[Viewpoint] Why a Trojan Horse in the Digital Finance Innovation Plan?

Professor Kim Hong-beom, Department of Economics, Gyeongsang National University

Recently, the government (Financial Services Commission) announced the ‘Comprehensive Innovation Plan for Digital Finance.’ The core idea is to foster the industry under the banner of financial digitalization, build infrastructure, and strengthen security and consumer protection. The Financial Services Commission broadly presented development plans for digital finance and is pushing for amendments to the ‘Electronic Financial Transactions Act’ to this end. However, some of the policies included are cause for concern. What is the problem?

The Bank of Korea has long fulfilled its role as the “operator, supervisor, and promoter of development” of the payment and settlement system. The problem arose when the Financial Services Commission quietly added a policy to the innovation list that is clearly in conflict with this role of the Bank of Korea. In short, the policy is to designate the Korea Financial Telecommunications & Clearings Institute (KFTC) as a digital payment transaction clearinghouse subject to the Financial Services Commission’s regulatory supervision, and to designate the current open banking joint business processing system of the KFTC as the open banking payment settlement system for management. This reveals the Financial Services Commission’s determination to legislate additional regulations even at the risk of undermining the current monitoring system of the KFTC, which is centered on the Bank of Korea.

However, there is hardly any practical necessity or rational basis for this, and it is difficult to find similar cases abroad. The stated reasons of the Financial Services Commission?“institutionalizing digital payment transaction clearing” and “legalizing open banking”?are merely a fa?ade cleverly disguised with technical terms to expand its jurisdiction. It is nothing but a Trojan horse. Like the Trojan horse in Greek mythology, which was a gift hiding an elite force that conquered ancient Troy.

Early central banks in Europe were ‘government banks’ that monopolized the authority to issue banknotes in exchange for providing financial support to monarchs. Thanks to this, these banks gained high creditworthiness, attracting surplus funds from other commercial banks, and by the late 18th century, the ‘government bank’ evolved into a ‘bank of banks’ that settled interbank loans. This is the origin of the payment and settlement systems centered on central banks in various countries today.

Central banks are inherently financial stability authorities optimized for supervising payment and settlement systems and ensuring settlement finality. The experience of the U.S. Federal Reserve System in the 1930s clearly demonstrates this. Due to the Great Depression, more than 5,000 banks failed in the U.S. by 1932, and bank runs continued for a month into early March 1933. In response, President Roosevelt took strong measures, including declaring a seven-day Bank Holiday just two days after his inauguration and enacting the Emergency Banking Act of 1933. On March 12, 1933, the day before banks reopened, Roosevelt’s famous fireside chat began with the message that “bank deposits are safer than cash kept at home.” Fortunately, when banks reopened, funds were redeposited en masse, and the previously halted payment and settlement system operations quickly normalized. According to Professor W. Silber of New York University, the Emergency Banking Act was effective because the Federal Reserve’s commitment to unlimited dollar supply to reopened banks was perceived as de facto 100% deposit insurance, decisively restoring public trust. After all, who is the Federal Reserve but the central bank with the authority to issue legal tender without limit.

Returning to the problematic ‘policy,’ in Korea, under the Bank of Korea Act and related laws, the Bank of Korea supervises the payment and settlement system of the KFTC and guarantees settlement finality. However, in 2014, the International Monetary Fund (IMF) in its Financial Sector Assessment Program (FSAP) Korea report diagnosed that while the Financial Services Commission’s regulatory authority over the payment and settlement system was “adequate,” the Bank of Korea’s supervisory authority was “not effective.” The IMF recommended amending the Bank of Korea Act to stipulate “the right to obtain accurate information,” “the right to supervise the implementation of the Bank of Korea’s opinions and conclusions on financial market infrastructure,” and “the authority to impose sanctions.” Although bills to amend the Bank of Korea Act were introduced in the 19th and 20th National Assemblies, discussions did not proceed at all due to government opposition.

Setting aside the long history of central banks and looking only at recent context, it is clear that the Financial Services Commission’s current policy is a case of putting the cart before the horse. The Financial Services Commission should pursue the digital finance innovation plan with a sound vision for the future. Is it appropriate to stir up a storm with an unexpected policy amid the chaotic times caused by the novel coronavirus disease (COVID-19)?

Kim Hong-beom, Professor of Economics, Gyeongsang National University

This content was produced with the assistance of AI translation services.