Communist Review - In recent years, in Vietnam, the digital economy has been paid attention and prioritized, so it has obtained significant results. Resolution No. 52-NQ/TW dated September 27, 2019 of the Politburo on “A number of policies to proactively participate in the Fourth Industrial Revolution” sets a target by 2025, the digital economy will contribute 20% to the gross domestic product (GDP). The State Bank of Vietnam - a public agency in charge of monetary and banking management has forecasted in the period 2016 - 2020 and assessed the impact of this trend on the financial and banking sector on three aspects: monetary policy, financial safety supervision and payment. At the same time, it has synchronously implemented various solutions to concretize the Party and State's policy on digital economy development.

Advantages and challenges brought by the digital economy

The digital economy has become an increasingly important component of the economy. It is developed on the basis of using digital technology and big data to create new business models and a great variety of products, services and to provide digital services to businesses and people through integrating different modern technologies (cloud computing, artificial intelligence (AI), internet of things (IoT),...). In the digital economy, businesses will renovate their production and business processes by switching towards an ecosystem model, linking value chains from production, trade, logistics... to consumption, contributing to the fundamental transformation of the economy, creating many new jobs and increasing labor productivity.

Digitization has started recently to change the structure of monetary system more fundamentally through the introduction of modern financial technologies, such as The Electronic Know Your Customer (e-KYC), cashless payment, cryptocurrency(1), Stablecoins(2), central bank digital currency(3), peer-to-peer Lending and others that promote innovation, technology competition and make profound changes to the financial structure in general and the structure of labor in the financial industry  towards increased application of artificial intelligence instead of simple labor. These impacts have been creating advantages and challenges for the monetary system, thereby affecting the efficiency and effectiveness of monetary policy and central banks.

It is obvious that the application of information technology assists effectively the promotion of innovation as an important driver to increase labor productivity and improve quality of life. According to classical economics and monetary economics, the increasing application of banking technology accelerates cash flow cycle, promotes faster and more convenient economic transactions, saves costs of intermediaries and increases economic efficiency. In addition, a cashless society thanks to digitization also helps to limit the underground economy and reduce tax evasion. Increased labor productivity helps to reduce production costs and stabilize inflation, which is the goal of monetary policy management shared by most countries. The application of technological advances in the financial - banking sector also promotes financial inclusion, creates better access to financial resources in remote and isolated areas, especially for vulnerable people in society.

There has recently been increasing international focus on the possible issuance of digital currencies of some major central banks, such as the US, UK, and Sweden, in which the Chinese central bank is the pioneer that has carried out a large-scale experiment to take advantage of technological benefits to create new tools and methods of conducting monetary policy, reducing the cost of issuing, preserving currency, and improving transparency for economic transactions, increasing financial market accessibility.

However, the digital economy also represents enormous challenges for monetary policy management and banking operations as follow:

First, there will be challenging to well manage the money supply and maintain the central bank's monopoly in issuing currencies if cryptocurrencies, especially private cryptocurrencies are widely accepted as a means of payment or hoarding of financial assets. At that time, impacts of monetary policy on economic operations through monetary policy instruments will be significantly reduced.

Second, modern payments systems speed the cash flow, affecting strategies and management of the central bank's money supply in controlling inflation. It also creates more challenges for the central bank to control the quantity of money.

Third, traditional credit channels, especially personal loans and consumer credit, will face strong competition due to the rapid growth of peer-to-peer lending.

Fourth, the challenges of financial security, digital crime, and non-traditional security threats become increasingly complex when private cryptocurrencies or new financial services and products on the basis of financial technology (fintech) are developed and used to hide illegal transactions, such as money laundering, financial crimes through multi-level marketing, disguised forms of “black credit” and others.

Fifth, there will be obstacles for the stability of financial system when the value of virtual assets and cryptocurrencies fluctuates greatly, affecting crypto-investor psychology, and also international capital flows between countries where fintech companies operate.

Sixth, all of the above challenges lead to the biggest problem that many countries are facing today, which is the “regulatory gap” in managing financial digitization to ensure how to optimize the technological benefits and also how to control the risks and challenges generated from this sector in order to ensure the safety and stability of the financial system, and protect the interests of consumers. This is not only a challenge for each country but for all countries in the world. Due to the rapid evolution of the digitization process in the economy, legal regulations cannot be adjusted in time. Therefore, in order to meet social human needs and create regulatory frameworks to manage digital innovations, especially financial innovation in banking to overcome inadequacies in the legal environment as mentioned above, many countries have used the regulatory sandbox as an experimental legal regime to regulate these activities.

Monetary policy management in Vietnam's digital economy

Firstly, for monetary policy management, science and technology advances have been creating favorable conditions for controlling inflation in monetary policy management of Vietnam. Over the years, the management, control and stabilization of inflation in Vietnam have been highly appreciated by domestic and foreign organizations. This success is resulted from the prudent, flexible, proactive and consistent monetary policy management of the State Bank. The gain of this achievement is also thanks to the improvement of supply factors through the application of science and technology to digitalize manufacturing industry. These applications have radically changed the production model, improved labor productivity, significantly reduced a human's involvement in manufacturing the process, thereby reducing production costs in countries with preeminent digital platforms. In the globalized world, technology advancement becomes a driver of low inflation. This trend will spread throughout the global value chain of which Vietnam is a link. Besides, the development of e-commerce creates pressure of price competition on domestic businesses to face international competition in domestic market thereby putting downward pressure on inflation.

Secondly, digital technology promotes the unprecedented rapid growth of payment systems, creating a remarkable transformation in infrastructure, products and services. Along with that ecosystem, the State Bank has issued many policies and solutions to maximize the development opportunities of payment intermediaries that bring completely new utillities and digital experiences to customers. In order to develop payment infrastructure to meet international standards, the State Bank regularly upgrades the modern interbank electronic payment system to act as the backbone of national payment system. In the first 9 months of 2020, the interbank electronic payment system processed more than 106 million transactions, equivalent to 75,539 trillion VND (decreased by 9.69% in quantity and increased by 8.49% in value compared to the same period in 2019). Under the direction of the State Bank of Vietnam, the automated clearing house (ACH) has been launched since July 2020 by the National Payment Corporation of Vietnam (NAPAS) to bring real-time payments, make “always–on” payments with 24/7 availability and process multi-channel transaction.

Countless types of banking products and services are offered by banks on the basis of modern technology application to improve customer experience, such as: banking services, internet banking, mobile banking  using IoT which allows customers to access and use banking services or connect with other digital ecosystems; disbursement and loan services using AI, robotic process automation (RPA) and Big data which help collect, analyze data and evaluate, classify customers for decision making. In particular, mobile banking service has achieved impressive results with an increase in 2020 by 123.9% in value and 125.4% in quantity of transactions compared to 2019. The number of transactions by QR code increased 82.4%. According to PwC Global Consumer Insights Survey (one of the Big 4 global accounting firms) for 27 countries and territories, Vietnam has seen the highest growth in the world in mobile payments in 2019. However, the digital transformation in Vietnam financial and banking sector is also facing many potential risks including cybercrime and cyberattacks. The recent cases of bank account fraud to steal money of users of online payment services via internet or mobile phone bear an evidence of this problem. In that context, the State Bank has been actively coordinating with the Ministry of Public Security and other relevant agencies to share information and data... to prevent and combat cybercrime.

Thirdly, regarding monetary and financial stability, the State Bank of Vietnam has drastically and synchronously implemented solutions to enhance the effectiveness and efficiency of banking inspection and supervision to meet international practices and standards and to conform to the reality of the banking industry in the new period. It has gradually improved the macroprudential policy to create a legal framework to prevent systemic risks. As a result, financial and monetary stability has been maintained; credit institutions have improved their financial capacity and guaranteed rate, strengthened risk management in accordance with the law and in line with international practices, the bad debt rate was controlled below the limit.

However, the financial and monetary stability in Vietnam is also facing negative effects from the fast and uncontrollable development of fintech services and products. In the past time, cryptocurrency scams have increased because people had fallen victim to the lure of the get-rich-quick scam when participating in multi-level marketing networks and investing in cryptocurrencies. Some scammers have carried out illegal acts such as illegal usury, black credit through peer-to-peer lending, etc. To deal with this problem, the State Bank soon affirmed that cryptocurrency is not a legal means of payment regulated by Vietnamese law. At the same time, it has promoted communication work to raise people's awareness in using financial and technological products that are not protected by law. However, it is necessary to create a favorable legal framework to support fintech companies to operate legally, to make new inventions that contribute to economic development and financial inclusion. However, it is compulsory to control potential financial risks from the fast development of fintech and digital innovation.

Solutions to manage monetary policy in the context of digital economy developement

Firstly, steadfastly pursue the goal of stabilizing the macro-economy, controlling inflation, continue to conduct a prudent and flexible monetary policy. Promote research and establish in the near future a legal framework to regulate peer-to-peer lending, central bank digital currency (CBDC), etc. Proactively adjust the monetary policy management by gradually shifting from monetary policy management relying on money supply to monetary policy management relying on interest rates in order to enhance monetary policy flexibility as oriented in Decision No. 986/QD-TTg dated August 8 - 2018 of the Prime Minister on “approval of the development strategy of Vietnam's banking industry to 2025, with vision to 2030”, thereby improving the adaptability to the increasingly rapid digital transformation in the financial and banking sector.

Secondly, improve the legal framework for non-cash payment activities by issuing a Decree to replace Decree 101/2012/ND-CP on non-cash payments and a Decree amending and supplementing Decree No. 222/2013/ND-CP on payment in cash. Enhance security and confidentiality, ensure the continuous operation of payment systems and protect the legitimate interests of customers. Instruct credit institutions to promote the application of banking technology and digital transformation towards a full digital banking system to enable customers to make “always-on” transactions; Find solutions for banks to have access to electronic identification of citizens and identity data in order to reduce paperwork and transaction procedures between banks and customers.

Thirdly, build the regulatory sandbox as an experimental legal regime to allow fintech businesses, new payment models and others to apply technological and digital innovations in banking operations; formulate and implement a national financial inclusion strategy until 2025 with a vision to 2030.

Fourthly, strengthen the inspection, supervision, prevention and combat of violations of the law in the banking sector; strengthen the macro-prudential analysis framework, strengthen early warning system to detect systemic risks, including financial technology risks. Continue to develop and improve the legal framework and regulations on financial stability and macroprudential policies, and macroprudential tools to prevent systemic risks./.

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(1) Cryptocurrency is a privately-issued money without collateral, so it is ultra-volatile. Common cryptocurrencies include Bitcoin, Ethereum,...

(2) Stablecoins are cryptocurrencies issued by private individuals with collateral to limit price fluctuations compared to conventional cryptocurrencies. Types of collateral can be major currencies, such as USD, Euro; cryptocurrencies such as Bitcoin, Ethereum,.... However, they use a high rate of guarantee (for example, the corresponding 1000 USD of Bitcoin is used as collateral to issue the corresponding 500 USD of Stablecoins) and the issuer's algorithm to ensure the supply/demand of the coin to control price volatility. Top Stablecoins tokens are Tether, TrueUSD,...

(3) Digital currency is issued by the Central Bank. It is a means of payment equivalent to cash but it is a digital payment mechanism.

This article was published in the Communist Review No. 962 (March 2021)