The Era of Digital Financial Innovation: Lessons from Economic History on Regulation

March 12, 2020

While digital finance innovation has the potential to provide businesses and consumers with lower costs and a greater range of financial services, it has raised questions regarding the risks it poses to consumers, individual financial institutions, the financial system and the economy at large – and how Canadian financial regulators should respond to those risks.

This Commentary focuses on the major macro-level risks that might arise, and sets out to answer three questions. What do we know from economic history about financial innovation in general and banking crises? What are some key areas arising from current and future digital financial innovation that regulators need to examine? And what are the implications for actions by Canadian regulators?

At the micro level, regulators will have to weigh closely the costs of new regulations against the benefits of financial innovations. At the macro level, however, the steps suggested in this Commentary should have little or no effect on the vast majority of digital financial innovations that are underway or contemplated in the near future. Therefore, there would be no real trade-off between the increased stability coming from these actions and the increased competition, efficiency and range of financial services that should come from digital financial innovation.