Fintech revolution: DLT technology takes centre stage with a prominent role for the Bank of Italy in the EU and beyond

DLT technology was the star of the 29° Assiom-Forex Congress seminar on the role of central banks between market infrastructure innovation and supporting the digital development of the payments and financial industry.

It is always exciting to enter the reality that the Fintech revolution has created, generating a global transformation of traditional finance and a shift in focus towards digital solutions to manage financial flows. 

Indeed, in the face of significant numbers: – $86 trl$ of global GDP, between debt and wealth, $253 trl$ of debt and loans, $360 trl$ of household wealth, $200 trl$ between equities and bonds, $280 trl$ of real estate – Fintech solutions undoubtedly enable efficient management of the revenues generated by the resulting transactions.

And against this, the financial ecosystem on which fintech expresses its full potential sees total commission returns of over $16 trillion across retail banking, global payments, FX transactions, insurance premiums, remittances and wealth management. All this is thanks to the intensive use of artificial intelligence and advanced technologies that have transformed fintech from a wild west into a flourishing and boundless prairie of innovation available to all.

Macro trends in the Fintech industry

The macro trends emanating from the Fintech industry and affecting international finance are microfinance and crowdfunding, payments and remittances, Robo-advisors/algotrading (and HFT, High-Frequency Trading) and then DLT technology, which stands out in the realm of blockchain and crypto assets. It was the distributed ledger technology (DLT) known as DLT that was the focus of the seminar at the 29th ASSIOM FOREX Congress devoted precisely to: “Prospects for DLT: the role of central banks between the innovation of market infrastructures and support for the digital development of the payments and financial industry” in which the Bank of Italy offered an exciting picture of state of the art in the approach of our Central Bank towards the markets, the authorities involved and savers, also considering the new economic opportunities created for greater inclusion: not only of new market players but also and above all of the non-banked subjects.

International financial markets are increasingly linked to blockchain success.

It is increasingly challenging to remember finance before the advent of fintech, such as the magnitude of the changes that have accelerated in the post-pandemic phase, not least because 14 years have passed since the words Bitcoin and Blockchain entered our vocabulary. To date, over 550,000 Italian households are involved in crypto-assets. Unfortunately, savers and families involved in the related ecosystem often need more awareness of risks and safeguards.

The reality of the international financial markets increasingly linked to the success of blockchain sees the breadth and speed of affirmation of the DeFI, or decentralised finance deriving in particular from the profound novelty that characterises DLT, between new services, including crypto-assets, and new actors, different from the traditional ones.

Last June 2022, the DLT Regime Pilot Regulation was published in the Official Journal, in force as of 23 March, which is part of the European Commission’s package of measures relating to MICAR and DORA, respectively: the Regulation for digital markets in crypto-assets and the Act on Digital Operational Resilience.

The Bank of Italy has thus placed DLT at the heart of the recent call for proposals of the Milano Hub, to which no less than 81 parties with 56 projects characterised an internationally participatory response, signalling the centrality of the Italian initiative in the EU. 

On the other hand, technologies based on distributed ledgers have assumed a fundamental role in the financial system’s stability and customer protection. Thanks also to the extension of its effects on three strongly interconnected dimensions such as new technologies, new participants and tokens, to which correspond levels of risk that must be monitored and regulated or at least supervised in the most appropriate and timely manner.

Is a digital euro possible?

The seminar discussed the digital euro and the evolution that its realisation could impart to the development of the technological infrastructure of the markets in the perspective of the digital advancement of the payments and financial industry; the success of this path requires a regulatory framework that is able, among other things, to create areas of compatibility between centralised and decentralised finance, in a European context where the EU itself is a leader in digital regulation. But this ‘digital challenge’ also requires the Authorities to look beyond the ordinary rules because it extends to the platform economy, it exploits public-private partnership logic; it is a path that requires effective channels of dialogue with the market to understand the needs of operators and customers to take them as a benchmark for institutional action.

What seemed very clear to us and how the Bank of Italy is increasing its efforts and commitment to monitoring the market in liaison with the other Authorities, ready to intervene even in advance of the definition of the European regulatory framework, as we have heard through the publication of specific indications for users, intermediaries and suppliers of technological solutions in the field of crypto-assets. There is a clear focus on the increasing integration of supervisory profiles on financial intermediaries, providers of critical functions, and oversight of the smooth functioning of the payment system related to crypto-assets. But not only that, it will use all other tools to intercept and prevent potential threats to user protection and system stability.

We must, however, be ready to intercept any new forms of risk promptly without renouncing the benefits that the digitisation of finance, together with that of society itself, can bring to individuals, households and businesses. To this end, it is necessary to strengthen the existing ‘dialogue’ between the market and the authorities by trying to preserve the essential openness to innovation and respect for the stringent timeframes imposed by international competition.

Bank of Italy in the front row

Our country and its central bank can play a traditional role in this scenario thanks to its skills, talents and many excellences. And the forthcoming meetings within the International Monetary Fund for the Financial Stability Board see the Bank of Italy as the chosen and most authoritative interlocutor for the development of valuable recommendations to strengthen the possibility of finally arriving, even in the world of global stablecoins, at a globally shared and accepted regulation so that safeguards are effectively adequate and ‘future-proof’. The challenge for which it will be necessary to work on two unavoidable levels: an update of the ordinary rules without neglecting the overall dimension of the Fintech phenomenon and anticipating its development by leading it towards tracks of security and efficiency.

On the other hand, as early as last June, at the same time as the publication of the DLT Regulation, the Bank of Italy had alerted the Authorities involved because if European regulation is a solid and very advanced cornerstone compared to other much vaguer international legislation, a two-dimensional approach is needed in the new decentralised finance, because the traditional system may not grasp the complexity of the new digital markets based on DLT.

The digital euro can lead to the developing of the technological infrastructure of financial markets.

Reassuring market operators, the Bank of Italy representatives who took the floor: Dr Piero Cipollone, Member of the Executive Board and Deputy Director General of the Bank of Italy and Dr Massimo Doria, Deputy Director General – Directorate General for Currency Circulation and Retail Payments, Head of Banca d’Italia’s Innovation Center ‘Milano Hub’, concluded as follows:

“The realisation of a digital euro, in its wholesale dimension, may give impetus to the further development of the technological infrastructure that underpins the functioning of financial markets. The Bank of Italy is significantly committed to the realisation of this path also through the impulse to appropriate forms of regulation of the new digital markets, which look, among other things, at the need to intercept the technological figure that characterises the unique digital ecosystems. Dialogue with the market is a necessary complement to this action to translate abstract principles and rules into concrete terms, fostering, as an ultimate goal, the emergence of services and products that are consistent with the needs of individuals, families, and enterprises”.

About the author, Claudia Segre

As a financial expert, author, speaker, and the president of Global Thinking Foundation, Claudia Segre believes the only way to build a brighter, more prosperous future is to invest in the financial education of all women and girls.

She uses her platform to fight economic violence, accelerate financial inclusion for women, support female entrepreneurs, and promote the role of fintech in closing the gender gap.

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