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UPDATED: August 15, 2014 NO. 14 APRIL 3, 2014
How to Regulate Online Finance?
By Lan Xinzhen

On March 13, the central bank issued an order to suspend online financial businesses of certain companies. The move should be supported.

Compared with traditional sectors of the financial industry, new areas brought about by the Internet finance, such as barcode-based mobile payments, will involve quite a lot of new technologies and procedures. Current regulation and supervisory rules are unable to bring these new financial businesses under effective control. Risks thus loom large in this burgeoning industry. This is an important reason for the recent ban. The central bank says it needs to make an overall assessment on the legality and security of the relevant businesses.

This is good news for consumers. A safe online financial environment can help protect consumers from risks. But disputes on the suspension of these new financial products have arisen. Some worry that it will take too long for the central bank to assess these new models, or the ban could lead to the abortion of a new industry. The challenge brought about by online finance to traditional financial services is the reason for people having such doubts. Therefore, it's necessary for the central bank to make its assessment on online finance security transparent in order to assuage people's fears.

Internet operators' dissatisfaction is totally understandable. In the era of the Internet, the birth of online finance follows a trend of innovation using new technologies. Support and protection should be offered to operators to encourage their creativity and new ventures.

Currently, developed economies all over the world are all trying to find a proper and balanced method of regulation on online finance. China should not turn a blind eye to this issue. Online finance should be brought under the central banks' regulation, but it must be scientific, reasonable supervision that respects the market. This kind of regulation should not restrict the development of this industry.

The core of Internet finance is finance, rather than Internet technology. Therefore, the central bank's regulation is not supposed to cover technology-related security loopholes. Online finance transaction is in essence finance, and has all of its features. These characteristics will not change just because financial trade begins to take place online and these are the areas the central bank's regulation and supervision should cover. The central bank is obligated to make open and transparent the information related to Internet finance products and to inform investors of the risks embedded in the area.

Another point for the central bank's supervision is the security of online transaction procedures. Take virtual credit card application for example, applicants can be granted a card merely by inputting their names, ID card numbers and personal cellphone numbers online. The risks here are obvious.

In the Government Work Report for 2014 delivered by Premier Li Keqiang at the nation's top legislative session in March, promoting the healthy development of online finance is high on the list of priorities for the Central Government. Owning the largest number of Internet users in the world and boasting the fastest pace of e-business development, China needs to set up a set of criteria for overseeing the development of online finance. The area is the result of creative thinking in the financial sector. It is now in need of correct guidance.

Though tension may at present exist between some of the interested parties, it is now anticipated that an appropriate way of advancing the development of online finance can be worked out through a process of negotiation and exploration involving supervisors, operators and consumers.

Email us at: lanxinzhen@bjreview.com

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