HKEX says Fintech success dependent on regulator innovation
Hong Kong report says regulators must establish new test environments to allow blockchain and AI to be integrated across the securities sector
The Hong Kong Stock Exchange (HKEX) has issued a detailed but upbeat report that argues the Fintech sector – including Artificial Intelligence and blockchain technology – can be managed under existing financial regulations but only if regulator innovation can match that of the technology they are setting out to govern.
The report, published jointly by the Exchange’s Chief China Economist’s Office and its Innovation Lab says Fintech – “financial innovations driven by technological advancement in the forms of new business models, new financial services, and new software and applications” – is currently having a “great impact on the provision of financial services and the development of the financial industry.”
However the report points out that to date there have been very few feasible Fintech plans based on specific securities business models and, aside from Artificial Intelligence technology that could be applicable in the exchange market, this new technology has largely been deployed in the industries of “banking, Internet finance and digital currencies rather than… securities”.
As such, the 26-page research report, entitled “Financial Technology Applications and Related Regulatory Framework” explores how blockchain and AI applications might be deployed in the securities industry by examining their integration and regulation in areas that include investment, trading and clearing and settlements.
The report lists feasible Fintech applications in capital markets as well as examples of blockchain platforms that have been deployed in trading and clearing and settlement businesses. Overall, HKEX remains optimistic about the role these new technologies can play, as long as the right regulatory framework is in place and this, says HKEX, will necessitate the use of “sandbox” test environments.
“Financial business model innovation brought about by technology… with the aim of financial services upgrade,” says the report, “can satisfy financial needs in a wide range of new scenarios and can contribute to enhanced allocation of financial resources. Technology innovation is conducive to the further development of the financial industry but cannot replace its basic functions.”
It adds that core Fintech technologies can promote healthy industry development but first needs an effective regulatory “supervisory sandbox” environment that allows for pilot trials of Fintech applications that can eliminate or resolve “risks and issues” before they are deployed live.
HKEX says securities regulators in a number of countries, including South Korea, have already established a dedicated testing environment and that these lessons should be studied before the Hong Kong market considers its “next step.”
Regulatory bodies must make use of big data and AI-based deep learning analysis to carry out macro-analysis of financial institutions and track and prevent systematic risks, concludes the report, but regulator innovation must also stay abreast of technological innovation.
Whether the core technologies of Fintech can promote the healthy development of the financial industry,” concludes the report “depends largely on innovation” from the regulator.