- Stakeholder consultations reveal that blockchain can help mitigate problems arising from data localization.
- Trends in data localization are problematic to cross-border payments because financial institutions are prevented from pooling data from multiple sources, and operational risks are increased.
The Financial Stability Board (FSB) has released its Stocktake of international data standards relevant to cross-border payments report, where several friction points are identified that impede fast, transparent, and secure cross-border money transfers.
The FSB holds that scaling large data frameworks to ensure compliance with laws and fluidity between intermediary Payment Service Providers who facilitate cross-border transactions is challenging with so many merging markets.
One such impediment identified was that of data localization. Data localization refers to the mandatory data storage and processing within a defined geographic area, typically a specific country or region. This requirement is enforced to maintain physical control over the data, ensuring it remains within the designated location for data privacy, security, and regulatory access. The FSB holds that data localization can:
- Increase cyber and operational risks.
- Prevent financial institutions from pooling sources from different sources.
- Prevent financial institutions from complying with cross-border regulatory requirements.
- Increase fixed and variable costs to deliver payments.
The FSB’s report found that trends of data localization are increasing, and the legislator consulted with stakeholders on this report to see what solutions could be presented. Stakeholders noted that rising ledger technologies could help establish mitigations against harmful data localization trends. Blockchain “would have the potential to support the sharing of information across jurisdictions in a secure and privacy-friendly manner.”