Dialogue on Global Digital Finance Governance

Technical Paper 1.1B

BigFintechs and their impacts
on macroeconomic policies
Katherine Foster, Sofie Blakstad, Sangita Gazi and Martijn Bos

The findings of the Dialogue on Global Digital Finance

Governance are packaged into three thematic areas:
Executive Summary
This paper follows directly from Technical Paper
Theme 1 1.1, “BigFintechs and their Impact on Sustainable
Development”, which examines the positive and negative
BigFintechs and their impacts on impacts of BigFintech (BFT) activities across the full
sustainable development spectrum of the Sustainable Development Goals (SDGs),
• T echnical Paper 1.1 BigFintechs and their particularly with regard to Least Developed Countries
impacts on sustainable development (LDCs). This paper serves as an extension of the analysis,
specifically on the findings with regard to SDG 16
• Technical Paper 1.1B BigFintechs and their
impacts on macroeconomic policies (peace, justice and strong institutions) to focus on the
macroeconomic impact of BFT actors and activities on
• Technical Paper 1.2 Digital currencies and
CBDC impacts on least developed countries LDCs. To accomplish the extended analysis, we first
address the limitations in bridging BFT activity, SDG
indicators and LDC macroeconomic policy impacts. We
Theme 2 draw upon the outline of the complex and opaque supply
chains, expanding service offerings across multiple
Corporate governance innovations business verticals and the complex ecosystem models
that amplify BFT impacts for LDCs as outlined in Technical
• T
 echnical Paper 2.1 BigFintechs and the UN SDGs: Paper 1.1. We discuss the key barriers in advancing the
the role of corporate governance innovations analysis including the limitations of the frameworks, tools,
indicators and data, to measure the macroeconomic
impacts particularly within the LDC context. Our findings
Theme 3 demonstrate that the current narrative ‘digital economy’
sees digital growth, maturity and market penetration in
BigFintechs and international governance, LDCs largely as positive developments. However, it fails
policymaking and the SDGs to address the potential for adverse impacts on LDCs
specifically owing to BFTs’ complex models and business
• T
 echnical Paper 3.1 Policymakers, BigFintechs and activities. We then outline the regulatory challenges
the United Nations Sustainable Development Goals
related to BFT across multiple factors including the
• T
 echnical Paper 3.2 BigFintechs and international cross-border nature of BFT ecosystems and activities, the
governance, policymaking and the UN Sustainable narrow scope of those digital services, the limitations of
Development Goals: the SDGs in the international foreign exchange rules and taxation classification.
governance of finance
• T
 echnical Paper 3.3 A principles-based approach
to the governance of BigFintechs

1
The Dialogue on Global Digital Finance Governance To advance the discussion, we leverage the OECD’s
was established by the UN Secretary General’s Task tiered definition of the digital economy and build out the
Force on Digital Financing of the SDGs. During its analysis from the data and findings extrapolated from
investigations, the Task Force recognized that the tools and methodologies developed in Technical
digitalization is not only reshaping the world of Paper 1.1. We set out the positive impacts of BFTs
finance; it is also driving the emergence of a new on reducing inequalities, access to capital, increased
generation of global, dominant digital finance employment and entrepreneurship and GDP growth, as
platforms (BigFintechs) with increasing cross-border well as more complex negative implications including
spillover effects on many areas of sustainable potential tax avoidance, crowding out of local businesses
development across the world, particularly and SMEs, evolving ecosystems of interdependence
in developing economies. with single points of failure, the potential for draining
liquidity from local financial systems and for currency
The potential impacts of these platforms are both substitution. We discuss the regulatory capacity to
positive and negative, and one of the main challenges address these macroeconomic impacts as well as
in addressing them is that existing policy approaches the new potential points of failure being introduced.
to BigFintechs have mostly focused on narrow, The paper then addresses the limitations of current
although important, financial stability, consumer governance parameters and structures that are struggling
protection and market integrity issues, and some to keep up with the power, size and complex business
aspects of data, Internet and competition regulation, model evolution of BFTs generally. The paper points to a
but have remained largely disconnected from the widening gap in terms of primary or targeted regulatory
broader SDG/ESG debate. Another issue is that the focus for LDCs, which are not generally within the
governing arrangements of such platforms have scope or mandate of regulators and legislators in more
seldom involved developing economies, where their developed markets where most BFTs are headquartered.
impacts are often strongest, and the potential for
transformation is greatest. A summary of the potential macroeconomic impacts
The Dialogue was established to explore the nexus and regulatory challenges is followed by a series of
of BigFintechs and sustainable development. Its goal conclusions indicating that rather than expanding
is to catalyse governance innovations that take their current value proposition of financial inclusion,
greater account of the SDG impacts of BigFintechs employment and economic growth, BFTs can actually
and are more inclusive of the voices of developing bypass or exploit segments of communities in LDCs with
nations. To this end, the Dialogue has produced a negative environmental, social and economic impacts.
series of Technical Papers that bring new, We further extrapolate the potential negative impact of
complementary perspectives on these issues. BFTs on financial or currency stability that could bypass
The papers have been drafted by commanding engagement with national taxation and regulation,
experts in the field and have been peer-reviewed through shadow banking particularly given the fragmented
by leading institutions and academics. regulatory space. Finally, we offer key recommendations
to consider with regard to alternative incentives and tools
for BFTs to address and report on activities and impacts
in LDCs, as well as innovative regulatory approaches for
The following paper is Technical Paper 1.1B under
more effective measurement, analysis and remediation of
Theme 1.
risks and impacts of BFTs on LDCs.

The Dialogue on Global Digital Finance Governance

is hosted by the Swiss and Kenyan Governments and
stewarded jointly by the United Nations Development
Programme (UNDP) and United Nations Capital
Development Fund (UNCDF).

2
About the authors

Katherine Foster - Executive Strategy Officer, Open Earth Foundation (USA); Member ESMA Financial Innovation
Standing Committee Consultative Working Group and the EU Blockchain Observatory; co-author IIED Brief Digital
technologies for an inclusive, low-carbon future that puts people first.
Sofie Blakstad - CEO, impact Fintech start-up hiveonline; author, Fintech Revolution: Universal Inclusion in the New
Financial Ecosystem.
Sangita Gazi - Research Fellow, Asian Institute of International Financial Law (AIIFL), University of Hong Kong (HKU);
PhD researcher at the Faculty of Law, HKU, focusing on the cross-border and monetary policy implications of central
bank digital currency (CBDC) in emerging economies.
Martijn Bos - Financial Technology & Financial Inclusion Consultant, co-author of The European Fintech Landscape in
Green Digital Finance.

Copyright © 2021 UNDP, UNCDF

All rights reserved.
The views expressed in this publication are those of the author(s) and do not necessarily represent those of the United Nations,
including UNCDF and UNDP, or their Member States.

Contents
INTRODUCTION 4

LIMITATIONS AND CHALLENGES OF THE CURRENT ‘DIGITAL ECONOMY’ NARRATIVE 4

GENERAL MACROECONOMIC CONSIDERATIONS FOR SDGS AND LDCS 7

MACROECONOMIC CONSIDERATIONS FOR SDGS 7

MACROECONOMIC IMPACTS RELATED TO BFTS’ DIRECT FINANCIAL SERVICE OFFERINGS 8

MACROECONOMIC IMPACTS RELATED TO BFTS’ INTEGRATED SERVICES, OPERATIONS,

INFRASTRUCTURE AND PROCESSES 8

IMPACTS RELATED TO BUSINESS MODEL, VALUE CHAIN AND OVERALL ECOSYSTEM

(VERTICAL AND HORIZONTAL INTEGRATION) INCLUDING CUMULATIVE AND SYSTEMIC IMPACTS 9

INDIRECT MACROECONOMIC IMPLICATIONS AND INFLUENCES OF BFTS 10

MACROECONOMIC POLICY, BFTS AND SDGS 11

THE INTERSECTION OF BFTS, SDGS AND MACROECONOMIC POLICY 12

MACROECONOMIC IMPACT OF THE UNBANKED MAJORITY 14

SHADOW BANKING 15

KEY EXTRAPOLATIONS AND CONCLUSIONS 15

RECOMMENDATIONS 16

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Introduction commonly used terms in the BFT and SDG context,
to enable fit-for-purpose use that accurately takes the
numerous—and often still developing—externalities
The increasing digitization of payments and digital
into consideration. Finally, the paper concludes with
access to non-bank financial services, together with
key recommendations, incentives and innovative
the increasing use of general technological advances
approaches for both BFTs and regulators to consider.
to deliver access and services to financial products, are
key drivers in a global transformation in banking and
finance. These trends are fast changing the financial Limitations and challenges of
sector, impacting billions of lives around the world and the current ‘digital economy’
leaving their footprint across global economies. Some of
these impacts are the direct result of BigFintech (BFT) narrative
activities in financial services. This paper seeks to analyse
the macroeconomic impact of BFT actors, as defined in Some of the most potent indicators available in
the foundational paper “BigFintechs, A New Paradigm,” macroeconomic analysis, such as GDP or Consumer Price
with a specific focus on least developed countries Index, are globally defined indicators that are applied
(LDCs). It builds on the findings outlined in the Technical uniformly across markets. However, this is true primarily
Paper 1.1, “BigFintechs and their Impact on Sustainable for traditional markets, where delivering goods and
Development” (hereinafter “Technical Paper 1.1”), which services incurs costs in a measurable way associated
uncovered key positive and negative impacts of BFT with a physical location, and focuses chiefly on more
activities across a range of economic, environmental developed, more urbanized markets. With the growth of
and social Sustainable Development Goals (SDGs). the digital economy at both speed and proportion, these
indicators are more difficult to apply, as distribution of
This paper builds out the analysis from the data and a service at scale over a digital platform tends towards
findings extrapolated from the tools and methodologies zero marginal cost while profits are built on non-traditional
developed in Paper 1.1. We focus on impacts specifically business models, such as data monetization, rather than
with regard to SDG 16 (peace, justice and strong through direct profit from sale of goods to consumers.
institutions), which is essential to fostering the
macroeconomic indicators of currency stability as well The difficulty in applying indicators is augmented by
as “investor confidence, strengthening public finances, the lack of a clear definition of the digital economy.
efficient and well-targeted public spending, infrastructure International organizations adopt different parameters
investments, debt sustainability, financial markets access, or indicators in defining the digital economy and its
financial stability”. This paper therefore highlights the associated components. In 2011, the Organisation for
meeting point between enhanced economic participation Economic Co-operation and Development (OECD) first
and the potential for unintended macroeconomic side defined ‘e-commerce transactions’, which laid down
effects thereof, when services are provided through new, the foundation of today’s digital economy discourses.
innovative and complex business models that fall outside The definition narrowly included any transaction—“the
the scope of traditional financial regulatory parameters. sale or purchase of goods or services, conducted over
computer networks by methods specially designed for the
This paper begins with a critical analysis of the current purpose of receiving or placing of order… To be included
discourse of the ‘digital economy’, which largely sees are orders made over the web, extranet or electronic
digital growth, maturity and market penetration as positive data interchange... [But] to be excluded are orders made
developments in LDCs but which rarely addresses the by telephone calls, fax or manually typed e-mail”.1
potential negative impacts arising from the complex
business models and activities of BFTs. For a long time, the principal indicator for measuring
We address the limitations of indicators, tools and data the digital economy was use of the web and related
in advancing measurement of the macroeconomic information and communication technologies (ICT)
impacts given the seamless—and often closed-loop— only.2 With the expansion of Fintech, the use of Big
nature of BFT ecosystems and activities. The paper Data and artificial intelligence (AI), and varieties of
examines the regulatory challenges in addressing the services using web-based platforms, the landscape
negative environmental, social and economic impacts of the digital economy has broadened and essentially
of BFTs, pointing to a widening gap in terms of primary includes any digital service and/or digital transaction
or targeted regulatory focus for LDCs. It argues for a conducted by a digital sector. The Asian Development
broader lens through which the macroeconomic impacts
of BFTs on LDCs can be analysed. This paper intends 1  ‘OECD Guide to Measuring the Information Society’, OECD, August 2011,
<www.oecd.org/sti/ieconomy/oecdguidetomeasuringtheinformationsoci-
to serve the purpose of redesigning the lens through ety2011.htm>.
which the macroeconomic impacts of BFTs on LDCs 2  ‘Working Paper: Defining and Measuring the Digital Economy’, Bureau of
Economic Analysis, March 2018, <www.bea.gov/sites/default/files/papers/
can be analysed, and provides baseline definitions of defining-and-measuring-the-digital-economy.pdf>.

4
Bank (ADB) defines the “digital economy” according to government, that are utilising these digital inputs in
the nature of “digital transactions”3—“which involves their economic activities.9
anything powered by digital technologies”.4 While the
The report also includes a tiered framework intended to
core of the digital economy is ICT-producing sectors,
“assist with accurate measurement and comparability
its broader dimension includes the platform economy
of the digital economy”, which it notes should also
(such as Facebook and Google), services rendered
incorporate digitalized interactions as one of the indicators
by using digital technologies (such as e-commerce,
of economic activities.10 A key focus of these indicators is
automation, and AI and the sharing and gig economies).5
to look across the verticals of infrastructure, empowering
Nonetheless, there are no universally accepted standard
society, innovation and technology adoption, as well as
definitions of these new economy models or the
employment and growth.11
services associated with them. Therefore, “[t]he lack
of a generally agreed definition of the ‘digital economy’
As helpful as these definitions and frameworks are, the
or ‘digital sector’ and the lack of industry and product
definition still falls short of encapsulating a universal
classification for Internet platforms and associated
standard as these metrics and indicators are contextually
services are hurdles to measuring the digital economy”.6
skewed towards G20 and OECD countries,12 and do
not represent the economies in the rest of the world.
BFTs operate in the digital economy, offering financial
Furthermore, the reports, frameworks and metrics rely
and other services over digital platforms to deliver
on data points that are unlikely to be readily available in
digital or financial goods and services.7 As these
LDC economies, such as Internet usage by individuals,13
platforms are often web-based, they can spread out in
household income or informal lending. Data—such as
different locations without requiring a physical location,
those available from GSMA14—for LDC countries, tend to
which significantly reduces their delivery costs. The
be focused on physical assets and infrastructure, which
lack of a clear definition and measurement framework
do not provide a complete picture or expose economic
of the ‘digital economy’ means that the impact of
impacts such as in the monetary and fiscal space, or
BFTs on macroeconomic outcomes becomes less
export and trade.
readily delineated and apparent in a classical analysis.
In a concerted effort to address these challenges,
It is therefore important to understand the limitations
several United Nations bodies and other international
of these frameworks and tools in an LDC context, while
organizations have advanced definitions of the digital
continuing to advocate for inclusive and alternative data-
economy and developed early frameworks and tools to
based monitoring tools so that LDC and other economies
employ in analysis of this new market for macroeconomic
disenfranchised by official definitions and current
impacts. After several precursor reports and consultations
measures do not fall by the wayside.
with several international organizations,8 a coordinated
and widely accepted definition of the digital economy was
The OECD ‘Roadmap’ recognizes that “The Core measure
published by the OECD in its 2020 report for the G20:
of the Digital Economy only includes economic activity
from producers of ICT goods and digital services”. It offers
The Digital Economy incorporates all economic
a more robust definition for a “consistent and consensual
activity reliant on, or significantly enhanced by the
use of digital inputs, including digital technologies, framework to guide policymaking providing a logical
digital infrastructure, digital services and data. It standard by which to compare indicators”.15 The OECD
refers to all producers and consumers, including definition includes five tiers of measures:
• Core: includes economic activity from producers of ICT
3  According to the report, a transaction is deemed to be digital if (i) the trans- goods and digital services.
action is digital ordered, enabled or delivered; (ii) the transacted products are
goods, services or data; and (iii) the transaction involves partners or actors,
such as consumers, businesses or government.
9  See
 ‘A Roadmap Toward a Common Framework for Measuring the Digital
4  ‘Asian Economic Integration Report 2021: Making Digital Platforms Work for
Economy’, OECD, 2020), <www.oecd.org/sti/roadmap-toward-a-com-
Asia and the Pacific’, Asian Development Bank, February 2021, <www.adb.
mon-framework-for-measuring-the-digital-economy.pdf>.
org/publications/asian-economic-integration-report-2021>.
10  Ibid.
5  Sharing economy could have a broad definition to include the supply of work
for small jobs in open labour platforms as well as crowdfunding in financial 11  bid.
platforms, or a narrow definition of underused assets such as accommodation 12  The OECD ‘A Roadmap Toward a Common Framework for Measuring the
and rides. The gig economy is pertinent to labour participation and income Digital Economy’ exceptionally included the non- countries of Brazil, China,
generation through ‘gigs’. Colombia, Costa Rica, India, Indonesia, South Africa and Russia.
6  See for example, ‘Measuring the Digital Economy’, IMF, April 2018, <www. 13  While ITU generates statistics used by the World Bank Findex and others
imf.org/en/Publications/Policy-Papers/Issues/2018/04/03/022818-measur- for countries globally, statistics such as Per centage of Individuals using the
ing-the-digital-economy>. Internet are ITU estimates for nearly all LDCs, in most cases for a decade
7  For example, Amazon is a digital-based platform and offering which sells digital or more. In the cases where statistics have subsequently been collected
products and financial services in addition to physical goods—and therefore from Zambia’s Central Statistical Office, the figure fell from 27.85% (2017 ITU
has a physical infrastructure—but the financial services are totally digital. estimate) to 14.30% (2018 actual value) and in Tanzania from 20% (2015 esti-
mate) to 13.50% (2016 actual). See ‘ITU Statistics: Per centage of Individuals
8  These organizations included Organisation for Economic Co-operation and
using the Internet 2000-2020’, ITU, 2021, <www.itu.int/en/ITU-D/Statistics/
Development (OECD), the International Telecommunication Union (ITU), the
Documents/statistics/2020/MobileCellularSubscriptions_2000-2019.xlsx>.
United Nations Conference on Trade and Development (UNCTAD), the Europe-
an Union (EU), the World Bank Group (WBG), the International Monetary Fund 14  G SM Association, <www.gsma.com/>.
(IMF) and the International Labour Organization (ILO). 15  S upra note 16.

5
• N
 arrow: includes the core sector as well as economic there are largely positive externalities associated with
activity derived from firms that are reliant on digital high levels of digital use and digitalized economies, it
inputs. is important to note that LDC countries, vulnerable to
macroeconomic and financial volatility, can be adversely
• B
 road: includes the first two measures as well as affected by unrestrained growth in this area because of
economic activity from firms significantly enhanced by the influx of foreign service offerings that fall outside
the use of digital inputs. more limited regulatory mandate and domestic fiscal
policies.19 For instance, with regard to taxation, BFTs
• Final: extends “further than the Digital Economy and operating across borders give rise to several regulatory
incorporates digitalized interactions and activities not challenges that stem from mismatches and ambiguities
included in the GDP production boundary” (ex. Use in regulatory and taxation classification, lack of definitions
of free digital platforms) recognizing this activity as of ‘platforms’ or ‘permanent establishment’ when
important for effective digital policy by government. interface is in use, outdated foreign exchange rules and
the narrow scope of digital services when imported.20
• Additional: covers “all economic activity that is digitally
ordered and/or digitally delivered”.16 As outlined in Technical Note 1.1, the digital economy
is a fast-evolving landscape including complex and
The ‘additional’ measure is flagged as “an alternative opaque supply chains, a succession of multiple
perspective of the digital economy, delineated based business models within a single organization and
on the nature of transactions. Rather than splitting a lack of fit to traditional models of measurement.
the economy based on firms’ output or production BFTs are further expanding their service offerings and
methods, this measure focuses on ordering or delivery strengthening their ecosystem models, amplifying
methods, regardless of the final product or how it is impacts across business verticals. The manner in
produced”.17 While the report upholds that the final tier which products and services are offered by BFTs is
is “not explicitly considered part of the Digital Economy rapidly changing, such as embedding and clustering
per se”, it recognizes that the activity is important more services while locking in value chain providers
for effective digital policy by the government. through these services. Coupled with the challenge
of how to measure growth, this means the scope of
This tiered definition marks a significant extension of activities and impacts of BFTs are difficult to identify
the discourse around defining the digital economy and and measure within traditional indicator boundaries.21
potential impacts including with regard to delineating
which data sources could be used when benchmarking Similarly, the gig economy, which is powered by digital
progress. Along with other digital interactions and platforms, fails to conform to traditional measures of
economic activity—including access to digital financial employment and productivity, leading to data collection
services—the latter two tiers of measures include results challenges that make it harder to quantify and therefore
from interactions such as accessing and purchasing goods measure. These challenges are exacerbated by the
and services. The inclusion of these interactions is notable rapid rise of ad hoc participation in the labour force
as they have not previously been categorized as ICT through gig economy platforms and the scope of
goods nor digital services and moreover, have not been existing regulations proving unable to address this
addressed in previous definitions of the digital economy. phenomenon.22 In addition, economies in which most
business activity is informal23 are challenging to evaluate
Another important qualitative factor to consider is that from a macroeconomic perspective, as GDP measures
in official metrics and indicators, digital growth, maturity struggle to effectively capture economic activity in
and market penetration are uniformly considered a
positive development. BFTs like Alphabet, Mastercard
and Facebook are rolling out technology in developing
economies aimed at increasing access to smartphones, 19  The changing dynamics of international tax rules in the context of digital
the Internet and digital services through partnerships economy was addressed by the OECD’s Action Plan on Base Erosion
and Profit Shifting (BEPS). See <www.oecd.org/tax/beps/beps-actions/>.
with local actors18—bringing benefits to many. While However, digitalization could amplify the negative effects of the BEPS as the
low-income and lower-middle-income economies are likely to incur significant
losses in corporate tax revenues. See <www.adb.org/sites/default/files/publi-
cation/674421/asian-economic-integration-report-2021.pdf>.
16 Ibid.
20  ‘Asian Economic Integration Report 2021: Making Digital Platforms Work for
17 
Supra note 16.
Asia and the Pacific’, Asian Development Bank, February 2021, <www.adb.
18 For example, Alphabet’s sponsorship of KaiOS smart featurephones, see: org/publications/asian-economic-integration-report-2021>.
Russell J, Lunden I, ‘Google invests $22M in feature phone operating system
21  S  upra note 7.
KaiOS’, TechCrunch, 2018, <https://techcrunch.com/2018/06/27/google-kaios/>;
Mastercard Farmer Network, see: PYMNTS staff ‘Mastercard Launches Digital 22  S  ee, for example, Duca JV, ‘Online Retailing, Self-Employment Disrupt
Sales Platform For Farmers’, 2019, <www.pymnts.com/mastercard/2019/mas- Inflation’ Federal Reserve Bank of Dallas, April 2019, <www.dallasfed.org/
tercard-launches-digital-sales-platform-for-farmers/>; Facebook expanding WiFi research/economics/2019/0416>.
in developing countries: Sun L, ‘Facebook Will Bring Expanded Internet Access 23  S  ee, for example, ‘The Least Developed Countries Report 2018: Overview’,
to Africa in $1 Billion Project’, Motley Fool, 2020, <www.fool.com/invest- United Nations Conference on Trade and Development (UNCTAD), 2018,
ing/2020/05/22/facebook-expanded-internet-access-africa-1-billion.aspx>. <https://unctad.org/system/files/official-document/ldcr2018overview_en.pdf>.

6
these economies.24 These challenges are illustrated technology (i.e. the ‘Digital Divide’) are growing, with
by the fact that while it is possible to measure factors the risk of excluding geographies and demographics
such as public debt, falling export earnings, official from the benefits of digitization and Fintech innovation,
development assistance (ODA) and remittances, very among other technical developments.29 Productivity
few indicators particularly relevant to LDCs—such is stagnating or declining in LDCs, exacerbated by the
as for informal business activity including informal economic fallout of COVID-19.30 As the pandemic is also
production, barter, informal lending and related informal aggressively contracting the economies of developed
employment—are captured in the ‘World Economic countries, foreign direct investment (FDI) is drying up in
Situation and Prospects as of mid-2020’ report.25 LDCs,31 and debt has been increasing steeply as global
trade has contracted, reducing export incomes for LDCs.32
The increase in debt and decrease in FDI, combined
General macroeconomic with a US$2.5 trillion investment gap (estimated pre-
considerations for SDGs COVID-19), is likely to drive down the abilities of LDCs to
and LDCs invest in infrastructure post-pandemic. To mitigate these
adverse developments, digital solutions such as online
Recognizing the challenges and the limitations in marketplaces are highlighted as an opportunity to reverse
achieving a comprehensive bridging of BFT activity, SDG this trend.33
indicators and LDC macroeconomic policy impacts, we
offer the following examination. It is based on data and China has been investing heavily in African, Asian,
findings extrapolated from the tools and methodologies Eastern European and Western European economies
developed and employed in Technical Note 1.1 including through its ‘One Belt One Road’ (OBOR) initiative led
an ESG26-SDG lens, landscape analysis and case study by public and private enterprises, such as Alibaba/Ant
examinations across the range of categories of BFTs. Group.34 The initiative covers two main projects: the
Pursuant to the aspiration outlined above for a robust ‘Silk Road Economic Belt’ connecting China’s land with
analysis of macroeconomic policy implications, it is Central Asia, Eastern Europe and Western Europe, and
important to distinguish between considerations unique the ‘21st Century Maritime Silk Road’ that would link
to the SDGs and LDCs, respectively, before uniting them China’s coast with the Mediterranean, Africa, South-East
under a BFT impact overlay for a holistic view. Asia and Central Asia.35 Although countries involved in
the OBOR initiative are receiving massive investment
Macroeconomic considerations boost through their local transmission projects, debt
conditions have been out of step with Western lending.
for SDGs For example, in November 2020, Zambia became the
There is a complex relationship between social, first African nation to default on its debt since the
environmental and economic factors impacting LDCs. pandemic began,36 with Western creditors citing a lack
LDC economies can be more susceptible to external of transparency over fair treatment vis-à-vis Chinese
shocks than more developed countries because of creditors.37 While in the long term OBOR could promote
their heavy reliance on foreign investment and debt. regional connectivity and promote bilateral and multilateral
This can in turn, increase pressure on LDCs to relax trades among countries involved, the process has
environmental or labour protection regulation to boost
investment and job creation. However, as we present in
this section, environmental degradation and inadequate  hardest hit’, World Bank Blogs, 2020, <https://blogs.worldbank.org/opendata/
 impact-covid-19-coronavirus-global-poverty-why-sub-saharan-afri-
protection of worker rights can lead to negative economic ca-might-be-region-hardest>.
consequences for those countries. 29  ‘Inequality in a Rapidly Changing World: World Social Report 2020’, United
Nations Department of Economic and Social Affairs, 2019, <www.un.org/
development/desa/dspd/wp-content/uploads/sites/22/2020/01/World-So-
While global income and wealth inequality have been cial-Report-2020-FullReport.pdf>.
30  ‘Digital Divide ‘a Matter of Life and Death’ amid COVID-19 Crisis, Secre-
rising, wealth inequality in LDCs was falling prior to tary‑General Warns Virtual Meeting, Stressing Universal Connectivity Key
onset of the COVID-19 crisis.27 However, the pandemic for Health, Development’, UNSG Statement, 2020, <www.un.org/press/
en/2020/sgsm20118.doc.htm>.
is projected to reverse that trend to 2017 levels in sub
31  Ibid.
Saharan Africa.28 Other indicators such as access to 32  Ibid.
33  Supra note 34.
24 See, for example, Prasad MK, Castro A, ‘Is GDP an adequate measure of 34  S ee ‘Alibaba founder Jack Ma played important role in pushing China’s Belt
development?’, International Growth Centre, October 2018, <www.theigc.org/ and Road initiative: report’, Dawn, November 2018, <www.dawn.com/
blog/is-gdp-an-adequate-measure-of-development/>. news/1447968>.
25 See ‘World Economic Situation and Prospects as of mid-2020’, United Nations, 35  ‘China’s One Belt, One Road: Will It Reshape Global Trade’, McKinsey&Com-
2020, <www.un.org/development/desa/dpad/wp-content/uploads/sites/45/ pany, July 2016, <www.mckinsey.com/featured-insights/china/chinas-one-
publication/WESP2020_MYU_Report.pdf>. belt-one-road-will-it-reshape-global-trade#>.
26 Environmental, Social, and Corporate Governance (ESG). 36  S ee ‘Zambia Declared in Default of Debt Repayment to Creditors’, africanews
27 See, for example, ‘The Least Developed Countries Report 2020’, United Na- 2020, <www.africanews.com/2020/11/18/zambia-declared-in-default-of-debt-
tions Conference on Trade and Development (UNCTAD), <https://unctad.org/ repayment-to-creditors//>.
system/files/official-document/ldcr2020_en.pdf>. 37  S tubbington T, Fletcher L, ‘Zambia on brink of default after lenders reject
28 Mahler DG, Lanker C, Castaneda Aguilar RA, Wu H, ‘The impact of COVID-19 debt relief request’, Financial Times, November 2020, <www.ft.com/content/
(Coronavirus) on global poverty: Why Sub-Saharan Africa might be the region fc82cf3f-be77-4380-9e44-401ca3bf4ed5>.

7
largely drawn on Chinese state-owned banks to fund and macroeconomic landscape to provide the following
major infrastructure initiatives, leaving many African extrapolations.
countries significantly indebted to these institutions.
The structure of the loans has left these institutions
vulnerable to defaults. With COVID-19, China may also be
Macroeconomic impacts related
forced to reduce its investment and refinancing of debt to BFTs’ direct financial service
as its own economy fails to grow as fast as predicted, offerings
impacting bilateral trade between China and Africa.38

In this context, BFTs could offer support to structural • B

 FTs, including their financial services, micropayments
and macroeconomic challenges faced by LDCs and remote payment facilitation services, can positively
through innovative services offerings such as online impact SMEs, employment and economic growth and
marketplaces—allowing for greater participation improvements to industry, innovation and infrastructure.
in the formal economy and the potential for better
traceability and taxation of previously informal sector • A
 ccess to BFTs’ financial services, platforms, e-markets,
activity, without the need for massive scaling up of etc., can therefore have a positive impact on addressing
local infrastructure. Furthermore, BFTs that offer access poverty and reducing inequalities based on gender and
to finance(ing) also employ novel risk assessment other minorities or segments of LDC populations, where
methods that often rely on non-financial data, allowing these service offerings are designed in an inclusive way,
more micro, small and medium enterprises (MSMEs) through access to formal financial services that provide
to access credit and loan services. Although these transfer and transaction capabilities.40 These services
are favourable on a market level, it would be prudent need to be accompanied by education and governed to
to assess capital flows out of LDC markets through ensure access to the most vulnerable.
BFT vehicles—mandating a need for a robust local tax
• A
 ccess to capital: individual or SME loans, including in
collection system before capital is moved abroad.
partnership with local or national banks, enable financial
inclusion and economic growth. Where lending is from
While some BFTs such as Facebook and M-Pesa have
non-bank financial institutions or BFT platforms, the
been aggressively acquiring customers in LDCs, on the
potential risks of overindebtedness leading to eventual
whole, current BFT penetration in LDCs is limited.39
financial exclusion must also be mitigated through
Participation in the economy through BFTs is also limited
education and regulation.
to individuals with the required technology, literacy and
data skills. As such there is a significant risk that the
• G
 DP growth: digital finance could bolster emerging
penetration patterns of BFTs could increase inequality
economies’ overall economic growth, where
for digitally excluded groups, if they do not purposefully
implemented, and increase their GDP by as much as
design products and take other measures to support the
6 per cent by 2025.41
needs of these groups. Greater access and lower barriers
to entry for financial services also brings risks such as
growing indebtedness, so BFTs need to be accountable Macroeconomic impacts related
for improving financial literacy as they provide that access, to BFTs’ integrated services,
to mitigate this potential impact.
operations, infrastructure
There are three descriptive categories of BFT impacts and processes
on SDGs aligned with the BFT activity areas and
range: 1) direct financial service offerings; 2) integrated
• P
 otential for increased employment, productivity and
services, operations, infrastructure and processes; and
GDP by increasing the ability for individual workers
3) business model, value chain and overall ecosystem
and businesses to be employed, albeit without any
(vertical and horizontal integration) including cumulative
employee protection, health care or pensions. In addition,
and systemic impacts. Using the impact methodology
the requirement to provide their own equipment and
and toolkit developed in “Technical Note 1.1”, it was
premises (e.g. car and computer), etc., which may result
possible to collect several data points from the BFT
in disproportionate benefit through higher participation to
those with greater capital resources, and lower uptake of
38 See ‘China may scale back investment in Africa, says new report’, the africa services than through formal employment.
report, November 2020, <www.theafricareport.com/51202/china-may-scale-
back-investment-in-africa-says-new-report/>.
39 In some LDCs, Facebook subscriptions by per centage significantly exceed 40  S
 ee ‘Inclusive FinTech’, Alliance for Financial Inclusion, <www.afi-global.org/
global averages; see comparison of Internet users vs. Facebook subscriptions, thematic-areas/inclusive-fintech/>.
bearing in mind that the Internet user data are sourced from ITU, and may 41  M
 anyika J, Lund S, Singer M, White O, Berry B, ‘How digital finance could
overstate actual numbers, as previously discussed in note 18; ‘Internet Users boost growth in emerging economies’, McKinsey & Company, September
Statistics for Africa’, Internet World Stats 2021, <www.internetworldstats. 2016, <www.mckinsey.com/featured-insights/employment-and-growth/how-
com/stats1.htm>. digital-finance-could-boost-growth-in-emerging-economies>.

8
• P
 otential for increased FDI as BFTs with physical or Impacts related to business
logistical arms establish local operations hubs, with
positive impact on employment but which could result model, value chain and overall
in the depression of wages where governance is weak, ecosystem (vertical and
leading to increased inequality.42 Further, significant
investments could also reduce trade bargaining power
horizontal integration) including
of LDCs, which could result in unpredictable trade cumulative and systemic impacts
flows43 and inflation.
• B
 FTs advance organizational structures which leverage
• B
 FTs’ likelihood of avoiding taxation through regulatory
existing tax legislation (or lack thereof)49 to their
arbitrage could undermine LDCs’ fiscal positions or
advantage not only at the expense of competition but
space.44 This should be mitigated by governance and
also with a direct impact on the funding of government
regulation such as laid out in the G20/OECD BEPS
and infrastructure by way of regulatory arbitrage.
Initiative.45
By shifting taxation and increasing the burden on
• R
 isk of ‘crowding out’ of established businesses, national social safety nets, because of the lack of
either through increasing market saturation from employee protection, BFTs are reducing the ability of
alternative suppliers abroad or through encouraging governments to implement fiscal policy that benefits
the establishment of new businesses that are not long-term stability. This results in reduced spending on
matched by market demand, leading to an inability to infrastructure and public services, eroding the services
achieve growth and ultimately to increased defaults/ while demand and reliance on them is increasing.
bankruptcies.
• L
 ow levels of fiscal stimulus and pressure from
• B
 FT business models—and the gig economy in buyers to reduce costs under inadequate regulatory
particular—are creating ecosystems of interdependence supervision, which on the one hand allows for unethical
with single points of failure in LDC context.46 These sourcing in value chains and on the other, reduces
points of failure are now being tested by COVID-19, producers’ ability to make long-term or sustainable
although other factors, such as conflict or natural choices, also leads to unsustainable agriculture and
disasters, can also break them. The business model production practices such as monoculture,50 which
of some BFTs involves flooding markets with low-cost degrade the environment, further reducing crop
services to drive out competition, then subsequently productivity and sustainability of farming communities.
raising prices (‘Blitzscaling’).47 As a result of a sharp The macroeconomic impact of soil degradation leading
decline in demand for ad hoc mobility, defaults on to reduced productivity and migration is a reduction in
auto and other loans, which were often underwritten GDP51 and increased burden on shrinking social safety
by local banks, are negatively impacting some LDC nets.
economies, banking sectors and national banks (SDGs 8
• T
 he growing internationalization of BFTs’ business
and 16). This in turn has the potential impact of draining
models is opening additional markets for entrepreneurs
liquidity from the local financial system in favour of BFT
in LDCs as well as governments’ opportunities to tax
investors.48
them through improved digital records. However, digital
platforms greatly decrease market access barriers for
foreign and potentially more developed service offerings
42 
While FDI generally results in economic growth, institutional strength of that represent a competition risk to SME entrepreneurs
countries is an important factor, and weaker institutional quality can result in
FDI having negative impacts. See Miao M et al., ‘The Impacts of Chinese FDI in LDC economies.
and China–Africa Trade on Economic Growth of African Countries: The Role
of Institutional Quality’, Economies 2020, 8(3), 53, <www.mdpi.com/2227-
7099/8/3/53>. • A
 lthough the introduction of digital substitute currencies
43 Predictability is crucial for countries’ development efforts to thrive. and global stablecoins (GSCs) could have potential
44 Supra note 26. benefits in reducing trade barriers and stabilize savings
45 See ‘BEPS Actions’, OECD, <www.oecd.org/tax/beps/beps-actions/>.
for people and MSMEs in LDCs, this could also restrict
46 For instance, the interconnectedness of payments technologies such as digital
wallet, e-money, could lead to concentration and single point of failure. See
‘FinTech Regulations Key Challenges posed by FinTech to the Regulators’,
PricewaterhouseCoopers, February 2018, <www.pwc.in/assets/pdfs/consult- 49  S
 ee, for example, Mullins P, ‘International Taxation and Developing Countries’,
ing/financial-services/fintech/point-of-view/financial-regulatory-technology-in- CDP, 2020, <www.cgdev.org/sites/default/files/Gupta-Mullins-Internation-
sights-newsletters-vinyamak/pwcs-financial-regulatory-technology-insights-feb- al-Taxation.pdf>.
ruary-2018.pdf>. 50  S
 tudies demonstrate the importance of effective governance to con-
47 The business model of some BFTs involves flooding markets with low-cost trol unsustainable agricultural practices, see Soendergaard N, ‘Modern
services to drive out competition; Sullivan T, ‘Blitzscaling’, Harvard Business Monoculture and Periphery Processes: a World Systems Analysis of the
Review, April 2016, <https://hbr.org/2016/04/blitzscaling>. Brazilian soy expansion from 2000-2012’, Rev Econ Sociol Rural 56(1),
48 For example, Uber drivers in Kenya have been defaulting on loans as Covid Brasília Jan./Mar. 2018, <www.scielo.br/scielo.php?script=sci_arttex-
reduced demand and following price drops by Uber; Murrey V, ‘Banks to t&pid=S0103-20032018000100069>.
Auction Uber, Commercial Vehicles Over Defaulted Loans’ Kahawa Tungu, July 51  S
 ee von Braun J, et al., ‘The Economics of Land Degradation’, ZEF Working
2020, <www.kahawatungu.com/banks-auction-uber-commercial-vehicles-de- Paper Series, Center for Development Research, University of Bonn, 2013,
faulted-loans/>. <www.econstor.eu/bitstream/10419/88314/1/773398570.pdf>.

9
 regulators’ abilities to control consumers’ choices of Indirect macroeconomic
currency for savings and stores of value; leading to a
potential for currency substitution52 and consequent implications and influences
impact on money supply and reduced control over of BFTs
monetary policy.53
In addition to the direct macroeconomic implications,
• Integrated payment platforms are becoming so indirect effects of long-term poverty such as increased
systemically important that they can impact LDC conflict,55 where youth with limited opportunities in
economies and financial stability. Social media their home location are more likely to be attracted to
integration with stablecoins, and new digital joining armed groups, and soil degradation caused
currencies, with potential to lead to increasing currency by a lack of funding for adequate crop care,56 can
substitution, could impact financial infrastructure with prevent commercial and financial growth, even with
implications for LDCs’ monetary policies and global the availability of digital finance and associated Fintech
financial stability. This is outlined in Technical Note 1.2. products. BFTs with extractive business models, such as
The analysis indicates that BFTs, including tech those that profit from opaque supply chains facilitating
giants becoming BFTs, have the potential to increase monoculture, poor labour conditions or overleveraging
employment and the development of MSMEs, as well of microbusinesses, can perpetuate or amplify these
as to provide the poorest in disproportionately excluded indirect impacts if they do not make a strategic decision
areas such as rural or slum communities, access to to address them through less extractive approaches.
the formal economy, new markets and monetization The authors’ direct practical experiences with partners
opportunities. However, the potential economic growth and customers indicate that financial services providers
offered by BFTs to date focuses on their most profitable tend not to support rural, bottom of the pyramid or
activities, which can have a mixed to negative impact on financially excluded populations because of the lack
individuals such as exclusion of aged, marginalized and of viable commercial business cases or inaccessibility
vulnerable populations and could be offset by the risk because of conflict, leaving them in a poverty trap.57
to national social safety nets,54 environmental impacts,
eroding worker protection, lack of accountability for Governments can also present both opportunities
supply chains and minimal contribution via taxation or and challenges for BFTs and thereby influence the
infrastructure build. There are new points of failure being macroeconomic impacts that they have on a country.
introduced along with macroeconomic implications For example, Kenya has been broadly supportive of
including the global financial safety net that provides M-Pesa, allowing it the regulatory space to grow
confidence that countries’ unexpected liquidity needs, rapidly and diversify its product offering under a special
for example as a result of overindebtedness leading licence. The same was true for Ant Financial/Ant
to widespread defaults, can be met. What net effect Group, until its recent IPO was halted by the People’s
BFTs will ultimately have will largely depend on Bank of China (PBOC), China Securities Regulatory
governance innovation combined with new economic Commission (CSRC) and the China Banking and Insurance
policies that ensure that positive impacts prevail. Regulatory Commission (CBIRC)58 over concerns about
consumer protection and lack of regulatory control.

55  S
 ee ‘Poverty and conflict’, GSDRC, October 2016, <https://gsdrc.org/profes-
sional-dev/poverty-and-conflict/#:~:text=Poverty%20and%20conflict%20
are%20widely,conflict%20relapse%20(Goodhand%202001)>.
56  S
 ee Kirui OK, ‘Impact of land degradation on household poverty: evidence
from a panel data simultaneous equation model’, AgEconSearch, 2016,
<https://ageconsearch.umn.edu/record/246396/files/136.%20Land%20degra-
52 Digital Money Across Borders: Macro-Financial Implications’, IMF Staff, dation%20and%20poverty.pdf>.
September 2020, <www.imf.org/en/News/Articles/2020/10/30/sp103020-new- 57  S
 ee also, for example, ‘Generating Private Investment In Fragile and Con-
forms-of-digital-money>. flict-Affected Areas’, International Finance Corporation, 2019, <www.ifc.org/
53 Generally. wps/wcm/connect/07cb32dd-d775-4577-9d5f-d254cc52b61a/201902-IFC-
54 Neate R, ‘Big tech accused of avoiding $2.8bn in tax to poorest countries’, FCS-Study.pdf?MOD=AJPERES&CVID=mzeJewf>.
The Guardian, October 2020, <www.theguardian.com/business/2020/oct/26/ 58  S
 ee Zhu J, Leng C, ‘China tells Ant to expect scrutiny of credit business
big-tech-accused-of-avoiding-28bn-in-tax-to-poorest-countries#:~:text=Big%20 ahead of record listing: sources’, Reuters, November 2020, <www.reuters.
US%20technology%20companies%20are,anti%2Dpoverty%20charity%20 com/article/ant-group-ipo-china-regulator/china-tells-ant-to-expect-scrutiny-of-
ActionAid%20International>. credit-business-ahead-of-record-listing-sources-idUSL8N2HP0RL>.

10
Increased government unease is also reflected in the adjacent markets both directly and through partnerships.63
amplified scrutiny of the US Securities and Exchange Third, they have access to large amounts of data and are
Commission (SEC) and associated bodies on US-based unmatched in their ability to analyze it”.64 These innovative
BFTs such as Facebook, Amazon and Google.59 features of BFTs’ business models create a challenge
for regulators as the current scope of governance and
With Amazon, regulators are concerned that regulatory structure, limited by geography and direct
the e-commerce giant improperly gleans data impact of financial services to consumers, does not cover
from third-party sellers in an attempt to give its the full range of BFTs’ reach and impact. This influence is
own products and services an advantage. In not overtly addressed by the 2020–2021 US hearings, but
looking at Facebook, government officials have it follows that decisions emerging from US regulators will
probed complaints it has gobbled up its digital have a secondary impact on the macroeconomic effects of
rivals, leaving few viable competitors in social BFTs on LDCs. These decisions may leave a widening gap
networking. And watchdogs have probed Google’s in terms of primary or targeted regulatory focus for LDCs
search, advertising and smartphone businesses as these international or regional knock-on effects are not
to determine whether they’ve stifled competition, generally within the scope or mandate of regulators and
following in the footsteps of European regulators
legislators in more developed markets.
who have already penalized the company.60

The focus of the US government’s scrutiny ranges from

Macroeconomic policy, BFTs
third-party content and consumer data to antitrust issues, and SDGs
within a mandate of protecting US citizens, entrepreneurs,
businesses and investors, maintaining fair and orderly Macroeconomic policy coherence has been recognized
functioning of the securities markets, and facilitating as an essential core strategy in implementing SDGs.65
capital formation. However, BFTs’ power, size and However, the focus of strategy has been largely on
business models have implications for the global economy how monetary, fiscal and structural reforms can lead to
and LDCs in particular. economic growth, specifically aligning macroeconomic
policies with the dual goals of job creation and poverty
While US regulators may be interested in forcing changes reduction, and directly contributing to the 2030 SDG
in US headquartered technology giants—where the BFTs Agenda (the 17 SDGs and 169 targets focusing on people,
are at least creating high-value jobs and paying some planet, peace, prosperity and partnership).
taxes—their interest does not extend to protecting rights
for foreign governments, workers and environments. There are three thematic bottlenecks in examining the
Therefore, LDC regulators will be forced either to accept macroeconomic impact of BFTs particularly on sustainable
these businesses as they are, or to restrict access to their development of LDCs.
services, as India has done with Facebook’s Free Basics.61
ESG as drivers of the SDGs: the social and
With new products, services, innovation and acquisitions, environmental elements of the SDGs have traditionally
the BFTs (particularly Amazon, Facebook, Apple, Microsoft been considered as externalities or by-products of the
and Alphabet) are increasingly cementing their digital global economic engine.66 Although climate change
imprint and expanding their influence on the global risks and consideration are increasingly incorporated
economy.62 This influence has three key layers: “[First], Big in macroeconomic policy, only a few LDCs “have
Tech companies can reach massive scale very quickly in identified specific policy tools to integrate SDGs within
new lines of business because their digital ecosystems a ‘beyond GDP paradigm’ – in particular using the tools
already have millions of active users. Second, they have of accountability like gender budgeting, the climate
a powerful capacity to enter, create and control any responsive budgeting and the strategies for financial
inclusion”, 67 let alone the tools to examine the impact
59 See ‘Facebook and Twitter CEOs face Senate questions on election measures’,
of the private sector on SDGs. UNDP’s recently issued
CBS News, November 2020, <www.cbsnews.com/news/facebook-twit-
ter-ceos-testify-zuckerberg-dorsey-senate-hearing-watch-live-stream-to-
day-2020-11-17/>; see also ‘Google and censorship’, C-Span, July 2019, 63  S
 ee, for example, Hamilton A, ‘Apple acquires payments firm Mobeewave
<www.c-span.org/video/?462661-1/senate-judiciary-hearing-google-censor- in $100m deal’, Fintech Futures, August 2020, <www.fintechfutures.
ship> and Shepardson D, Heavey S, ‘Amazon, Apple, others to testify before com/2020/08/apple-acquires-payments-firm-mobeewave-in-100m-deal/>.
U.S. Senate on data privacy September 26’, Reuters, September 2018, 64  S
 ee Álvarez C, ‘From fintech to Big Tech: In search of the new digital regu-
<www.reuters.com/article/us-usa-tech-congress-idUSKCN1LS25P>. lation’, BBVA, June 2020, <www.bbva.com/en/from-fintech-to-big-tech-in-
60 See Romm T, ‘Amazon, Facebook and Google turn to deep network of political search-of-the-new-digital-regulation/>.
allies to battle back antitrust probes’, The Washington Post, June 2020, <www. 65  S
 ee ‘Macroeconomic Policy Coherence for SDG 2030: Evidence from
washingtonpost.com/technology/2020/06/10/amazon-facebook-google-politi- Asia Pacific’, NIPFP, January 2020, <www.nipfp.org.in/media/mediali-
cal-allies-antitrust/>. brary/2020/01/WP_292_2020.pdf>.
61 See Solon O, ‘‘It’s digital colonialism’: how Facebook’s free internet service 66  S
 ee ‘Transformations to Achieve the Sustainable Development Goals’, Inter-
has failed its users’, The Guardian, July 2017, <www.theguardian.com/technol- national Institute for Applied Systems Analysis, July 2018, <https://iiasa.ac.at/
ogy/2017/jul/27/facebook-free-basics-developing-markets>. web/home/research/twi/TWI2050_Report_web-small-071018.pdf>.
62 See Clement J, ‘Google, Amazon, Facebook, Apple, and Microsoft (GAFAM) 67  S
 ee ‘Macroeconomic Policy Coherence for SDG 2030: Evidence from
- statistics & facts’, Statista, February 2021, <www.statista.com/topics/4213/ Asia Pacific’, NIPFP, January 2020, <www.nipfp.org.in/media/mediali-
google-apple-facebook-amazon-and-microsoft-gafam/>. brary/2020/01/WP_292_2020.pdf>.

11
 Development Finance Assessment (DFA) and the Addis As such, it is not feasible to understand the potential
Ababa Agenda will help to shift the focus towards the positive impacts as well as “risks of spillovers in an
SDGs; however, these do not yet address the gap in increasingly interconnected world”,71 without considering
private sector impact assessment.68 BFTs and their implications for LDC governments to
create a sound macroeconomic environment for robust
The role of financial inclusion (banking the unbanked and sustainable growth.
and underbanked): access to finance is considered as a
means of enabling economic and financial growth and The intersection of BFTs, SDGs
stability, and the role of Fintech and Fintech institutions
has been framed as a means of advancing inclusion and macroeconomic policy
and growth. While financial inclusion relates to eight
of the 17 SDGs, access to financial services is not a BFTs’ intended impacts for developing countries generally
development goal in itself, and does not have its own focus on the enabling capacity of the digital economy72
specific indicators, as both market development and and specifically on financial inclusion which is directly
sufficiently affordable financing for financial institutions linked in literature to an assumed narrative of positive
are also key to creating opportunities for commercial impact across eight of the 17 SDGs including:
growth.69 This has been exacerbated by the COVID-19
crisis, which is shrinking economies and local markets, ...SDG1, on eradicating poverty; SDG 2 on ending
forcing debt-bound businesses into default. hunger, achieving food security and promoting
sustainable agriculture; SDG 3 on profiting health
and well-being; SDG 5 on achieving gender
Monetary and fiscal policy as macroeconomic
equality and economic empowerment of women;
drivers: the role of BFTs has been examined largely as
SDG 8 on promoting economic growth and jobs;
a subset of Fintech as contributors to financial inclusion SDG 9 on supporting industry, innovation, and
but not in terms of the broader impacts on SDGs and infrastructure; and SDG 10 on reducing inequality.
the implications of developing countries’ abilities to Additionally, on SDG 17 on strengthening the means
drive and implement macroeconomic policies. BFTs of implementation there is an implicit role for
have not been examined as a driver in a shrinking greater financial inclusion through greater savings
fiscal space or in terms of increasing the social burden mobilization for investment and consumption that
for LDCs, through reduced contribution to national can spur growth.73
taxation. The embedded nature of BFTs’ supply chains
in LDCs, both owned and third-party, also lowers Although the impacts of increased financial inclusion and
policymakers’ opportunities to regulate economic participation yield innumerable benefits to underserved
growth through tariffs. Their potential role in increasing markets, it is also important to guard against overuse of
currency substitution could have a positive impact the term or to employ the financial inclusion moniker to
on individuals and businesses, but at the expense of deflect from other, more debatable business practices.
governments’ ability to implement effective monetary Examples of this are exploitative business practices in
policy. vulnerable groups (a so-called captive audience) that
suffer from low levels of both financial and digital literacy.
Consequently, there is little means to examine the BFTs’ activities have generally been considered as aiding
macroeconomic impacts, whether positive or negative, LDCs in terms of increasing financial inclusion (including
of BFTs on SDGs particularly for LDCs. across the above noted SDGs) and in achieving higher
economic growth (translated into GDP and increases
Broadly, policymakers have articulated a plethora in employment rates), thereby creating a conducive
of legislative climate, regulatory mechanisms and economic environment to bring about overall financial
economic environment measures to implement stability. Our analysis finds that the intended BFT
SDGs at national and subnational levels. However, impacts intersect across a wider scope of SDGs and
the most significant, and often overlooked, are moreover can be both positive and negative (albeit still
about the macro policy tools that they have challenging to measure) including impacts on climate
to complement these broad approaches...
change (SDG 13) and strong institutions (SDG 16).
(the approaches required)...to regulate activity,
mobilize revenue, promote gender equality and
environmental management, provide cash transfers
to vulnerable groups and provide employment.70 71  S ee ‘IMF and the Sustainable Development Goals’, International Mon-
etary Fund, February 2021, <www.imf.org/en/About/Factsheets/
68 See ‘Global Outlook on Financing for Sustainable Development 2019: Sheets/2016/08/01/16/46/Sustainable-Development-Goals>.
Time to Face the Challenge’, OECD, November 2018, <www.oecd-ilibrary. 72  The narrative is premised on the notion that digital finance and Fintech have
org/sites/9789264307995-12-en/index.html?itemId=/content/compo- an enabling capacity with risks largely related to data governance, consumer
nent/9789264307995-12-en>. protection and operational risk. See ‘BigTech Firms in Finance in Emerging
69 See ‘Financial inclusion’, The World Bank, October 2018, <www.worldbank. Market and Developing Economies’, Financial Stability Board, 2020, <www.
org/en/topic/financialinclusion/overview>. fsb.org/wp-content/uploads/P121020-1.pdf>.
70 See ‘Macroeconomic Policy Coherence for SDG 2030: Evidence from Asia 73  S ee ‘Financial Inclusion and the SDGs’, UNCDF, 2021, <www.uncdf.org/
Pacific’, NIPFP, January 2020, <www.nipfp.org.in/media/medialibrary/2020/01/ financial-inclusion-and-the-sdgs>.
WP_292_2020.pdf>.
12
Furthermore, our analysis indicates that BFTs’ impacts entrepreneurs to start businesses.79 Cumulatively, the
could also have the opposite, if unintended, effect on effect of more defaults on lending increases risks and
financial inclusion, employment, economic growth, and the cost of borrowing both to individuals and to lenders,
financial or currency stability. Their use of disruptive resulting in a lack of liquidity and a restriction in credit.
technology, innovative business models, and ability to Higher prices charged by banks, bringing bank lending
integrate financial services across the rapidly expanding closer to, or even above the prices of non-bank lenders,
market could displace jobs, increase the digital divide, would reduce the competitive advantage for the banks
reduce governments’ abilities to collect taxes and enable and drive borrowers to alternative lenders. This opens
the violation of labour rights or result in environmental the possibility for Fintechs to supplant the formal banking
degradation. sector, with limited options for effective interventions by
central banks.
BFTs such as mobile money services in Africa and digital
payments in China have demonstrated that they can BFTs’ growing ecosystems have a profound impact on
promote financial inclusion for unbanked and underbanked reshaping the global payments system, because of their
populations. However, Fintech transactions could be scale. For instance, this is the case with $ Coin, a dollar
costly in comparison to cash depending on the service denominated coin being accepted by Visa,80 and the
provider’s “competitive pressures, agent commission first $-backed stablecoin planned by Diem, which will
models, dynamics with strategic partners…”, which can be offered via a wallet on Facebook’s platform, among
drive up the pricing structures,74 as well as taxation in others.81 It is one of the driving factors for central banks
countries that apply mobile money taxes, which are around the world—anticipating its adoption as a substitute
passed on to the consumer. Their lending, where backed currency and potential for dollarization of the financial
by bank lending, can also add extra cost to bank credit system—to accelerate their development of central bank
services.75 BFTs providing alternate credit scoring also digital currencies (CBDCs), based on concerns about
create a data asymmetry with the banks, which are not a flight to an e-dollar as a store of value and payment
able to access or evaluate core data, relying on the BFT’s instrument.82 It is important to note that while sovereign
scoring. Proprietary lending, such as M-Pesa’s short-term governments make plans and considerations towards
overdraft facility, can become extremely costly because digital currencies, both fiat and privately led, two BFT
of the higher credit risk of unbanked individuals and a lack players with global market share, Visa and Mastercard,
of market competition.76 In addition, although BFTs’ use have both announced that they will be phasing in
of technology can improve the quality of financial services transactions conducted in, and transfer of, select
in good times, it can also pose a higher risk to financial cryptocurrencies in the future, heralding a new age in the
stability during bad times. This risk is especially relevant, acceptance of cryptocurrencies as mainstream payment
where they operate as shadow banks in an unregulated methods. This presents another layer of macroeconomic
space, exposing consumers to greater risk. It could also impacts on LDCs as it drives these countries to reassess
be used to exclude citizens from financial services and their monetary policies to accommodate the issuance of a
other products, as has been seen in China’s social credit new digital currency. While CBDCs are considered another
systems, where citizens have had access to services means to promote financial inclusion in developing
removed.77 countries and LDCs, their impacts are largely unassessed,
especially with regard to whether foreign CBDCs would
Two key issues for technologically enabled financial have any impact on substituting their own currencies or
inclusion are that first, rather than providing greater the potential for creating a liquidity crisis.83
inclusion, there is a risk of further excluding traditionally
excluded groups, such as women, who may lack financial,
technical and functional literacy; and that second,
access to financial services does not equate to market
development, as demonstrated by the high number of
79  B
 ateman M, Duvendack M, Loubere N, ‘The Curious Case of M-Pesa’s
Uber drivers defaulting on auto loans in Kenya,78 and the Miraculous Poverty Reduction Powers’, Developing Economics, June 2019,
crowding out effect observed as M-Pesa enabled more <https://developingeconomics.org/2019/06/14/the-curious-case-of-m-pe-
sas-miraculous-poverty-reduction-powers/>.
80  S
 ee Dillet R, ‘Visa supports transaction settlement with USDCstablecoin’,
74 
See ‘How Do Mobile Money Fee Structures Impact the Poor?’, CGAP, May techcrunch, March 2019, <https://techcrunch.com/2021/03/29/visa-sup-
2017, <www.cgap.org/blog/how-do-mobile-money-fee-structures-impact-poor>. ports-transaction-settlement-with-usdc-stablecoin/>.
75 See Kimani E, ‘Fin-tech in Kenya should not cause poverty in pursuit of 81  S
 ee, for example, De N, ‘Libra Rebrands to ‘Diem’ in Anticipation of 2021
financial inclusion’, LSE, January 2020, <https://blogs.lse.ac.uk/africaat- Launch’, coindesk, December 2020, <www.coindesk.com/libra-diem-re-
lse/2020/01/20/fin-tech-kenya-poverty-financial-inclusion-gambling-mpesa/>. brand>.
76 Ibid. 82  S
 ee, for example, Ye C, Desouza KC, ‘The current landscape of central bank
77 See Kobie N, ‘The complicated truth about China’s social credit system’, digital currencies’, Brookings, December 2019, <www.brookings.edu/blog/
Wired, June 2019, <www.wired.co.uk/article/china-social-credit-system-ex- techtank/2019/12/13/the-current-landscape-of-central-bank-digital-curren-
plained>. cies/>.
78 See Sperber A, ‘Uber made big promises in Kenya. Drivers say it’s ruined their 83  F
 or detailed analysis on macroeconomic impacts of digital currencies, includ-
lives’, NBC News, November 2020, <www.nbcnews.com/news/world/uber- ing CBDC, see Technical Paper 1.2 ‘Digital currencies and CBDC impacts on
made-big-promises-kenya-drivers-say-it-s-ruined-n1247964>. least developed countries (LDCs)’.

13
Macroeconomic impact of of revenue for data monetization89 to customers, and
transfer of other data. The formalization of individuals and
the unbanked majority groups engaged in the informal economy, together with
DLT, can increase both efficiency and market access90
Given the scale of the unbanked community in LDCs, adding to GDP, and potentially enabling micro-taxation with
economic impacts at a community level can also impact the same approach as micropayments, although controls
fiscal space and positively or negatively influence key to ensure taxation does not impact consumers would
indicators such as the GINI coefficient or more classically, also be needed.91 However, to be effective and to confer
interest rates and GDP. Fintech companies (including benefits on these communities, taxation and regulation
BFTs) have the potential to support market-based needs to evolve to make mobile money transactions
interventions to increase both demand and supply, affordable for the most vulnerable. While technically
by going beyond provision of basic financial products possible to implement, BFTs have shown a tendency
like payments and lending, to include services such as to instead deliver services causing both positive and
blended financing for agricultural inputs (as M-Pesa has negative impacts and outcomes, as demonstrated by the
done in Kenya), or increasing transparency in supply chains cases outlined above, rather than implementing innovative
and lenders’ terms.84 As identity verification is core to solutions that support greater long-term economic
financial services, BFTs are increasingly providing identity stability for LDCs or disadvantaged communities.92 The
verification services, either as a core service or extension risk is that this structural mendacity will perpetuate
of satisfying their own KYC needs, which can help existing business models unless effectively regulated by
financially excluded individuals join the formal economy.85 supervisory bodies and public opinion.
They have the potential to open up investment corridors
to communities such as agricultural cooperatives, and to Disadvantaged communities specifically in LDCs
improve efficiency in export production,86 bringing much- (particularly smallholder farmers, typically surviving on
needed foreign capital into LDCs. However, BFTs have not less than US$2/day and rural communities that lack
yet entered this space, and so the benefits derived from access to infrastructure, good-quality education and
limited studies may not be achievable at scale. health care) typically have poor access to both mobile
devices and signal as well as low levels of functional,
Fintech companies (including BFTs) can also play an numeric and technical literacy.93 Depending on how they
important role in enabling unbanked majority populations are designed, the technology requirements and digital
to participate in the formal economy.87 However, many literacy needed to use BFTs’ products may therefore
BFTs lack incentives to work with ‘last mile’ populations exclude these groups, missing a significant development
and domestic currencies because of their global opportunity, and increasing rather than decreasing the
business models and non-differentiated service offerings. digital divide.94 Alternative designs can address these
Corporate social responsibility (CSR) reporting could challenges; however, BFTs may lack incentives to adapt
provide incentives to service this economically significant designs to support the poorest customers. Furthermore,
demographic if BFTs are obliged to report on areas as bank-grade regulatory oversight is lacking on BFTs’
such as impact on the digital divide in LDCs, rather than activities, there are few or no controls on their compliance
choosing on which areas to report. with consumer data protection. Absence of regulation
about the consumer’s right to own his/her data leads
Distributed Ledger Technology (DLT), which includes BFT to harvest, own and monetize data that would not
blockchain, can increase transaction efficiency by enabling be accessible to a regulated financial institution following
virtually zero cost micro-transactions, enabling both secure rigorous data protection rules.95 There is a significant
automated micropayments,88 such as passing on a share
89  S
 ee, for example, Ramachandran GS, Krishnamachari B ‘A Reference Archi-
tecture for Blockchain-based Peer-to-Peer IoT Applications’, arXiv.org, May
2019, <https://arxiv.org/ftp/arxiv/papers/1905/1905.10643.pdf>.
90  S
 ee, for example, Boly A, ‘The Effects of Formalization on Small and
84 See, for example, ‘Digital Financial Services For Agriculture Handbook’, Medium-Sized Enterprise Tax Payments: Panel Evidence from Viet Nam’,
IFC, 2018, <www.ifc.org/wps/wcm/connect/3d053636-c589-47ac-865d- Asian Development Review, 2020, <www.adb.org/sites/default/files/publica-
731068f0736e/Digital+Financial+Services+for+Agriculture_IFC%2B- tion/575101/adr-vol37no1-6-formalization-sme-tax-payments.pdf>.
MCF_2018.pdf?MOD=AJPERES&CVID=moq-VoG>. 91  P
 art of the reason for the high cost of mobile money in some countries is
85 See, for example, ‘Mobile identity enabling the digital world’, GSMA, 2020, providers passing taxation on to consumers.
<www.gsma.com/idx/wp-content/uploads/2020/05/Mobile-Identity-en- 92  S
 ome blockchain platforms, such as Celo and Stellar, are aligned with sup-
abling-the-digital-world-report-Final-1.pdf>. porting low-cost transactions for micropayments; however, these are yet to
86 See, for example, ‘Blockchain-enabled supply chain sustainability scheme achieve the scale of BFTs and these low barrier blockchains are susceptible
hailed ‘successful’ by business giants’, edie, September 2019, <www.edie. to price volatility (e.g. Celo has more than doubled in price in the recent crypt
net/news/8/Blockchain-enabled-supply-chain-sustainability-scheme-hailed--suc- boom).
cessful--by-business-giants/>. 93  S
 ee ‘Giving women farmers access to technology’, Qrius, January 2021,
87 See, for example, Mishra SP, ‘FinTech Lending - Nurturing Sustainable <https://qrius.com/giving-women-farmers-access-to-technology/>.
Development’, Linkedin, August 2020, <www.linkedin.com/pulse/fintech-lend- 94  S
 ee Van Nieuwkoop M, ‘To feed the world, we must tackle the digital divide’,
ing-nurturing-sustainable-development-smita-p-mishra/>. Thomson Reuters Foundation News, December 2018, <https://news.trust.
88 See, for example, Khan N, Ahmed T, State R, ‘Blockchain-based micropayment org/item/20181221165816-loesb/>.
systems: economic impact’, IDEAS’19, June 10–12, 2019, Athens, Greece, 95  S
 ee Solon O, ‘‘It’s digital colonialism’: how Facebook’s free internet service
<www.researchgate.net/publication/334584292_Blockchain-based_micropay- has failed its users’, The Guardian, July 2017, <www.theguardian.com/tech-
ment_systems_economic_impact>. nology/2017/jul/27/facebook-free-basics-developing-markets>.

14
risk that, without sufficient incentives or enforceable Key extrapolations
regulation, BFTs could either bypass or significantly
exploit these communities, or, conversely, provide a and conclusions
platform that bypasses engagement with national taxation
and regulation, through shadow banking. BFTs have the potential to positively impact LDCs’ GDP
through increasing access to financial services and
employment. However, without incentives to contribute to
Shadow banking national taxation, to support excluded demographics, or to
maintain ethical value chains, their potential to negatively
Unlike traditional big banks, BFTs’ shadow banking impact countries’ fiscal space and budget for the provision
encourages regulatory arbitrage as similar risks are of core services and infrastructure could be greater than
regulated more tightly in the traditional lending sector, any potential benefits they confer.
especially the post-banking crisis of 2008.96 For instance,
depending on the country, traditional banking sectors BFTs facilitate credit to individuals and SMEs, enabling
are generally required to comply with the Basel capital growth, but at a cost of locking in SMEs101 and crowding
adequacy requirements and stress testing97 to prove their out ‘bricks and mortar’ SMEs in favour of online
resiliency during a time of financial stress.98 Where BFTs suppliers.102 Business growth in LDCs does not guarantee
are increasingly lending off their own books or acting as a growth in market demand, so it can lead to greater
financial intermediary at a systemically significant scale, business and loan defaults without additional market
this can give rise to system-wide risks. Regulators are interventions. Further, as COVID-19 results in contracted
responding by clamping down on BFT activity. Examples markets, increased borrowing is inducing a high level of
of this include the new regulations in China that led to the defaults in micro-businesses.103 Regulatory response is
surprise halt of Ant Group’s IPO by Beijing99 and the US fragmented, reactive and targeted at individual BFTs, with
regulatory attempts to break up Facebook.100 However, the potential to create negative consumer perception of
these responses are fragmented, aimed at individual BFTs regulators and impact on consumers.
by the regulatory regime where they are headquartered,
and can invite criticism of underlying political agendas, BFTs’ unmonitored value chains could create significant
especially where they overturn previous acceptance. As environmental and social impacts resulting in decreased
noted previously, regulators beyond the boundaries of BFT economic growth, especially in LDCs with low levels of
headquarters locations have limited power to influence worker and environmental protection at the end of the
business models, and ‘home’ regulators will be concerned value chain, where foreign investment is likely to be more
with protection of their own economies. Thus, any extractive.
measures taken by developed economy governments are
likely to fail to take into account any risks to LDCs. BFTs could, with the right incentives, provide tools to add
transparency and efficiency to local markets, potentially
creating greater opportunities for FDI in LDCs, both in
communities and infrastructure projects.

96 ‘BIS Quarterly Review’, Bank of International Settlements (BIS), September

2018, <www.bis.org/publ/qtrpdf/r_qt1809.pdf?mod=article_inline>.
97 A BIS review revealed that most of the 100 non-Basel members surveyed had
implemented Basel 1, 90% had some implementation of Basel 2 and 80% at
least one Basel 3 capital control in place, developing countries tend to cherry
pick controls, see: Hohl S, et al., ‘The Basel framework in 100 jurisdictions:
implementation status and proportionality practices’, BIS, 2018, <www.bis.org/
fsi/publ/insights11.pdf>. 101 Sussman
 S, ’How Amazon uses lending to control small businesses’, The
98 Philppon T, ‘The fintech opportunity’, National Bureau of Economics, August American Prospect, February 2020, <https://prospect.org/economy/how-ama-
2016, <www.nber.org/papers/w22476>, cited in Chan S and Yang J, ’Do inter- zon-uses-lending-to-control-small-businesses/>.
est rate liberalization and fintech mix? Impact on shadow deposits in China’, 102 Bundhun
 R, ‘Why small traders in India fear the Amazon effect’, The National
China & World Economy, 2020. News, January 2020, <www.thenationalnews.com/business/economy/why-
99 See ‘Lessons from China’s decision to halt Ant Group’s giant IPO’, Financial small-traders-in-india-fear-the-amazon-effect-1.965981>.
Times, <www.ft.com/content/bf4ff599-419b-47f9-ae92-131702700b79>. 103 Tyson J, ‘Covid-19 and financial access: supporting low-income businesses
100 S
 ee In gram D, ‘Federal Trade Commission calls for breakup of Facebook’, NBC and households in Africa’, ODI, September 2020, <https://odi.org/en/insights/
News, December 2020, <www.nbcnews.com/tech/tech-news/u-s-govern- covid-19-and-financial-access-supporting-low-income-businesses-and-house-
ment-calls-breakup-facebook-n1250588>. holds-in-africa/>.

15
Recommendations
• C
 reation of safeguards by regulators for vulnerable • A
 ddressing opacity issues in value chains for BFTs
unbanked/underbanked populations, for example, by by mandating reporting of labour and environmental
mandating financial inclusion, financial literacy and data indicators.
protection metrics as part of licensing arrangements.
• R
 egulatory exchange to improve consistency between
• C
 ollaborating via existing communities such as the regulatory regimes, and to build or adopt collective
African Regional Economic Communities (RECs), African standards, interoperable and open systems.
Union or others, to advance sustainability aligned
• R
 egulators to review financial services definition
regulatory practices for the governance of BFTs.
to encompass financial services offered by BFTs,
• P
 rovision of conditions conducive to the use of Fintech acknowledging the expanding range of financial services
for financial inclusion, and for competition from offered and taking into account different levels of risk.
additional risk-assessed issuers of stablecoins to offset
• F
 oster collaborative, forward-looking regulatory
the monopolistic power of the BFTs in LDCs.
standards for international businesses and Fintech
• P
 romote regulatory collaboration between financial activities that encourage market entry to LDCs,
services and telecom sectors regulators for elaboration incentivize reducing social inequalities and bolstering
of conditions related to BFTs’ operations in the country local economies, and penalize monopolistic behaviours
for effective oversight and supervision. and decrease tax avoidance practices such as base
erosion and capital flight.
• C
 onsiderations towards alternative incentives for BFTs
(and, by extension, large multinationals) supplementary • D
 evelop more robust data collection and measurement
to consumer pressure or ESG reporting, such as approaches to enable more effective measurement and
mandatory reporting or penalties, to participate in analysis of economic impacts of emerging technology
creating sustainable infrastructure and community and BFTs on LDCs.
investment in LDCs in exchange for market access.

16
The authors would like to express their gratitude to David Jensen (UNEP), Aditya
Narain (IMF), Lisette Cipriano (ADB), Peter Rosenkranz (ADB), Drew Propson (WEF),
Vijay Mauree (ITU), Ben Gregori (New America) and the team at UNCDF/UNDP
(Pamela Eser, Aiaze Mitha, and Johannes Schultz-Lorentzen) for their insightful
feedback and suggestions.

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10 May 2021

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