The mobile phone has evolved from its basic telecommunications utility to take on a new enhanced role as a ubiquitous payment and value transfer instrument in the economies of developing countries.
These facilities, now mostly known as Digital Financial Services (DFS), involve complex interplays of telecommunications, financial services and related components, necessitating reassessment by a range of affected national regulators on whether and how to apply or adapt their sector-specific regulatory precepts to DFS and its providers.
Overall, the purpose of this study is to provide a fresh perspective on the role of the Central Bank as one of the primary DFS sector regulators and to systemize the understanding of the role of central banks within the context of DFS. It examines the specific and evolving roles the central bank may have in regulating DFS and similar value transfer and payment mechanisms.
This study is part of a series by the author on the role of the primary regulators in the DFS ecosystem, intended to systemize each of their roles. We find that as the primary regulator of DFS, the model of licensing and regulation the central bank choses for provision of services will ultimately impact the success of DFS provision. In most markets, central banks have evolved from a more restrictive bank-based (institutional) model to an open (functional) ‘enabling’ regulatory model, where an entity is licensed or authorized ex ante to provide services and then regulated according to whether it (functionally) provides a service described in a law or regulation. Coupled with proportional ‘enabling’ regulations, this holds the most promise for meeting national financial inclusion goals.
The central bank’s role however becomes more complex as the DFS ecosystem develops, in particular in relation to competition and interoperability issues, where the central bank has to undertake further policy enhancements to allow non-banks in national payment systems to create a fully integrated financial market infrastructure. Emerging ‘regtech’ solutions using automated regulatory tools to replace manual processes may assist central banks in navigating this increased complexity.
And with the introduction of new cryptographic-based systems, central banks may ultimately issue their own emoney in the form of digital fiat currencies. The impact on banks and Digital Financial Services Providers (DFSPs) is also discussed.
Due to the multi-sectoral and cross-cutting nature and increasing complexity of DFS, we argue for increased cooperation between implicated regulators and agencies as well as increased capacity building for central banks.