The growing application of digital technology across the economy contributes to greater financial inclusiveness. The term refers to wider access to new financial instruments, such as crypto transactions and digital assets. Russia ranked fifth by the number of users of crypto instruments as far back as 2016, even though the country provided no clear legal status or regulatory framework for them. In 2021, Russia rose to second place in the global ranking in terms of the share of the population owning crypto assets. In 2022, the number of crypto wallets owned by Russians exceeded 10 million. We asked Doctor of Economics, Professor Marina Abramova, Head of the Banking and Monetary Regulation Department at the Government’s Financial University about the opportunities and challenges posed by financial inclusion in the context of the financial system’s transformation. The conversation took place during the recent conference, Transformation of Financial Markets and Financial Systems within the Digital Economy.
Maximize access to financial services
– Could you tell us more about financial inclusion? How is it different from accessibility of financial products?
– Financial inclusion is a wider notion than what the Bank of Russia explains as accessibility of basic financial products. Financial inclusion is usually understood as the process of effective inclusion of market players – primarily private users, as well as small and medium-sized businesses – in a wide range of transactions with financial products and services. This should be facilitated by multiple “access points,” with financial regulators making efforts to keep this network growing. This ensures wider availability of online services, which is evidenced by the growth in non-cash payments, the development of online insurance, and digital mortgages. But it is also difficult to imagine financial inclusion outside the context of digital financial services. With regard to the Russian market, there are the Faster Payments System, the financial services marketplace, and the Unified Biometric System. Digital skills are another important component of financial inclusion, as they are required to use remote channels to access financial services. This is the cognitive aspect of financial inclusion.
– Why is financial inclusion important for the economy?
– Financial inclusion ensures that additional resources are attracted for their later use by various market institutes, for instance, in loan and payment services. It is also important in relation to reducing poverty. Financial inclusion also facilitates including market players in the formal economy and avoiding their transition to the shadow economy. The above-mentioned financial resources are also used in streamlining financial flows in the state’s economic interests to reach sustainable development goals and structural transformation of the financial system and national economy.
– What opportunities are offered by financial inclusion related to the transformation of the monetary and payment systems?
– First of all, it is an entire range of opportunities related to creating, and most importantly, providing users with access to new financial instruments, first of all, fiat digital currencies, in our case to the digital ruble. It is especially important that it can help create a new financial system that is able to provide economic stability amid the growing risks. The use of central bank digital currencies, given the reliability of the technology intensive payment infrastructure, can become a catalyst of positive changes. It is important to note the ability of digital currencies to meet the growing demand of citizens, businesses, financial institutions and even the state in monetary settlements. They also open new channels of the distribution of financial products, expand the horizons of monetary settlements with the use of digital technology, and help achieving leadership in the new economy.
To regulate, or to ban?
– How does financial inclusion relate to central bank digital currencies?
– The concept of a central bank digital currency provides, among other things, the opportunity to promptly determine threats to stability that provoke system-wide risks on the financial market (the main threat to financial stability). It will also allow for reducing the risks of foreign currency predominance.
– What are the challenges related to the increased number of transactions with digital financial instruments?
– If we speak about digital financial instruments, the challenge for the traditional market is that banks could lose their monopoly as intermediaries in settlements, which might lead to reducing the efficiency of monetary policy. There could be failures in money turnover, as well as the increased money supply. It is also noteworthy that people who are actively engaged in financial transactions lack knowledge of financial crises; their inconscient investing in high-risk products, and a risk to become a scheme or fraud victim also play a role.
– What are the risks and opportunities as regards crypto tools?
– Speaking of risks, in case of strict prohibitions, the market’s turnover may divert to the informal economy, with crypto assets transactions and income possibly shifting to foreign jurisdictions. The risks also include the loss of IT personnel and promising entrepreneurs due to a possible technology ban, as well as decreasing financial development, not to mention Russia’s reduced influence in international financial regulation institutions.
Prudential regulation of the sector will minimize unauthorized use of cryptocurrency, protect citizens from fraud and financial loss, and contribute to the development of new forms of investment and entrepreneurship. We should also note a prospect for occupying a niche in the global digital space and having impact on regulations for global digital capital flow.
Financial literacy and trusted execution environment
– Many of the mentioned risks often result from insufficient financial literacy. Is it a challenge as regards financial inclusion?
– Indeed, users may not be fully aware of the risks associated with digital financial products, including due to insufficient information on their characteristics. This leads to clients facing a risk of being mis-sold financial products or services. Unfortunately, most users who start vigorous activity in the financial market lack crisis management experience – which results in both underestimating and overestimating risks and causes panic. Also, people make attempts to invest in high-risk financial products and may become victims of fraud or fraudulent schemes. In addition, digitalization of the financial market facilitates hasty decision-making, leading to substantial risks.
– Does digitalization of the financial market serve as a factor of financial stability?
– On the one hand, digital transformation of financial services (and aspects of their provision) increases their availability for small and medium-sized businesses, as well as for citizens, and contributes to greater financial inclusiveness. However, we should note the previously developed and existing wary attitude towards digital finance which may lead to reduced quality of life, given the insufficient financial awareness and literacy.
– Are there ways to minimize these risks?
– We should develop a trusted digital space and have confidence in reliability of all components of digital interaction, from users and regulators to technologies and processes. Another important aspect involves efficient models for managing economic and technological processes, as well as big data. In this case, nearly unlimited arrays of information will not only become available to economic agents but will also allow for making economic decisions in the conditions of formal economy, without switching to the informal economy, provided there are no physical boundaries in the information space.
By Olga Blinova