Robert Fay is the managing director of digital economy at the Centre for International Governance Innovation. David Dodge is a former governor of the Bank of Canada and is senior adviser at Bennett Jones LLP.
Around the world financial systems are digitizing to provide faster, cheaper and more secure and comprehensive services to households and businesses.
Meanwhile, cryptocurrencies, stablecoins and central bank digital currencies are attracting substantial public attention. They are reflections of the continuing digitalization of the global economy, driven by innovation and competition, that is creating new opportunities worldwide.
The potential benefits are many.
Digital currencies and payments can speed up and lower transaction costs, both domestically and especially across borders, while bolstering security. Financial technology (fintech) is expanding the range of financial services available in the marketplace.
Open banking allows consumers and small businesses to securely and efficiently transfer their financial data among financial institutions and accredited third-party service providers. It can stimulate competition, facilitate access, and expand the range of services available to households and businesses.
And central bank digital currencies can spur innovation and boost financial inclusion, ensuring all have access to digital services.
But fully harnessing the benefits of digitalization will require a sound and coherent framework that ensures collaboration between the public and private sectors.
We recently held a workshop to hear the opinions of international and Canadian experts in this domain. As we explain in more detail in a new report, we argue there are three essential steps that Canada must take.
First, Canadian governments and service providers need to work together to deliver what has already been placed on the agenda; namely, a modernized payments system and secure data transfer to facilitate open banking.
Second, Canada requires a thoroughly updated legislative framework for privacy and data management, and the adoption of industry standards for digital identification. Governments, the central bank, and regulators, working with market participants, must adapt existing policy frameworks to accommodate and harness change in a manner that supports a financial system that is efficient, competitive, stable, secure, inclusive, and one that instills trust. It is essential to ensure data security and privacy and enable consumers to have greater control over their financial data in ways that promote sound competition.
Third, regulatory gaps must be remedied. Existing regulatory frameworks are ill-suited to deal with new and emerging market structures.
Federal leadership here is crucial.
To deliver on these three essential steps, the federal government must exert strong leadership in mobilizing the necessary collective effort; making policy and market choices will require a careful balancing of objectives. Win-win solutions must be pursued, but there will be trade-offs at the margins – for example, between efficiency and stability, or between compliance and privacy.
Risks must be taken.
The federal government cannot do this alone, for both jurisdictional and practical reasons. Collaboration is required. A digital financial marketplace requires that the roles of the public and private sectors complement each other. A collective effort is essential to design, build, operate and oversee the financial system, to realize the dividends of innovation and to serve the public interest.
Connecting all the moving parts entails public-private sector collaboration, the active participation of the provinces and territories, and intergovernmental efforts to promote the harmonization of rules and well-functioning markets.
Interoperability will be key to ensuring coherence, competition and the ability of newcomers to enter the market. Different systems that may be developed domestically must work with each other and with other systems internationally.
International collaboration, particularly in the development of global standards and trading platforms, is also essential. Canada must be in step with global innovation to make its own decisions in shaping the future of our financial system.
Canada’s efforts need to be accelerated.
There is a window of opportunity to learn from early experiences of global leaders, for example the United Kingdom and Australia, on open banking.
Moreover, too slow or too timid a course will impede the development of our vibrant fintech ecosystem and lessen the pressure and incentive for innovation by incumbents. This would allow foreign competitors and Big Tech to take a stronger hold, without appropriate safeguards for Canadian consumers.
If progress does not accelerate, this country will fall behind global competitors, and our institutions will be disconnected from the aspirations and ways of transacting that younger, tech-enabled generations now take as given.
Change is disruptive and can be difficult. But going slow is not a strategy. The cost to Canadians of missed opportunity is just too high.
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