Bank of Japan governor Kazuo Ueda warns of the risk of rapid adoption of financial innovation.

The fast adoption of technology in Asia’s financial sector has brought vast benefits to the public in many countries including financial inclusion, but this could give rise to new risks, Bank of Japan governor Kazuo Ueda said in his keynote address at the 18th «Asia-Pacific High-Level Meeting on Banking Supervision» held on Wednesday.

Ueda stressed the need to strike the right balance between reaping the benefits of financial innovation and managing the risks it poses.

Digital Finance

The central bank governor noted that the widespread use of digital financial services has allowed people to make daily payments, make investments and take out loans. 

This «leapfrogging» in the digitalization of finance is especially prominent in many emerging countries in Asia where people without access to face-to-face financial services are increasingly relying on the convenience of smartphones to make electronic payments.

Managing Risks and Introducing AML Measures

While such developments enhance financial inclusion, digitalization of finance could pose new risks to the stability of the financial system, Ueda said. Ensuring operational resilience has become increasingly important and this requires cyber and third-party risks to be properly managed. More anti-money laundering and counter-financing of terrorism (AML/CFT) measures need to be introduced.

Ueda also singled out crypto assets, tokenization, artificial intelligence and other new technologies as financial innovations that could bring opportunities as well as risks to the financial system.

Challenges to Regulators and Policymakers

The challenge to financial regulators and policymakers, Ueda said, is to ensure that they leverage the advantages of the digitalization of finance while making sure that risks are effectively managed to ensure the safety of the financial system.

As financial service providers continue to diversify, adopting the principle «same activity, same risk, same regulation» has become increasingly important, Ueda said. The challenge lies in determining which activities and risks should be classified as «the same» under this principle, he added.