer rights protection. There is a need to create innovative ways to cooperate between centralised authorities and decentralised financial institutions, despite the fact that it is extremely difficult in this uncharted territory that was designed to defy the conventional methods of finance.
