In a recent open letter from the president of the Financial Stability Board (FSB) of the G20, Klaas Knot, it is reiterated that they will continue to closely monitor the implications of digital innovations on financial stability: among these, crypto markets, tokenization, and artificial intelligence (AI) are specifically mentioned.
The FSB is the G20 Financial Stability Board whose purpose is to monitor the global financial system.
Klaas Knot’s letter: G20 focus on crypto, tokenization, and AI
The open letter from the FSB President is addressed to the G20 finance ministers and respective central bank governors.
Knot states that the FSB has developed a global work plan for 2024 that incorporates the priorities of the Brazilian presidency of the G20.
The main elements of the plan consist in identifying and addressing the vulnerabilities of the system
financial, with particular attention to banking turbulences, such as those in March 2023, to
digitization and climate change, as well as improving the efficiency of cross-border payments.
The goal of the council would be to achieve tangible results already during the current Brazilian presidency of the G20.
Knot believes that the prospects for financial stability remain challenging, due to the gap between modest economic growth and high interest rates, and geopolitical uncertainty. He also warns that global financial conditions are showing signs of easing.
After citing the banking turmoil of March 2023 as an example of significant systemic banking stress, Knot argues that the international framework, however, appears to be solid.
However, it highlights some sectors that deserve further attention.
Digital Innovation
An entire chapter of the letter is dedicated to digital innovation.
Knot indeed emphasizes how digitalization is radically changing the way finance works, and the way the financial sector is organized.
The goal is to take advantage of the opportunities of digital innovation while at the same time containing the associated risks, and in this regard he writes:
“We will continue to closely monitor the implications of digital innovations on financial stability, including cryptocurrency markets, tokenization, and artificial intelligence (AI)”.
Therefore, it only mentions these three innovative sectors among the priorities, in the context of digitalization, making it clear how the G20 financial council is focusing on the new crypto markets and AI.
Knot also promises to finance ministers and central bank governors that during 2024 they will provide reports on the financial stability implications of asset tokenization and artificial intelligence.
The goal in this sense is the global supervision of activity in cryptocurrency markets and global agreements on stablecoins, and to advance the implementation of a coordinated and comprehensive policy and regulatory framework.
It also adds that the acceleration of digitalization in all sectors of finance has improved efficiency and increased the interconnection of the global financial system, thus increasing the possibility that a computer or operational incident even at a single financial institution could have repercussions beyond borders and sectors.
Cross-border payments
Regarding cross-border payments, it is revealed that last year the G20 roadmap has moved to the next phase of actions and practical improvements.
The goal is to make cross-border payments faster, cheaper, more transparent and
inclusive, while maintaining the integrity and security of the system, and Knot in this regard states that they have strengthened collaboration between the public and private sectors, particularly regarding anti-money laundering and combating the financing of terrorism (AML/CFT), as well as data protection.
In the future, they want to further increase the efficiency of payment systems and strengthen their integrity and security.
Knot reveals that the G20 goals are achievable by 2027, for those who make and receive cross-border payments.
It is precisely this last point, namely the timing, that reveals how much slower the evolution in the traditional financial sector proceeds compared to the new sectors related to cryptocurrencies, since in three years in the crypto sector anything and everything can happen.
G20: Financial stability and the impact of crypto, AI, and tokenization
Knot concludes the letter once again highlighting the priority of financial stability, with the goal of working towards a more sustainable and digitized financial system.
Probably this is why the crypto markets worry the G20 financial council so much.
The same G20 (Group of 20) is nothing more than a forum of leaders, finance ministers, and central bank governors of the countries of the European Union, the African Union, and 19 other of the world’s most industrialized countries, including the USA, China, Japan, Russia, and Great Britain.
The revolution of cryptocurrencies really questions the current system, namely its stability, otherwise it wouldn’t be a revolution.
So what worries the major countries of the world is precisely the questioning of their financial system, which they would like to be stable and therefore solid. They are willing to accept that it can be innovated, or at least evolve a little, but they are not willing to accept that it can be overturned or surpassed.
However, on one hand, the crypto market does not seem to be able to challenge the traditional financial system yet, on the other hand, in some specific areas it seems to be able to surpass it, and this represents a big challenge for the G20 that they would not want to lose. But the slowness with which the traditional financial system evolves, compared to the speed of the crypto markets, suggests that this could be a challenge already lost.