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보고서 1
Bigtech and financial stability [23-04]
Senior Research Fellow Lee, Hyo Seob / Feb. 06, 2023
As the Fourth Industrial Revolution continues to accelerate, big techs equipped with innovative ICT are increasingly entering the financial services industry. Amid their expansion into banking, insurance, securities and electronic finance sectors, major big techs based in Korea and overseas have been praised for their positive role in offering more convenient, affordable and universal financial services. On the other hand, there are concerns that big techs may neglect their duty of consumer protection and threaten financial stability while rapidly taking up share in the financial market. A case in point is Wirecard, a fast-growing European big tech, which went bankrupt in June 2020. Its bankruptcy caused a massive loss to Wirecard users, which was transmitted to associated financial services firms. This has raised the need to monitor financial risks from big techs’ expansion into the financial sector and to regulate relevant big techs. Korea also has experienced the suspension of Kakao financial services arising from the Pangyo data center fire in October 2022 and the Mergepoint scandal in August 2021. These cases inflicted huge damages on users, thereby leading to the need for regulating large-scale fintechs or big techs. As the market share of Korean and global big techs is growing in the financial services industry, it is likely to compromise the interests of financial consumers and impair financial stability. However, Korea has a lack of research on how to enhance financial stability in preparation for big techs’ penetration into the financial sector.

Global financial supervisory organizations including the Bank for International Settlements (BIS), the Financial Stability Board (FSB) and the International Monetary Fund (IMF) have found that big techs’ entry into finance could offer economic benefits such as improving the convenience of financial consumers, addressing information asymmetries and cutting down costs for searching and transaction. But they also argue that big techs’ data monopolies and network externalities could hurt the interests of financial consumers and pose a threat to financial stability. The organizations have presented decreased welfare of financial consumers resulting from price and product differentiation strategies, mis-selling, unfair business practices and abuse of information as side effects of data monopolies, while pointing out unnecessary concentration within the financial services industry, deteriorating financial soundness and the increase in systematic risks as risks from network externalities. Korea’s big techs could be exposed to such risks. What should be also noted is that they are subject to less strict regulations and have a wider work scope and greater market dominance based on ICT, compared to financial services firms, although they provide essential financial services. This makes Korean big techs more susceptible to financial risks than their foreign counterparts.

In this article, big techs are defined as service providers that qualify for online platform provision, undertaking of essential financial services, and scale and user requirements to analyze financial risks posed by Korea’s big techs. According to analysis results, big techs have lower core financial risks than financial services firms such as market and credit risks, while showing higher operation risks. As for concentration and reputation, big techs exhibit higher risks. But it is hard to say that their risks regarding liquidity, law and system are higher than those of their counterparts in the financial services industry. Considering that big techs see risks related to credit, operation, liquidity, concentration and system increasing at a more rapid pace, compared to financial services firms, it is necessary to thoroughly monitor relevant risks. In addition, this article explores the possibility that increased risks of big techs would endanger other financial institutions, financial markets and infrastructure. Notably, market and credit risks of big techs are less likely to spread to financial institutions, whereas operation risks of big techs could be transmitted. Furthermore, big techs could offer poor brokerage services for non-traditional assets such as real estate P2P lending, brokerage of unlisted stocks and digital assets, which potentially undermine the stability of the financial market. Also, ICT-related disruptions and hacking incidents caused by big techs could disrupt financial infrastructure.
As stated above, Korea’s big techs are experiencing rapid growth of major financial risks while increasingly providing essential financial services. Accordingly, they are likely to destabilize financial institutions, financial markets and infrastructure. To make the financial system more stable, Korea’s authorities should devise specific regulations for big techs. First, big techs offering essential financial services should be subject to regulations applicable to financial services firms in terms of market entry, financial soundness, business practices and consumer protection. For instance, as a way of resolving ambiguity between advertisement and intermediary services, advertisement regulation can apply to continuous information provision involving unidentified products and consumers while strict rules of investment solicitation can be applicable to other intermediary services. Second, major big techs engaging in essential financial services should be designated as financial conglomerates and be subject to more rigorous regulations regarding financial soundness and liquidity. Third, it is necessary to impose the internal control obligation, applicable to financial services firms, on big techs, specify supervisors’ liability according to big tech executives’ roles and liabilities, and establish the incentive system to reinforce internal control. Fourth, preliminary oversight activities should be harmonized with ex-post supervision. In this respect, stress tests should be regularly conducted for each channel disrupting financial institutions, financial markets and infrastructure, and supervisory measures for financial services firms should equally apply to financial services provided by big techs.
보고서 1
Big Tech in Finance and Fair Competition [23-02]
Senior Research Fellow Lee, Seokhoon and others / Jan. 27, 2023
As the presence of large online platform companies called big tech grows in the provision of financial services, fair competition related to big techs is emerging as a major issue in the financial services industry. A recent BIS report predicts that big techs can eventually change the current market structure centered on financial services firms. The problem is that big techs can take the lead in the financial platform due to an inadequately prepared regulations rather than their potential technology and innovation capabilities. In this regard, it is necessary to secure fair competition related to big techs through proper regulations, and this study examines this issue focusing on the preparation of an appropriate regulatory system for big-techs’ anti-competitive behavior and the design of open banking that can promote fair competition.

Big techs have significant market power in their core platform. They can reduce costs by building an ecosystem consisting of services from multiple platforms on one platform, and also enjoy network effects. Big techs can also induce consumers to choose their own financial services through the design of the platform or ranking in search results, and can bundle subscription or use of a specific platform with financial products. Big techs can take advantage of this advantage to eventually limit competition by driving competitors out of the market or preventing the entry of potential competitors. In addition, big techs can utilize vast amounts of consumer data in the platform competition in the retail finance sector, and the gap in data held between big tech and competing platforms can lead to differences in service quality and undermine the competitive environment in the market. In response to this problem, many countries around the world are preparing systems for data portability and privacy. In particular, open banking, which gives financial consumers data portability to support fintechs’ entry into financial services sector, is being adopted in many countries.

Major countries such as the EU, the US, and the UK are preparing separate ex-ante regulations specifically focusing on big techs. Regulations in these countries include provisions to secure market competition, such as designation of regulated big tech, restrictions on data use, duty to provide data portability and interoperability, and ex-ante ban on corporate takeovers, and to prevent abuse of market dominance, such as prohibition of preferential treatment for own products.

Although open banking was introduced for the purpose of facilitating the advancement of fintechs into finance services sector, not only fintechs but also big techs benefit from the open banking, so fair competition of big techs related to open banking is also being discussed as an important issue.

In Korea, Naver and Kakao do not fall under big tech, but they are at the level that requires close monitoring according to the standards stipulated by Digital Markets Act (DMA) of EU. Therefore it is necessary to pay attention to the issue of fair competition related to their financial services business. As for the direction of the financial regulatory policy for fair competition, first, it is necessary to prepare an institutional device for mutual cooperation and coordination between the financial authority and the competition authority, and the financial authority need to respond to big techs’ anti-competitive business practices in order to protect financial consumers. Second, it is necessary to positively review to oblige big techs to share data with  financial services firms subject to financial consumers’ consent.
보고서 1
Foreign Exchange Business of Korea’s Securities Firms: Current State and Implications [23-01]
Senior Research Fellow JANG, GEUNHYUK and others / Jan. 02, 2023
This report intends to explore how Korea’s securities firms currently conduct foreign exchange business and present improvements and challenges for reinforcing their FX business capability. Korean securities firms’ incompetence in the FX business may stem from a lack of their effort, but it is also attributable to limitations in the Foreign Exchange Transactions Act. Securities firms are restricted from securing foreign currency funds and are not permitted to remit or receive foreign currency. Foreign exchange trading (currency exchange) by securities firms is only allowed for investment purposes and opening an FX account is also limited.

This situation requires the Korean government to depart from the FX bank-centric concept deeply rooted in the Foreign Exchange Transactions Act and to encourage non-banking financial institutions such as securities firms to improve their FX business capabilities. Notably, when securities firms carry out typical FX services specified by the Financial Investment Services and Capital Markets Act, their FX business practices, such as currency exchange, account settlement and foreign currency remittance, are interconnected with each other. Accordingly, it should be noted that partial deregulation hardly helps non-banking institutions to comprehensively handle business practices. This implies sweeping deregulation will play a critical role in strengthening the capability of FX and global finance business across the financial services industry by enhancing the external soundness of non-banking financial institutions. Relaxed regulations are also crucial in increasing convenience in financial investment transactions and improving efficiency in financial intermediary services by reducing trading costs.     

In this respect, Korean securities firms need to exert diversified and proactive efforts as follows. First, they should establish a comprehensive FX service system for cross-border investments including investment brokerage, foreign currency remittance and settlement, entrustment and custody of foreign currency securities, and FX hedging. Second, FX businesses of securities firms should evolve into a foreign currency transaction platform through an electronic business system to meet the growing demand for digital finance. Third, it is also necessary to overhaul the internal FX management system regarding monitoring and risk control.
보고서 1
Entry into the Crypto Assets Business by Global Financial Services Firms [22-17]
Senior Research Fellow Choi, Soon Young / Sep. 13, 2022
Global financial services firms are entering into the crypto assets business on multiple fronts. This stands in contrast to the previously negative stance held by these same firms regarding crypto assets. Part of this shift in attitude comes from regulatory changes enabling entry into the business of crypto assets, but more importantly, it is due to the growing demand for crypto assets investing by the core clients of global financial firms, that is high net worth and institutional investors.

Interest in crypto assets investing especially heightened in 2021 as prices of major crypto assets sky-rocketed. The market capitalization of crypto assets reached 3 trillion dollars in 2021, on par with the global alternative investments market, such as private equity and hedge funds. With growing demand by high net worth and institutional investors, entry into the crypto assets space became a necessity for global financial services firms in order to retain and expand their core client base. Many financial services firms are adding crypto assets as part of their main business, such as wealth management, asset management, trading and custody services. In addition, blockchain technology, which underpins crypto assets, is being adopted more and more by financial services firms to improve the efficiency of their financial infrastructure, such as payment and settlement systems. 

Despite the broad entry into the crypto assets related business by financial services firms, the approach is still quite cautious as uncertainties surrounding the crypto assets market and related regulations are still high. In addition, the ‘crypto winter’, brought on by the Terra-Luna crisis in 2022, is likely to further slow the speed of crypto assets business of global financial firms, but not enough to reverse the momentum that has already been established. In the case of Korea, though a clear regulatory framework for crypto assets is still pending, local financial services firms are showing great interest and already entering into some related areas of business, particularly crypto assets custody services. In addition, Korean financial services firms are actively entering into partnerships and joint ventures with fintechs specializing in crypto assets and blockchain technology. Although the crypto assets market is in the early stages of development, the environment is changing rapidly. Korea’s financial services firms need to closely monitor the market development and develop appropriate business strategies for crypto assets.