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Over the recent years, the evolution and application of new technologies in the financial industry has led to the consolidation of the “fintech” concept. The term emerged in New York City in 1972, when Abraham Leon Bettinger, the former vice president of the Manufacturers Hanover Trust Bank, used it to describe the innovative changes shaping the bank’s management techniques. But it was not until 2008 that the term “financial technology” imprinted itself on the industry in a more meaningful way.
In particular, that year’s global financial crisis forced the sector to identify new solutions to address its inefficiencies and offer alternative financial services, in accordance with the stricter regulations and public disaffection that accompanied the crisis. These issues, along with the parallel circulation of smartphones, created fertile terrain in which fintech could take root.
Nowadays, there is no single definition of “financial technology,” but most have a few common traits. First, fintech is related to disruptive innovations, and more specifically to the application and interaction of artificial intelligence, blockchain, cloud computing, and big data: the basis of the so-called “ABCD” fintech model. Second, fintech development aims to create alternative solutions that challenge the traditional business model of financial intermediaries. Third, fintech supports the achievement of higher degrees of efficiency. According to forecast data, the global market in fintech will grow by 22.7 percent annually between 2020 and 2025, reaching a value of $305 billion in five years’ time. But in this context, the study of developments in fintech cannot proceed apart from an analysis of the geopolitical and international security aspects that are both the cause and consequence of these recent transformations.
This article discusses the example of Indonesia, a country that is on track to become the world’s fourth largest economy by 2050 – a goal that is reflected by the ambitious vision of President Joko Widodo, who hopes to see Indonesia occupying a more prominent role on the global economic scene. Achieving these aspirations also requires Indonesia to leverage the potential of new technologies that are able to facilitate access to financial services across every segment of society. Startups such as OVO, Doku, Kredivo, Gopay, and Amartha have become omnipresent in the country, providing citizens with a variety of services, from payments and lending, to crowdfunding and financial planning. Within this emerging fintech ecosystem, where ambitious objectives meet a high penetration of smartphones and Internet, revenues from digital financial services are projected to reach $8.6 billion by 2025, with an annual average growth rate of 34 percent. The sector is also favored by foreign investors. For example, Chinese investors are likely to shift their focus to Indonesia as a consequence of the challenges currently encountered within the digital market of India.
However, while the fintech revolution certainly brings significant benefits to countries, it also raises concerns when certain entities, in particular terrorist networks, use new technologies to augment their power and resources. In 2017, Bahrun Naim, a well-known Indonesian militant fighting alongside ISIS rebels in the Middle East, transferred money back to his country to fund terrorist cells in Java using PayPal and Bitcoin, as confirmed by Indonesian Financial Transaction Reports and Analysis Centre (PPATK). The episode testifies to terrorist groups’ increasing interest in finding alternative ways to fund their activities while avoiding detection.
In particular, a 2018 study commissioned by the European Parliament’s Policy Department for Citizens’ Rights and Constitutional Affairs detailed the terrorist financing risks associated to the adoption of virtual currencies (VCs). According to the authors of the report, even while conventional methods of fundraising still present concerns, VCs could represent a new frontier for lone actors and small terrorist cells, especially for young people who are fluent in the use of the internet and digital technologies. For example, virtual currencies could easily be used to shift funds among members, raise money for campaigns or travel, and procure weapons.
Some features of the VCs, the authors highlight, must be taken into account to better understand why they could be chosen to finance such groups. First, users who transfer funds, for example using Bitcoin, are represented by an alphanumeric address which masks their identity. In addition, further veils of anonymity can be added via “mixers,” whose function is to aggregate and then distribute transactions made by different nodes. Monero, Dash, and Zcash are among the open-source cryptocurrencies that guarantee higher levels of anonymity than Bitcoin.
Second, virtual currencies can be transferred across borders, and are even easily portable when compared to physical money. Third, decentralization makes VCs attractive, given the lack of a central authority with the ability to prevent access to the currency. Furthermore, new applications have been developed to overcome the barriers potentially posed by cryptocurrency exchanges. In particular, some platforms allow users to be connected, even without being directly involved in the exchange of funds.
Even if there are currently only a few cases in which terrorist groups have taken advantage of virtual currencies and new financial technologies, the topic remains relevant due to its likely future development and implications. In Indonesia, specifically, in spite of the efforts of private companies and regulators such as Indonesia’s Financial Authority, the fertile fintech environment, which is destined to grow, could potentially pose significant risks that should be monitored closely over the coming years. Considering the space that Indonesia is projected to occupy and the active role that it wishes to take, the challenges that the country will have to deal with will only increase in number and complexity.
Federica Russo is a Researcher and Simulation Supervisor at the consulting firm Wikistrat.
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