Regulators are divided on the potential impact of financial technology on the global financial system and the need for better coordination and oversight.

As leaders prepare to gather for the G-20 meeting in Japan in late June, their finance ministers and central bankers are getting conflicting advice from regulators on the risks and benefits of fintech.

Regulators who make up the international Financial Stability Board prepared separate reports on cryptocurrency and decentralized technology. Each report failed to reach consensus on the best approaches. Some say it’s too soon to draw conclusions about the new technology while other leaders say they can’t ignore the impact of what’s coming.

One reason for the contrasting opinions is that cryptoassets are not yet mainstream and have a small market footprint, said Gregory C.J. Lisa, a partner at the law firm Hogan Lovells in Washington.

“But no regulator wants to get caught flat-footed on this, and given the speed of technological advancement, that’s a real possibility,” he said.

The reports were made for finance ministers and central bankers who met last weekend in Fukuoka, Japan, in advance of the global summit.

The May 30 cryptocurrency report said regulators of the world’s leading economies need to keep a close eye on how they oversee cryptoassets and be wary of gaps in existing rules that could undermine investor protections, anti-money laundering efforts and bank exposures.

But the Switzerland-based FSB noted its members, which include the U.S., hold different views on whether more regulatory coordination is needed across borders, and, if so, how large a priority should be given to enhanced cooperation internationally.

“On the one hand, some members note that the policy implications of crypto-assets do not always fit neatly into existing remits, which could result in significant regulatory asymmetries,” the report said. “On the other, crypto-assets are at a nascent stage and the FSB’s assessment is that they do not present material risks to global financial stability at present.”

Some FSB member countries say the majority of issues can be addressed with existing policy tools.

The tension was also evident in the report released Thursday and focusing on the implications of decentralized technology, such as distributed ledgers and “tokenisation” of traditional financial instruments.

While the cryptocurrency report indicated the FSB doesn’t think cyptoassets pose a risk to the financial system, the decentralized fintech report said they “may entail risks to financial stability,” including concentrations of ownership and operation of “key” technologies.

“New uncertainties concerning the determination of legal liability and consumer protection may also affect public trust in the financial system,” the second report said.

The issues may pose challenges for regulation and supervision, the FSB wrote. The second report also said decentralized fintech could lead to greater competition and diversity in the financial system “and reduce the systemic importance of some existing entities.”

Innovation

In the meantime, the market is innovating.

Last week, a consortium of international banks announced the creation of a new company, Fnality International, that plans to launch digital versions of major global currencies for use in “peer-to-peer” settling of financial transactions. Settlement occurs when securities or other investments are transferred and payment is received. It can be a surprisingly complicated function.

The participants are largely European, with only BNY Mellon and State Street Corp. from the U.S. involved. Other participants include Barclays, Banco Santander, Credit Suisse, ING, Lloyds Banking Group and UBS.

The new digital currency, known as a “utility settlement coin,” will be backed by five national currencies, including the dollar, pound and yen.

Rhomaios Ram, CEO of Fnality, said June 3 that the company and the founding big bank shareholders will start the regulatory approval process “right away,” and they anticipate the first use soon. The coin “offers a significant opportunity to simplify liquidity management using one cash asset for as many settlement needs as possible,” Ram said.

The creation of Fnality illustrates the enormity of the task facing the FSB and regulators across the globe in monitoring and supervising the ever-shifting fintech landscape.

In its cryptocurrency report, the FSB acknowledged the difficulties “given the rapidly evolving nature of the crypto-asset ecosystem and related risks.” As a result, the G-20 should adopt “a forward-looking approach” to monitoring cryptoassets and how they are overseen, the FSB recommended.

Hogan Lovell’s Lisa said regulators want to be seen as involved. “But there’s always the possibility that in being too involved, the government winds up suffocating innovation rather than letting it grow,” he said.

The FSB reported regulators worldwide are pursuing policy initiatives and studies directed at cryptoassets’ potential risks and benefits.

For example, the Switzerland-based Basel Committee on Banking Supervision is collecting information on banks’ direct and index exposures to cryptoassets. The committee expects to release results in October. Early results suggest that exposure remains “limited,” according to the FSB.

Likewise, the international Committee on Payments and Market Infrastructures is reviewing innovation in settlement and new variants of money using digital tokens. It is exploring “potential legal issues relating to digital currencies.”

The International Organization of Securities Commissions, based in Madrid, created a consultation network on initial coin offerings “through which members discuss their experiences and bring their concerns, including any cross-border issues, to the attention of fellow regulators,” the FSB reported. IOSCO also created an online portal through which its members, including the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission, can access and share information on enforcement and other issues related to cryptoassets and digital threats.

But regulators shouldn’t just talk to each other, the FSB said.

“Regulators may also wish to engage in further dialogue with a wider group of stakeholders, including those in the technology sector that have had limited interaction with financial regulators to date,” the decentralized technology report said. “This should help avoid the emergence of unforeseen complications in the design of decentralised financial technologies at a later stage.”