The pace at which human civilization develops is directly linked to cross-border free trade. Trade is the exchange of money and goods. Money is called a payment instrument due to its versatility to be exchanged with any good. Human society always strives to make payment instruments easier, faster, more reliable, and accessible to use. Therefore, the financial sector is usually the first to benefit from new technological breakthroughs.
How are the new technologies transforming payment instruments? Why do they create both challenges and opportunities for Mongolians?
Eliminating boundaries of trust
New technologies bridge the gap between people. Printing machines eliminated the knowledge gap in the 15th century, whereas steam locomotives affected power discrepancies in the 18th century, and the Internet made it possible to reach out and communicate over vast distances and time constraints in the 1990s. After emerging at the turn of the century, smartphones now allow one to make trade anywhere, anytime. In addition to making payments using our mobile phones, we can take loans and transfer money nowadays. The Fintech sector, a combination of finance and technology, is booming, and banking services are now accessible to even the poorest of the global population.
Following the 2008 financial crisis, the next revolution took place. A new program called blockchain was developed, allowing millions of computers to communicate with each other, group data (block), and create the next batch from the previous one through duplication (chain) while making the data immutable.
This program records the movement of assets (ledger). Once registered, there’s no undoing, and it is encrypted with many layers, which makes it secure. Blockchain technology eliminates the boundaries of trust since people now trade their tangible and intangible (virtual) assets directly with each other without any intermediaries (government, notaries, shops, bank accounts, credit cards, etc.).
Satoshi Nakamoto created the first cryptocurrency (digital currency secured by cryptography) – bitcoin in 2009. It was followed by a surging number of cryptocurrencies worldwide, reaching a total number of 1600 until now. Ardcoin, Dogecoin, etc., are some examples.
Besides serving as a payment instrument like digital money, cryptocurrencies have become financial investment tools that are traded freely and highly profitable due to the spread, just like stocks and bonds. An individual buying a dollar worth of bitcoin in its initial days would now have 60 thousand dollars. However, stock prices constantly fluctuate.
Attempts to regulate
Since there is no intermediary (nobody responsible or monitoring) and transactions occur between individuals, the risk of money laundering crimes is high. Therefore, international organizations investigating financial crimes have already started advising governments to regulate this new trend.
In addition, the transfer of tangible and intangible assets requires protection from potential data loss, as all personal information is stored. Therefore, each country has enacted laws and regulations governing the activities of intangible (virtual) asset service providers. Its regulation is not an easy task, which no country has managed to fully control at the moment and is impossible to restrict completely.
Thanks to the relatively fast-growing telecommunication sector in Mongolia, such a need arose 7-8 years ago. Digital currencies are still emerging in Mongolia. Currently, six fintech companies, including Mobifinance NBFI LLC (Monpay, formerly Candy), Super App Wallet LLC, Ard Credit NBFI LLC (ArdCash), MPSC NBFI LLC, Invescore Wallet NBFI LLC (Pocket), and High Payment Solutions LLC, are authorized by the Bank of Mongolia to issue digital currency equal to Mongolian tugriks.
Around 20 companies provide financial services on mobile phones, and some of them have formed a collective Fintech Association, seeking to create a highly efficient ecosystem.
The regulations usually lag behind technological progress. The Financial Regulatory Commission and the Bank of Mongolia have only recently been authorized by law to issue and revoke licenses for providing trading, transaction, and payment services since non-bank participants entered the scene. Even more recent developments are, 1) law on virtual assets (here) drafted by the Bank of Mongolia, and 2) the approval of the Regulatory Sandbox framework by the Financial Stability Board, which provides an opportunity to introduce and experiment with new fintech products and services on the market. The first regulatory framework is to be submitted to the Parliament soon, while the regulatory sandbox is valid for one year and can be extended once.
There are many issues to be resolved in the Mongolian fintech sector. Firstly, e-signatures and smart contracts need to be legalized to save time for businesses and prevent the hassle for consumers. There is also a need to establish a centralized database and infrastructure for fintech companies to reduce non-performing loans and improve public financial discipline and accountability. In China, for example, it is now almost impossible to make payments anywhere without Ali Pay (2013) or Wechat pay (2013), which benefited from the support of the government and the exemption from fees.
Hindrances
The current rules and regulations in the fintech sector are, in reality, hindering the activities of service providers and leading to customers experiencing dissatisfaction and inconvenience. For example:
- Regarding digital currency: The ‘Law on the National Payment System’ (in effect since early 2018) opens the possibilities for non-bank organizations to provide e-payment services. The Bank of Mongolia has formulated the framework to implement the law. However, this procedure puts strict limits on the operation, such as a maximum of one million tugriks for each transaction, no more than three million tugriks per day, and no more than 50 million tugriks in a customer’s account. In addition, customers who have not signed a contract or are registered are not allowed to make transactions exceeding 20,000 tugriks per day. The maximum amount of money allowed in their account is 100,000 tugriks. This strange limitation is not in sync with the trends and has seriously hampered business operations. Weren’t the officials claiming they would make policies for a cashless society and encourage contactless payments to fight the pandemic? This arrangement can be likened to building a ten-lane road and then allowing vehicles on only one lane, blocking the traffic. When consumers complain, they respond that the digital money must be kept in small quantities. In order to expand, the service providers need permission from the bank, which blocks free-market competition. The management of the Bank of Mongolia is not aware of this “regulation”.
- The state has not figured out a way to regulate virtual assets yet. They are resorting to their go-to option of blocking and hindering. They are pursuing a policy of separating non-physical assets based on blockchains, such as bonus points, tokens, and coins, from digital money and, are excluding them from their list of responsibilities. Moreover, the requirement to have separate applications for tangible and intangible services makes it inconvenient for a customer who has already used a single application for both. A noteworthy example is Ard Coin being separated from the Ard application and made accessible on the website. All these measures seem like swimming against the current.
- Sandboxing frameworks will provide an opportunity to test innovative products, services, and business models in financial services based on new technologies in a real environment, for a limited period and scope. However, the future of the applications, which hundreds of thousands of people have already used, is also uncertain, as it is not clear who, when, and how to set that limited scope. It is possible to set another barrier any time, just because the officials don’t like it or know how it works.
Despite the situation mentioned above, Mongolian fintech companies are working full of hope, competing fairly, innovating, and collaborating with the government to bring the benefits of the blockchain revolution to our country and elevate Mongolians into the global financial arena.
2021.04.26
Trans. by Riya.T and Munkh-Erdene.D