Digital Finance Blurs Regulatory Lines, Says RBI Deputy Governor SC Murmu

The RBI DG addressing the 3rd Annual Global Conference of the College of Supervisors, Reserve Bank of India said the digitalisation is also blurring traditional regulatory boundaries.

"Many of the financial activities are now being unbundled and delivered through non-financial platforms and arrangements involving both regulated and un-regulated entities, that do not fit neatly within the existing regulatory scope of RBI. Oversight of such activities is often fragmented among multiple financial and non-financial regulators with no single authority having a comprehensive, end-to-end view of the entire activity chain and risk transmission pathways," he said.

"Hence, regulatory actions taken within individual mandates may be sound in isolation yet collectively may not fully address such cross-cutting risks."

He further said the fragmentation across jurisdictions further complicates the oversight of digital financial activity.

Difference in legal frameworks, institutional mandates, and domestic policy priorities can lead to divergent regulatory approaches which may create scope for regulatory arbitrage and uneven risk management, thereby underscoring the importance of effective cross-border co-operation, he added.

Addressing financial stability concerns, Murmu flagged emerging systemic risks from increased reliance on cloud services, algorithms, and third-party technology providers. He stressed that accountability for technological outcomes must remain firmly with regulated entities, even when operations are outsourced or automated.

"Digital innovations like usage of cloud and decentralised finance introduce new and potentially systemic risks, owing to increased interconnectedness with unregulated entities like technology providers, single points of failure, opacity of underlying arrangements and diluted accountability," he said.

As systemic fragility can emerge without any single entity appearing vulnerable, regulators are required to look beyond entity-level soundness to systemic effects of concentration, limited substitutability, and the potential for disruption when widely relied-upon services are impaired, he added.

- ANI