Routledge International Studies in Money and Banking

DIGITAL FINANCE AND THE

FUTURE OF THE GLOBAL
FINANCIAL SYSTEM
DISRUPTION AND INNOVATION
IN FINANCIAL SERVICES
Edited by
Lech Gąsiorkiewicz and Jan Monkiewicz
Digital Finance and the Future of
the Global Financial System

This book offers an in-depth analysis of the most salient features of

contemporary financial systems and clarifies the major strategic issues facing
the development of digital finance. It provides insight into how the digital
finance system actually works in a socioeconomic context. It presents three
key messages: that digital transformation will change the financial system
entirely, that the State has a particularly important role to play in the whole
process and that consumers will be offered more opportunities and freedom
but simultaneously will be exposed to more risk and challenges.
The book is divided into four parts. It begins by laying down the
fundamentals of the subsequent analysis and offers a deep understanding of
digital finance, including a topology of the key technologies applied in the
transformation process. The next part reviews the challenges facing the digital
State in the new reality, the digitalization of public finance and the
development of digitally relevant taxation systems. In the third part, digital
consumer aspects are discussed. The final part examines the risks and
challenges of digital finance. The authors focus their attention on three key
developments in financial markets: accelerated growth in terms of the
importance of algorithms, replacing existing legal regulations; the expansion
of cyber risk and its growing impact and finally the emergence of new
dimensions of systemic risk as a side effect of financial digitalization. The
authors supplement the analysis with a discussion of how these new risks and
challenges are monitored and mitigated by financial supervision.
The book is a useful, accessible guide to students and researchers of finance,
finance and technology, regulations and compliance in finance.

Lech Gąsiorkiewicz is an Associate Professor at the Faculty of Management,

Warsaw University of Technology, Warsaw, Poland.

Jan Monkiewicz is Professor of Financial Management at the Faculty of

Management, Warsaw University of Technology, Warsaw, Poland.
Routledge International Studies in Money and
Banking

Financialization, Financial Literacy, and Social Education

Edited by Thomas A. Lucey
Moral Hazard
A Financial, Legal, and Economic Perspective
Edited by Juan Flores Zendejas, Norbert Gaillard and Rick Michalek
Mergers, Acquisitions, and International Financial Regulation
Analysing Special Purpose Acquisition Companies
Daniele D’Alvia
Pension Fund Capitalism
The Privatization of Pensions in Developed and Developing Countries
Leokadia Oręziak
Central Banks in Organizational Networks
Entangled Market Actors
Christoph F-D. Wu
Responsible Finance and Digitalization
Implications and Developments
Edited by Panu Kalmi, Tommi Auvinen and Marko Järvenpää
Digital Currencies and the New Global Financial System
Edited by Ranjan Aneja and Robert Dygas
Negative Interest Rates and Financial Stability
Lessons in Systemic Risk
Karol Rogowicz and Małgorzata Iwanicz-Drozdowska
Digital Finance and the Future of the Global Financial System
Disruption and Innovation in Financial Services
Edited by Lech Gąsiorkiewicz and Jan Monkiewicz
For more information about this series, please visit: www.routledge.com/Routledge-
International-Studies-in-Money-and-Banking/book-series/SE0403
Digital Finance and the
Future of the Global
Financial System
Disruption and Innovation in Financial
Services

Edited by Lech Gąsiorkiewicz and

Jan Monkiewicz
First published 2023
by Routledge
4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
605 Third Avenue, New York, NY 10158
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2023 selection and editorial matter, Lech Gąsiorkiewicz and
Jan Monkiewicz; individual chapters, the contributors
The right of Lech Gąsiorkiewicz and Jan Monkiewicz to be identified as the
authors of the editorial material, and of the authors for their individual
chapters, has been asserted in accordance with sections 77 and 78 of the
Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
utilised in any form or by any electronic, mechanical, or other means, now
known or hereafter invented, including photocopying and recording, or in
any information storage or retrieval system, without permission in writing
from the publishers.
Trademark notice: Product or corporate names may be trademarks or
registered trademarks, and are used only for identification and explanation
without intent to infringe.
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloguing-in-Publication Data
Names: Gąsiorkiewicz, Lech, editor. | Monkiewicz, Jan, editor.
Title: Digital finance and the future of the global financial system :
disruption and innovation in financial services / edited by Lech
Gąsiorkiewicz and Jan Monkiewicz.
Description: Abingdon, Oxon ; New York, NY : Routledge, 2023. |
Series: Routledge international studies in money and banking | Includes
bibliographical references and index.
Identifiers: LCCN 2022007883 (print) | LCCN 2022007884 (ebook) |
ISBN 9781032205489 (hardback) | ISBN 9781032205496 (paperback) |
ISBN 9781003264101 (ebook)
Subjects: LCSH: Finance--Technological innovations. | Digital currency. |
International finance. | Financial services industry.
Classification: LCC HG173 .D54 2023 (print) | LCC HG173 (ebook) |
DDC 332--dc23/eng/20220217
LC record available at https://lccn.loc.gov/2022007883
LC ebook record available at https://lccn.loc.gov/2022007884
ISBN: 978-1-032-20548-9 (hbk)
ISBN: 978-1-032-20549-6 (pbk)
ISBN: 978-1-003-26410-1 (ebk)

DOI: 10.4324/9781003264101

Typeset in Bembo
by MPS Limited, Dehradun
To Ania and Grażynka our beloved wives for their
continuous support and inspiration

Jan Monkiewcz, LechGąsiorkiewicz

Contents

List of figures ix
List of tables xi
List of contributors xii
Digital finance: basic terminology by Jan Monkiewicz and
Marek Monkiewicz xiii
Preface by Stanisław Owsiak xix

Introduction 1
LECH G ĄS IORKI E W IC Z AN D J AN MON KI E W I C Z

PART I
Fundamentals 11

1 Digital finance: systemic framework 13

J AN MONKIEW I C Z A N D P AW EŁ G O Ł Ą B

2 Datafication – economization and monetization of data 33

KA ROL MAR EK KL I MC ZAK AN D J A N MA KAR Y FRYCZ A K

3 Key technologies in the digital transformation of finance 45

KA TAR ZY NA R OS TE K

PART II
Digital State: tasks and tools 65

4 National digital sovereignty: what is at stake? 67

MA GDALENA WR ZO S EK

5 The state in the era of digital revolution and digital finance 93

MA REK RAT A JC Z AK
viii Contents
6 Digitalising the public financial system: the road ahead 109
J OANNA W Ę GR ZYN AN D A GA T A Z A C Z EK

7 Digitalisation of the tax system 123

J OANNA W Ę GR ZYN AN D MA R L E N A S YL I W O N IUK

PART III
Financial consumer in digital space: new issues and
approaches 143

8 Ethics in digital finance: towards a new paradigm of

self-regulation 145
P AW EŁ SK U CZ Y Ń SK I

9 Consumer protection in the financial market in the era of

digital transformation 161
EW A KORNAC KA AN D MAR E K M ON KI E W I C Z

10 Digital exclusion in the financial system: emerging agenda 180

BOG UM IŁ C Z ER WI Ń S KI

PART IV
Risks and challenges of digital finance 197

11 Systemic and cyber risk: the two monsters of financial

system 199
AD A M GŁOGO W S KI

12 Financial supervision in digital age: innovations and data

abundance 213
J AN MONKIE W I C Z

Index 226
Figures

0.1 Valuation of tangible versus intangible assets in S&P 500

companies, 1975–2018 3
0.2 Use of the word FinTech in world literature 5
1.1 The three dimensions of digital transactions 15
1.2 Digital finance cube 16
1.3 Digital financing scheme 18
1.4 Algorithmic trading and other investment forms 19
1.5 Diagrams of three different network structures: centralised
(1), decentralised (2) and distributed (3) 22
1.6 Interaction between Cyber and Financial Network
(schematic diagram) 30
3.1 The radar chart – results comparison of two analyzed cases 52
3.2 The heat map – results distribution in relation to the two
differentiating criteria 52
3.3 The dashboard – interactive overview of indicators and
reports 53
3.4 The participation of various analysis types in the decision-making
process 55
3.5 Framework for in-memory technology agility 60
4.1 History of UN GGE groups 75
7.1 Diagram of the cyberspace tax system 127
7.2 Structure of labour taxation, unemployment rates and aging
populations in high income and low- & middle-income
countries 2005–2019 133
7.3 Structure of the share of income and indirect taxes in high
and lower income countries 2008–2019 135
7.4 Possible scenarios for changes in fiscal policies related to
social and economic changes in the development and wide
use of the potential of technology 137
9.1 Division of personal data according to GDPR 170
9.2 Basic principles of data processing according to GDPR 170
10.1 Percentage of residents using online financial products in
selected Central European countries in 2010–2019 (%) 188
x Figures
10.2 The percentage of individual clients using financial products
in the online version in Poland and in the European Union
in 2010–2019 (%) 191
11.1 The “fintech tree” 201
11.2 Big Tech and Fintech credit flows in China (left panel),
G20 excluding China and including all EU countries
(middle panel) and other countries (right panel) 203
12.1 Hexagon of contemporary financial sector supervision 218
12.2 Common key points in the regulatory reporting process 219
12.3 Digitalization of supervisory analytics 221
Tables

1.1 Bigtechs on the financial market 28

3.1 The cloud computing stack 48
4.1 Four dimensions of the concept of sovereignty 68
4.2 Data policy in Europe 82
4.3 Cybersecurity strategy and regulations in the EU 85
7.1 The impact of megatrends on tax policy related to the
development of technologies in the field of automation and
robotisation of the economy 131
10.1 Percentage of residents using internet banking in selected
European countries in 2010–2019 (%) 189
10.2 Percentage of residents using the Internet to purchase other
financial products in selected European countries in
2016–2019 (%) 190
Contributors

Lech Gąsiorkiewicz Warsaw University of Technology, Faculty of Management

Paweł Gołąb President International Center for Digital Finance
Karol Marek Klimczak Lodz University of Technology
Jan Makary Fryczak Lodz University of Technology
Katarzyna Rostek Warsaw University of Technology, Faculty of Management
Magdalena Wrzosek Cybersecurity Expert
Marek Ratajczak Poznań University Of Economics and Business
Joanna Węgrzyn Warsaw University of Technology, Faculty of Management
Marlena Syliwoniuk University of Warsaw, Digital Economy Lab
Agata Zaczek Intellectual Property Rights Expert
Marek Monkiewicz Warsaw School of Economics, Risk and Insurance Unit
Ewa Kornacka Data Protection Expert
Bogumił Czerwiński University of Technology, Faculty of Management
Paweł Skuczyński University of Warsaw, Faculty of Law and Administration
Adam Głogowski Narodowy Bank Polski, Research and Financial Innovation
Department
Jan Monkiewicz Warsaw University of Technology, Faculty of Management
Digital Finance: Basic Terminology
Jan Monkiewicz and Marek Monkiewicz

1 Introductory remarks
Relative novelty of the digital finance area justifies a separate presentation of
basic terminological definitions which may help the readers in understanding
further analysis and discussion contained in the book. The definitions provided
are on purpose very synthetic, using a plain language and therefore sometimes
not very accurate in reflecting inherent complexity. They are intended to
convene in a friendly manner a non technical description of the underlying
terminology. The basis for the selection were the opinions of contributors and
existing standards of international bodies such as BIS, ITU, CPMI-IOSCO,
IMF, NIST or ISO. These standards are much broader in scope and may serve
as additional reference material. For the ease of use of terminology it is
presented in an alphabetical order. We deliberately avoid structuring our
glossary according to some predefined criteria, which makes it untransparent
for potential user. Most of the terms included in this review will be further
developed in the core text.

2 Glossary
Advanced analytics: tools and models for studying data sets of any size and
structure, ready not only to provide information but also to create
complete decision support solutions
Aggregator: digital platform providing some valuable services to their users,
in addition to their interaction with external producers that they facilitate.
It is a business organization that combines data from various sources,
standardizes it and prepares data sets for sale
Algorithmic trading: trading in financial instruments where a computer
algorithm automatically determines individual parameters of orders, with
limited or no human intervention
Algorithms: a sequence of instructions telling a computer what to do. Any
kind of software consists of algorithms
Altcoin: abbreviation of “Bitcoin alternative”; alternative cryptocurrencies
launched after the success of bitcoin
xiv Digital Finance: Basic Terminology
Anti money laundering(AML): laws, rules and systems aimed at detection
and detaining the use of financial systems for disguise utilization of funds
criminally obtained
Application Programming Interface (API): a software program which
allows for different application programs to interact with each other and
share data
Artificial intelligence (AI): simulation of human intelligence in machines
that are programmed to think like humans and mimic their actions
Authentification: a system of ensuring that a person or a transaction is valid
for the process being performed
Authorization: the procedure of checking whether a customer has the right
to accomplish specific action
Balance sheet consumer lending: provision of a loan directly from the
platform entity to a consumer borrower
Big data: large data sets that may be analysed computationally to discover
patterns and trends and relating to human behaviour. Often come from
multiple sources
Big data analytics: a set of automatic and semi-automatic computational
techniques for processing large data sets, including machine learning and
artificial intelligence
Big tech: major information technology companies operating in a form of
platforms such as for example Google, Apple, Amazon, Facebook,
Tencent, Baidu, having currently a capitalisation ranging from $1
trillion up to $2 trillion each
Biometric identification: a technology facilitating the identification of a
person through biometric verification by evaluating biological traits such
as fingerprints, hand geometry, earlobe geometry, retina, iris patterns and
voice waves
Bitcoin: digital currency or crypto currency created in 2009. Bitcoins are not
issued or backed by any central bank or government so far with the
exception of Salwador
Blockchain: the technology of a shared digital ledger. Underlies bitcoin and
other cryptocurrencies
B2B: Business to business payment
B2G: Business to government payment, including paying taxes
B2P: Business to person payment, including salary payment
Cloud computing: delivery of different IT services on external data centres
without direct management by the user
Cognitive systems: systems that use intelligent data processing and artificial
intelligence to imitate Cognitive systems human thinking, e.g. computer
learning, natural language processing, speech recognition, image processing
Collaborative finance: a category of financial transaction occurring between
individuals without the intermediation of a traditional financial institution
Crowdfunding: collection via on line internet platforms small amounts of
funds to finance a new business venture
 Digital Finance: Basic Terminology xv
Cryptoassets: digital assets which utilize cryptography, peer to peer networking
and a public ledger to regulate the generation of new units, verify and secure
the transactions without the intervention of any middleman
Cryptocurrency: a digital/virtual/currency that uses cryptography for
security and hence is difficult to counterfeit
Cyber: relating to, within, or through the medium of interconnected
information infrustructure of interactions among persons, processes,
data, and information systems
Cyber event: any observable occurrence in an information system
Cyber incident: a cyber event which jeopardizes the cyber security of an
information system or violates the security policies or security procedures
Cyber resilience: the ability of an organization to carry out its activities
withstanding cyber incidents and anticipating and adapting to cyber threats
Cyber risk: the combination of the probability of cyber incidence occurring
and their impact
Cybersecurity: protection of internet connected systems, including hardware,
software and data, from cyberattacks
Data anonimization: removal of personal information from a data set while
maintaining information about transactions involving the same user
Data breach: a cybersecurity mishap when data falls into the wrong hands
without the knowledge of the owner or user
Data broker: a business organization that that facilitates trading in data
Data enrichment: combining data sets generated internally in a business
organization with additional data procured from external providers, which
contains required features that are lacking in the original data set
Datafication: creation of a new economic resource from data
Data quality: fit between data characteristics and user needs including data
accuracy, completeness, consistency, reliability and recency
Data standardization: preparation of data sets in accordance with accepted
technical standards to facilitate further processing and use
Data storytelling: a method of communicating information, tailored to a
specific audience, with using three major components: data, narrative, and
visuals
Data visualization: using images and interactive technologies to analyze data
sets in a user-friendly graphic environment
Digital financial service provider: a entity which provides a digital
financial service to consumer, business or government
Digital financial services (DFS): a range of financial services accessed and
delivered through digital channels. It includes payments, savings, credit,
remittances and insurance
Digital fraud: criminal use of digital finance to take funds from another
business or individual
Digital payment: any payment which is executed electronically
Digital platform: a group of technologies used as a base for other
applications and processes to be implemented
xvi Digital Finance: Basic Terminology
Distributed ledger technology: a digital system for recording the
transaction of assets in which the transactions and their details are
recorded in multiple places at the same time
Donations based crowdfunding: donors provide funding to individuals or
companies on philantropic or civic motivations
Electronic banking: Provision of banking products and services through
electronic channels
Electronic money (E-money): a type of monetary value electronically
stored on payment devices like chips, prepaid cards, mobile phones, or on
computer systems
Electronic payment (E-payment): Any payment made through an
electronic funds transfer
Electronic wallet: a place to store electronic money to allow rapid and secure
electronic transactions. It could take the form of a smart card or a mobile
phone
Equity based crowdfunding: individuals or institutional funders purchase
equity issued by a company via a digital platform
Financial inclusion: sustainable provision of affordable digital financial
services that bring the poor into the formal economy
Financial regulator: governmental organization empowered to set up and
enforce standards and practices referring to financial system
Financial services comparison platforms: provide for the users a possibility
of comparing the conditions of diverse financial products offered by different
companies
Fintech: new technologies used in financial applications. It is also used
referring to the businesses providing software services and products for
digital financial services
GDPR (GDPR): The General Data Protection Regulation, EU law on data
protection and privacy for all individuals within the EU and EEA
Initial coin offering (ICO): a type of fundraising primarily done by
crowdfunding
In-memory databases: data repositories enabling the collection of
unstructured data in non-relational structures and processing of data
resources in the operational memory of a computer system. Their growing
popularity is conditioned in particular by the need to access Big Data sets
Insurtech: use of technological innovations to improve the performance of
insurance sector
Internet of things (IoT): a system of interrelated computing devices,
mechanical and digital machines, objects, animals or people equipped
with unique identifiers and the ability to transfer data over network
without requiring human-to-human or human-to computer interaction
Interoperability (interconnectivity): ability of the payment system
allowing different digital platforms to interact seamlessly. In end result it
provides an ability to exchange payments transactions among providers
 Digital Finance: Basic Terminology xvii
Know Your Customer (KYC): the process of identification of a new
customer at the time of a start of commercial relations. It is also an
international regulatory standard which requires all financial institutions to
ensure that they validate the identity of all their clients
Machine learning (ML): entails computers learning from data without
human intervention. It is a method of designing problem-solving rules
that improve automatically through experience. Machine-learning
algorithms give computers the ability to learn without specifying all the
knowledge a computer would need to perform the desired task
Marketplaces: digital platforms that have as primary objective creation of
efficient matches between consumers and suppliers of goods
(examples:eBay, Uber, Booking.com)
Mining: verifying transactions and securing the public ledger
Mobile banking (M-banking): The use of mobile phone to access banking
services and execute financial transactions
Natural language processing (NLP): the capacity of computer programs to
process human language. As a component of artificial intelligence, NLP is
an interdisciplinary field comprising computer science, AI, and
computational linguistics. NLP applications are designed to understand
natural human communication, either written or spoken, and to respond
using natural language
Near-field Communication (NFC): a short range high frequency wireless
communication technology enabling the exchange of data between
devices
P2P: Peer to peer lending, called alternatively social lending. It enables
individuals to obtain loans directly from other individuals using internet
platforms
Predictive analytics: combines data, algorithms and machine learning to
identify future outcomes based on historical data
Prepaid card: e-money product where the record of funds is stored on the
payment card or a central computer system
Real time payments: payments incurred instantaneously
Regtech: the management of regulatory processes within the financial sector
through technological innovations
Reward-based crowdfunding: financing is provided to individuals or
companies in exchange for non monetary rewards
Robotic process automation: a software technology that makes it easy to
build, deploy, and manage software robots that emulate humans actions
interacting with digital systems and software. The main goal is minimizing
the risk of error, optimizing process efficiency and guaranteeing stable
quality of its implementation
Smart contracts: self-executing contracts with the terms of the agreement
between buyer and seller being directly written into lines of code
Sup tech: application of financial technology to supervisory purposes
xviii Digital Finance: Basic Terminology
Systemic risk: the risk of collapse of an entire financial system or entire
market as opposed to risk of collapse of individual provider or end user
Usage based insurance: type of vehicle insurance where the premium
depends on the distance and the driving style of the policyholder
Wearable technology: a category of electronic devices that can be worn as
accessories, embedded in clothing, implanted in the user’s body, or
tattooed on the skin

Bibliography
1 AFI, Digital financial services. Basic terminology, August 2016.
2 Alliance for Financial Inclusion, Basic terminology, 2013.
3 BIS CPSS-A glossary of terms used in payments and settlement systems, 2003.
4 CPMI-IOSCO, Guidance on cyber resilience for financial markets, June 2016.
5 FSB, Cyber lexicon, 12 November 2018.
6 NIST, Glossary of key information security terms, Rev. 2, 2013.
Preface

Digitalization of economic and social life is taking ever more and more scope. It
is an expression of progress in the world of information, a symptom of a
technological revolution in data collection and processing. The beneficial effects
of computerization, modern means of communication (the Internet) appeared in
all their glory during the pandemic. Today it is difficult to imagine a relatively
efficient functioning of the economy and society, e-banking, the financial
system (e-insurance), and also education (distance learning), consumer activity
(e-commerce), health care system (electronic services), many public services,
etc., without a developed communication system, without digitalization.
Digitalization gave a development impulse to the sphere of economy and
finance due to the radical acceleration of transactions concluded with the use of
digital information carriers already before the pandemic, but during the
pandemic it mitigated its negative effects. The scale and scope of digitalization
is well presented in this monograph, in which the origins and evolution of this
phenomenon as well as its various interpretations have been indicated.
Digitalization creates opportunities for the improvement of economic and
social relations; however, a thoughtless approach to computerization, including
digitalization, would be dangerous.
For an economist, the following questions become of fundamental
importance: to what extent does digitalization contribute to a better
allocation of labor resources, human capital, and financial capital, that is to
what extent does digitalization serve economic and social development. Such
questions must be asked as digitalization should be treated as a tool for
achieving economic and socially useful goals. It is about immediate effects, for
example, reduction of transaction costs due to digitalization of documents,
elimination of postage fees related to document shipments, etc., and also about
long-term effects, i.e. those that favor the optimization of resource allocation
in the long run.
From the point of view of the economic and social effects of digitization and
its impact on the effective allocation of resources, attention should be paid in
particular to another phenomenon, namely the financialization of the economy
(real economy). Financialization, as measured by the ratio of financial assets to
Gross Domestic Product, was monstrous in scope and pace until the financial
xx Preface
crisis that emerged in the first decade of this century. There was an alienation of
monetary and financial phenomena from the real sphere. Meanwhile, it is in this
sphere, and not in the financial sphere, that the meaning and purpose of activity
and man lie. The negative effects of excessive financialization are generally
known and there is no reason to quote them here. Something else is important,
namely the question of whether the right lessons have been learned after the
financial crisis in order to avoid (minimize the risk) another financial crisis, so
negatively affecting the real economy. There are significant doubts about this.
After a partial reduction in the scale of financialization of the economy, the
value of financial assets began to increase again, although not at the same pace
and level as before the crisis. Currently, it is difficult to clearly state what phase
the economy is in due to the level of financialisation due to disturbances caused
by the pandemic. It is also unclear to what extent the inflation wave that is
currently rising around the world is the delayed effect of quantitative easing
related to the financial crisis, and to what extent is it a pandemic crisis. We raise
this problem because concluding financial transactions as part of the
aforementioned financialization would not be possible, at least more difficult,
without the development of information technologies, including digitalization.
Hence, the financialization of the economy, also with the use of digitalization,
cannot be approached indiscriminately. The undeniable value of this book is
precisely the reflective, assessment of digitalization from various points of view,
from the perspective of various areas of economic and social life. Moreover, the
treatment of digitalization as a tool for shaping economic, financial, social and
political processes is a great advantage of work. At the beginning of the
monograph, the authors devoted a lot of space to terminological issues, which is
of great importance in the face of the existing chaos, as well as the ambiguity of
concepts encountered in practice. This makes the work an important asset when
studying digitalization issues, as it makes them easier to understand. This is all the
more important as the digitalization of life continues regardless of whether we
perceive it or not. The observation of this process encouraged the authors to
analyze more closely the essence of digitalization in the context of the shaping of
contemporary economic and financial phenomena accompanying social
development.
The computerization of the economy creates conditions for the
optimization of decisions in state policy. Digitalization, in turn, facilitates
the acquisition of large data sets describing various economic, social and
financial phenomena and processes and, consequently, using them to shape
various fields. The analysis of the position of the state as a special entity in the
conditions of digitalization of the economic, social and public environment
should be included in the original approach to this issue. The state becomes an
important entity in the process of digitalization of various spheres of life.
Digitalization is increasingly becoming a manifestation of the activities of the
institutions of the economic system, in particular the financial system, which
was interestingly highlighted in the second part of the monograph.
 Preface xxi
Holding firmly the assumption that financial instruments, with which
digitalization is strongly related, are a tool for achieving economic and social
goals, the authors of the monograph tried to keep the right proportions and
put emphasis on the expected benefits, but also the emerging threats related to
digitalization. The types of potential abuses in terms of digitalization of
transactions, purchase of financial services and products have been indicated.
The problem of excluding, for various reasons, some consumers from digitized
financial services is also considered. It is important because some inventions in
the field of financial instruments turned out to be very risky even for their
authors. This imposes a special responsibility on financial institutions that use
digitalization, as although it facilitates the sale of these instruments and
concluding transactions, it also creates threats. After all, only a minority of
consumers of financial services have adequate knowledge of financial
instruments, others rely on the opinions of experts and advisers. If they are
representatives of licensed financial institutions, the importance of good
practices and ethical motives for the operation of financiers, bankers, etc.
increases. as we generally observe information asymmetry between the client
and the institution. Hence the need for permanent education and
popularization of knowledge in the field of digitization, for which this work
undoubtedly serves, because there are also institutions (intermediaries) on the
financial market, over which state supervision is limited. It should also be
noted that the terminology used in digitalization is not necessarily easy,
especially in the language of information technology. Hence, it is worth
emphasizing that this knowledge is accessible, which is of practical importance.
The things I referred to, I believe, constitute a sufficient reason to read and
study the book. It can significantly broaden horizons in this still somewhat
mysterious, sphere. The work also has an invaluable practical meaning. It is a
response to the need for knowledge, also for an ordinary person moving in the
world of money, finance, rapidly growing information, and sometimes –
unfortunately – disinformation.
Professor Stanisław Owsiak
Economic University in Cracow
The Committee on Financial Sciences of the Polish
Academy of Sciences, Member of the Presidium
Introduction
Lech Gąsiorkiewicz and Jan Monkiewicz

1 General remarks
Social and economic life is getting in recent years increasingly digitalised and
virtualised. It is characterised by a rapidly growing transmission, processing and
application of data in different public and private contexts. It generates new
opportunities and challenges. It leads to different distribution of wealth and
ranking of the States, regions and businesses. The development of the digital
economy is geographically wise highly uneven. In the least developed
countries (LDCs), only one in five people uses the internet as compared with
four out of five in developed countries. Global digital divide remains a matter
of concern and leads to different initiatives in the international community to
get it under control.
The two champions of the digital world today are US and China. They
control most of the relevant technologies and resources. They own about 75%
of world patents related to blockchain technology, they control ca.75% of the
global cloud computing services market and they are the home for 70 largest
digital platforms, which represent 90% of their global market value
(UNCTAD, Digital Economy Report 2019).
Europe and other players are trying to respond with their own recipes and
strategies but so far they are largely unsuccessful.
The expansion of digital economy is driven by digitalisation of data. They
arise from the digital footprints of activities and transactions registered on
various digital platforms. Global internet traffic grew from about 100 gigabytes
per day in 1992 to more than 45,000 gigabytes per second in 2017. By 2022,
the global internet traffic is projected to reach over 150,000 GB per second.
By 2023, experts expect around 30 billion interconnected devices up from 19
billion in 2018.
Globally, most data sit in private hands. As assessed by World Economic
Forum, 80% of data worldwide will reside by 2025 in business entities (WEF,
2020, p. 4). This results in hectic regulatory attempts at national and inter-
national levels to control the ways they are collected and utilised.
Value creation arises only when the data are transformed into usable col-
lections and monetised through commercial use by digital platforms.

DOI: 10.4324/9781003264101-1
2 Lech Gąsiorkiewicz and Jan Monkiewicz
Platformisation is the second driver of digital economy. Digital platforms
provide the mechanisms for bringing together a set of parties to interact on-
line. Platform-centered businesses have a major advantage in the data-driven
economy. As both intermediaries and infrastructures, they are positioned to
record and extract all data related to online actions and interactions among
users of the platform. The digital platform model already dominates the
business world. Platform-based companies are able to develop much quicker
compared to their traditional competitors, product-focused firms (WEF,
2019). They accelerate inter alia the conversion of businesses from tangible-
based assets into intangible-based assets (WEF, 2020). As reported by Aon and
Ponemon Institute, 88% of assets in possession of S&P 500- companies, as of
2018, were of intangible nature, compared to 17% only 30 years before (Aon,
2019). This is really a revolutionary change (Figure 1).
The third principal driver of the digital economy are digital technology
enablers, the list of which covers currently, among others, blockchain tech-
nology, big data analytics, artificial intelligence, 3D printing, the internet of
things, robotisation, cloud computing and natural language processing. In
order to be applied in practice, they frequently need various non-technology
enablers, such as new regulations, institutions, organisational ideas or business
models.

2 The concept of digital finance

Digital finance refers to the digital part of the financial system, including both
financial products and services, covering the internet, credit and payment
cards, electronic exchange systems, home banking, home investment and the
use of ATMs, crypto assets as well as the infrastructure of the financial system.
In addition, it also includes all mobile services and electronic applications.
Digital finance enables natural persons and legal entities to be active on the
financial market via the internet, without having no direct contact to the
financial institution. It also enables different set up of back end and front end
activities of the financial institutions and the growth of specific ecosystems.
The financial sector belongs to the largest users of information and com-
munication technology, accounting for about 20% of all IT expenditures in the
world. Most financial services delivered today rely on the application of digital
technologies and extensive use of data, whether we talk about banking, in-
surance services, investments or wealth management. Regulation on digital
operational resilience for the financial sectors, Inception impact assessment. This
is true both for business applications as well as for public sector finance. This
strong dependence raises the issue of cybersecurity and operational resilience. As
indicated by a European Parliament report, the financial sector is three times
more at risk of cyber attacks than other economic sectors (Regulation on digital
operational resilience for the financial sectors, Inception impact assessment). The
pandemic of Covid-19 hit the financial sector more often by cyber attacks than
other sectors. This is attributed to the increased mass migration of financial
 $25.03T
Tangible Assets vs. Intangible Assets for S&P 500 Companies, 1975 –2018 Intangible: $21.03T
Tangible: $4.00T

Tangible Assets
§ Easy to value
§ Thick & eficient $11.6T
secondary markets Intangible: $9.28T
Tangible: $2.32T
§ Insurable
$4.59T
Intangible: $3.12T
$1.5T Tangible: $1.47T
$715 billion Intangible: $482B
Intangible: $122B Tangible: $1.02T
Tangible: $594B

1975 1985 1995 2005 2018

Intangible Assets
IBM IBM
§ Difficult to value GE GE
Exxon Exxon Apple
§ Thin & ineficient Exxon Exxon
Mobil Mobil Alphabet
secondary markets Mobil Mobil
Procter & GE Microsoft
Coca-Cola Microsoft
§ Difficult to insure Gamble Schlumber Amazon
Attria Citigroup
GE ger Facebook
Walmart Walmart

5 Largest Global
Companies by
Market Cap
3M Chevron

Figure 1 Valuation of tangible versus intangible assets in S&P 500 companies, 1975–2018.
Source: Aon (2019, p. 4).
Note: S&P 500 market cap represents up to 80% of the total US stock market capitalisation.
Introduction 3
4 Lech Gąsiorkiewicz and Jan Monkiewicz
institutions’ staff to work from home arrangements. Largest part of Covid 19
related cyber incidents in 2020 was registered in finance (25,3%), followed by
services (24,4%), public administration (15,6%) and trade 12,3% (BIS,
2021) p. 5–6.
There is no single definition of digital finance which is commonly accepted.
There are also different opinions on its content and principal constituents.
From the technical point of view, digital finance may be simply described as
the financial system based on electronically stored money with no material
representation and internet transmission of transactions. Of course its social
and economic dimension is much more complex.
Historically, the term digital finance was preceded by the use of the term
electronic finance or e-finance. It was first applied by Erik Banks, an American
banker from Merrill Lynch, who made the first comprehensive assessment of
the development of e-finance on a global scale in 2001 (Banks, 2001). A year
later, an article by Franklin Allen, James McAndrews and Philip Strahan en-
titled “E-finance: An Introduction” appeared in the Journal of Financial
Services Research. It also raised the topic of the impact of electronic finance
on the financial sector. In this study, “e-finance” was defined as the provision
of financial services using electronic communication and processing (Allen
et al., 2002). At that same time, according to Gattenio (2002), the term digital
finance was already being used interchangeably. Today the term digital finance
is frequently substituted by the notion of fintech, which has roughly the same
meaning. As indicated in a recent study by leading experts in this area, “fintech
is now defined by a long-term, global process of digitisation of finance, in-
creasingly combined with datafication and new technologies” (Zetsche et al.,
2020, p. 35).
Historically, the term fintech was used for the first time in 1972 by Abraham
Bettinger, vice-president of the Manufacturers Hanover Trust, a well-known
American bank. In a short two-page article, he stated that, among other things,
the operational research department of the bank had developed over 100 models
used at that time in banking activities. About 40 models had been set aside and
named “fintech.” He further explained that the word “fintech” is an acronym
standing for financial technology which combines banking expertise with
modern management science techniques and computers (Bettinger, 1972).
This term has returned to widespread use over the last 10 or so years, with
its popularity rising rapidly to an unprecedented level. Research into the in-
formation resources of the well-known US database ABI/Inform Collection,
which contains magazine articles, doctoral dissertations and the content of the
most important business and economic periodicals, indicates that in the period
2008–2019 the use of the term fintech in publications around the world in-
creased 25-fold, from around 40,000 times annually in 2008 to approx. 1
million publications in 2019 (see Figure 2).
The enormous popularity of the term fintech was also noted in a recent
Elsevier study regarding areas of research on the leading international SSRN
database in 2016–2018. It turned out that fintech-related research papers were in
 Introduction 5

ABI/INFORM Collection search for term “FinTech”

1,000,000
Number of Occurrences

800,000

600,000

400,000

200,000

0
01

11

19
03

09

13
05

15
07

17
20

20

20
20

20

20
20

20
20

20
Year of Occurrence

Figure 2 Use of the word fintech in world literature.

Source: H.S. Knewtson and Z.A. Rosenbaum, Toward Understanding FinTech and its Industry, 16 January
2020, ssrn.com/abstract=3542438, p. 1.

first place with over 660,000 paper downloads, second came “machine learning”
with about 180,000 and “big data” was third with 159,000 (Tucker, 2018).
The term of digital finance in comparison to fintech is in much modest use.
Simple detection of the papers posted in Social Science Research Network as
of June 2021 indicates that in the course of last 3 years the term digital finance
was identified as central in 343 publications whereas the term fintech was
indicated as central over the same period in 926 papers, twice as much. The
total amount of research papers posted at this period was close to 816 thou-
sands and they were coming from 0,5 million researchers.

3 Purpose of the book

The book concentrates on the extremely important part of the digital
economy which is the digital finance. The elevated role of finance in con-
temporary social and economic life is undisputable. It represents a particular
feature in the digital context as financial transactions are largely an exchange of
data with no material base behind. Therefore, they can become virtualised to
an exceptional degree. There is little doubt today that the future of the fi-
nancial system in next few decades lies in its thorough digitalisation.
The book undertakes an analysis of the most salient features of the changing
contemporary financial systems. Digitalisation disrupts existing analog reality
and introduces numerous changes into the financial systems. The discussion
aims at the clarification of major strategic issues facing the development of the
digital finance and their potential solutions.
We approach the problem in a broad systemic way, providing the
knowledge of how the digital finance system works in its social and economic
6 Lech Gąsiorkiewicz and Jan Monkiewicz
framework. This framework allows us to understand the way various parti-
cipants of the financial system are able to operate in a digital reality and various
challenges and risks they are exposed to.
We offer a bird’s eye panoramic view, disregarding detailed solutions,
which are available elsewhere. We are convinced that such a systemic ap-
proach serves its purpose, particularly at a time of such dynamic developments
generated by digital drivers, that are experienced nowadays.
We bring in the book three key messages: first, digital transformation needs
an active role of the state, whose determination and participation are critical;
second, digitalisation will change the financial system entirely, disrupting
existing reality, and that new risks and challenges will emerge; third, the fi-
nancial consumers will be offered more opportunities and freedom but ex-
posed to more risk.

4 Lay out of the discussion

The book is a collection of 12 chapters written by 16 authors. Most of them
come from academia, others come from public institutions. The book looks at
the digital finance in four steps. For the start, it lays down the fundamentals of
the subsequent analysis. In the next steps, it reviews the challenges facing the
digital state in the new reality, digitalisation of the public finance and the
development of a digitally relevant taxation system. In the third step, the di-
gital consumer aspects are discussed. Finally, the risks and challenges of the
digital finance are addressed.
Part 1 is comprised of three chapters. In Chapter 1, focused on the clar-
ification of the notion of digital finance, Paweł Gołab and Jan Monkiewicz aim
at the identification and systematisation of principal elements constituting digital
finance. Additionally, analysis of existing internal dependencies is provided. For
this purpose, a digital finance cube tool is applied. Digital finance is considered
both as the enhancement of the e-finance and as a form of alternative finance. In
Chapter 2 Karol Klimczak reviews the phenomenon of danetisation and its
impact on the economy. He defines the danetisation as the process of creating of
streams and collections of data representing the elements of the real world.
Access to the data combined with the modern methods of its processing offers
new perspectives for the financial world. Data becomes a decisive resource
shaping its competitiveness. The chapter analyses challenges and opportunities
resulting therefrom for the financial sector. In Chapter 3, Katarzyna Rostek
concentrates her attention on mapping out and assessing key technologies in the
digital transformation of finance. She indicates that the overwhelming digitali-
sation of the economy has impacted the operation of the world of finance, both
the financial organisations themselves as well as the financial services of the non-
financial undertakings. These technologies are aiming at satisfying businesses as
well as consumers. The chapter reviews key technologies applied, their specific
characteristics and the future trends. Additionally, their impact on the financial
world is discussed.
 Introduction 7
Part 2 is focusing fundamentally on the role of the state, its new tasks and
tools. It is composed of four chapters. In Chapter 4, which opens the dis-
cussion, Magdalena Wrzosek addresses the issue of national digital sover-
eignty. She observes that digital revolution transmits ever more human
activities to the cyberspace. It raises naturally the question for the role of the
state and the question of national security, which might be endangered. The
chapter aims at the clarification of the meaning of the digital sovereignty, its
historical development and its principal constituents: data, technology and
cybersecurity. Additionally, it discusses the question of Internet balkanisa-
tion. In the next chapter, Marek Ratajczak takes on the table clarification of
the driving forces of the changes in the developmental trends of the state and
its role within the framework of the digital economy, particularly the digital
finance. As he observes the spectrum of views on the role of the state in
economic and social life ranges from libertarian minarchism to extreme
statism. In recent years, the debate has been sparked again in the aftermath of
two events that took place within a short period of each other. The first one
was the global financial crisis that happened at the end of the last decade, and
the second one is the COVID-19 pandemia. Both events, though essentially
different in their nature, have prompted many states to take extraordinary
measures, including those associated with the digital revolution. Especially
the important role of the state refers to the adequate regulatory optimisation
to address the randomness of the digital paradigm. Additionally, it includes
adequate development of the internet and communication technology to
respond to public and private needs. One of the questions addressed in the
chapter is to what extent does the digital revolution call for a change in the
scope of state regulation and does it represent a change in the role of the state
as a policy-maker? In Chapter 6 Joanna Węgrzyn and Agata Zaczek elaborate
on the digitalisation of the public financial system, an area that is so far clearly
neglected in academic discussion. As they indicate public finance is operating
parallelly with the private finance system and they are frequently intersecting
each other. It was particularly visible during Covid-19 when public financial
assistance shields could have been rapidly implemented into the financial
resources of millions of companies and individuals with the use of digital
technologies. The chapter reviews the current agenda of the digitalisation of
public finance and provides some use cases from the world. Special attention
is paid to the EU agenda. This topic is largely continued in Chapter 7 by
Joanna Węgrzyn and Marlena Syliwoniuk. They focus their attention on the
digitalisation of the taxation system. They underline that the development of
the digital economy raises the need for the appropriate taxation system re-
flecting the specific nature of the new products, services and new business
models. Additionally, it should maintain the level playing field for the analog
or hybrid economy. These new business models for taxation purposes need
to entail several characteristics such as mobility of the non-material assets and
the users, data, network effects, active participation of private individuals in
8 Lech Gąsiorkiewicz and Jan Monkiewicz
the sharing economy, etc. The chapter reviews existing knowledge and
provides some original recommendations for application in this area.
Part 3 of the monograph addresses the crucial issue of the financial consumer
in digital space. The first chapter by Ewa Kornacka and Marek Monkiewicz
focuses its attention outright on the protection of digital finance consumers.
They underline that digitalisation offers new opportunities but at the same time
generates new risks to digital consumers. The chapter reviews the international
regulatory agenda in this respect focusing particularly on G20 and EU. It
concentrates predominantly on the issues of personal data protection which has
become the most debated issue and an area of international consideration. The
chapter provides a critical assessment of the appropriate EU regulation and
discusses the needs for future initiatives. The next chapter of part three by
Bogumił Czerwiński concentrates on the digital exclusion in the financial
system. Czerwiński underlines that digitalisation of finance offers a number of
advantages and opportunities to its customers. At the same time, however, it
may restrict the effective access to the financial system. It may be a result of the
lack of competence to comprehend the way digital transactions are run or it may
be a result of the lack of necessary tools, which determine the access to the
internet and to the financial operators. The chapter provides an analysis of the
determinants and consequences of the digital finance exclusion and offers some
international evidence. Last chapter of this part by Paweł Skuczyński con-
centrates on ethics in digital finance. It seems that digitalisation of finance im-
pacts understanding of ethical norms in finance and the way they become
institionalised. The chapter advocates the view that digitalisation enhances the
responsibility of the financial institutions due to their increased impact via digital
infrastructure and due to the application of new technological tools. This creates
pressure for the new ethical solutions adapted to the digital world. The author
sees a particularly promising solution in collective self-regulation.
Part 4 and the last in the monograph delves into the risks and challenges
generated by digitalisation. The first chapter by Adam Głogowski addresses the
issue of the most powerful risks to digital finance: systemic and cyber risk. He
observes that systemic risk is drawing continuous attention of the public au-
thorities worldwide due to its wide-ranging consequences once materialized.
Growing digitalisation of the financial system generates new sources of micro
and macroprudential risks and thus may have implications for the financial
stability. This is what happens particularly in the case of cyber risk.
The chapter reviews the impact of digitalisation in critical areas such as
cyclicality of the credit supply, liquidity transformation, application of algo-
rithms in risk management process, cyber risk and specifically the special role
of artificial intelligence. It also discusses the possibility of birth of new gen-
eration of systemically important institutions. The final chapter of part four is
by Jan Monkiewicz who undertakes the issue of the financial supervision in
the digital age. He observes that financial supervision is since long a unique
institution of the financial system having until now no similar sectoral peers
elsewhere. It remains in place also in the digital age. Its characteristics however
 Introduction 9
undergo important changes. It takes place on three fronts: it is done differently
than in the analog reality, it is focusing largely on different aspects of financial
markets operation and finally, it is to a large degree deployed outside the
financial sector. The chapter reviews these changes and provides empirical
evidence.

5 Key takeaways
The book that we offer should be of interest to all people applying digital
finance in their everyday life, journalists, students and researchers. It should be
also useful for the business people and representatives of the public sector to
understand its values and limits. It is written by academics and practitioners in a
friendly manner, avoiding unnecessary technical jargon. To make the life of
the readership easier we are also offering a concise non-technical lexicon of
digital finance.

6 Concluding remarks
Digitalisation of finance impacts increasingly growing areas of the financial
world. It attracts also more and more new entrants which make use of cyber
networking and platformisation of economic life. At the same time digitali-
sation allows traditional financial institutions to expand their activities beyond
finance. Their value-added activities include some areas of public services such
as ID confirmation or application acceptance as well as commercial services
such as e-commerce, purchase of air tickets, arrangement of medical visits, etc.
Traditional strong separation of financial and non-financial activities are dis-
appearing.

Bibliography
Allen F., McAndrews J. and Strahan P. (2002) E-Finance: An Introduction, Journal of Financial
Services Research, 22, no. 1–2, pp. 5–27.
Aon (2019) 2019 Intangible Assets Financial Statement Impact Comparison Report. Global
edition, Aon, Ponemon Institute, April 2019.
Banks E. (2001) E-Finance: The Electronic Revolution, John Wiley and Sons.
Bettinger A. (1972) Fintech – A Series of 40 Time Shared Models Used at Manufacturers Hanover
Trust Company, Interfaces, 2, pp. 62–63.
BIS (2021) Aldasoro I, Frost J, Gambacorta L, Whyte D, Covid 19 and Cyber Risk in the
Financial Sector, BIS Bulletin, no. 37, 14 January 2021.
Gattenio C.A. (2002) Digitizing Finance: Views from the Leading Edge. (Special Section:
Digitizing Finance). Financial Executive, 18, no. 2, pp. 49–51.
Knewtson H.S. and Rosenbaum Z.A. (2020) Toward Understanding FinTech and its Industry,
16 January 2020, ssrn.com/abstract=3542438.
Tucker D. (2018) The Fast-Moving World of Fintech Is now a Fast-Growing Research Topic,
www.elsevier.com, October 8, 2018.
UNCTAD, Digital Economy Report (2019).
10 Lech Gąsiorkiewicz and Jan Monkiewicz
WEF (2019) Platforms and Ecosystems: Enabling the Digital Economy. Briefing paper,
February 2019.
WEF (2020) A New Paradigm for Business of Data, Briefing paper, July 2020.
Zetsche D., Arner D.W., Buckley R.P. and Attila Kaiser-Yücel (2020) Fintech Toolkit:
Smart Regulatory And Market Approaches To Financial Technology Innovation, GIZ Gmbh,
April 2020.
Part I

Fundamentals
1 Digital finance: systemic
framework
Jan Monkiewicz and Paweł Gołąb

1.1 Introductory remarks

Since the beginning of the century, modern financial systems have been ex-
periencing a period of dynamic change. The causes of this change are mani-
fold, both on the supply and demand sides. In particular, we should highlight
technological progress, the limitations of applied business models and con-
cepts, the changes introduced by regulations relating to financial markets and
institutions, changes in the organisation of social life, etc. These changes have
caused the uniform fabric on which the financial systems were based for a long
time to become eroded and a multitude of alternative entities to appear in their
place. The existing systems are becoming increasingly heterogeneous and less
transparent. In addition to the traditional financial system based on sectoral
regulatory order, highly regulated financial intermediaries with a legal
monopoly, and characterised by progressive concentration and effective
market monopolisation, a new system is emerging. It is based on a market
infrastructure that allows fund to be directly allocated and obtained on a P2P
or B2B basis (Solarz, 2014). It is characterised by, among other things, the
application of light regulations and horizontal integration, the extensive use of
distributed architecture, without central nodes and vigorous competition in
the market with existing entities. Both segments of the financial system exist
side by side and also engage in various interactions. In addition, in both these
systems, we have seen the growing penetration of virtual solutions in the form
of digital finance in recent years (Gąsiorkiewicz and Monkiewicz, 2021).
The purpose of this chapter is to review the fundamental changes that have
taken place in the financial system during the most recent decade of the new
century, with our main focus being on the digitalisation of the financial system.
It is our belief that this is the essential direction of transformation that will lead to
a fundamental change in the present social, economic and financial reality.
In this chapter, we will systematise the concept and description of the main
components of digital finance, as well as their wider context. They are treated
both as a certain continuum of the development of new types of financial
systems – alternative finance, e-finance and the broadly understood fintechs –
and also as a certain parallel reality existing in a wider environment. This

DOI: 10.4324/9781003264101-3
14 Jan Monkiewicz and Paweł Gołąb
environment comprises the previous editions of financial systems, which both
appear alongside and also intertwine with each other.

1.2 Digital finance: the concept and its components

Digital finance refers to the digital part of the financial system, encompassing
both financial products and services, including the internet, credit and debit
cards, electronic exchange systems, home banking, home investment and the
use of ATMs, as well as the digital infrastructure of the financial system. In
addition, it also includes all mobile services and electronic applications.
Digital finance enables natural persons and legal entities to be active on the
financial market via the internet, without having to contact the financial in-
stitution directly.
Historically, the term digital finance was preceded by the use of the term
electronic finance or e-finance. The first person to use it was Erik Banks, an
American banker from Merrill Lynch, who made the first comprehensive
assessment of the development of such finance on a global scale (Banks, 2001).
A year later, the topic was taken up by Franklin Allen, James McAndrews and
Philip Strahan. In their study, “e-finance” was also defined as the provision of
financial services using electronic communication and processing (Allen et al.,
2002). At that same time, according to Gattenio (2002), the term digital fi-
nance was already being used interchangeably.
In the current phase of discussions on the financial system and its evolution, the
category of digital finance is starting to play an increasingly important role. Its
delineation is not being given special attention in the literature, however. In a
recently published work reviewing the state of research on fintech and digital
finance, the issue of defining these categories does not appear at all, which is
difficult to explain rationally (Allen et al., 2020). Perry Beaumont also treats this
issue vaguely in his work published in 2020. He defines digital finance as “any
kind of data that can be captured and expressed electronically, inclusive of
numbers, text, images and sounds. If it is something that can be sent via email, it is
digital. This information can link to business models and the processes involved in
generating, analysing and otherwise using digital data” (Beaumont, 2020, p. 3)
Beaumont divides the current financial system into “clicks” and “bricks”
finance. He also points out that the saturation of the clicks and bricks elements
may differ markedly in different business functions/transactions or in different
jurisdictions. He does not elaborate further on this issue, however.
It should be noted that certain parts of financial operations can be performed
in click mode and some in brick mode. For example, we can meet our ob-
ligations by making an online transfer, but only obtain a loan at a bank branch.
We can purchase an insurance policy online, but only settle claim through
direct contact. An illustration of the various possible solutions in this regard is
provided in Figure 1.1.
It shows, first, that a transaction may be carried out in different ways at
different stages of its implementation. Second, it also shows that the different
 Digital finance: systemic framework 15

Nature Product Actors

(„how”) („what”) („who”)

Digitally
Ordered Corporations
Goods
and/or
Households
Platform
Enabled Services
Government
and/or
Digitally
delivered Non-profit
Information/data
institutions

Figure 1.1 The three dimensions of digital transactions.

Source: Fortanier and Matei (2017).

material components of a transaction are also subject to the same differentia-

tion. This applies in particular to non-financial transactions, and yet most of
the financial transactions in the financial market support transactions in the real
sectors, not the financial ones. They take place outside the sphere of finance,
in the fields of trade, production, construction, transport or logistics, whereas
in finance they are only mapped. The digital nature of a transaction may also
be determined by the nature of the actors involved. As a rule, corporate en-
tities are at the forefront of development, followed by households. Behind
them are usually public sector institutions and NGOs. Thus, a hypothetical
transaction may not only take place in the digital space as part of a B2B, B2C
or B2G relationship but also in the analogue space as a C2B, C2C or C2G
relationship. It can also run differently in different spheres.
In the literature to date, the most comprehensive approach to the issues of
digital finance and their systematics was that adopted in the study by Gomber
et al. (2017), in which they used the concept of the so-called digital finance
cube. (Figure 1.2)
According to this concept, digital finance is deemed a reality that should be
considered spatially. They divided the entire digital finance space into three di-
mensions: business functions, technologies and their underlying technological
concepts, and markets and financial institutions that provide digital financial services.
One can agree with the creators of this concept that the most important
dimension from the point of view of business and business management is that
of business functions in the field of digital finance. It is their core and
16 Jan Monkiewicz and Paweł Gołąb

Digital finance technologies

ric y,
in g

et ph
s
ks

s
rn

om ra
ing
ain

lou
or

lea

bi og
f th
etw
h

dc

C, ypt
kc

ine

to
oc

NF :cr
an
ch
ial

ne
Bl

s
er
ma

ta

Traditional sevice providers

c

er
So

th
Da
Int

O
d
an

Big
AI

Digital financing

Fintech companies
Digital investments
Business functions

Digital money

Digital payments

Digital insurance ke ita s

ar ig n
m d d tio

ts l
u

Digital financial advice

an stit
In

Figure 1.2 Digital finance cube.

Source: Gomber et al. (2017).

integrator. The other two dimensions are strictly dependent on the first: the
technologies and technological concepts enable the implementation of specific
functions – they are the tools used – while the functions are created by the
markets and institutions from the field of digital finance.
These dimensions complement each other, and at the same time interact
and interpenetrate. The digital finance cube has been constructed so that each
internal area can be described with properties from the three different di-
mensions. All areas are certain subgroups that relate to a specific combination
of a business function, a specific technology and an institution. Not all areas
need to be described by each dimension, just as one institution does not have
to be assigned to one function or technology.
The important functional features of the cube concept are its high level of
generality and flexibility of shaping. The dimensions can be expanded with
new elements when new innovations appear or, if they already exist, they can
find new business functions or new suppliers. It is a kind of Mendeleev’s table
that can be filled with new elements.
In our further analysis, we will endeavour to follow this path and break
down the digital finance cube according to the dimensions proposed. We will
 Digital finance: systemic framework 17
pay particular attention to the issues of the markets and institutions, which,
compared to the business and technological dimensions, have been treated
very vaguely by the creators of the digital finance cube.

1.3 Business functions in the area of digital finance

The first dimension that describes digital finance is its business functions. As
things stand today, these include digital finance, digital investing, digital money
(cryptocurrencies), digital payments, digital insurance and digital financial ad-
vice. Within these functions, there may be a number of specific activities.

1.3.1 Digital financing

Digital financing includes all digital types of capital sharing for both individual
and business clients through the use of the internet. Both digital non-banking
platforms for financial services and online banks can be used for this purpose.
This may involve the use of electronic factoring or electronic invoicing using
online platforms. A growing part of the digital financing market is crowd-
funding, in its various dimensions (donation, investment, reward-based, etc.).
The scheme of such a transaction is simple. The fundraiser uses an internet
platform to obtain the necessary financing. Of course, the operational details
are more complex. The fundraiser usually prepares a document outlining the
collection goals, the desired level of funding, possible remuneration for the
“contributors,” etc. There must also be some authorisation mechanism and
performance security. (Figure 1.3).

1.3.2 Digital investments

Digital investments are supportive of individuals, institutions and companies in
investment decisions, as well as in the independent management of investment
transactions using digital technologies. Investments using new technologies
include mobile trading in securities, internet commerce operations, social
trading, online brokerage services, online commerce in the B2C area and
high-frequency transactions in the area of B2B. The latest innovation in this
respect is the progressive tokenisation of the financing of development projects
through the growth of the mechanism of the Initial Coin Offering (ICO),
whereby an enterprise issues tokens to raise the necessary funds.
The purchased tokens can then be used only for purchases on a separate
internet platform. It is estimated that financing for over 1,000 start-ups of
around USD 12 billion was obtained around the world in this way in
2017–2018 (Benedetti and Kostovetsky, 2018).
Mobile trading refers to the trading of securities using mobile devices such
as smartphones or tablets via an application or special software. Mobile trading
platforms offer real-time access to financial markets and the ability to trade
regardless of location and without financial intermediaries, advisors or brokers.
18 Jan Monkiewicz and Paweł Gołąb

PROJECTS

INTERNET
FUNDRAISERS FUNDPROVIDERS
PLATFORM

FINANCIAL
TRANSFERS

Figure 1.3 Digital financing scheme.

Source: Kordela (2016, p. 148).

Social trading is a new form of investing that is the result of the rapidly
growing popularity of social networks and the development of new invest-
ment technologies. It involves less-experienced investors being able to observe
or imitate (also automatically) the moves of more experienced investors
achieving above-average results. This solution makes it possible even for
people who do not have specialist knowledge or analytical skills in the field of
finance to invest because their role comes down mainly to copying the be-
haviour of other market players. The benefits for more experienced investors
are, first, additional remuneration from the owners of the social trading
platforms, and second, it is an opportunity to compete with other investors.
Automated trading, also called an investment machine or investment robot,
enables investors to implement pre-defined investment decisions in software
that automatically initiates and manages orders on electronic transaction
platforms, most often without human intervention.
High-frequency trading (HFT) is a special type of automated trading. It is
characterised by a large number of operations being performed in a very short
time (often less than a second), using advanced technological tools and an
algorithmic approach. Investment positions are also changed many times
during the day (even thousands of times). The place of algorithmic trading in
comparison to other forms of investment is presented in Figure 1.4.

1.3.3 Digital money

Digital money, or cryptocurrencies, is becoming an increasingly common
phenomenon on the financial market. They fulfil all monetary functions,
 Digital finance: systemic framework 19

Execution latency Traditional investments

High

Algorithmic and e-commerce trading

Low
High-frequency trading
Short Long
Investment period

Figure 1.4 Algorithmic trading and other investment forms.

Source: Karkowska and Karasiński (2021).

although they exist only in electronic form and are mainly used on the in-
ternet. Cryptocurrencies are based on a decentralised network and are not
dependent on any state institution. They are distributed and controlled by
their creators. Cryptocurrencies use the modern cryptography technology of
blockchain (distributed data structure) and, as a result, they are considered by
users to be the safest medium of value exchange due to the inability to
counterfeit or copy such currency and the lack of institutions intermediating in
the exchange. There are currently several thousand different cryptocurrencies
on the market, although Bitcoin (BTC) remains the most popular one. Other
currencies are called altcoins – alternative currencies. Cryptocurrencies are not
generally considered in any country as a means of payment though El Salvador
has adopted from June 2021 bitcoin as legal tender.

1.3.4 Digital payments

Digital payments are defined as all payments that have been initiated, defined
and processed electronically (Hartmann, 2006). The demand for electronic
payments appeared along with the development of online stores (e-commerce).
The first electronic payment solutions were strongly associated with banking
activities and money transfer via bank accounts. Since then, however, new so-
lutions have emerged that are more suited to customers and traders. The payment
process involves transferring a certain amount of money from the payer to the
payee, usually via the internet, regardless of where the transaction is located.
Electronic payments can be divided into three categories: mobile, direct
payments (P2P) and electronic wallets.
Mobile payments are defined as the transfer of funds in exchange for goods
or a service where a mobile phone is involved in both initiating and approving
payments. The location of the payer and their device is not important.
P2P(peer-to-peer or person-to-person) direct payments refer to the transfer
of funds between individuals. There are currently three direct payment
20 Jan Monkiewicz and Paweł Gołąb
models. The first is a non-banking model that uses the services of external
companies such as Pay Pal. The second model is the banking model, where a
private person sends to the bank an order to make a transfer to the recipient’s
account. Using this model, users do not have to register with an external
service provider, which can be seen as a safer solution. The last model is based
on cards, where the payment is processed entirely by the credit or debit card
system.
The term e-wallet, or electronic wallet, describes a digital memory for
electronic money that fulfils most of the tasks of a physical wallet: storing
identification information (ID, driving licence), simplifying cash payments
(transfers, deposits/withdrawals), linking payment cards or storing temporary
tokens such as bus tickets.
Another method of digital payments is fast transfers, which are currently the
most popular form of payment in e-commerce. This service revolves around
the fact that all data for the payment are filled in automatically and the cus-
tomer only logs in to the bank and authorises the payment. With this solution,
there is no possibility of a mistake because the payment is registered im-
mediately.

1.3.5 Digital insurance

The insurance sector is also subject to intense digitalisation processes. Services
in this area are currently focused on specialised insurance comparison websites,
the development of P2P insurance, the use of large databases in the risk as-
sessment process, the Internet of Things in the risk management process and
mobile services (Łańcucki, 2019).
Digital group insurance involves the buying of an insurance policy through
the platform by several people forming a group – usually family or friends. Each
member of the group pays a pre-determined amount of insurance, which is
divided into two parts. The first part goes to the insurance company and the
second part stays in the joint group account on the platform. In the event of any
minor damage or harm being suffered, compensation is paid out from the shared
account on the platform, without the loss of any discounts. This simplifies the
process of obtaining compensation because it reduces the time to examine the
application and reduces administrative costs (the insurance company does not
bear any costs). The platform also receives “compensation” for handling minor
claims from a cooperating insurer (Ostrowska and Ziemniak, 2020).
An important issue in the field of insurance is also risk management and its
reduction based on data provided online by the customer’s devices [usage-
based insurance (UBI)]. The greatest progress in this area is visible in car in-
surance. Sensors installed in cars allow for detailed monitoring of a driver’s
road behaviour (e.g. speed, braking, lane changes, distance travelled, road
category) and based on this data, an insurance policy can be valued. Life in-
surers have used a similar solution for clients sharing their results from activity
logs such as heart rate monitors.
 Digital finance: systemic framework 21
1.3.6 Digital financial advice
In recent years, the number of websites and portals comparing services or
products from various industries, such as computing, food or medical services,
has increased significantly. They classify various articles or services, analyse
them in terms of features and properties and then evaluate them to help other
users choose the best service or product. Studies have shown that such
comparison tools have a real impact on consumer behaviour. Therefore, the
financial industry has also started to create websites dealing with such analysis
in the field of financial services. They can be divided into two categories:
companies primarily involved in product reviews and those that focus on
comparing the services of competing companies. Of course, there are also
hybrid suppliers.
Trading communities, which discuss and exchange information on various
investment instruments, are also developing. These discussions and exchanges
of information often take place on online forums. Studies have shown that the
exchange of information among investors can have a significant impact on
investment behaviour (Gomber et al., 2017).

1.4 Technological foundation: technologies and

technological concepts
The second dimension of the digital finance cube includes technologies and
technological concepts used in modern finance solutions. The basic compo-
nents of digital finance technology are currently fast and mobile internet ac-
cess, artificial intelligence, mobile devices, intuitive user interfaces and
technologies related to cybersecurity. Apart from technologies, the key
technological concepts that are driving the recent changes and developments
in the field of financial services are also very important. These are primarily
blockchain technology, social media, Near-Field Communication (NFC),
peer-to-peer technology and Big Data analytics.

1.4.1 Blockchain technology

Blockchain technology, that is, the technology of distributed data registers,
currently occupies a special place in the technological foundation. It is a system
that allows the registration of an asset transaction when the conclusion of the
transaction and its details are recorded simultaneously in many places of the
network at the same time. According to K. Piech, we can assume that
“Blockchain is a distributed database that contains a constantly growing
amount of information (records) grouped into blocks and linked together in
such a way that each subsequent block contains a timestamp when it was
created and a link to the previous block, which is a cryptographic hash of that
block’s contents” (Piech, 2016, p. 5). The essence of this technology is to
generate data that is protected against forgery, as well as the lack of central
22 Jan Monkiewicz and Paweł Gołąb
management. The integrity of the process is guaranteed by distributing a copy
of the blockchain file to all users every time a new data block is added. It is
arousing great interest, not only in the world of finance but also in other
branches of the economy, as it can be widely used in many other areas, such as
real estate, medicine, legal services and the judiciary.
The basic property of a distributed network, which distinguishes it from the
others, is the lack of a central hub. Compared to a centralised network, such as
in banks, or a decentralised network that still depends on the central issuer, the
distributed structure does not have a superior unit. The key objective of this
technology is to generate data that is protected against forgery and can be
shared between users. All users can read data files and check their authenticity
and correctness, though only a selected group of users can update them. A
configuration that allows data updates by many users can remove the need for
central owners or central management. Everyone has an updated copy of the
file and can check the consistency of the hash (Figure 1.5).
A centralised network is a characteristic solution in banking, where the
central bank is the centre of the system. A decentralised network is characteristic
of insurance and investment funds, where the role of the keystone is played by
reinsurers and infrastructure vehicles (e.g. custodian banks, clearing houses).
Due to the fact that blockchain guarantees data accuracy, it can also be used
to create smart contracts. These contracts are embedded as code in the

Siec scentralizowana Siec zdecentralizowana Siec rozproszona

(Blockchain)

Figure 1.5 Diagrams of three different network structures: centralised (1), decentralised (2)
and distributed (3).
Source: own elaboration.
 Digital finance: systemic framework 23
blockchain and executed automatically when a trusted external data source
confirms that a specified transaction value has been reached. An example of
such a contract would be a weather insurance agreement which automatically
pays compensation when the rainfall in a specific location and in a certain
month exceeds a set value (so-called index insurance).
In summary, the basic features of blockchain are:

• Distributed nature – many copies of one database;

• Each copy contains a set of data linked together in a chain;
• Each user has access to the entire database and change history;
• The data is inextricably linked and cryptographically secured;
• Consensus – the network users must agree to carry out each transaction.

1.4.2 Social networks

The internet connects users and allows social interaction. We can define social
networking services as internet services that allow individuals to create a public
or semi-public profile within a limited network, create a list of other users
with whom they share a connection, and view their own list of user con-
nections and lists made by other users within a given network.
People can use these websites to share their opinions and experiences,
exchange information or discuss specific topics. The easy and quick availability
of social networks means that they are also increasingly being used in the
financial sector, primarily to provide information on new solutions (promo-
tional and marketing activities), but also to share commercial information or
information on profitable investments.
Lenders are increasingly incorporating social media data into the cred-
itworthiness assessment process. Loans granted by friends via the internet are
also popular.

1.4.3 Artificial intelligence and machine learning

Artificial intelligence, understood as a branch of computer science, serves to
make computers able to perform activities that are usually the domain of
people. It creates models of intelligent behaviour by computer systems, and
software and systems that simulate them. Machine learning is a field of artificial
intelligence dealing with the creation of self-improving systems. Artificial
intelligence is increasingly being used in financial systems as they become
progressively digitised, both in back office and front office applications.

1.4.4 Internet of Things

We can define the Internet of Things as a system of electronic devices that can
automatically communicate with one other, exchange data and take action
without human intervention. These systems can perform control and
24 Jan Monkiewicz and Paweł Gołąb
measurement, analytical or control tasks. In the financial sector, they are now
increasingly being used in insurance. An example may be the initiation of an
automated fire-fighting operation if a sensor installed in a building detects the
occurrence of a fire, flood or other events inside it.

1.4.5 Big data analytics and cloud computing

Over the past few years, there has been a significant increase in the possibilities
of data storage and processing. Today, several dozen times more information is
processed daily than just a few years ago. This would not be possible without
the development of artificial intelligence and the use of the concept of cloud
computing. Big data are data whose size and nature force them to be stored
and processed beyond proven storage or processing methods. Big data analytics
is possible primarily due to the ability to scale large volumes of data, support
analytical modelling, real-time data calculation, effective use of computing
power and visual data representation (tables, graphs or charts), as well as the use
of natural language processing technology (NLP) (Cong et al., 2019). The
analysis of data sets can result in finding new correlations, for example in
business trends or changes in customer behaviour. The use of cloud solutions,
in turn, opens up the processing market to small entities, thus allowing them to
compete on an equal footing with large entities.

1.4.6 Cryptography and biometrics

Cryptography is a technology to protect data against unauthorised access. Its
importance is growing with the progressive datafication of social and eco-
nomic systems. Biometrics, in turn, is a technology for automatically re-
cognising people based on their external features, such as the retina, iris,
fingerprints, etc., and behavioural features such as gait, voice and facial ex-
pressions. It is mainly used for the purposes of controlling access to protected
spaces or user authorisation. Both technologies are being used more and more
widely on the financial market for the purposes of the authorisation of par-
ticipants. Biometrics may turn out to be a much more convenient and cheaper
solution than classical cryptography.

1.4.7 Near-field communication – NFC

NFC is a standard that uses high-frequency radio bands for wireless data ex-
change between devices without the need to configure them together. The
devices only need to be very close to each other. NFC is standardised and
operates within an unlicensed radio frequency band.
An example of a mobile application from the digital finance sector that uses
NFC technology is an application for processing payment transactions. A
mobile device, for example a smartphone with NFC enabled, is similar to an
NFC device built into a cash register. Through near-field communication, the
 Digital finance: systemic framework 25
payer is identified, the payment transaction is initiated and then the money is
transferred from the payer’s account to the recipient’s account.

1.4.8 P2P system

The peer-to-peer (P2P) technology or system is a self-organising system of
equal, autonomous entities (users) who strive to share and use distributed
resources in a network environment, avoiding a central service provider or
supervisor. Such distributed resources mean that participants share some of
their own hardware resources (computing power, memory capacity, network
link capacity). Users in a system organised in this way are also called nodes.
These nodes maintain acceptable connectivity and performance without the
need for mediation or the support of a global centralised server or supervisor.
The dynamic growth of the digital economy, based on the internet in parti-
cular, has contributed to the creation of P2P loan platforms that enable the
direct matching of lenders and borrowers.
Borrowers submit a loan application via the platform and provide in-
formation about their own financial situation (earnings, work, other loans,
etc.). Lenders look for clients from among those people who have submitted
loan applications and they make their selection, judging the level of risk and
potential profit according to their own preferences (Szpringer, 2017).

1.5 Digital finance institutions and markets

The last dimension of the digital finance cube is digital finance institutions and
markets.
The digitalisation of financial markets has a significant impact on their or-
ganisation, the nature of the institutions operating on them, the nature and
intensity of competition between the actors on the markets and the new
challenges in the protection of consumers present on them, as well as new
tasks, tools and supervisory models (OECD, 2020). The digitalisation and
platformisation of the financial market has led to a reduction in the role of
hierarchical structures in favour of decentralised markets. The driving force
behind these changes is the use of distributed data ledger technology. As a
result, a new market order may be formed (Zetsche et al., 2020).
As for digital finance institutions, this is a very diverse group of entities
(FSB, 2017). It mainly includes traditional financial service providers such as
banks, insurance companies, investment firms and asset management compa-
nies that operate using digital technologies. In recent years, they have sig-
nificantly digitalised their traditional services and offer the online sale of
numerous products and services. The decline of traditional finance, as ex-
pected by some analysts, has not occurred, however. From 1994 to 2018, U.S.
banking assets quadrupled from USD 3.7 trillion in 1994 to USD 17.4 trillion
in 2018. Over the same period, the number of banking institutions decreased
by half, from around 10,500 to around 5,000. There are fewer banks,
26 Jan Monkiewicz and Paweł Gołąb
therefore, but they are much larger. The development of the internet led to
the emergence of internet banks, but they did not replace the old banks as they
also began to offer digital financial services to their clients (Stulz, 2019). A
similar phenomenon occurred in the insurance and asset management sectors,
where traditional companies have efficiently embraced the digital reality.
In addition to traditional financial institutions, enterprises from the fintech
sector, i.e. the financial technology sector, and the big tech sector, that is the
ICT services sector, also operate on the digital market. These are two ex-
tremely diverse groups of entities, alien to traditional financial institutions and
constituting their obvious competitors.
The very word fintech is a neologism created from the combination of two
words – “financial” and “technology.” It has been defined as “technology-
enabled innovation in financial services that could result in new business models,
applications, processes or products with an associated material effect on the
provision of financial services” (FSB, 2017, p. 4). There is also a second meaning
which is widely used. In this second meaning, fintech means non-financial
institutions, an alternative to the traditional financial circuit, providing financial
services based on their technological advantage. They are usually small, agile
institutions based on niche technologies and offering a narrow package of ser-
vices. The fintech sector is part of the alternative finance sector, although fintech
technologies can also be used by traditional financial system entities.
Historically, the term fintech was used for the first time in 1972 in the
American magazine Interfaces by Abraham Bettinger, vice-president of the
Manufacturers Hanover Trust, a well-known American bank (Bettinger, 1972).
This term has returned to widespread use over the last 10 years, with its
popularity rising rapidly to an unprecedented extent. Research into the in-
formation resources of the well-known US database ABI/Inform Collection,
which contains magazine articles, doctoral dissertations and the content of the
most important business and economic periodicals, indicates that in the period
from 2008 to 2019 the use of the term fintech in publications around the world
increased 25-fold, from around 40,000 times annually in 2008 to approximately
1 million publications in 2019 (Knewtson and Rosenbaum, 2020).
The enormous popularity of the term fintech was also noted in a recent
Elsevier study regarding areas of research on the leading international Social
Science Research Network (SSRN) database from 2016 to 2018. It turned out
that fintech-related research papers were in first place with over 660,000 paper
downloads, second came “machine learning” with about 180,000, and “big
data” was third with 159,000 (Tucker, 2018).
The fintech sector is made up of small, agile, narrowly specialised enterprises
operating with innovative technological solutions. Companies from the fin-
tech sector play the role of neobanks, neoinsurers and investment neopreneurs.
They usually support a small segment of the value chain on the financial
market, such as online payments or risk management, customer profiling,
advertising campaigns, etc. The recipients of their services are both traditional
financial institutions and consumers. In the beginning, fintech companies took
 Digital finance: systemic framework 27
over financial services which were perceived as niche and unprofitable for the
old players. At present, however, these services have become important from a
business point of view and constitute a significant part of their income also for
traditional financial service providers.
In response to this development, these providers often enter into business
and capital relationships with companies in the fintech sector. These com-
panies constitute the largest population of new entrants on the financial
market, bringing to it an element of diversity, competition and freshness.
The size of this population is difficult to assess as we do not have a com-
monly accepted definition of a fintech entity. According to a report prepared
in 2018 for the European Parliament, in 2018 this population consisted of
approximately 3,800 entities. Approximately 1,500 of them were domiciled in
the USA, around 1,000 were in the EU, around 250 were in India and around
100 in China (European Parliament, 2018, p. 33).
It is estimated that in 2019 global investments in the fintech sector increased
by nearly 16% compared to 2018 and amounted to approximately USD 140
billion. The average value of these companies also increased. In 2019, 458 of
them reached a value higher than USD 1 billion (known as unicorns), and
their cumulative value was over USD 1.3 trillion. The main area of fintech
expansion in 2019 was the USA and Europe, where the value of these in-
vestments increased by 60% and 90%, respectively (BIS, 2020a). Fintechs
currently use the latest technical capabilities to provide modern financial
services, usually via the internet. In this way, they are becoming more and
more part of the digital reality.
Alongside those, the population of new financial service providers is starting
to grow with the bigtechs. This term refers to existing companies in the field
of information technology and e-commerce, such as Google, Alibaba,
Amazon, Facebook, Tencent, Apple and Microsoft, which somehow pupate
from bigtechs into techfins and begin their operational activity on the financial
market. The term bigtech emphasises the scale of their operation. The term
techfin, in turn, emphasises their expansion into the financial market based on
their position in internet technology.
Unlike fintechs, bigtechs/techfins base their business model on offering a
wide range of business services. As a rule, they start by selling technological
and data management services, to which they then add financial services.
Bigtechs are also the most important providers of cloud computing services.
As techfins, these companies have experience in e-commerce, social networks,
entertainment and telecommunications. Large databases built up during these
operations are now used to provide financial services, and they can also be sold
to other financial companies (see Table 1.1). They can also sell them to other
financial companies. In 2018, over 11% of global bigtech revenues came from
the provision of financial services. At the same time, these companies had
enormous market power, as measured by the value of capitalisation. The
world’s top seven – Microsoft, Amazon, Apple, Google, Facebook, Alibaba
and Tencent – are clearly ahead of the world’s largest banks in terms of market
Table 1.1 Bigtechs on the financial market

Big tech Main business Banking% Credit provision Payments Crowd-funding Asset management Insurance

Google Internet search/advertising ✔* ✔

Apple Tech/producing hardware ✔
Facebook Social media/advertising ✔
28 Jan Monkiewicz and Paweł Gołąb

Amazon E-commerce/online retail ✔ ✔ ✔ ✔

Alibaba (Ant Group) E-commerce/online retail ✔ ✔ ✔ ✔ ✔ ✔
Baidu (Du Xiaoman) Internet search/advertising ✔ ✔ ✔ ✔ ✔ ✔
JD.com (JD Digits) E-commerce/online retail ✔ ✔ ✔ ✔ ✔ ✔
Tencent Tech/gaming and messaging ✔ ✔ ✔ ✔ ✔ ✔
NTT Docomo Mobile communications ✔ ✔ ✔ ✔
Rakuten E-commerce/online retail ✔ ✔ ✔ ✔
Mercado Libre E-commerce/online retail ✔ ✔ ✔

Source: Crisanto et al. (2021).

FSI Briefs No 12 Big techs in finance: regulatory approaches and policy options Juan Carlos Crisanto, Johannes Ehrentraud and Marcos Fabian March 2021.
✔ Provision of financial service through big tech entity and/or in partnership with financial institutions outside big tech group in at least one jurisdiction. ✔* Launch ekspected in 2021. %
the core activiti of an entiti engaged in banking is taking deposits, though regulations vary across countries.
 Digital finance: systemic framework 29
capitalisation. They had a potential incomparable to those other institutions
and were able to effectively compete with them on the market.
Companies from the fintech and bigtech sectors have significantly changed
the structure of financial services offered, as well as their distribution and
consumption. They have also changed the conditions of competition for
traditional financial institutions. However, they have not been able to gain a
dominant position on the financial market, and the banking market in parti-
cular. In a recently published BIS study, it is estimated that in 2019 fintech and
bigtech companies granted global loans of a total of nearly USD 800 billion, an
increase of over USD 100 billion compared to 2018. In loans, fintech ac-
counted for over USD 200 billion, while this figure for bigtechs was over
USD 570 billion. However, it still constituted a small part of the total volume
of loans granted. In countries such as the USA, Great Britain, the Netherlands
and Germany, it constituted less than 0.5% of the total value of loans granted.
In China, where this share is the highest in the world, it has still not exceeded
3% of total loans (OECD, 2020, p. 13). In total, China accounted for over
60% of the value of loans granted by these companies worldwide (BIS, 2020b).
In addition to commercial institutions, the world of financial institutions also
includes supervision of the digital financial sector, including financial prudential
supervision as well as non-financial supervision. The latter covers the super-
vision of teletechnical systems, in particular in the field of cybersecurity.
The tasks and structure of market supervision are different from those which
dominated in analogue times. There are many more technical and horizontal
elements to it. This is due to the direct interactions between cyber networks
and financial networks (see Figure 1.6). It should be noted that cyber networks
include all elements of information and communication technologies, such as
software, hardware or teletechnical service providers, who create the infra-
structure for operational processes running in financial networks. For example,
hardware and software suppliers may enter into direct ties with institutions
present on the financial market: insurers, banks, investment funds, central
contracting parties, specialised databases, etc. The situation is similar with
providers of IT and communication services. The ties connecting both types
of networks make the reliability of cybernetic networks crucial for the stability
of the entire financial system (Brauchle et al., 2020, p. 5).
In the new conditions created by digital finance, the issues of protecting the
rights and interests of consumers, as well as supervising the protection of
privacy and the use of personal data, are also of great importance. At the same
time, supervisory instruments that use digital technologies to a much greater
extent are also changing, too.

1.6 Final remarks

Financial systems are complex aggregates containing elements created in the
past as well as new ones which are the product of the new possibilities and
needs of today. They are multi-layered. These systems are also living creations,
30 Jan Monkiewicz and Paweł Gołąb

CYBER NETWORK

Software IT Provider

Hardware Communication
Cloud Infrastructure

Insurance
Bank Information
Company
S Services

Investment Central Counterparty

Fund FINANCIAL NETWORK

= representative of broader network components

Figure 1.6 Interaction between cyber and financial network (schematic diagram).
Source: Brauchle et al. (2020, p. 4).

under which constant competition processes occur and cooperation rules and
networks are shaped.
The digitalisation of the financial system is currently intensifying compe-
tition in the financial market, broadening consumer choices and democratising
access to financial services. At the same time, it is also leading to new
monopolisation threats related to the expansion of bigtechs/techfins. This
danger is very clearly indicated by the recently adopted report on competition
in digital markets by the US Congress and the set of urgent recommendations
in this regard (Investigation of Competition in Digital Markets, US, 2020).
The report predicts that if bigtech development is left without regulatory
intervention, then in 10 years’ time, the five largest American entities in this
area will control 30% of global GDP.
The digitalisation of the financial markets also leads to financial systems becoming
more efficient, for example by improving the risk management systems, as a result
of the development of databases, and better analytical and sales solutions. The di-
rection of the future evolution of these systems are not known to us in advance and
cannot be decreed by anyone, although regulatory interventions do have a sig-
nificant impact on the shape of the existing systems. Understanding the reasons for
change is an important circumstance that can allow us to read upcoming events.
Such a diagnosis is a complex issue. It requires an interdisciplinary approach and a
broad, global perspective. It also requires the constant observation of events and the
use of new tools, models and analytical techniques.
 Digital finance: systemic framework 31
Bibliography
Agarwal S. and Zhang J. Fintech, Lending and Payment Innovation: A Review, ssrn/com/
abstract=3673248
Al-Blooshi L. and Nobanee H. Applications of Artificial Intelligence in Financial Management
Decisions: A Mini-Review, Abu Dhabi University, ssrn.com/abstract=3530140
Allen F. et al. (2020) A Survey of Fintech Research and Policy Discussion, FRB of
Philadelphia Working Paper No. 20–21, May 2020.
Allen F., McAndrews J. and Strahan P. (2002) E-Finance: An Introduction, Journal of
Financial Services Research, 22( 1–2), pp. 5–27.
Banks E. (2001) E-Finance: The Electronic Revolution, John Wiley and Sons.
Beaumont P. (2020) Digital Finance, Routledge.
Benedetti H. and Kostovetsky L. (2018) Digital Tulips?, ssrn.com/abstract=3182169
Bettinger A. (1972) Fintech – A Series of 40 Time Shared Models Used at Manufacturers
Hanover Trust Company, Interfaces, 2, pp. 62–63.
BIS (2020a) Cantu C and Ulloa B, The Dawn of Fintech in Latin America: Landscape,
Prospects and Challenges, BIS Papers No. 112, November 2020.
BIS (2020b) Cornelli G et al., Fintech and Bigtech Credit: A New Database, Working
Paper, September 2020.
Brauchle J.P., Goebel M., Seiler J. and Busekist C.H. (2020) Cyber Mapping the Financial
System, Carnegie Endowment for International Peace, Working Paper, April.
Cong L., Li B. and Zhong T., (2019) – Alternative Data for FinTech and Business
Intelligence, 10 October 2019, ssrn.com/3521349
Crisanto J.C., Ehrentraud J. and Fabian M. (2021) Big Techs in Finance: Regulatory
Approaches and Policy Options, FSI Briefs No. 12, Financial Stability Institute, March 2021.
European Parliament (2018) Competition Issues in the Area of Financial Technology
(FinTech) Study, July 2018.
Fortanier F. and Matei S. (2017) Measuring Digital Trade: Results of OECD/IMF
Stocktaking Survey, Paris, France, 24–26, 2017, OECD/IMF (2017).
FSB (2017) Financial Stability Implications from FinTech. Supervisory and Regulatory
Issues that Merit Authorities’ Attention.
FSB (2019) Bigtech in Finance: Market Developments and Potential Financial Stability
Implications.
Gattenio ChA (2002) Digitizing Finance: Views from the Leading Edge (Special Section:
Digitizing Finance), Financial Executive, 18(2), pp. 49–51.
Gomber P., Koch J. and Siering M. (2017) Digital Finance and FinTech: Current Research
and Future Research Directions, Working Paper, January 2017, Journal of Business
Economics, 87, pp. 537–580.
Hartmann M.E. (2006) E-Payments Evolution, in: Lammer T (ed.), Handbuch E-Money, E-
Payment & M-Payment, PhysicaVerlag, Heidelberg.
Investigation of Competition in Digital Markets, Majority Staff Report and Recommendations,
Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the
Judiciary, US, 2020.
Karkowska R. and Karasiński J. (2021) High-frequency Trading – A New Challenge for
Capital Markets, in: Gąsiorkiewicz L and Monkiewicz J, Innovation in Financial Services.
Routledge, pp. 217–231.
Kayal P. and Purnima R. (2019) Bitcoin in the Literature of Economics and Finance: A Survey,
National University of Singapore, ssrn.com.abstract=3573248
32 Jan Monkiewicz and Paweł Gołąb
Knewtson H.S. and Rosenbaum Z.A. (2020), Towards Understanding FinTech and its
Industry, January 16, 2020, ssrn.com/abstract=3542438, p. 1.
Kordela D. (2016) Crowdfunding w Polsce –koncepcjafinansowaniaspołecznościowego
[The Concept of Crowdfunding], in: Prace Naukowe Uniwersytetu Ekonomicznego we
Wrocławiu [Papers of the University of Economics in Wrocław], No. 436.
Łańcucki J. (2019) Wpływ innowacyjnych technologii na funkcjonowanie rynku ubez-
pieczeniowego, Prawo Asekuracyjne [The Impact of Innovative Technologies on the
Functioning of the Insurance Market, Insurance Law], 2/2019, pp. 6–22.
OECD (2020) Digital Disruption in Banking and its Impact on Competition.
Ostrowska M. and Ziemniak M.P. (2020) The Concept of P2P Insurance: Review of the
Literature and EIOPA Report, PrawoAsekuracyjne [Insurance Law], 1(102), pp. 31–48.
Piech K. (ed), (2016) Leksykonpojęćnatemattechnologiiblockchainorazkryptowalut [Lexicon of Concepts
on Blockchain Technology and Cryptocurrencies], Warsaw, MC, Ministry of Digitalisation.
Solarz J.K., (2014) Shadow banking: systemowainnowacjafinansowa [Shadow Banking: Systemic
Financial Innovation], SAN, Studies and Monographs, Łódź-Warsaw, 2014, No. 52.
Stulz R.M., (2019) FinTech, BigTech and the Future of Banks, Ohio State University, Fisher
College of Business Working Paper Series, WP 2019.03.020
Szpringer W., (2017) Nowetechnologie a sektorfinansowy [New Technologies and the
Financial Sector], Poltext, Warsaw, 2017.
Tucker D., (2018) The Fast-moving World of Fintech Is Now a Fast-growing Research
Topic, www.elsevier.com, 8 October 2018.
Tułodziecka A., (2019) Wykorzystanie nowych technologii w sektorze finansowym na
przykładzie blockchain. Analizaiocena. [The Use of New Technologies in the Financial
Sector on the Example of Blockchain: Analysis and Assessment], WZ PW, master’s
thesis, 2019.
Zetsche D., Arner D.W. and Buckley R.P. (2020),Fintech Toolkit: Smart Regulatory and
Market Approaches to Financial Technology Innovation, GIZ GmbH, April 2020.
2 Datafication – economization
and monetization of data
Karol Marek Klimczak and Jan Makary Fryczak

2.1 Introduction
Financial companies around the world face the challenge of effectively har-
nessing a new source of value: volumes of data generated, processed and stored
on an ever-growing scale. Datafication is based on the digitization of en-
terprises that preceded it, but unlike the introduction of IT technologies that
are now ubiquitous in financial institutions, it affects the environment rather
than the way companies in the financial sector are managed. Although fi-
nancial institutions have huge datasets, legal and organizational constraints
make it difficult to monetize this data. Meanwhile, global Internet corpora-
tions are gaining a monopoly position in the international and domestic data
markets. New, data-driven business models may shake the structure of the
financial sector, forcing regulators to seek legal solutions that balance system
stability while fostering its long-term development (IMF, 2021). What are data
and how do they shape digital finance?
The concept of datafication derives from a popular book devoted to the
consequences of big data analytics for enterprises and society (Mayer-
Schönberger and Cukier, 2013). Datafication is defined in this publication as
the ongoing process of creating a digital representation of an increasing
number of aspects of the real world. The authors suggest that everything can
become data: from words written in books, contained in libraries and archives,
to words spoken by customers calling the bank’s hotline. Big Data is growing
exponentially, consuming more and more resources, and overwhelming tra-
ditional sources of information with its sheer size. Mayer-Schönberger and
Cukier (2013) indicate, however, that their use requires a specific approach
and capabilities companies need to develop. Big Data analysts rely on quantity
rather than quality, accept errors and noise in the data rather than correct
them, and limit their conclusions to correlations without explaining causal
relationships.
The purpose of this chapter is to describe datafication, its features and
consequences in the context of the digitization of finance. What arouses the
interest of financial professionals are the economic benefits resulting from
datafication and the related increase in the efficiency of enterprises, or more

DOI: 10.4324/9781003264101-4
34 Karol Marek Klimczak and Jan Makary Fryczak
broadly, of factors of production. Distinguishing data from other technical
concepts, such as quantification, measurement, registration, digitization, or
Big Data, is of lesser importance. Datafication implies the process of dis-
covering value in data. Data are an economic resource that can be employed
for the benefit of the enterprise.
The phenomenon of datafication has been defined for the purposes of this
book as the separation of a new data-driven economic resource, referring to
the definition proposed by Mejias and Couldry (2019). This definition allows
to use the wealth of economic theory dealing with the use of limited resources
in the production of goods and services. Data are a component of capital,
which is one of the three factors of production alongside land and labor. How
do data fit the category of capital? First, data are products of business activities
rather than product of nature or society. Second, data increase labor pro-
ductivity. At the micro-level, data can be analyzed in line with the resource
theory of the enterprise (Mikalef et al., 2017), which defines a resource as all
assets, capabilities, processes, attributes, information, knowledge, etc. con-
trolled by the enterprise that enable the creation and implementation of a
strategy increasing effectiveness and efficiency (Barney, 1991).
The definition of data as an economic resource opens the door to a deeper
analysis of its characteristics. Creating a data resource, like capital, must require
investment before the resource can be used up. Over time, data would gradually
lose its value because it describes people’s behavior at a certain point in time.
Impairment of data is equivalent to capital depreciation. Therefore, maintaining
a data resource requires repeated expenditure on updates, the value of which is
proportional to the size of the resource. As the data resource used by enterprises
grows, the outlays for maintaining the value of this resource will constitute an
increasing part of total investment. At the same time, the benefits for the en-
terprise resulting from its data resources depend on the availability of com-
plementary resources, the method of linking various resources within the
business model, and its external environment (Barney, 1991). Data can be
traded, if separated, as an independent resource, because they meet the basic
market requirement: data have value. The further part of the chapter discusses
the use of value of data, and its exchange value obtained when selling data.
This chapter contains the following sections. The introduction defines
datafication in the context of economic theory. Datafication in Finance pre-
sents the subject from the perspective of the financial sector. The Global Data
Economy discusses the development of the data market and regulatory ac-
tivities of the most important countries. Benefits and Risks discuss the con-
ditions necessary for a profitable use of data in finance. The chapter ends with
conclusions regarding possible future developments.

2.2 Datafication in finance

Data collection and analysis have been instrumental in building competitive
advantage in finance long before datafication (Navaretti et al., 2017, p. 18),
 Datafication 35
and the intensity of data processing is steadily growing in all areas of business
(IMF, 2021). Analysis of financial instruments and data on the economic
foundations of their issuers provide the basis for making decisions about
buying or selling assets. Collecting data about credit applicants and their credit
histories is helpful in making decisions on granting or withdrawing a loan.
Similarly, information on loss incidence ratios is helpful in negotiating the
insurance premium. Financial data are also collected for the purpose of doc-
umentation of the transaction and facilitating subsequent settlements. This is
achieved through the record of operations on accounts in banks, brokerage
houses or clearing houses. Financial firms have thus experienced the benefits
and costs of using data.
The development of digital technologies was originally intended to improve
the processes of collecting, processing, and exchanging data by financial
companies. The current interest in datafication signals a breakthrough resulting
from the increase in volume and diversification of data (Mayer-Schönberger
and Cukier, 2013), requiring a redefinition of the strategy. Data are no longer
a matter confined to the domain of information and technology. Obtaining an
edge over competitors requires a particularly favorable combination of data,
information, and other resources of the enterprise with the developments in its
environment: networking of social life, process autonomy and production
personalization. The networking society opens spheres previously considered
private for exploitation by business. Autonomation of processes frees en-
terprises from cognitive limitations of employees, reducing the cost of on-
boarding, training, and managing change. Customizing production allows
companies to accelerate the design and manufacturing processes using cus-
tomer data and autonomous algorithms. Companies can therefore provide
each client with a product that suits their needs while keeping costs low. At
the same time, companies can differentiate the selling price according to the
customer’s willingness to pay, exploiting the consumer’s surplus.
Recent literature highlights the consequences of datafication, replacing
initial enthusiasm with caution. The Encyclopedia of Big Data, under the
heading “datafication,” focuses mainly on criticism and warnings (Southerton,
2020). It is a fact that more and more events, actions and behaviors are re-
corded in a digital form, allowing them to be quantified and used by whoever
gains access to the data. Their use is subject to simplifications and errors,
however, resulting from the limitations already mentioned by Mayer-
Schönberger and Cukier (2013): the data show what is happening, but not
why. They show correlations but not causation. Meanwhile, analysts take a
mental shortcut to the implicit assumption that big data delivers high-value
information in any situation. By creating autonomous devices, they forget
about the limitations of the data they use to train artificial intelligence systems.
For example, data show variation rather than consequence because the cross-
sectional dimension tends to be much larger than the time dimension. Their
usefulness in forecasting is therefore limited to a short time horizon. In ad-
dition, there are large, systematic differences in the use of social media,
36 Karol Marek Klimczak and Jan Makary Fryczak
devices, and platforms by demographic and social groups. Data may conse-
quently only reflect the preferences of a subset of the population, a limitation
the management may be unaware of.
These limitations are of little business relevance if decision-makers are
convinced of the benefits of datafication. Profitable niche strategies using
customer data have been proposed for over a decade (Elberse, 2008). They
stem from the observation that the economy is effective, indeed highly ef-
fective, in meeting the needs of the population, but there are groups of
consumers whose needs differ from the typical ones and are willing to pay a
higher price to meet these needs. Datafication reduces the costs associated with
meeting diverse needs, thereby increasing the profitability of niche strategies.
The combination of the ability to identify needs through datafication and
personalization is of particular importance. At the same time, high flexibility of
production allows companies to exploit the consumer’s surplus in a niche that
was not available before. Thus, access to high-quality data may be a major
success factor.

2.3 Global data economy

The economic importance of data is a recent phenomenon, so only pre-
liminary estimates are available. The European Commission has been re-
searching the data market since 2013 as part of the Digital Single Market
Initiative (EU, 2020). The original projections were to employ 10 million
people in data processing across European industries, which would increase
the economic output by more than € 700 billion, or 4%, by 2020.
Observations from the last, third measurement round in 2019 showed lower
rates: 7.6 million workers and an estimated GDP impact of € 400 billion or
2.8% (EU, 2020, p. 13). The market is projected to continue to grow by half
over five years, even after adjusting for the effects of the pandemic. The data
market is not a separate sector, so researchers engaged in a tedious task of
identifying some 149,000 companies providing digital services and data-based
products in various sectors, and 535,000 companies using data to improve their
own business (EU, 2020, p. 37). The financial sector appears to be in the lead,
according to this data, next to the industrial sector, in terms of employment of
specialists (10% of the total), the number of enterprises in the sector using data
(20%) and the share of data in the sector’s output (20%). The report does not
state what part of the European data market is captured by the American
Internet giants, however.
The United States is two times ahead of Europe in terms of the size of the
data market and its growth rate, according to the European Commission report.
The total revenues of data business exceed 200 billion euros, compared to 70
billion in the old continent (EU, 2020). American corporations have created
online platforms serving the global market, from search engines, through social
networks, to customer relations and data processing. The stock market capita-
lization of five internet giants has already exceeded the value of the entire
 Datafication 37
regulated capital market of the European Union (IMF, 2021). According to the
House of Representatives, these companies have a monopoly position on the
global market (USA, 2020). They control not only data resources, but also their
flows. Almost all smartphones in the world, for example, use operating systems
developed by two American companies, compelling every European company
to seek their services when providing mobile solutions.
Information on the data market in other countries has not been compiled as
comprehensively as in the European report. The Japanese market is more
developed than the European one, especially in terms of human resources in
the information and technology sectors, but smaller in size (EU, 2020).
Japanese privacy laws are like those in Europe. Little is known about the data
market in China, for which even sector statistics are not available. The
emergence of an oligopoly of three large Chinese Internet companies in recent
years suggests that the policy of protecting the internal market from US
corporations is paying off. In contrast, according to indicators compiled by
Zhang and Chen (2019), the Chinese digital economy is well below the levels
of highly developed countries. The Chinese specialist workforce headcount,
for example, is smaller than in Europe despite a larger population. However,
China is gaining ground in digital finance, particularly in mobile payments,
using datafication to expand its financial market reach.
The global data market is concentrated in the US, where the right to
privacy is protected only in selected areas: child protection, spam, debt col-
lection and access to credit (FTC, 2020). The data broker industry emerged,
offering data obtained from various sources, with a total turnover exceeding $
200 billion (EU, 2020). The cost of annual access to payment card transactions
data of several million Americans over a decade, for example, may reach
several hundred thousand dollars. Collections of this type contain unique
identifiers so that analysts can track transactions over time, having information
about the date, place, and sides of the transaction. Specialized enterprises deal
with the aggregation of data from various sources. Some of them boast access
to several thousand financial enterprises. Data purchased on the market can be
combined with proprietary datasets in the process of data enrichment.
Analytical platforms that offer enterprises the ability to store and process data at
attractive prices facilitate enrichment, as the agreement with clients usually
gives the platform access to the clients’ data. Data enrichment can involve
multiple sources, such as data retrieved from “free” mobile apps.
In the European Union, data trade is limited by the law protecting natural
persons, the General Data Protection Regulation or GDPR (EU 2016/679).
As a result, the availability of data on the citizens of the Member States is
limited. It is the consumer who decides when and what data to disclose, and
enterprises are obliged to take care of the data entrusted to them. Data from
other sources are not subject to such restrictions, as clearly stated in the
Regulation on the Free Flow of Non-Personal Data (EU 2018/1807).
Legislative work is under way to facilitate access to data processed by public
entities, which would create a third class of data.
38 Karol Marek Klimczak and Jan Makary Fryczak
The future of the data market is currently the object of varied regulatory
actions, which may lead to an international agreement on common principles
for the data economy (IMF, 2021). Governments of European countries are
looking for methods to accelerate datafication, aiming to catch up with world
leaders while maintaining the freedoms and rights of their citizens. In 2020, a
digital strategy project was created (EC, 2020). One concept that aroused
interest is building common data banks, including high-value and sensitive
data from the public sector, which would be available to all enterprises, re-
gardless of size or belonging to a global capital group. This would solve data
access problems resulting from technical, legal, and pricing constraints. The
strategy further provides for easier transfer of personal data for research and
public purposes, for example medical treatment history. The business sector is
also interested in the introduction of a data standard that enables multiple uses.
Most developed countries have taken similar initiatives and recognize the need
to invest in processing capacity so that this new, valuable data is not captured
by global Internet giants (OECD, 2019).
In the US, state governments and the federal government are taking first steps
to regulate data distribution, gradually curbing an almost complete freedom
enjoyed by American companies. In 2019, the State of Vermont enacted a law
requiring registration for the collection and trade of data, followed by about ten
other states. The resulting list of 120 data brokers can be the basis for further
regulatory work, such as checking whether brokers allow individuals to delete
their data on request. The State of New York is considering using a similar law
to tax trade in data. The state of California and several other legislatures have
taken a different direction with consumer privacy laws, like European ones, that
secure citizens the right to request their personal information be. Action by the
federal government is expected, but it will probably only take place after an
extended period of observing how state laws function in practice. Currently,
more emotions are triggered by the actions of US Congress under existing
antitrust laws (USA, 2020), and the actions of the Federal Trade Commission
under consumer protection laws, which resulted in a record $ 5 billion fine for a
global social network (FTC, 2020).

2.4 Benefits and risks

Assessing the impact of data storage on financial enterprises is a complex task.
Some journalists exaggerate that datafication will invalidate existing business
models, threatening the companies present on the market. It certainly creates
conditions for the development of new activities, opens market niches, and
increases effectiveness (Navaretti et al., 2017). It requires significant outlays
and profound organizational changes, however. Moreover, the emergence of
new players increases competition. Incumbent financial institutions have the
scale, resources, and regulatory structures unavailable to innovators, however.
There are effective barriers to entry. To sum up, the balance of benefits and
threats depends on the resource structure specific to each enterprise and its
 Datafication 39
ability to use these resources to exploit competitive opportunities (Mikalef
et al., 2017). In this section, we review some core benefits and challenges.
The role of data in financial enterprises in relation to other resources and the
environment was aptly captured in the Kotarba financial ecosystem model
(2021). He interviewed 52 experts from the private and public sector, using
the Delphi method, asking them about the current state and the future of the
industry in Poland. The results indicated the low stability of the industry re-
lated to the tensions between enterprises and the regulator, hence the urgent
need to build an infrastructure to support the evolution towards the data
economy. Experts suggested creating new institutions and services to allocate
funds to innovations. At the same time, they rated the current state of data
resources as low, due to strict protection of personal data, combined with poor
infrastructure and low trust in innovative companies. They mentioned user
identification tools, cloud services, and new regulations as key challenges for
data-driven finance.
Financial companies have high-quality data resources waiting to be used
internally or in relationships with partners. The value of these resources can be
realized to a small extent through their sale because separating and anon-
ymizing data significantly impoverishes them. Banks, for example, obtain an
unprecedented wealth of data from their clients, ranging from complete
personal data and account balances, through transactions, to activity records,
mobile application use and recordings of conversations with consultants
(Klimczak, 2021). Meanwhile, adjusting the offer to the customer’s needs
remains a challenge, the best example of which is the phenomenon of miss-
selling. It seems that creating an attractive offer is so difficult that some in-
stitutions prefer to use tricks based on Big Data analytics to sell useless or risky
products to customers. Efficient use of data resources will allow banks to build
a truly personalized offer (Lehrer et al., 2018). Using text analysis to under-
stand customer attitudes towards different products, and then combining this
data with datasets using artificial intelligence systems may enable banks to
target varied preferences. Most banks, however, are just starting to build the
resources and capabilities needed (EBA, 2020).
Enriching existing datasets with additional information from public or paid
sources is another area of benefits. The analysis of posts on the Internet and
social networks is commonly employed in forecasting economic trends
(Klimczak, 2021). By analyzing the sentiment of managers ( Jiang et al., 2019),
institutions can predict changes in demand for individual products. Extending
corporate customer information to publicly available online data increases
the effectiveness of default alert systems to unprecedented levels (Cecchini et al.,
2010). Tools for named entity recognition help to achieve this. Determining the
identity of an individual customer on the web can be easier, especially if they use
social media under their own name. Combining customer call logs and social
media entries increases the effectiveness of chatbots and virtual agents if these
data are used for precise customer profiling (Riikkinen et al., 2018). However,
obtaining these benefits requires significant outlays on building data resources,
40 Karol Marek Klimczak and Jan Makary Fryczak
and then maintaining them and keeping up with the competition in the de-
velopment of modern solutions (Klimczak, 2021).
Datafication may lead to a change in the approach to decision making in
financial enterprises, where highly paid specialists will be replaced by algorithms
using big data. In fact, it is easy to argue that people make predictable mistakes,
guided not only by data but by social expectations and psychological needs. In
addition, reducing staffing needs would allow businesses to grow in places where
staff is not available, and to launch new business models without the need for
staff training. Artificial intelligence or algorithmic intelligence has no beliefs that
could distort the interpretation of the data (Günther et al., 2017). It can point to
useful relationships that were not suspected by people using scientific theories
and personal preferences. It can combine many different data sets, as well as use
data sent in real time. Only an algorithm can track a user’s clicks on a transaction
website and adapt the website to the customer’s needs continuously. The au-
tomation of decision-making processes leads to an increase in the scope of in-
formation used, better adaptation to changing conditions, acceleration of
decision-making and better shaping of the organization according to the
changing environmental conditions (Günther et al., 2017).
However, the concept of transferring responsibility from human decision-
makers to automata raises many doubts. The first is the low level of trust in
artificial intelligence systems, resulting from the opacity machine learning al-
gorythms to its users (Glikson and Wolley, 2020). The second is the propensity
of algorithms to discriminate people based on correlation between gender or
race and other characteristics (Mejias and Couldry, 2019). The third doubt is
that the immediate feedback that human decision-makers normally receive is
unavailable. Instead, statistical verification is applied. An algorithm makes
decisions that are expected to be correct in an accepted percentage of cases. In
some cases, it may make gross errors in cases that would be obvious to humans.
An algorithm does not learn from errors until these errors accumulate into a
mass comparable to the original data. Unintended effects of the algorithm, for
example, discrimination against selected social strata, may only become no-
ticeable after a long time. The quality of algorithmic decisions needs to be
monitored (EBA, 2020). Finally, reliance on algorithms leads to the loss of
qualified staff, thus increasing organizational fragility even if it boosts eco-
nomic performance (Markus, 2017).
In summary, the benefits and costs of data are a multidimensional problem,
and the final balance depends on many factors. Researchers are just beginning
to learn about these determinants (Günther et al., 2017; Markus, 2017).
Mikalef et al. (2017) attempted to define the conditions necessary for com-
panies to benefit from datafication:

• Master the art of creating data-driven assets from capturing, through

using, to decommissioning them.
• Use datafication in key areas, rather than solving insignificant problems for
which data are currently available.
 Datafication 41
• Assure data availability in key areas, as it may prove to be a constraint.
• Engage in conscious change management activities to enable efficient
operation despite natural organizational inertia.
• Obtain approval of company management, which might be reluctant to
limit the freedom of decisions and follow artificial intelligence.
• Carry out thorough cost-benefit analysis, as the benefits seem obvious but
the costs don’t (Dobija et al., 2012)

Ghasemaghaei et al. (2017) identified organizational elements that must be adjusted

for datafication to allow the company to dynamically adapt to changes in the
environment. They pointed out that data analysis tools sometimes do not corre-
spond to the type of data processed by the enterprise. Companies need staff
competent in the use of new tools, as a good understanding of the technology
allows for its efficient use. Finally, the tools should be suited to the tasks that
require automation. For example, a financial firm may waste resources if the data
does not match the strategy. Rather than streamlining a business, algorithms can
limit the flexibility of an organization, cementing a layer of automated bureaucracy.
Finally, it is worth noting that enterprises can take advantage of the re-
sources created by governments, open data, postulated under the European
Digital Single Market initiative. Governments possess high-value data, such as
business, vehicle, and property registers, but lack the technical means to
process it. According to the proponents of open government, these data could
bring tangible benefits to the economy once used. However, making them
available may have unexpected consequences resulting from the basic feature
of datafication, that is the possibility of reusing data for any purpose.
Marjanovic and Cecez-Kecmanovic (2017) systematized these problems:

• Decontextualization – giving data a new meaning resulting from the

particular interest of the parties that process it.
• Recombination – combining data with other sets in a way that distorts
their original meaning.
• Simplification – the use of simple quantitative indicators to make complex
decisions.
• Gaming – strategic selection of data while ignoring others to achieve the
goals of the data processing party.
• Propagation of legitimacy – the use of a high-quality primary data source
to assign a similar quality to processed data despite their dissimilarity.
• Takeover of control by unqualified persons – the use of simplified data by
persons unfamiliar with their specificity to exert pressure on institutions or
data subjects.
• Reinforced emphasis on achieving quantified goals – the impact of data
perception of activities on resource allocation decisions.

In the literature, there appear the first examples of datafication developed

systematically by scientists, which show a richer picture than the success stories
42 Karol Marek Klimczak and Jan Makary Fryczak
discussed in the industry media. Lehrer et al. (2018) compiled four cases,
including one concerning an insurance company and another concerning a
bank, which were looking for methods of personalizing individual customer
service. Data resources built by the insurer and the ability to process them
strengthened relationships with customers. A new service was offered, auto-
matic damage detection and management, by integrating data from customer
systems: alarms, smart homes, cars. Monitoring social networks made it pos-
sible to detect key events in the lives of customers, such as weddings or real
estate purchases. This information would be sent to agents who would take
appropriate sales action. The bank, another case study, sought to integrate
digital services with direct customer relations, that is to maintain the con-
sistency of customer experience despite the use of multiple channels. A service
generating customer profiles was created, so that an advisor could quickly
obtain key information in a clear, visual form. The data for the profile came
from analyzing customer history, records of interactions and suggestions about
matching products. For example, if a young client used a mortgage calculator
on the bank’s website, the adviser would receive the information needed to
offer a loan. The results of the case study were used by Lehrer et al. (2018) to
build a service personalization model that combines the features of data and
technology with the methods of their use.
In contrast, the use of data can be detrimental to performance when it causes
changes in the functioning of the industry (Adamik and Nowicki, 2019).
Markus (2017) shows the negative market consequences of automating credit
decisions in the US. The benefits of speeding up the process were, according
to the author, less important than the losses caused by the concentration of
responsibility for granting the loan in the seller’s hands. The seller is financially
motivated to conclude a contract without regard to its terms, so the first
provider whose credit-scoring machine will accept the loan wins. The con-
sequence is the increased number of risky loans with high interest rates. In
addition, customers have learned about the advisors’ motivations, so they no
longer expect advice, independently looking for the cheapest loans from
vending machines.

2.5 Conclusions
The chapter shows that data are an economic fact, not a technological curi-
osity, by describing its global progress, and reviewing its benefits and threats to
the financial sector. The analysis shows that data are developing as an eco-
nomic resource at an unusual but varied pace. On the one hand, we observe
impressive growth of several American enterprises, Internet giants, whose
global reach is beyond comparison to any company in economic history. On
the other hand, little is known about the broader economic importance of
data. So far, only the European Commission has made the effort to system-
atically study the data economy and create a digital industrial policy. The
strongest effects of state intervention can be observed in China, where a local
 Datafication 43
internet oligopoly has been established, which may compete with the
American Internet giants. Perhaps the key contribution of data technology to
finance are digital financial products which make finance available to masses of
people, including millions of Chinese, so far excluded from the financial
market. Overall, data brings about changes that financial companies and
government must respond to, but the question remains open as to what course
of action is best.

Financing
The work is a result of the research under grant No. 2019/35/B/HS4/03800
financed by the National Science Centre in Poland.

Bibliography
Adamik, A., & Nowicki, M. (2019). Pathologies and paradoxes of co-creation: A con-
tribution to the discussion about corporate social responsibility in building a competitive
advantage in the age of Industry 4.0. Sustainability, 11(18), 4954. 10.3390/su11184954
Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of
Management, 17(1), 99–120. 10.1177/014920639101700108
Cecchini, M., Aytug, H., Koehler, G. J., & Pathak, P. (2010). Making words work: Using
financial text as a predictor of financial events. Decision Support Systems, 50(1), 164–175.
10.1016/j.dss.2010.07.012
Dobija, D., Klimczak, K. M., Roztocki, N., & Weistroffer, H. R. (2012). Information
technology investment announcements and market value in transition economies:
Evidence from Warsaw Stock Exchange. Journal of Strategic Information Systems, 21(4),
308–319. 10.1016/j.jsis.2012.07.003
EBA (2020). EBA Report on Big Data and Advanced Analytics. European Banking Authority,
EBA/REP/2020/01. https://eba.europa.eu/file/609786
Elberse, A. (2008). Should you invest in the long tail? Harvard Business Review, 86(7/8), 88–96.
EU (2020). The European Data Market Monitoring Tool. D2.9 Final Study Report. https://
datalandscape.eu/sites/default/files/report/D2.9_EDM_Final_study_report_16.06.2020_IDC_
pdf.pdf
FTC (2020). Privacy and Data Security. Update 2019. https://www.ftc.gov/reports/privacy-
data-security-update-2019
Ghasemaghaei, M., Hassanein, K., & Turel, O. (2017). Increasing firm agility through the
use of data analytics: The role of fit. Decision Support Systems, 101, 95–105. 10.1016/
j.dss.2017.06.004
Glikson, E., & Wolley, A. W. (2020). Human trust in artificial intelligence: Review of
empirical research. Academy of Management Annals, 14(2), 627–660. 10.5465/annals.201
8.0057
Günther, W. A., Rezazade Mehrizi, M. H., Huysman, M., & Feldberg, F. (2017). Debating
big data: A literature review on realizing value from big data. The Journal of Strategic
Information Systems, 26(3), 191–209. 10.1016/j.jsis.2017.07.003
IMF (2021). Toward a Global Approach to Data in the Digital Age. Staff Discussion Note No.
SDN/2021/005.
44 Karol Marek Klimczak and Jan Makary Fryczak
Jiang, F., Lee, J., Martin, X., & Zhou, G. (2019). Manager sentiment and stock returns.
Journal of Financial Economics, 132(1), 126–149. 10.1016/j.jfineco.2018.10.001
Kabza, M. (2021). Artificial intelligence in financial services – Benefits and costs. In: J.
Gąsiorkiewicz & J. Monkiewicz (Eds.) Innovation in Financial Services: Balancing Public and
Private Interests, pp. 183–198. Routledge.
Klimczak, K. M. (2021). Text analysis in finance: The challenges for efficient application.
Digital transformation of the financial ecosystem. Interaction of private and public sector.
In: J. Gąsiorkiewicz & J. Monkiewicz (Eds.) Innovation in Financial Services: Balancing
Public and Private Interests, pp. 199–216. Routledge.
Kotarba, M. (2021). Digital transformation of the financial ecosystem. Interaction of private
and public sector. In: J. Gąsiorkiewicz & J. Monkiewicz (Eds.) Innovation in Financial
Services: Balancing Public and Private Interests, pp. 25–43. Routledge.
Lehrer, C., Wieneke, A., vom Brocke, J., Jung, R., & Seidel, S. (2018). How big data
analytics enables service innovation: Materiality, affordance, and the individualization of
service. Journal of Management Information Systems, 35(2), 424–460. 10.1080/07421222.201
8.1451953
Marjanovic, O., & Cecez-Kecmanovic, D. (2017). Exploring the tension between trans-
parency and datification effects of open government IS through the lens of Complex
Adaptive Systems. The Journal of Strategic Information Systems, 26(3), 210–232. 10.1016/
j.jsis.2017.07.001
Markus, M. L. (2017). Datification, organizational strategy, and IS research: What’s the
score? The Journal of Strategic Information Systems, 26(3), 233–241. 10.1016/j.jsis.201
7.08.003
Mayer-Schönberger, V., & Cukier, K. (2013). Big Data: A Revolution that Will Transform
How We Live, Work, and Think. John Murray Publishers.
Mejias, U. A., & Couldry, N. (2019). Datafication. Internet Policy Review, 8(4). 10.14763/2
019.4.1428
Mikalef, P., Pappas, I. O., Krogstie, J., & Giannakos, M. (2017). Big data analytics cap-
abilities: A systematic literature review and research agenda. Information Systems and e-
Business Management, 16(3), 547–578. 10.1007/s10257-017-0362-y
Navaretti, G. B., Calzolari, G., Mansilla-Fernandez, J. M., & Pozzolo, A. F. (2017). Fintech
and banks: Friends or foes. European Economy, 3(2), 9–30.
OECD (2019). Enhancing Access to and Sharing of Data: Reconciling Risks and Benefits for Data
Re-use across Societies. OECD Publishing. 10.1787/276aaca8-en (Dostęp 30.11.2020).
Riikkinen, M., Saarijärvi, H., Sarlin, P., & Lähteenmäki, I. (2018). Using artificial in-
telligence to create value in insurance. International Journal of Bank Marketing, 36(6),
1145–1168. 10.1108/IJBM-01-2017-0015
Southerton, C. (2020). Datafication. In: L. Schintler & C. McNeely (Eds.) Encyclopedia of
Big Data. Springer. 10.1007/978-3-319-32001-4_332-1
USA (2020). Investigation of Competition in Digital Markets. Majority Staff Report and Recommendations.
https://judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf
Zhang, L., & Chen, S. (2019). China’s Digital Economy: Opportunities and Risks. IMF
Working Paper No. WP/19/16.
3 Key technologies in the digital
transformation of finance
Katarzyna Rostek

3.1 Introduction
The ubiquitous digital transformation, further accelerated by the current
pandemic, facilitates the development of new technologies as well as new
applications for already existing ones. While changes in the economy are
gaining momentum, customer demands continue to grow as the market be-
comes increasingly competitive. Companies and organizations are forced to
flexibly adapt to these conditions. Entities in the financial sector respond to
those needs by implementing new organizational and technological solutions
in their operations.
According to The Chartered Institute of Management Accountants
(CIMAs) Future of Finance Report [Farrar, 2019, p. 16] around 54% of
corporate finance departments are using cloud solutions, 11% are adopting
process robotization and 25% are implementing advanced data analytics. In
contrast, the percentage of enterprises that intend to implement these solutions
in finance in the next 3–5 years are as follows: 23% cloud solutions, 17%
robotization and 24% advanced data analytics. In the coming years, artificial
intelligence and automation will also be key in this area of management and
will, on the one hand, take over the execution of simple, routine and re-
petitive tasks, and on the other, effectively support decision-makers in the
context of complex and risky financial decisions.
According to a study by Delloite [Delloite, 2016, pp. 9–25], there are seven
types of technology that are growing in importance and increasingly impacting
both finance departments and the financial sector:

• Cloud computing – understood as the technology of executing services via

the Internet, optimizing investment costs and limiting implementation risk;
• Robotic process automation – automation of transaction processing and
communication between technological systems as part of routine and
repetitive operations, minimizing the risk of error, optimizing process
efficiency and guaranteeing stable quality of its implementation;
• Data visualization – using images and interactive technologies to analyze
data sets in a user-friendly graphic environment;

DOI: 10.4324/9781003264101-5
46 Katarzyna Rostek
• Advanced analytics – tools and models for studying data sets of any size
and structure, ready not only to provide information but also to create
complete decision-making support solutions;
• Cognitive systems – systems that use intelligent data processing and
artificial intelligence to imitate human thinking, e.g. computer learning,
natural language processing, speech recognition, image processing;
• In-memory databases – data repositories enabling the collection of
unstructured data in non-relational structures and processing of data
resources in the operational memory of a computer system. Their
growing popularity is due to the need to access Big Data;
• Blockchain – a digital method of concluding and certifying transactions,
implemented through a distributed ledger, but without the participation
of a third party, understood as an institution regulating or controlling the
conducted activities.

By considering the above as a preliminary characteristics of the fundamental

technological changes taking place both in the financial sector and in finance
departments of enterprises, the following chapter will discuss the applications
of the above technologies in the context of digital finance.

3.2 Cloud computing

One of the key challenges faced by financial markets and the financial sector is
the application of solutions that allow technologies to quickly adapt to business
requirements, changes in legal regulations and expectations of digital custo-
mers without generating excessive investment risk. A cloud computing en-
vironment is fully responsive to all these needs, provided it is selected with due
consideration for its specifics and critical user requirements.
Cloud computing is a method of providing computing services (infra-
structural, environmental, applicational) via the Internet. The benefit to the user
is that costs are incurred only relative to the scope and intensity of services
covered by the contract, while the terms of the same can be flexibly modified
whenever the needs of the recipient change. This flexibility and ability to adapt
to individual requirements is a major advantage in a situation where technology
development and customer expectations are growing much faster than organi-
zations’ ability to meet them. Proper selection of the implementation type and
cloud architecture depending on the actual needs of the user is one of the most
important challenges, and at the same time the strongest determinant of the
ultimate profitability as well as security of cloud solutions, is the latter being
particularly important in applications involving financial transactions.
A distinction is made between public, private and hybrid clouds depending
on the type of implementation. Public clouds are computing services offered by
third-party providers over the public Internet, making such services available to
anyone willing to use or purchase them. They can be offered free-of-charge or
sold on-demand, with fees incurred only for the actual use of processing
 Key digital technologies 47
operations, disk capacity, or data stream throughput. An example of this type of
paid service is Microsoft’s Azure platform.1 The most important benefit of using
this group of solutions is the possibility of rapid scalability, that is adjusting the
intensity and scope of the resources used depending on the current demand of
the service recipient. Providers are able to guarantee such flexibility because,
operating on a mass scale, they have enough resources to meet the changing
needs of customers. However, one should be aware that a public cloud provides
the lowest level of security due to the very fact that the running applications and
the shared data are widely accessible, which gives rise to the potential risk of
hacking attacks and leakage of protected and confidential data or information.
A private cloud is a more secure alternative. It comprises and is based on
cloud computing resources used exclusively by a single organization. It can be
physically located in the organization’s local data center or hosted by a third-
party service provider. In the case of a private cloud, the services and infra-
structure provided are located on a private network that is difficult to access for
a potential external attacker. The benefits found in a public cloud, such as self-
service, scalability and flexibility are still available, but with the added ad-
vantage of greater control and security of the resources used [Shoikova,
Peshev, 2012]. The disadvantage of such a solution is the responsibility of the
service user for the costs and billings related to the management of the private
cloud [Dreher et al., 2016]. Thus, private clouds require the same staffing,
management and maintenance expenses as owning a traditional data center.
The combination of different aspects of public and private clouds leads to
another type of deployment – a hybrid cloud. Hybrid clouds allow data and
applications to be shared between private and public clouds, benefiting from the
synergy between the flexibility and availability of the public cloud with the se-
curity of the private cloud, ensuring optimized resource utilization [Mangal et al.,
2015]. However, it is important to remember that a system is only as strong as its
weakest link, that is the combination of public and private clouds will create
additional opportunities to access private cloud resources by identifying and
exploiting security flaws in the public cloud. One possible answer to this problem
is a multi-cloud model, which entails maintaining different cloud environments
without hybridizing them, where the choice of a specific environment is de-
termined by given business objectives and the required level of security.
In addition to the type of implementation, the architecture of a solution is
an important factor determining the viability of cloud services. There are three
basic types: Infrastructure as a Service (IaaS), Platform as a Service (PaaS) and
Software as a Service (SaaS). These are also referred to as the cloud computing
stack as they progressively expand the range of the services provided. An
analysis of the scope of such services and the responsibilities borne, respec-
tively, by the service provider and the service user allows a characterization of
the aforementioned cloud computing stack (Table 3.1).
Infrastructure as a Service is the most basic category of cloud computing
services. It consists in renting IT infrastructure (i.e. servers, virtual machines,
data storage, networks, operating systems) from a service provider in a pay-as-
48 Katarzyna Rostek
Table 3.1 The cloud computing stack

Management and On Premises Infrastructure as a Platform as a Software as a

Responsibility Service (IaaS) Service (PaaS) Service (SaaS)

Service user Data Data Data Data

Application Application Application Application
Executable Executable Executable Executable
environment environment environment environment
Virtual Virtual Virtual Virtual
machines machines machines machines
Servers Servers Servers Servers
Data storage Data storage Data storage Data storage
Service provider Network Network Network Network

Source: Own research.

you-go model, which means that a payment is consistent with actual use. The
service recipient is responsible for the purchase, installation, configuration and
management of the operating environment, software and data.
Platform as a Service refers to cloud computing services that provide an on-
demand environment for preparing, testing, delivering and managing appli-
cations. PaaS is primarily intended to provide developers with an environment
to work on web or mobile applications without having to configure and
manage the necessary infrastructure of servers, storage, networks and databases.
Software as a service is a method of delivering utility applications. Cloud pro-
viders host and manage the applications along with the infrastructure they require,
and in the case of the SaaS solution, they are also responsible for maintaining,
updating and customizing the software. Applications are accessed via a web browser
using a computer, laptop, tablet or phone, depending on the type of application.
The continuous technological advances and the evolving needs of users
facilitate the emergence of new specialized types of cloud services, for ex-
ample, BPaaS – business process as a service [Domaschka et al., 2017], STaaS –
storage as a service [Martini, Choo, 2013], CaaS – communication as a service
[Boukadi et al., 2020], or DRaaS – disaster recovery as a service [Andrade
et al., 2017]. New variants of cloud services continue to be developed, varying
in scope and extensiveness depending on the needs of the user. It is also
possible to integrate traditional IT solutions with resources implemented and
operated by cloud computing customers. All of the above are intended to
increase the flexibility and accessibility of the environment, which is funda-
mental for the ability to deliver a broad package of state-of-the-art solutions
and technologies, including those described later in this chapter.

3.3 Robotic process automation

Automation of work in finance departments is a challenge faced particularly by
organizations whose dynamic growth causes a rapid workload increase. This is
 Key digital technologies 49
usually accompanied by an increase in the complexity of financial processes, as
well as strong pressure on both the quality and speed of delivering results,
which means that standard optimization methods do not yield the expected
results. One solution to such problems comes in the form of process robot-
ization (RPA – Robotic Process Automation), which gives financial depart-
ments the possibility to both improve the efficiency of their implementations,
and fulfill one of the main conditions for digital transformation. The financial
and accounting processes that are particularly noteworthy in this context in-
clude [JOLT, 2019]: invoice processing, order to cash, record to report, bank
reconciliation, fixed assets analysis, vendor management, incentive claims, sales
orders, master data management, ERP logging from another system.
RPA in finance involves implementing software robots to mimic specific human
activities, such as searching for information, copying and updating data, and per-
forming routine tasks (e.g. processing invoices and standard documents). However,
one should be aware that it is profitable to automate only certain processes, char-
acterized by a highly structured nature, repeatability, reliance on known rules
(susceptibility to algorithmizing), and digital forms of input data. Only then can
automation (partial or complete) result in operating cost savings, improvement of
the condition and quality of documentation and reports, reduction of execution
error rates, as well as the ability to more accurately measure process efficiency.
Selection in terms of the viability and cost-effectiveness of automation dues not
apply exclusively to processes. The individual activities comprising a given process
should also be analyzed in this context and a distinction should be made between
those that easily lend themselves to such changes and those for which the application
of RPA tools is neither simple nor obvious. Operations that seem to be particularly
predisposed to automation include [McCann, 2018]: access to web-based corporate
applications, collection and integration of data from different bases and storages,
copying and pasting data between applications, structuring data extracted from
documents, applying if-then rules, reading e-mails with attachments.
Researchers of the phenomenon [Gartner, 2020; Kokina, Blanchette, 2019]
also point to the need to refine internal controls, reliable reporting, ensure
regulatory compliance and mitigate risks in RPA management. This is re-
quired in order to maintain the appropriate level of accountability and security
that financial departments and the financial sector are obligated to ensure. This
will be likely to involve the creation of new, still unknown jobs related to
RPA care, as well as the transformation of some bot-process interactions into
bot-human communications. In this regard, Deloitte [Deloitte, 2020] iden-
tified seven conditions whose fulfillment ensures the emergence of a con-
trolled RPA development environment:

• establish a governance framework – RPA risk should be mitigated by a

governance model adopted taking the established automation strategy into
due account. Clearly defined, well-documented processes and controls for
an effective governance model will ensure that the organization is able to
deal with the financial and operational risks associated with the use of bots;
50 Katarzyna Rostek
• select tools and develop automation coding and configuration – business
and design requirements for process automation should be stored so that
internal and external auditors can perform proper testing of controls. If
implementation documentation is omitted or only superfluous, it can
create a dangerous gap in internal control;
• leverage and enhance existing controls – the primary activity undertaken
in this area is to assess the bot’s impact on existing controls. Transaction
logs, log-in and activity logs should be monitored, making sure that the
process is executed properly and yields expected outcomes;
• monitor user and bot access – until recently, access to IT systems was
granted only to business employees who were assigned specific system
roles. Currently, another category of users has emerged – the digital
worker (bot). It is therefore extremely important that access granted in this
way is also subject to identification and monitoring;
• manage a changing environment – existing change management models
should be extended to account for the existence of bots and to track the
impact of internal and external changes involving bots, in particular,
changes to: system upgrades, service providers, workflows, reporting
requirements, as well as task and service delivery schedules;
• detect and report – each error caused by a bot should be recorded and
evaluated. The results of this assessment and its conclusions should be
related not only directly to the technical solution but also to the processes
and procedures that remain in the area of its operation. The aim is not
only to eliminate the detected error but also to prevent its recurrence;
• monitor and escalate – it is expected that bot functions will incorporate
risk monitoring and identification (severity assessment) functionalities.
Conclusions from the conducted risk assessment should be reflected in the
applied control mechanisms (risk management), adequate to the identified
types of threats and the level of risk they generate.

Robotic Process Automation in finance has become a reality. However, in-

tensive research is still underway into how to implement it efficiently and
safely [Harrast, 2020] and how and in which areas to use it to maximize
benefits and eliminate risks [Cooper et al., 2019].

3.4 Data visualization

Proper visualization and analysis of data can be crucial to their perception,
understanding and usability. The aim of visualization is to present sets of data
and results in the most accessible and user-friendly way possible, but at the same
time to highlight elements of particular interest to the recipient, that is identified
trends, relationships and phenomena. Success in this respect tends to depend on
two key aspects – observing the basic rules of correct data visualization and using
a wide range of visualization tools and techniques. The following should be
mentioned in terms of the principles of correct visualization:
 Key digital technologies 51
• Limited presentation size – the presentation should use a limited area, for
example one screen, one slide, one A4 page. The longer and more drawn
out the presentation, the more difficult it will be to maintain coherence
and clarity of the message;
• Selecting information – the second principle follows from the first because
if the presentation size is to be limited and the message is to remain
complete and clear, one has to skillfully select the presented information.
The challenge is to select those elements that respond to the recipient’s
query and at the same time not to oversimplify the problem, which could
lead to misinterpretation;
• Clarity and comprehensibility – information should be presented in such a
way that the message is understandable even without the author’s
commentary. It is important to remember that the prepared visuals will
most likely be the basis for later consideration and discussion, even after
the agreed time for the presentation has ended. Therefore, they must be
useful for any group and category of recipients;
• Tailored to the recipient – a visualization is prepared for a specific
recipient. It is, therefore, worth devoting time and effort to learning their
particular preferences in terms of appearance, format and desired
substantive content. This will significantly improve clarity and compre-
hensibility as well as reduce the number of necessary consultations and
interactions between the provider and the recipient of the visualization.

In terms of specific techniques, visualizations take advantage of for example,

tables, charts, diagrams, maps, management cockpits, infographics. The sim-
plest and most popular of the same and are tables and charts. However, even
these two basic visualization techniques include a variety of types and formats,
and choosing the right one can significantly influence the reception and
usefulness of a given presentation’s content. The most commonly used formats
include bar, pie and ring charts. Meanwhile, in terms of presenting the results
of multi-criteria analyses, the radar chart provides an excellent alternative
(Figure 3.1).
Heat maps provide the ability to present a large amount of detailed in-
formation in a readable form highlighting differences between the presented
values in a two-dimensional system. Respective colors indicate specific de-
tailed values or value ranges wherein given categories of recorded or calculated
results fall (Figure 3.2).
The need to provide synthetic, aggregated, but still useful information to a
single recipient, typically a decision-maker, is the reason why dashboards have
permanently entered the canon of data visualization techniques (Figure 3.3).
A dashboard is an interactive, single-screen summary of aggregated in-
formation that provides graphs, values of indicators and information, all freely
controlled by the user. A dashboard allows the user to keep track of this in-
formation without being overwhelmed by excessive details that are not needed
at a given moment (hence the concept of organizing and making the whole
52 Katarzyna Rostek

A B
1
13 1.0
2
0.8
12 3
0.6

0.4
11b 0.2 4

0.0

11a 5

10 6

9 7
8

Figure 3.1 The radar chart – results comparison of two analyzed cases.
Source: Own research.

MON TUE WED THU FRI SAT

JAN 6 2 2 10 10 10
FEB 0 6 4 4 4 8
MAR 10 10 6 10 6 4
APR 8 8 4 0 2 2
MAY 8 8 4 10 0 8
JUN 6 2 6 2 8 0
JUL 4 2 10 8 4 4
AUG 6 4 10 2 2 10
SEP 4 4 8 8 8 8
OCT 8 4 10 0 0 0

Legend: 0 2 4 6 8 10

Figure 3.2 The heat map – results distribution in relation to the two differentiating criteria.
Source: Own research.
 CAT LC Raport terminowosc
´´ Raport szkodowosc
´´ Raport finansowy

czba uzytych przez klientów form ´platnosci: POKAZ SZCZEGÓLOWY WYKRES Liczba uzyc poszczególnych cech kierowców:
´ POKAZ SZCZEGÓLOWY WYKRES

 ´
Uzyte formy platnosci Uzycie
 cech kierowców
600
2500
500 2031
2000
400
300 1500
Karta firmowa
200 Karta platnicza 1000
100 Gotówka
500
0 75 54
Poniedziatk Wtorek Sroda Czwartek Platek Sobota Niedziela 15 11 9 2 5 0
Karta firmowa 11 5 7 7 0 1 0 0
Foteik dia Pomoc przy
Duze
 auto Niekisamochód Puszy bagaznik
 Terminal Cichy kierowca Iezyk angieksi Iezyk rosyjski
Karta platnicza 145 211 350 295 381 395 254 dziecka bagatu
Gotówka 62 88 48 74 100 126 152 Liczba uzyć 15 11 75 9 2031 2 5 0 54

DSC
´ ´ zamówlen´ w danej dzielnicy: POKAZ SZCZEGÓLOWY WYKRES Liczba kierowców w danej strefie (dzielnicy): POKAZ SZCZEGÓLOWY WYKRES Liczba zamówlen klienta: Anna Kowalska WYBIERZ KLIENTA

Zamówienia w danej dzielnicy Przypisani kierowcy do danej dzielnicy (strefy) Liczba zamówleń
8

405 241 97 84 7
151 22 6
187 31
211 5
52 80
4
294 412 7
48 3
301 115 2 4
3 3
1 2 2
Bielany Targówek Zolborz Centrum Bielany Targówek Zolborz Centrum 1
0
Bemowo Wola Praga Mokotów Bemowo Wola Praga Mokotów
Poniedziatk Wtorek Sroda Czwartek Platek Sobota Niedziela

Figure 3.3 The dashboard – interactive overview of indicators and reports.

Source: Own research.
Key digital technologies
53
54 Katarzyna Rostek
thing available on a single screen only). However, a dashboard also offers the
possibility to “drill down” if the need to access information at a higher level of
detail arises, that is interactively activate data sets and results on which the
original aggregated view is based. In a well-designed dashboard, it should be
possible to go down to the level of the most detailed data without the need for
additional technical or analytical support.
The examples presented above show that although visualization of data and
analysis results seems to be a pleasant manipulation of colors and graphic
objects, in reality, it is one of the key determinants of effective communication
of information. It is therefore worth enhancing and developing the visual
competences of analysts with a view to better satisfy the needs and preferences
of information recipients through for example, data storytelling rather than
classical presentation [Dykes, 2019].

3.5 Advanced analytics

Advanced analytics is becoming a fundamental part of business, as well as a
critical factor contributing to competitive advantage and, in some cases, even
the ability to maintain a stable position in the market. This is because analytics,
by providing information, support the problem-solving and decision-making
process. However, the use of these advantages is only possible under certain
conditions:

• the data provided for analysis must be relevant to the needs of the analytical
model and the expected results of the analysis, be of sufficient quality (i.e.
complete, informatively true, structurally correct), sufficiently numerous (so
that the outcome of the analysis can be considered reliable and repeatable),
and up-to-date from the point of view of the decision-making horizon;
• analyses should be continuously developed and refined, increasing the value
of the information provided from traditional classification and description,
through in-depth data mining, to advanced predictive analyses;
• analysts’ efforts should be focused on developing and deepening analyses
(data science), while routine and standardized analyses ought to be
generated automatically;
• the organization must understand and accept that the value of analytical
results is determined by the availability of the necessary and appropriate
data and tools to perform the analysis.

The latter of the above points is particularly noteworthy, as managers expect

results often without understanding that low-quality input data or a limitation
of the analytical tools used will fundamentally affect the value of the in-
formation obtained. Therefore, while bearing in mind the costs associated
with implementing highly specialized analytical and database tools, it is also
important to be aware of their capabilities in relation to a specific organization
and its information needs.
 Key digital technologies 55
Literature distinguishes four types of analytics [Iraqi et al., 2021, p. 507]:

• Descriptive analytics – which answers questions about the data and

content being analyzed, such as: what is happening? what is it about? what
does it mean? what are its attributes?
• Diagnostic analytics – which focuses on explaining the situation by finding
answers to questions such as: why did it happen? what are the triggering
events? what are the preliminary conditions for each context?
• Predictive analytics – is more focused on the future, thus answering
questions like: what is likely to happen? what happened in similar situations
throughout the past? what could be the results of such actions or decisions?
• Prescriptive analytics – discusses and suggests potential alternatives to fix
problems or capitalize on opportunities. Questions answered in prescrip-
tive analytics include: what should I do about it? what can I do prevent it?
how can I best exploit it?

The specific contribution of individual analysis types to the decision-making

process in conjunction with the activity of the human decision-maker tends to
differ on a case-by-case basis (Figure 3.4).
The increasing share of business analyses in the formulation of a decision-
making solution translates into the requirement to use suitably advanced tools
and analytical models:

• Descriptive analytics – it is sufficient to use classical tools of statistical

analysis and data visualization in terms of generating descriptions and
characteristics of events and phenomena;
• Diagnostic analytics – diagnosing the causes of events and phenomena
requires tools that enable hypothesis testing, data mining and the
calculation of statistics in multidimensional systems (OLAP);
• Predictive analytics – predicting the development of events and occur-
rence of phenomena is possible using forecasting methods (e.g. time series,
econometric models), supported by artificial intelligence methods (e.g.
artificial neural networks, fuzzy logic) and machine learning (e.g. rule-
based decision trees);

Descriptive analytics Human activity

Diagnostic analytics Human activity
Data Decision
Predictive analytics Human activity
Prescriptive analytics

Figure 3.4 The participation of various analysis types in the decision-making process.
Source: Own research.
56 Katarzyna Rostek
• Prescriptive analytics – creation of decision-making solutions that meet
the set criteria and are highly rated in terms of quality, requires the use of
methods such as artificial intelligence and machine learning, including
algorithms for creating and optimizing solutions, such as evolutionary or
swarm algorithms.

In addition to the continued development of business analytics models and

methods [Shi et al., 2020], we are also seeing an increase in the volume and
availability of data that is the source of this analysis. Rather than treat analytic
data repositories as central storage for data produced within an organization,
we are now moving towards the realization that the utility of analytic results is
contingent on the scope of the input data, with said scope expected to extend
significantly beyond the boundaries of the organization. Until recently, a
serious barrier to freely increasing the volume of obtained data was its quality
level, but nowadays algorithms based on fuzzy logic rules are able to use data of
undefined quality or reliability. Hence, the unlimited source of the Internet, as
well as vast resources of data coming via the network (Big Data), have become
valuable inputs for many analyses performed in organizations. Thus, we ob-
serve a tendency to increasingly adopt heuristic analysis methods [Rostek,
2015; Rostek, Młodzianowski, 2018] in business analytics, which significantly
facilitates analytical integration of quantitative and qualitative data, as well as
the introduction of analytical models that are understandable and easily in-
terpretable for their recipient.

3.6 Cognitive systems

Cognitive systems are developed on the foundations of artificial intelligence
algorithms, which were originally intended to meet the high usability re-
quirements for modern applications and computer systems. According to the
Accenture Technology Vision survey [Accenture, 2018] of 800 banking and
IT managers, the potential for implementing artificial intelligence is the
greatest in three areas: building customer trust (indicated by 71% of the re-
spondents), optimizing costs and operations (indicated by 63% of the re-
spondents), and improving the degree of regulatory compliance (indicated by
62% of the respondents). Cognitive systems represent the next stage in the
development of this field, as they can communicate with humans using natural
language, understand voice, text and even thought commands as well as re-
spond to questions giving action recommendations or solution patterns, while
also effectively supporting the predicted areas of deployment potential.
Many studies conducted in different areas show that even simple learning
algorithms outperform humans in algorithmizable tasks or operations [Baker,
Dellaert, 2018]. Therefore, ultimately, cognitive systems should lead to full
automation of organizational processes, wherein machines will be able to
independently draw conclusions and create solutions based on collected data
and analyses performed in real time (so-called M2M mode: machine-to-
 Key digital technologies 57
machine). Banks are already using cognitive systems to automate processes,
particularly in supporting the implementation of sustainable development
strategies [Carlucci et al., 2018].
Cognitive devices also help to obtain information that would be either
extremely time-consuming and thus inefficient to work out by humans, or
even impossible to attain due to the huge volume of input data that would
need to be analyzed for this purpose. Cognitive technologies are already used
in this way to support the performance of audits [Macaulay, 2017]. A tradi-
tional auditor analyses data and issues an opinion based on an established
procedure but using only a sample of all the available transactions and docu-
ments as input. Cognitive systems use an analogous approach but on a com-
pletely different scale. All the available data, collected from many different
sources and in many different formats (including unstructured data), are ana-
lyzed. Various analytical methods are used, including predictive analysis,
pattern recognition, or hypothesis testing, and the final decisions are based on
verified results of these analyses and tests.
The level of security is also increased because cognitive agents have the
ability to locate a threat and mitigate or eliminate it before it materializes. An
example of a real-world solution in this context is the IBM Watson platform,2
which uses a combination of algorithms for natural language processing, in-
formation retrieval, knowledge representation, automatic reasoning and ma-
chine learning. Its dedicated tool, IBM OpenPages with Watson, supports
finance departments in the area of Governance Risk Compliance (GRC), in
particular business continuity and operational risk management, as well as
compliance with laws and regulations, internal control, financial control, etc.
As a consequence of the implementation of cognitive solutions, the concept
of a cognitive enterprise has also emerged as an evolution of previously known
business models, influenced by the expansion of advanced intelligent tech-
nologies such as Artificial Intelligence, automation, robotics and the Internet
of Things. According to IBM, the most important functional areas of the
cognitive enterprise are [IBM, 2020]:

• Market-making business platforms – this is a new formula of organiza-

tional business strategy, based on intelligent communication platforms,
directing investment priorities and initiatives of planned and implemented
changes in terms of the needs and expectations of the digital customer.
The role of such a platform is to strengthen the competitive position,
shape a new role of the organization on the market of virtual products and
services, as well as identify and actively create areas for development and
expansion on that market;
• Intelligent workflows – based on highly automated processes, using
advanced intelligent technologies to build strong relationships with
external customers and create value for those customers. It is obvious
that they will fundamentally change the way of measuring work efficiency
and the correctness of task execution in the digital environment;
58 Katarzyna Rostek
• Enterprise experience and humanity – the cognitive enterprise relies
heavily on human experience and competence, despite the widespread use
of advanced intelligent technologies. However, due to the high level of
specialization, there are increasing needs and requirements for team
leaders and regular employees. Digital skills or the ability to communicate
freely with both humans and machines are just some examples of new, but
crucial competencies. Perhaps the biggest challenge, and at the same time
the biggest opportunity for the development of cognitive businesses will
be to induce the necessary changes in terms of employees’ specialist
knowledge, mindsets and work patterns.

In summary, cognitive technologies are very likely to shape our future work
environments, in which machines will take over the performance of routine,
easily algorithmized tasks and duties, while the domain of humans will focus
on supervising the actions of the automated robots as well as performing
creative tasks that do not lend themselves to algorithmization and automation.

3.7 In-memory databases

In the era of Big Data and rapidly growing volumes of processed information,
new solutions and tools with considerably higher performance are needed.
The NoSQL (Not-only SQL) concept is an answer to these problems, offering
high scalability of databases stored mainly in distributed systems.
While relational databases are built based on the ACID model (Atomicity –
Consistency – Isolation – Durability), which ensures correct execution of
transactions while guaranteeing data consistency and durability, NoSQL da-
tabases are based on the BASE model (Basically Available – Soft-state –
Eventually Consistent), which aims to achieve the highest possible scalability,
availability, and processing efficiency. Notably, the BASE model does not refer
to the last property of the ACID model, that is persistence. This is because
NoSQL databases process data in operating memory (“in-memory”) instead of
on-disk storage, thus providing increased speed of query processing and
analysis execution. However, the issue of persistence, also understood as a
guarantee of data preservation, is not a priority in this case, which in some
cases may raise concerns about the risk of data loss.
Various concepts of structuring and identification are known among the
NoSQL database models used, for example [Kabakus, Kara, 2017, p. 521]:

• Key-value store – data are stored as key and value pairs. This data structure
is also called a “hash table,” in which the data is retrieved via identifying
keys;
• Document store – documents contain data and information in standard
formats or encodings such as XML, JSON, YAML, BSON. Documents
are addressed in the database with a unique identification key that
represents a particular document;
 Key digital technologies 59
• Column family – data are stored as sets of rows (storing key-value pairs)
and columns grouped according to an established data relationship;
• Graph database – data are represented as a graph, consisting of elements
associated with a finite number of relationships between the same. The
type of data defined in this database are, for example, social relationships,
transportation links, road maps, network topologies, etc. A graph database
is based on nodes (entities) and edges (relations), with properties consistent
with the graph theory;
• Multi-model – this is the arbitrary coexistence of different NoSQL models
in a configuration tailored to properly store different types and data
ranges.

NoSQL databases enable in-memory data processing, which results in such

efficiency and speed that even complex, multidimensional analyses can be
conducted in real time. This is particularly important in Big Data systems and
streaming databases, where information is often not stored permanently at all,
but only processed on an ongoing basis and selected for its informative value.
Thanks to these advantages, it is possible to further develop Business
Intelligence and other analytical and reporting systems towards real-time
systems that do not require the implementation of a permanent repository of
analytical data. This lack of permanent data storage speeds up the process of
implementation of the whole solution, significantly reducing the costs of its
start-up and operation, but at the same time creating threats related to the
potential loss of some data.
The value expected from in-memory technology is actually the agility and
flexibility of the solution, which can be explained by the framework shown in
Figure 3.5. Change behavior is a central construct of agility and describes the
behavior of in-memory technology with regard to such change. A solution can
behave reactively or proactively, it can create or even learn from change.
Perceived customer value (PCV) highlights the importance of quality, simplicity
and economy to the customer using an in-memory solution. Change readiness
describes the time frame or point in time at which in-memory technology is
able to adapt to changing environments. It can happen in a continuous, planned
or ad-hot process. The actual physical duration is dependent on the context of
in-memory solution and may differ for specific strategic, tactical and operational
uses. Change processing comprises the ability of in-memory technology to
sense, analyze, and respond to a change. In-memory technology includes tools
intended for modeling data and solution architecture. Agile in-memory tech-
nology may require a new architectural approach that is, for example, reusable,
reconfigurable and scalable. Additionally, agile in-memory solutions should
support, improve or enable the business model, for example, by supporting the
business processes of an organization.
Considering the above, it seems that in-memory databases are a technology
that represents the future of database development. Especially since, due to
high-performance requirements, they use the latest solutions in data
60 Katarzyna Rostek

Creation of Proaction to Reaction to Learning Change

change change change from Behavior
change

Perceived
Economy Quality Simplicity Customer
Value

Change
Continuous Ad hoc/Spontaneous Planned
Readiness

Change
Sense Diagnose Respond
Processing

Architecture
Scalability Reusability Reconfigurability Architecture and
Infrastructure

Business
Support Improvement Enablement
Model

Figure 3.5 Framework for in-memory technology agility.

Source: Knabke, Olbrich, 2018 (p. 497).

compression and indexing, optimizing both the use of operating space and the
efficiency of data retrieval to a level that is not achievable in classical databases.
However, although these systems offer high performance, they are associated
with a certain risk of data loss due to a lack of permanent storage. Therefore,
the search for and application of highly specialized security mechanisms is
currently the main challenge, and indeed a crucial concern, when it comes to
solutions from this group.

3.8 Blockchain
Blockchain is a technology that is used to store and transmit information about
transactions made on the Internet. This information is arranged in the form of
chronologically ordered data blocks. Each block contains information about a
specific number of transactions, and when a block is filled, another data block is
created, thus building a chain of connections, called a blockchain [Anta et al., 2018].
The main essence of blockchain is to maintain a shared, collective and
digital ledger of transactions, multiplied across the network in identical copies.
The concept is based on peer-to-peer communication, with no central servers,
management systems or people verifying transactions. This means that any
computer connected to the network can participate in the transmission and
authentication of the transactions made.
 Key digital technologies 61
The ledger is secured against unauthorized access using cryptographic so-
lutions, but it is also open and accessible to all transaction participants. The
user can view and verify the transaction history from the very beginning of its
existence up to the current moment, as each subsequent transaction is
chronologically added to the next block using established mathematical al-
gorithms. At the same time, no previous transaction to which a new trans-
action is appended can be deleted or changed. Thus, participants in a
transaction are guaranteed that (Zyskind, Nathan, 2015):

• Transactions are confidential – as the identities of individual participants

are not known or identified;
• The data is secure – because it cannot be changed once an entry is created;
• The register of entries is transparent – since all interested persons are
informed about each new entry and have full access to it;
• The data and transaction management process is autonomous – because
there is no trusted third party with the authority to certify or guarantee the
accuracy of transactions.

On this basis, blockchain technology has been applied to the registration and
processing of a range of document types, including:

• Publicly available documents such as: land and property ownership

certificates, vehicle registration certificates;
• Personalized identifiers such as: driver’s license, ID card, passport;
• Private documents such as: bills of exchange, contracts, specimen
signatures, wills, powers of attorney, insurance policies, notarization of
documents.

Undoubtedly the heyday of this technology was only brought by the in-
troduction of bitcoin. Cryptocurrencies are a subset of virtual currencies that
use encryption mechanisms to verify the authenticity of transactions.
Additionally, bitcoin is a fully peer-to-peer payment system and is not con-
trolled by any administrative or governmental authority. Transactions are
made exclusively on the Internet and are verified by a network of computers
created by the participants in the transaction. Based on the characteristics
indicated, the European Central Bank clarifies the definition of bitcoin as3: a
digital token that can be exchanged electronically, which does not exist in physical form.
Bitcoins are created and kept track of by a network of computers using mathematical
formulas, rather than by a single authority or organization.
Users need to have a so-called cryptocurrency wallet in order to conduct
transactions on the bitcoin network. Each wallet consists of two keys – a
private one and a public one. The public key is where transactions are de-
posited and paid out. It also appears on the blockchain as the digital signature
of the user. If a user receives payment in bitcoins for their public key, he will
not be able to withdraw the funds without their private key. The public key is
62 Katarzyna Rostek
a truncated version of the private key, created using a predetermined math-
ematical algorithm. It is nearly impossible to reverse the process and generate a
private key from a public key, due to the complexity of this mathematical
operation, involving massive operational and computational resources.
An important feature of bitcoin is its complete detachment from the real
world, which could justify and determine its actual value. It lacks the con-
nection characteristic for traditional financial instruments with a non-virtual
economic domains, such as economic activity, state budgets, national
economies or measurable tangible goods. The value of bitcoin is based solely
on the belief and faith of its holders that other transaction participants will
recognize and use it in their financial settlements and that its use will be widely
accepted. It should be noted, however, that the desire of the system’s creators
to eliminate financial institutions as payment intermediaries has led instead to
the need to trust other bitcoin users as parties guaranteeing the correctness and
veracity of the performed transactions.

3.9 Summary
The study presented in the chapter is just a snapshot of how new technologies
are changing the work environment and operation of digital finance. The ef-
fective implementation and application of these solutions will also induce
profound changes in management approaches across functional scopes, in par-
ticular in HR management, work organization, monitoring of process execu-
tion results, and ensuring security and business continuity. This means,
therefore, that the ongoing digital transformation is not only an ascent to a
higher level of technology and automation of processes, but above all it is a
permanent change in the very concept of an organization, its functioning,
communication with its environment, as well as ways of delivering value to the
customer. This entails many implications and challenges, the most important of
which inform the topics of the remaining chapters of this monograph.

Notes
1 https://azure.microsoft.com/pl-pl/overview/what-is-a-public-cloud/
2 https://www.ibm.com/pl-pl/watson
3 https://www.ecb.europa.eu/explainers/tell-me/html/what-is-bitcoin.en.html

Bibliography
Accenture (2018). Accenture Technology Vision 2018. Accenture LC.
Andrade, E., Nogueira, B., Matos, R., Callou, G., & Maciel, P. (2017). Availability
modeling and analysis of a disaster-recovery-as-a-service solution. Computing, 99(10),
929–954.
Anta, A. F., Konwar, K., Georgiou, C., & Nicolaou, N. (2018). Formalizing and im-
plementing distributed ledger objects. ACM Sigact News, 49(2), 58–76. DOI:
10.1145/3232679.3232691
 Key digital technologies 63
Baker, T., & Dellaert, B. G. C. (2018). Regulating robo advice across the financial services
industry. Iowa Law Review, 103(2), 713–750.
Boukadi, K., Rekik, M., Bernabe, J. B., & Lloret, J. (2020). Container description ontology
for CaaS. International Journal of Web and Grid Services, 16(4), 341–363.
Carlucci, D., Ferreira, F. A., Schiuma, G., Jalali, M. S., & António, N. J. (2018). A holistic
conception of sustainable banking: Adding value with fuzzy cognitive mapping.
Technological and Economic Development of Economy, 24(4), 1303–1322.
Cooper, L. A., Holderness, Jr, D. K., Sorensen, T. L., & Wood, D. A. (2019). Robotic
process automation in public accounting. Accounting Horizons, 33(4), 15–35.
Delloite (2016). Crunch Time. Finance in a Digital World. Delloite Development LCC.
Deloitte (2020). Delloitte Insights: Automation With Intelligence. Pursuing Organisation‐Wide
Reimagination. Delloite Development LCC.
Domaschka, J., Griesinger, F., Seybold, D., & Wesner, S. (2017). A cloud-driven view on
business process as a service In: Closer (Proceedings of the 7th International Conference on
Cloud Computing and Services Science), 739–746.
Dreher, P., Nair, D., Sills, E., & Vouk, M. (2016). Cost analysis comparing HPC public
versus private cloud computing. In International Conference on cloud computing and services
science, Springer, Cham, 294–316.
Dykes, B. (2019). Effective Data Storytelling: How to Drive Change with Data, Narrative and
Visuals. John Wiley & Sons.
Farrar, M. (2019). Re-inventing Finance for a Digital World. The Future of Finance. Chartered
Global Management Accountant (CGMA).
Gartner (2020). Future of Finance: 10 Trends to Watch Now. Garner Institute.
Harrast, S. A. (2020). Robotic process automation in accounting systems. Journal Corporate
Accounting & Finance, 31, 209–213. 10.1002/jcaf.22457
IBM (2020). Building the Cognitive Enterprise: Nine Action Areas. IBM Institute for Business Value.
Iraqi, B., Benhiba, L., & Idrissi, M. (2021). Data analytics in investment banks. International
Journal of Advanced Computer Science and Applications(IJACSA), 12(5), 506–513, 10.14569/
IJACSA.2021.0120562
JOLT (2019). Robotic Process Automation – Process Heatmaps. JOLT Advantage Group.
Kabakus, A. T., & Kara, R. (2017). A performance evaluation of in-memory databases.
Journal of King Saud University-Computer and Information Sciences, 29(4), 520–525.
Knabke, T., & Olbrich, S. (2018). Building novel capabilities to enable business intelligence
agility: Results from a quantitative study. Information Systems and e-Business Management,
16(3), 493–546.
Kokina, J., & Blanchette, S. (2019). Early evidence of digital labor in accounting:
Innovation with Robotic Process Automation. International Journal of Accounting
Information Systems, 35, 100431.
Macaulay, M. T. (2017). How Cognitive Tech Is Revolutionizing the Audit. Support Learning
and Insight.
Mangal, G., Kasliwal, P., Deshpande, U., Kurhekar, M., & Chafle, G. (2015). Flexible cloud
computing by integrating public-private clouds using openstack. In 2015 IEEE International
Conference on Cloud Computing in Emerging Markets (CCEM) (pp. 146–152). IEEE.
Martini, B., & Choo, K. K. R. (2013). Cloud storage forensics: ownCloud as a case study.
Digital Investigation, 10(4), 287–299.
McCann, D. (2018). Special Report: The New Digital Workforce. Robotic process automation
emerges from the back office to take on core finance tasks. https://www.cfo.com/applications/
2018/09/special-report-the-new-digital-workforce/
64 Katarzyna Rostek
Rostek, K. (2015). Benchmarking Collaborative Networks. Springer International Publishing.
Rostek, K., & Młodzianowski, P. (2018). Evaluation of the possibility of predicting social
reactions using in-depth analysis of information published on web-portals. Zeszyty
Naukowe Uniwersytetu Przyrodniczo-Humanistycznego w Siedlcach. Seria: Administracja i
Zarządzanie, 45(118), 5–14.
Shi, L., Lu, P., & Yan, J. (2020). Causality learning from time series data for the industrial
finance analysis via the multi-dimensional point process. Intelligent Automation and Soft
Computing, 26(5), 873–885. 10.32604/iasc.2020.010121.
Shoikova, E., & Peshev, A. (2012). Research on managing private cloud computing in-
frastructure. In INTED2012 Proceedings, IATED, 699–708.
Zyskind, G., & Nathan, O. (2015). Decentralizing privacy: Using blockchain to protect
personal data. Security and Privacy Workshops, 180–184.
Part II

Digital State: tasks and

tools
4 National digital sovereignty:
what is at stake?
Magdalena Wrzosek

4.1 Introduction
The discussion on the position of the state in the area known as cyberspace has
become increasingly important and multi-dimensional in recent years. States
are looking to play a more important role not only in internet governance but
also in data management and the production of modern technology. It turns
out that both the internet and data, as well as technology itself, can have a
nationality, and that a state can be digitally sovereign or non-sovereign.
In 2016, the NIS Directive was adopted – the first European law in the field
of cybersecurity – and the North Atlantic Alliance (NATO) recognised cy-
berspace as a domain of military operations. As a consequence of these actions,
considerations began on the subject of digital sovereignty. This is still a rela-
tively new concept, one which has not yet been fully defined, but it has been
provoking an ever-wider discussion in the international arena for some time.
In Europe, digital sovereignty now appears to have three dimensions. The first
is the policy on personal data protection and non-personal data governance.
The second dimension relates to ensuring that the most essential sectors of the
economy have the appropriate level of cybersecurity, while the third concerns
the technological aspects of digital sovereignty – striving for the technology
used in Europe to be a technology produced by European countries, or
certified by them. This third dimension of digital sovereignty, in particular, has
been the centre of attention recently – be it in terms of introducing a
European certification framework1 or the discussion on 5 G.2

4.2 The concept of digital sovereignty

In political science, the concept of sovereignty has four dimensions: legal,
political, internal and external. The legal dimension refers to the unques-
tionable right and monopoly of the state to enact laws and determine both
what is in line with them and also what is not. Political sovereignty means
unlimited political power in a given territory, combined with the requirement
of obedience, and thus a state monopoly on the use of force. Internal sover-
eignty refers to the greatest power of a state to make decisions that bind all

DOI: 10.4324/9781003264101-7
68 Magdalena Wrzosek
Table 4.1 Four dimensions of the concept of sovereignty 3

Legal sovereignty The unquestionable right to determine compliant behaviour

Political sovereignty Unlimited political power and the requirement of obedience
(state monopoly on the use of force)
Internal sovereignty The greatest power in the state that makes decisions that bind
all citizens, groups and institutions together within the
territorial borders of the state
External sovereignty The place of the state in the international order, as well as its
ability to act autonomously

citizens, groups and institutions together in a specific territory (within the

boundaries of the state). External sovereignty, on the other hand, applies to the
international order and refers to the ability of a state to act autonomously in
international relations (Heywood, Warsaw, 2006) (Table 4.1).
In international relations, sovereignty means the formal status of a state that
allows for independent and unlimited participation in international interac-
tions, such as war, diplomacy, trade and foreign policy (Krasner, London –
New York, 2009). Only a sovereign state may undertake any international
activity without consent or authorisation from anyone else, acting in its own
name, with binding authority and bearing full responsibility for its actions.
Such an understanding of sovereignty is the result of centuries of activity by
states in the international arena and the shaping of the modern concept of a
state, which has sovereignty as one of its main attributes.
The term “sovereignty” was first used by the French lawyer and political
philosopher Jean Bodin (1530–1596), whose Six Books on the Commonwealth
became the basis for the French absolute monarchy introduced during the
reign of Louis XIV. According to Bodin, sovereignty is the absolute, per-
manent, eternal and indivisible power over people, which binds the state
together and allows internal and external independence to be maintained. This
concept is often termed “effective power” (Filipowicz, Gdańsk, 2007) and
refers to the power of a monarch. Political philosophers such as Johannes
Althusius, Gustav Buchman, Joseph Brutus and Jean Boucher were against this
view, however, and advocated the primary and non-exclusive power of the
people. In their opinion, power is fiduciary and results from the explicit or
implied consent between the ruler and his subjects. During the
Enlightenment, Jean-Jacques Rousseau (1712–1778) combined the sover-
eignty of the people with indivisibility and inalienability. In his opinion, the
subject of sovereignty are the people themselves; their sovereignty cannot be
waived, it is not subject to the statute of limitations, and it cannot be divided
or limited (Król, Gdańsk, 1998, pp. 51–56). It was Rousseau’s concept that
made the sovereignty of the nation a modern political principle that entered
modern constitutional law. As Stanisław Bieleń states: “While constitutional
law defines the sovereign within the state, international law defines the po-
sition of the state in international relations and binds the attribute of
 National digital sovereignty 69
sovereignty only to the state” (Bieleń, Warsaw, 2010, pp. 104–105). On the
one hand, we have the sovereignty of the nation, and on the other, the so-
vereignty of a state that is sovereign insofar as it has the ability to decide for
itself in its relations with other states and international institutions.
In this context, the events of the French Revolution, which contrasted the
old principle of the legitimacy of the monarch with the principle of the so-
vereignty of the people, are extremely important. The sovereignty of a nation
organised into a state has become the main criterion for putting the world in
order. The French Revolution re-evaluated the principles of how sovereignty
is perceived and emphasised the role of the nation (the subjectivity of the
nation). It is the will of the nation, and not the will of the monarch, that has
become the territorial and political basis of today’s Europe.
The 19th century brought fierce rivalry between the great powers.
Colonialism made it clear that not all states have the same rights in international
relations. African and Asian states were treated as objects through having treaties
imposed on them that restricted their rights. Bieleń states that the principle of
territorial authority has become the basis for international relations. As he notes,
“diplomatic and consular relations between ‘civilised’ powers and ‘uncivilised’
states were unequal. They were expressed in agreements limiting territorial
authority. A common form of such restrictions was the so-called capitulation
regime, whereby citizens of all European states were excluded from the au-
thority of the state where such a regime was imposed. They came under the
jurisdiction of their consul.” (Bieleń, Warsaw, 2010, p. 108).4
The First World War brought about fundamental changes in this respect.
The emergence of new states in the international arena and the concept of the
self-determination of nations, as well as the outlawing of war as such,5 re-
defined the perception of international relations. The right to war is no longer
respected as an attribute of state sovereignty, or a result of that sovereignty.
Consequently, violations of sovereignty that occurred through the use of force
became illegal. Such violations would include the seizure of foreign territory,
for example. It was at this time that the legal definition of sovereignty was first
used in international relations – in the Island of Palmas Case of 1928.6 This
definition assumed that: “Sovereignty in relations between states means in-
dependence. It consists in exercising the functions of the state, regardless of the
part of the world in which the territory is located.” (Island of Palmas arbitral
award, p. 838). As Bieleń notes, “The principle of the non-recognition of
situations, rights or claims resulting from the illegal use of force began to form
in international law” (Bieleń, Warsaw, 2010, p. 108). On 7 January 1932, the
US Secretary of State, Henry L. Stimson, addressed a diplomatic note to Japan
condemning its aggression against China. It plainly stated that the US did not
recognise the violation of China’s sovereignty (Bieleń, Warsaw, 2010, p. 108).
Also, Article 10 of the League of Nations Covenant7 stated that “The
Members of the League undertake to respect and preserve as against external
aggression the territorial integrity and existing political independence of all
Members of the League. In case of any such aggression or in case of any threat
70 Magdalena Wrzosek
or danger of such aggression the Council shall advise upon the means by
which this obligation shall be fulfilled.” (Convention of the League of Nations).
Thus, after the First World War, a commitment to mutual respect for so-
vereignty between states was created, with sovereignty understood as terri-
torial integrity and political independence.
The interwar period was a time when as many as 21 out of the 30 European
countries had their borders questioned by others. At the same time, two major
ideologies were growing in importance: fascism and communism. The League
of Nations did not prove to be a lasting and sufficient guarantor of the in-
violability of the sovereignty of individual states. In 1935, Italy conquered
Ethiopia, while in 1938 first Austria and then the Sudetenland were annexed
to Germany. Bieleń claims that “the Munich Pact of 1938 dug up 19th-
century methods of violating the sovereignty of states and depriving them of
their independent existence.” The Molotov-Ribbentrop Pact was also an
example of this.8
It was only after the Second World War that the principle of the sovereign
equality of states became an exponent of the concept of sovereignty. Article
2.1 of the Charter of the United Nations, signed in 1945,9 stipulates that “The
Organization is based on the principle of the sovereign equality of all its
Members.” This principle has become a generally applicable principle of in-
ternational law. In 1970, the Declaration on Principles of International Law was
signed, which states that all states have equal rights and obligations, are equal in
law and enjoy full rights associated with full sovereignty.
The North Atlantic Treaty Organisation (NATO) interprets the concept of
sovereignty in a similar way.10 Article 5 of the treaty stipulates that “The
Parties agree that an armed attack against one or more of them in Europe or
North America shall be considered an attack against them all” and further that
“if such an armed attack occurs, each of them, in exercise of the right of
individual or collective self-defence recognised by Article 51 of the Charter of
the United Nations, will assist the Party or Parties so attacked by taking
forthwith, individually and in concert with the other Parties, such action as it
deems necessary, including the use of armed force, to restore and maintain the
security of the North Atlantic area.” In the light of these provisions, violating
the sovereignty of one of the members will lead to a response from the entire
Alliance.
The concept of sovereignty has a history going back centuries and is strongly
linked to how the concept of power and the concept of the state were perceived
in different eras. From identification with the power of the monarch – the
divine anointed one – through the attribute of the nation to the inalienable
attribute of the state as the subject of international relations. At the same time, it
should be noted that currently the processes of globalisation and international
integration are significantly redefining the perception of state sovereignty. The
decision-making autonomy of states is de facto limited, even for the great powers.
As Bieleń underlines, a sovereign state has “supreme power over its territory and
population, it may voluntarily enter into equal relations with other states and be
 National digital sovereignty 71
a member of freely chosen international organisations, and has the ability to
freely shape its social, economic and political system” (Bieleń, Warsaw, 2010,
p. 113). Skarzyński, on the other hand, notes that today “the concept of so-
vereignty has lost much of its original meaning, as people no longer seek ab-
solute reference in the way they once did.” Therefore, sovereignty cannot be
defined “as simple state independence and a monopoly for regulating or su-
pervising internal and external relations. Rather, one should ask what is the
dependence of sovereign entities and how does it differ from those without
sovereignty” (Skarzyński, Białystok, 2006, p. 354).
In his book The New 21st Century, Jacques Sapir analyses the political
processes taking place in the world at the beginning of the 2000s and notes the
decline in the importance of the US, in favour of the growing power of states
such as Russia and China. Referring to the concept of sovereignty, he notes
that “states have never pretended to be in a position to control everything.
The most powerful and absolute despot has always been powerless against
storm or drought. The same problem exists with the international obligations
of states. Treaties are seen as absolute obligations, pacta sunt servanda. But it is
nothing other than the application of another principle, namely that of in-
strumental rationality” (Sapir, Dialog, 2009, p. 158). Sapir states that there are
clear differences in how the US and Russia interpret their sovereignty. In his
view, it comes down to a fundamental difference: the US believes that “our
values justify our right to impose them on our neighbour” (Sapir, Dialog,
2009, p. 160). It is worth recalling the context of the US superpower policy
related to the spread of democracy in other countries and the policy of in-
ternational organisations aimed at unifying and looking for a common de-
nominator for many countries. Sovereignty is therefore gradual in some way.
For Russia, on the other hand, “there can be no organisation uniting nations
that does not respect the sovereignty of each of them” (Sapir, Dialog, 2009,
p. 160). This means that military intervention should not be explained by a
desire to spread democratic values, but it can be justified if there is a direct
threat to the state from the actions of other states. In light of this dichotomy,
the US intervention in Iraq was a violation of that country’s sovereignty
because it was based on a lie – there were no weapons of mass destruction
there. This type of dichotomy will be important in the following subsections
of this chapter that deal with the technological aspects of digital sovereignty.
The contemporary sovereignty of states is therefore a multifaceted phe-
nomenon, and the so-called digital revolution11 has opened a whole new
chapter in the interpretation of this concept. The creation of interconnections
between countries, institutions, people, devices and applications in the first
decade of the 21st century has resulted in a very strong and rapid saturation of
cyberspace. The widespread adoption of technologies such as smartphones,
wi-fi and social media has created new markets and new patterns of social
behaviour that have affected the lives of millions of people around the world.
Many activities have been transferred to the web, and critical sectors such as
72 Magdalena Wrzosek
energy, finance and transport have become dependent on information and
communications technology (ICT) systems. The digital revolution has con-
tributed to the emergence of a new domain for state activity, cyberspace,
which has gradually come to be addressed as a domain in which state sover-
eignty must be asserted.
The first to use the phrase “digital sovereignty” were the French. In 2011,
Pierre Bellanger12 defined digital sovereignty as “control over our present and
future related to the use of technology and computer networks” (Gueham,
January 2017). This short definition captures the essence of the discussion very
well. It is about ensuring the independence of state activities in a new sphere of
activity – cyberspace. Within the European Union (EU), the discussion has
been going on for a long time, with the issue being termed digital sovereignty
only recently.13
At the beginning of 2020, the European Commission (EC) announced a
new European strategy for the digital transformation of the EU (Shaping
Europe’s Digital Future). In the paper, the Commission placed a strong emphasis
on digital sovereignty in the context of ensuring the integrity and resilience of
ICT networks. According to the Commission, this requires the creation of
appropriate conditions enabling the development and implementation of its
own capabilities in this area, so that Europe can become independent of
technologies developed in other parts of the world. Thus, sovereignty is un-
derstood here on two levels. First of all, as the cybersecurity of Europe, and
ensuring the appropriate level of security for networks and ICT systems that
are key for individual Member States and appropriate for EU institutions. On
the second level, however, it is understood as the creation of European
technology, independent of third countries.

4.3 Internet and its nationality – international law in

cyberspace
The legal international order relating to sovereignty cited in the previous
section did not apply to cyberspace. Those regulations were determined long
before the internet was created and became a mass medium, and also before
ICT networks and systems began to be used to provide critical, from the
citizens’ point of view, services: electricity, drinking water, transport and
health protection. The year 2007 is considered to be something of a turning
point in the perception of the importance of these issues. It was then that, as a
result of a DDoS attack, the websites of Estonian banks, newspapers, ministries
and parliament were blocked. These events made the international community
aware that by acting in cyberspace, it is possible to effectively paralyse the
functioning of an entire state and contribute to significant economic losses. At
the time, no direct links between the Nasi group, which was responsible for
those attacks, and the Russian Federation were proven, but a discussion began
in international forums (NATO, UN) as to whether this was an attack that met
the prerequisites for so-called “cyberwarfare.” This discussion was sparked by
 National digital sovereignty 73
Estonia itself, referring to Article 5 of the NATO Treaty, that is, the principle
of a collective response by the entire Alliance in the event of a violation of the
sovereignty of a NATO member.14 A “cyberwar” was taken to mean the
violation of state sovereignty in cyberspace. Although there was no clear
definition at the time of what this breach of sovereignty actually entailed, the
general perception was that it did occur. These events, therefore, saw an in-
tensification of efforts to define the principles of the functioning of interna-
tional law in cyberspace.
Such activities were already being carried out at that time by the interna-
tional community. The United Nations had seen the need to interpret in-
ternational law in the context of modern technology at the beginning of the
21st century. In 2003, the UN General Assembly asked the Secretary-General
to analyse potential threats to information security, and to publish possible
preventive measures and opportunities for cooperation that would help to
minimise those threats. This was followed by the establishment of the Group
of Government Experts (GGE on Information and Telecommunications
Development in the Context of International Security).15 Six of these groups16
met between 2003 and 2020, with most of them presenting a final report.
The first GGE held its meetings in 2004–2005. The work of the Group
concerned the international approach to information security. The delibera-
tions revealed significant discrepancies in the perception of this topic. Due to
the lack of a consensus, no final report was prepared. The second GGE Group
operated in 2009–2010, in new international circumstances. This was after the
attacks on Estonia in 2007, when there was a greater understanding of ICT
threats. The Group’s work focused on international security issues, and the
final report included recommendations related to deepening the dialogue
between states to reduce the risk of cybersecurity threats and critical infra-
structure protection; building mutual trust, stability and reducing risks arising
from the use of ICT by states, including in the context of international
conflicts; and issues related to the exchange of information on national leg-
islation, national strategies, technological solutions, policies and examples of
good practice. Although these recommendations do not seem ground-
breaking, it is worth emphasising that the very fact that a final report was
prepared and such recommendations were agreed to marked a significant
breakthrough in international relations, especially in view of the fact that re-
presentatives from such countries as the USA, France and Germany, as well as
Russia and China, all took part in this Group.
The next Group, the third GGE, deliberated in 2012–2013 and its final
report was one of the more successful ones as the experts agreed that the norms
of international law are also valid in cyberspace. The final report stressed that
the activities of states on the internet, including the activities of information
and communication infrastructures within the territory of a state, are subject to
both the Charter of the United Nations and the norms and obligations of state
sovereignty, as well as other rules of international law. The report’s re-
commendations included: the need to apply the norms of applicable
74 Magdalena Wrzosek
international law in cyberspace, including the United Nations Charter;
adopting an international code of conduct on information security; the need to
respect human rights and fundamental freedoms enshrined in international law
when taking actions related to cybersecurity; and the prohibition on using
proxy servers for the purposes of illegal activities in cyberspace. This report
was a huge breakthrough. Recognising that the norms of international law also
apply in cyberspace means that states have their sovereignty and the right to
defend that sovereignty in cyberspace.
The deliberations of the fourth GGE Group (2014–2015) also ended with
the adoption of its final report. This document was not as groundbreaking as
the previous one, but it strongly emphasised that states should not knowingly
support cyber activities that target other states’ structures, especially their
critical infrastructure. Following these successes, the deliberations of the fifth
Group (2016–2017) ended with no consensus and no final report.
Furthermore, they also revealed a clear discrepancy between countries in their
approach to cyberspace. On the one hand, there are some countries, such as
the US and the members of the EU, which expect clear and concrete
guidelines for the application of international law on the use of modern
technologies, including humanitarian law, the right to self-defence and the law
of state responsibility and remedies. It is primarily about resolving issues such as
the use of self-defence in response to an attack in cyberspace. On the other
hand, there is another group of countries, such as Russia and China, which
believe that such application of the regulations could lead to the militarisation
of cyberspace. However, it is worth emphasising here that the lack of reg-
ulation means the lack of sanctions and clear rules in response to attacks such as
the one in Estonia in 2007.
The sixth Group completed work in May 2021, and there are no immediate
plans to renew the format. In parallel with the establishment of the sixth GGE
group, the UN created a new format for discussion: an Open-Ended Working
Group (OEWG) on Developments in the Field of ICTs in the Context of
International Security. This is a wider body than the GGE group, with all
Member States allowed to participate, rather than just 25 of them. What’s
more, consultations on the work of the OEWG are to be carried out in a
format allowing the participation of representatives of business, the third sector
and academic centres.17 The establishment of this format is an attempt to break
the previous deadlock. It is also worth noting that the actions taken in the
forum of both Groups and the recommendations issued by them are not
generally applicable provisions of international law, but only (or even)
guidelines for the application of this law in the context of cyberspace
(Figure 4.1).
Actions taken at the UN forum are not the only attempt to interpret the
provisions of international law in cyberspace. In 2013, Cambridge University
Press published the Tallinn Manual 1.0, an academic textbook analysing how
international law is implemented in cyberspace.19 Four years later, the second
 National digital sovereignty 75

2004 – 2005 2009 – 2010 2012 – 2013 2014-2015 2016 – 2017 2019 – 2021

The First The Second The Third The Fourth The Fifth The Sixth
Group Group Group Group Group Group

15 Experts 15 Experts 15 Experts 20 Experts 25 Experts 25 Experts

results of work: results of work: results of work: results of work: results of work: results of work:

no agreement the need for · Recognition that · Principles of State no agreement · Harmful ICT
cooperation international law, sovereignty, the activity against
between both and in particular settlement of critical
the states as the UN Charter, disputes infrastructure;
well as the applies to digital by peaceful means,
· A increase in
public and space and non-
states’ malicious
private sectors intervention
· Norms, rules, and use of ICT
in the field of in the internal
principles on the -enabled
cybersecurity affairs of other
responsible covert information
States, applies to
behaviour of campaigns to
cyberspace.
States influence the
· Recognition that processes,
· Reference that states must comply systems
state sovereignty with their and overall
applies to the obligations stability of
digital field under international another state;
· The principle that law to respect and
· And malicious
states must meet protect human
ICT activity
their international rights and
aimed to exploit
obligations fundamental
vulnerabilities.
regarding freedoms.
internationally · Agreement that UN
wrongful acts in should play a
cyberspace leading role in
attributable to developing
them common
understandings on
the application of
international law
and norms, rules
and principles for
responsible State
behaviour
· Other norms, rules,
and principles on
the responsible
behaviour of States
· Confidence-
building measures

· Invitation for
international
cooperation and
assistance in ICT
security and
capacity-building

Figure 4.1 History of UN GGE groups. 18

edition of Tallinn Manual 2.0 was published, which expanded on certain

issues. The entire first chapter of this publication deals precisely with digital
sovereignty. The authors describe five principles of digital sovereignty
(Tallinn Manual 2.0, Cambridge, 2017):
76 Magdalena Wrzosek
1 The principle of state sovereignty applies in cyberspace.
2 Internal sovereignty in cyberspace is related to the ICT infrastructure,
people and activities taking place in the territory of the state, subject to
international legal obligations.
3 External sovereignty in cyberspace is related to the freedom to act in
cyberspace in international relations, subject to international legal obliga-
tions.
4 Violation of sovereignty in cyberspace refers to the prohibition on
undertaking operations in cyberspace that violates the sovereignty of
another state.
5 The immunity of sovereignty and inviolability means that any state
interference with the ICT infrastructure belonging to another state,
regardless of where it is located, constitutes an infringement of sovereignty.

On the basis of these principles, the state has the right, among other things, to
disconnect from the network any ICT infrastructure located on its territory,
the operation of which may violate the sovereignty of the state (Tallinn
Manual 2.0, Cambridge, 2017, pp. 12-13). In addition, internal sovereignty
means that a state may, partially or entirely, restrict access to the web by
persons within its territory, in particular to certain online content (Tallinn
Manual 2.0, Cambridge, 2017, p. 15). There is also a rule about refraining
from hostile activities in cyberspace (Tallinn Manual 2.0, Cambridge, 2017,
p. 16). External sovereignty, on the other hand, means that states can engage in
cyberspace activities in international relations, in accordance with their own
decisions, as long as they do not violate the norms of international law (Tallinn
Manual 2.0, Cambridge, 2017, p. 16). Any interference within the territory of
the state, related to activities in cyberspace, is a violation of sovereignty. As an
example, experts cite the use of a USB stick with malware by a given country
in order to disrupt the operation of systems in the territory of another country
(Tallinn Manual 2.0, Cambridge, 2017, p. 19). For this purpose, however, it is
necessary to carry out attribution, that is provide evidence that another state is
responsible for this action.
The discussion related to the application of international law norms in
cyberspace has a broader context related to network governance – so-called
internet governance. According to the definition proposed at the WSIS (World
Summit on the Information Society) in 2005, internet governance is the devel-
opment and application by governments, the private sector and civil society, in
their respective roles, of common principles, norms, rules, decision-making
procedures and programs that shape the development and use of the internet.
Historically, the US government was responsible for the process of assigning
internet domains and the overall supervision of the operation of DNS servers
around the world. 1998 saw the creation of ICANN (Internet Corporation for
Assigned Names and Numbers), a private non-profit organisation to which the
US government delegated oversight of the technical aspects of the internet.
However, ICANN has the status of a company registered in the state of
 National digital sovereignty 77
California and therefore falls under the jurisdiction of the US government. It
took over the role of IANA (Internet Assigned Numbers Authority) to deal with
the governance of the global domain name system. With the growing im-
portance of the internet, the American domination in the field of internet
governance has been criticised by many countries (including Brazil, China and
Arab countries). Problems with reaching a consensus at the UN GGN forum
are related to the clash between the political interests of states and the different
approaches to the issue of internet governance. On the one hand, there are
countries representing the position of respecting and protecting the multi-
lateral model of internet governance (including European countries and the
USA), while on the other hand there are those that are in favour of increasing
the scope of government control and influence over the internet.20
In this context, there is also the discussion about the so-called
“Balkanisation” of the internet, that is the gradual move away from a global
network to “national internets” in which nation-states will control the net-
work, depending on their own policies and according to their own tech-
nology. As a result, there will no longer be the “Internet,” a global network
connecting all users, but “internets,” that is, networks operating under the
auspices of individual governments. This is already partially visible in the
policies of China and Russia, as well as in the case of large international
platforms that provide web users with different content depending on the IP
address. It is significant that in creating this narrative, Russia and China use
precisely the argument of digital sovereignty, understood in a similar manner
to that cited in the previous subsection. According to Russia and China, they
have every right, and even the obligation, to create a national internet in their
territory as it is directly related to their sovereignty and right to self-
determination, which cannot be restricted by international organisations or
treaties.21
The concept of “digital sovereignty” thus poses a challenge to the func-
tioning of the internet as such. For countries such as the USA, Russia or
China, the challenges of internet governance and the implementation of in-
ternational law in cyberspace are an element of geopolitics. The increasing
dependence of states on cyberspace is resulting in a desire to assert their
dominance in this area. This poses a direct threat to internet neutrality,22 a rule
that neither ISPs nor governments should impose any restrictions on users’
access to the web.
It is significant that in the face of these phenomena, Europe (the EU) has
still not developed its own definition of digital sovereignty, and only began to
speak clearly about the issue itself in 2020, during the adoption of the
aforementioned EU Digital Transformation Strategy. This does not mean,
however, that it has not been involved in activities related to ensuring digital
sovereignty. This process has been ongoing within the EU for some time,
although it was not named as such directly. This phenomenon is based on
three dimensions: the protection of EU citizens’ personal data and the proper
management of non-personal data; the building of an adequate level of
78 Magdalena Wrzosek
cybersecurity for those sectors of the economy that have been identified as
being particularly important from the point of view of state security; and the
attempt to create European technological solutions, or to certify and stan-
dardise those that are not European. The following sections will deal with all
those aspects that can be called the three pillars of the European concept of
digital sovereignty.

4.4 Data and ownership – Europe versus GAFA

In his book The Four: The Hidden DNA of Amazon, Apple, Facebook and Google,
Scott Galloway analyses the policies of the companies known as GAFA,23
noting that they concentrate a great deal of knowledge about web users, and
thus wield significant power. As he notes, “We know these companies aren’t
benevolent beings, yet we invite them into the most intimate areas of our lives.
We willingly divulge personal updates, knowing they’ll be used for profit”
(Galloway, Warsaw, 2017, p.10). And further: “They are organizations that
have aggregated enormous power. (…) These companies avoid taxes, invade
privacy, and destroy jobs to increase profits because … they can” (Galloway,
Warsaw, 2017, p. 321).
In view of the construction in Europe of the so-called Digital Single
Market,24 the increasing economic and political dominance of GAFA has been
a recurring theme, with the issues of algorithms controlling access to
knowledge, the running of election campaigns on social media and the control
of network users’ data all being highlighted, in particular. All this means that
the knowledge that these companies have about internet users is often greater
than the knowledge individual countries possess about their own citizens.
Therefore, the issue of personal data and the need to protect them has been
strongly emphasised in the discussion.
Since the WikiLeaks and Edward Snowden scandals, data have been treated
with increasing care not only by individual states but also by the international
community. In 2017, The Economist published an article entitled The world’s
most valuable resource is no longer oil, but data, in which data were described as
“the oil of the digital age.” There is a belief that in the 21st century, data are the
basis of power and knowledge. The data-driven economy was supposed to be
the future, and in the age of the information society, it is data that will de-
termine the political power of individual countries.
The WikiLeaks and Snowden scandals seemed to confirm this. It turned out
that this kind of “collecting” of information on citizens, allies and opponents is
the domain of the superpowers, and thanks to their use of modern technology
they are extremely efficient at it. It did not take long for Europe to respond.
The EU introduced new regulations in two dimensions: the protection of
personal and non-personal data. This was combined with a discussion on the
role of GAFA in the processing of personal and non-personal data of
Europeans. In doing so, the EU stressed that data has become a “currency” for
 National digital sovereignty 79
paying for free services – internet users give up their personal data to large
digital platforms in exchange for unfettered access to the services they provide.
The General Data Protection Regulation (GDPR) was adopted in April
2016, and has been in force since 25 May 2018. The regulation represents
something of a revolution in the approach to personal data protection in
Europe and worldwide as non-EU entities providing services in the territory
of Member States are also obliged to apply it. The most important changes
concerned:

• introducing new rights for data subjects (the right to transfer data and the
right to be forgotten),
• extending the information obligation (the data controller is obliged to
inform the data subjects about the processing),
• regulating profiling (decisions are no longer based solely on an algorithm,
but the data subject can request human intervention),
• introduction of an approach to protect personal data at the design stage
(work by design) and as a default setting (privacy by default).

The GDPR strengthens the control over the processing of the personal data of
EU citizens and introduces a higher level of security, also by introducing
administrative financial penalties for non-compliance (between 10 and 20
million EUR or 2–4% of a company’s total annual global turnover).
Moreover, it forces all companies that process the personal data of Europeans
to hold that data within the EU, thereby ensuring that they are subject to
European jurisdiction.
The second piece of data protection legislation is the ePrivacy Regulation
(Regulation on the respect for private life and the protection of personal data in electronic
communications), which is still pending in the EU following the presentation of
the draft regulation in January 2017. The regulation was due to come into
force together with the GDPR and was designed as a lex specialis in the field of
online privacy. The ePrivacy Regulation applies to telecommunications ser-
vice providers, internet providers and entities such as Facebook, Messenger,
Skype, Gmail, WhatsApp and Viber. It also applies to machine-to-machine
(Internet of Things) messages and data from public and semi-private com-
munications networks (hotspots).
The most important change introduced by the ePrivacy Regulation is the
extension of the definition of electronic communications data, which will now
not only include the transmitted content, but also end-user information,
tracking and source identification data, communication locations, geographical
location, date, time, duration and type of communication. Under the draft,
these data were to be treated as confidential and interference by anyone other
than the end user is prohibited. The direct result of this approach is the re-
cognition of cookies as a private sphere subject to protection, and the in-
troduction of the right of users to control their electronic communications by
being able to decide on the identification of incoming and outgoing calls. The
80 Magdalena Wrzosek
protection also covers metadata, providing information about the location,
browser history, connection time and time of sending the message. The
ePrivacy project thus significantly empowers internet users by allowing them
to decide the scope and purpose of the collection of data about them.
Both regulations introduce strong privacy protections unparalleled in any
other legal regime outside the EU. In the EC’s assumption, these regulations
were supposed to build the citizens’ trust in modern technologies and the
wider use of the internet. It is one of the pillars of the Digital Single Market in
Europe25 and based on the belief that Europeans must have a privacy guar-
antee so that they can use the internet with confidence and thus contribute to
building a strong digital economy.
At the same time, in connection with the development of the digital
economy, the European Commission has introduced a number of regulations
on non-personal data. The EC has identified data-driven innovation as being
key to EU economic growth and job creation, on the assumption that the use
of data would allow the EU to gain a competitive advantage in the global
market. This is the second pillar of the Digital Single Market.
The first strategic document in this regard was the EC Communication
entitled Towards a common European data space, presented in April 2018. The
document identifies data as the “raw material of the Digital Single Market,”
which has the potential to revolutionise lives and create growth opportunities
for medium-sized businesses,which are most numerous in the EU. Optimising
the use of data has been identified as being key to Europe’s development,
including in the context of new technologies such as Artificial Intelligence and
the Internet of Things. The Communication defines three categories of non-
personal data for which the EC has taken action: public sector data that should
be allowed to be re-used; scientific data that should be made more widely
available to advance research in specific areas; and private sector data that
makes the European economy competitive and is made available to the public
sector to improve public services.
Together with the Communication, the EC also presented two more
documents: Guidelines on private sector data sharing and Recommendations on access
to and preservation of scientific information. These documents concern the sharing
of data between companies with regard to 4 principles:

• Transparency: designating the people and entities that will have access to
the data generated by the product or service; determining the type of data,
the level of detail and the purposes for which the data will be used.
• Collaboratively created value: taking into account the fact that data is
sometimes created as a side effect of the use of the device and several
parties contribute to its creation.
• Respect for the interests of other companies: adequate protection of the
interests and business secrets of all companies involved in the collaboration.
• Protection of competition: taking into account the right to fair competi-
tion for all parties involved.
 National digital sovereignty 81
The documents also describe business-to-business (B2B) data exchange, which
can take place in three formats: open data exchange; data sharing for re-
muneration; and via a so-called data marketplace, which is a platform that
allows companies to exchange the information they need anonymously.
In terms of access to scientific data, the EC pointed out that this is necessary
to create a common space for data sharing in Europe and to develop research
faster. Four recommendations were made on access to, and protection of,
scientific information:

• Open access to scientific publications and research results – Member States

should ensure open access to publicly funded publications and research.
The EC assumes that these data should be generally available by the end of
2020 at the latest.
• Cooperation with scientific institutions – Implementation of the recom-
mendations by Member States should take place in cooperation with the
research institutions that are responsible for managing public funds, as well
as the academic institutions that receive those funds.
• Skills and competences – It is essential to provide training in open access
to data, data management, data protection and data handling. Training
should be available at every level of education and wherever such
experience may be necessary.
• International dialogue – Member States should be involved in international
dialogue on open access to science at national, European and global levels.

In November 2018, the Regulation on a framework for the free flow of non-personal
data was adopted. The assumption underlying this document was the belief
that in order to take full advantage of the benefits of the data economy, it is
necessary to ensure the free flow of data. As a result, both companies and
public administrations will be able to store and process non-personal data
anywhere in the EU. The regulation provides for:

• The free flow of non-personal data across borders: any organisation should
be able to store and process data anywhere in the EU.
• The availability of data for regulatory control: public authorities will retain
access to data, including that which is located in another Member State or
stored or processed in the cloud.

The next step was the issuance in May 2019 of the Guidance on the Regulation of
thefree flow of personal and non-personal data in the EU. The purpose of this
document was to make it easier for small and medium-sized enterprises to
understand the relationship between the Regulation on the protection of
personal data and the Regulation on the free flow of non-personal data.
A very important step in building a European policy on non-personal data
was the adoption in June 2019 of the Directive on open data and the re-use of public
sector information, which replaced the so-called PSI Directive (Directive from
82 Magdalena Wrzosek
2003 on the re-use of public sector information). The Directive focuses on the
economic aspects of the re-use of information, not on citizens’ access to it, and
it encourages the Member States to make as much information as possible
available for re-use. The rules apply to material held by public sector bodies in
the Member States at national, regional and local level, such as ministries, state
agencies and municipalities, as well as organisations mainly funded or con-
trolled by public bodies (e.g. meteorological institutes).
The table below shows the development of the EU’s approach to personal
and non-personal data: (Table 4.2)
Over the last few years, therefore, the EU has undertaken many activities in
which data – both personal and non-personal – have been at the centre. The
conviction that European data should be protected, and at the same time used
for the development of modern technologies (including Artificial Intelligence
and the Internet of Things), was dictated by the desire to compete with
countries such as the US and China, and to oppose GAFA’s dominance.
Although not called as such directly, these issues oscillated around the subject
of digital sovereignty. The protection of personal data and the proper use of
non-personal data are the first of the pillars on which the concept of digital
sovereignty in the EU is based.

4.5 Security of ICT systems – cybersecurity in the context

of digital sovereignty
In 2013, the European Commission published its first Cybersecurity Strategy. At
the time, cybersecurity policy in Europe was focused on civilian aspects and
cybersecurity was understood as an important part of the digital revolution.
The EC argued that both the freedom and prosperity of EU citizens depend

Table 4.2 Data policy in Europe

Personal data Non-personal data

27 April 2016 – adoption of the GDPR 25 April 2018

10 January 2017 – ePrivacy proposal • EC Communication Towards a
28 May 2018 – entry into force of the common European data space
GDPR • Guidance on private sector data sharing
• Recommendations on access to scientific
information
14 November 2018 – Regulation on a
framework for the free flow of non-personal
data
29 May 2019 –Guidance on the Regulation
on the free flow of personal and non-personal
data in the EU20 June 2019 –Directive
on open data and the re-use of public sector
information
 National digital sovereignty 83
on information and communication technologies, which are “the foundation
of economic growth and are a critical resource on which all sectors of the
economy rely” (Cybersecurity Strategy …, 2013, p. 1). The Commission
defined the following as the objectives of its activities:

• Achieving resistance to cyber threats.

• Drastically reducing cybercrime.
• Developing a defence policy and cybersecurity capability in conjunction
with the EU Common Security and Defence Policy.
• Developing industrial and technological resources for cybersecurity.
• Establishing a coherent international cyberspace policy for the EU and
promoting EU core values.

The Strategy clearly emphasises the need to ensure an appropriate level of

cybersecurity for those ICT systems that provide citizens with basic services,
such as electricity, transport, health care and finance.
Together with the Strategy, the European Commission also presented a
proposal for the first pan-European cybersecurity law in the EU – the NIS
Directive.26 After three years of negotiations, the directive was finally adopted in
July 2016. The new law introduced mandatory incident reporting for key
service operators (private or public sector entities providing key services in the
energy, transport, banking and financial markets infrastructure, health, water
supply and digital infrastructure sectors), as well as making the level of security
dependent on risk assessments and the introduction of a national cybersecurity
strategy. The NIS Directive came into force on 25 May 2018, almost si-
multaneously with the GDPR. However, the general discourse was dominated
by the provisions related to the protection of personal data. Although the data
protection regulation attracted much more interest, both from the private sector
and the general public,27 both legal acts became effective simultaneously.
Shortly before the adoption of the NIS Directive in July 2016, the Commission
presented the Communication Strengthening the European Cyber Resilience System
and Supporting a Competitive and Innovative Cybersecurity Industry, which was an
update of the 2013 Strategy. The document focused on cooperation between
Member States in the event of large-scale incidents, stressing that operational
cooperation and information sharing on incidents and threats between Member
States was necessary to maintain a real, high level of cybersecurity in the EU.
The actions announced in the Communication were operationalised by the
EC in the so-called Cybersecurity Package in September 2017. The package
included the following documents:

• Communication Resilience, Deterrence and Defence: Building Strong

Cybersecurity for the EU–another update to the EC’s strategy.
• Proposal for a Cybersecurity Act to provide a mandate for the European
Union Agency for Cybersecurity (ENISA) and certification at the
European level.
84 Magdalena Wrzosek
• Recommendations from the Commission for a coordinated response to
large-scale cyber incidents and crises (the so-called Blueprint).
• Communication from the Commission on the implementation of the NIS
Directive.

The package created real mechanisms for advanced cooperation between the
Member States. Part of the Cybersecurity Act (CA) was a new mandate for the
ENISA, which until that point had the status of an interim body. With the
entry into force of the CA in April 2019, ENISA gained new powers and a so-
called permanent mandate – it ceased to be a temporary agency. This was a
sign of how important the issue of ensuring an appropriate level of cyberse-
curity had become in the EU forum.
On 16 December 2020, the European Commission presented a new cy-
bersecurity package, which included a new Cybersecurity Strategy for the Digital
Decadeand a proposal for the NIS2 Directive. The new Strategy defined cy-
bersecurity as an integral part of EU security, emphasising the increase in ICT
threats targeting critical and important sectors of the European economy, such
as finance, energy, transport and health care, which had become an extremely
important sector in the face of the global pandemic. The document proposed
even stronger integration and cooperation among Member States in the field
of cybersecurity through, among other things, the creation of a Joint Cyber
Unit, whose task would be to strengthen cooperation between the organisa-
tional units of the EU and the authorities of the Member States responsible for
cybersecurity.
The proposal for the NIS2 Directive, on the other hand, covers more
sectors than before, ones which have been identified as crucial and necessary
for ensuring an appropriate level of cybersecurity in the EU (including public
administration, the food sector, waste water, industry, waste management and
space), and treats some sectors more broadly, such as the health sector. In
addition, the size-cap rule means that Member States will no longer set criteria
to determine which entities have to comply with the NIS2 Directive – the
scope will include all entities in the sectors listed in the annexes that are
classified as large and medium-sized enterprises. This means that not only will
the number of sectors and subsectors covered by the NIS2 Directive increase,
but so will the number of entities in the individual sectors subject to the
Directive.
What is more, these entities are subject to greater requirements than in the
NIS Directive in terms of the management, handling and disclosure of security
breaches, testing the level of cybersecurity and the effective use of encryption.
The proposal also includes more precise provisions on incident reporting than
the previous Directive. In addition to reporting ICT incidents, the obligation
has also been introduced to report the threats that these incidents may cause,
which is a very big change from the previous Directive. Moreover, the sta-
teobtains a much wider scope of control in relation to the entities covered by
the NIS2 Directive.
 National digital sovereignty 85
Table 4.3 Cybersecurity strategy and regulations in the EU

7 February Cybersecurity Strategy of the European Union: An Open, Safe and Secure
2013 Cyberspace
5 July 2016 Communication Strengthening Europe’s Cyber Resilience System and Fostering
a Competitive and Innovative Cybersecurity Industry
6 July 2016 Adoption of the NIS Directive
13 September Cybersecurity Package:
2017 • Communication Resilience, Deterrence and Defence: Building Strong
Cybersecurity for the EU– another update to the EC’s strategy
• Proposal for a Cybersecurity Act to provide a mandate for the
European Union Agency for Cybersecurity (ENISA) and certification
at the European level
• Recommendations from the Commission for a coordinated response to
large-scale cyber incidents and crises (the so-calledBlueprint)
• Communication from the Commission on the implementation of the
NIS Directive
17 April 2019 Adoption of the Cybersecurity Act
16 December The new EU Cybersecurity Package:
2020 • The EU’sCybersecurity Strategy for the Digital Decade
• Proposal for the NIS2 Directive

A new aspect is the introduction of liability for company management for

compliance with cyber risk management measures, and heavy penalties for
non-compliance – at least 10,000,000 EUR or up to 2% of the company’s
total annual worldwide turnover, whichever is higher.
NIS2 also introduces new mechanisms for international cooperation by
establishing the European Cyber Crisis Liaison Organisation Network (EU-
CyCLONe), whose task is to support the coordination of large-scale incident
management at the EU level. The table below provides an overview of the
strategic documents and regulations in the field of cybersecurity in the EU
(Table 4.3).
Ensuring an appropriate level of cybersecurity to those sectors of the
economy that are defined as being particularly important for security is
therefore the second pillar of European digital sovereignty. Taking into ac-
count the very ambitious provisions of the NIS2 proposal, increased actions of
individual Member States should be expected in this regard.

4.6 Technology and its nationality

The third aspect of digital sovereignty in the EU, apart from data and the
security of ICT systems, is technological independence. This matter started to
become particularly evident in 2019 during the global discussions on the topic
of 5 G network implementation. The US accused the Chinese company
Huawei of covert ties to the Chinese government. First, in August 2018, the
US administration banned the use of Huawei equipment by employees of the
federal government. Then, in May 2019, the Department of Commerce
86 Magdalena Wrzosek
placed the Chinese company on the list of companies subject to the Export
Administration Regulations, as a result of which US companies cannot do
business with Huawei without a government licence. In 2019, the USA also
conducted a concerted international campaign aimed at preventing the
Chinese company’s devices from being used in the implementation of 5 G
technology in Europe. This fits into the broader context of the so-called
economic war between China and the US.
Moreover, the EU’s focus in 2019 was on ensuring the right level of security
for next-generation networks. In March of that year, the European Commission
presented its recommendations on the cybersecurity of 5 G networks, while in
the October the EU coordinated a risk assessment related to cybersecurity in
fifth-generation networks. These activities ran in parallel with a worldwide
discussion on service providers. However, this discussion was primarily about
powerful economic interests, with the dispute being over where the technology
would come from and who would make money from it. Technology has a
nationality and is defined as one aspect of digital sovereignty. In the discussion
about 5 G, the US has repeatedly presented Europe with a kind of ultimatum:
the use of Chinese technology in this narrative would make European countries
a less reliable partner for the United States.
The technological aspects of digital sovereignty had already been discussed in the
EU back in 2013. In the EU’s first Cybersecurity Strategy, as previously described in
this article, the European Commission stressed the importance of producing so-
called European technology. In the section on the expansion of industrial re-
sources, the European Commission made it clear that, “There is a risk that Europe
not only becomes excessively dependent on ICT produced elsewhere, but also on
security solutions developed outside its frontiers. It is key to ensure that hardware
and software components produced in the EU and in third countries that are used
in critical services and infrastructure and increasingly in mobile devices are trust-
worthy, secure and guarantee the protection of personal data” (Cybersecurity
Strategy …, 2013, p. 27). The aforementioned 2016 amendment to the Strategy also
contained elements related to technological security. A major challenge addressed
in the Communication Strengthening European Cyber Resilience and Fostering a
Competitive and Innovative Cybersecurity Industry was the need to build a European
cybersecurity industry. To this end, a contractual public-private partnership was
established, the aim of which was to integrate the sector and support its activities.
The project was not successful, however, as the partnerships included non-
European companies.28 In addition, the Communication announced the in-
troduction of European certification for products and services.
The Cybersecurity Package that the European Commission presented in 2017
emphasised issues related to technological security much more strongly than the
previously existing EU documents and regulations. The Communication Resilience,
Deterrence and Defence: Building Strong Cybersecurity for the EU talked about enhancing
Europe’s technological capacities in the field of cybersecurity, while the Cybersecurity
Act (CA) introduced the certification of ICT products and services.
The adoption of the Cybersecurity Act (CA) in April 2019 put technological
 National digital sovereignty 87
issues at the centre of the discourse on digital sovereignty in Europe. The Act is
the first law related to the internal market that is a response to the need to
increase the level of security of ICT products, services and processes. The idea
behind this legislation is that consumers will be able to choose devices and
solutions that are tested and meet the appropriate safety standards. Companies,
on the other hand, will only have to apply for a certificate in one Member
State as it will be honoured throughout the EU. This is, of course, to support
the development of the Digital Single Market and foster increasing the level of
security, as well as building the technological advantage of European com-
panies. However, the adoption of the act was accompanied by a number of
controversies. First of all, very few countries have to date built up certification
competencies (e.g. France, Germany and Spain). For many, building structures
that will enable the implementation of the new law29 is a big challenge as it is a
costly process that will take a long time. In the first stage, many countries will
certainly have to use laboratories located outside their borders. In addition,
countries that have already reached a certain level of certification are con-
cerned that newly established certification bodies in other countries will not
meet the appropriate standards and yet it will be necessary to honour the
certificates they issue.
In the negotiation process of the CA, the issues of sovereignty and the need
to ensure an appropriate level of cybersecurity of ICT products were strongly
articulated. The assumption that products and services from outside the EU
will have to have a European certificate in order to be released is supposed to
be one of the building blocks of European digital sovereignty. Even if in-
dividual countries still have doubts about the level of certificates issued in other
countries, at least they will be European certificates.
One more piece of legislation still pending at EU level deserves attention in
the context of the technological dimension of digital sovereignty: the
Regulation establishing the European Cybersecurity Industrial, Technology and
Research Competence Centre and the Network of National Coordination Centres. The
draft of this regulation was presented by the European Commission on 12
September 2018 (Wrzosek (ed.), Warsaw, 2019). The purpose of the regulation
is to stimulate the European technological and industrial ecosystem and
strengthen cooperation in the field of cybersecurity between different industries
and research communities. The regulation provides for the establishment of a
new institution, the European Cybersecurity Competence Centre,30 and a
network of national coordination centres. According to the assumptions, this is
to facilitate the production in the EU of innovative new technological solutions
in the field of cybersecurity, that is to ensure that the technology used to protect
key sectors of the economy will be European technology.
The EU’s Cybersecurity Strategy for the Digital Decade, adopted in December
2020, for the first time defines building digital sovereignty – resilience,
technological sovereignty and leadership – as one of the EU’s three strategic
objectives. Sovereignty is very strongly linked here to the technological aspect.
The Commission envisages in this respect, among other things, the launch of a
88 Magdalena Wrzosek
network of ICT-enabled, ultra-secure and quantum-based Security
Operations Centres, support for small and medium-sized businesses within
Digital Innovation Hubs,31 the completion of work on a unified approach to the
implementation of 5 G technology in Europe, and the development of stan-
dards governing the security of the Internet of Things (IoT). The draft NIS2
Directive also places a strong emphasis on technological sovereignty by in-
troducing supply chain security obligations for entities covered by the
Directive, as well as creating the possibility of delegated acts requiring those
sectors covered by the Directive to use products certified under the
Cybersecurity Act.
Technology is therefore the third pillar of digital sovereignty currently
under discussion. Its origins and ability to produce its own solutions, as well as
forcing suppliers to comply with standards, are key elements of the techno-
logical dimension of digital sovereignty.

4.7 Conclusions
The Digital Revolution transforms more and more areas of human activity
into the cyberspace. As a result, the question arises about the role of the state in
this process, both in the context of ensuring security and also exerting some
degree of control over the internet within its own borders, including political,
economic, cultural and technological activities – the digital sovereignty.
The concept of sovereignty has a history going back centuries and is strongly
linked to how the concept of power and the concept of the state were perceived
in different eras. From identification with the power of the monarch – the
divine anointed one – through the attribute of the nation to the inalienable
attribute of the state as the subject of international relations. At the same time, it
should be noted that currently the processes of globalisation and international
integration are significantly redefining the perception of state sovereignty. The
decision-making autonomy of states is de facto limited, even for the great powers.
The concept of digital sovereignty does not yet have an official definition,
though it is an issue that is currently being discussed in many international
forums (UN, OSCE, EU). The concept poses a challenge to the functioning
of the internet as such. For countries such as the USA, Russia or China, the
challenges of internet governance and the implementation of international law
in cyberspace are an element of geopolitics. The increasing dependence of
states on cyberspace is resulting in a desire to assert their dominance in this
area. This poses a direct threat to internet neutrality, a rule that neither ISPs
nor governments should impose any restrictions on users’ access to the web.
In the EU, digital sovereignty is understood in three dimensions. The first is
the policy on personal data protection and non-personal data governance. The
second dimension relates to providing the most essential sectors of the
economy (such as finance, energy and transport) with the appropriate level of
ICT security, while the third concerns the technological aspects of digital
 National digital sovereignty 89
sovereignty – striving for the technology used in Europe to be a technology
produced by European countries, or certified by them.
Over the last few years, therefore, the EU has undertaken many activities in
which data – both personal and non-personal – have been at the centre. The
conviction that European data should be protected, and at the same time used
for the development of modern technologies (including Artificial Intelligence
and the Internet of Things), was dictated by the desire to compete with
countries such as the US and China, and to oppose GAFA’s dominance.
Although not called as such directly, these issues oscillated around the subject
of digital sovereignty. The protection of personal data and the proper use of
non-personal data are the first of the pillars on which the concept of digital
sovereignty in the EU is based.
Ensuring an appropriate level of cybersecurity to those sectors of the
economy that are defined as being particularly important for security is the
second pillar of European digital sovereignty. European countries are devel-
oping different policy and legislation to make sure that they have control over
essential and critical sectors. Also to ensure that if the cyber incident occurs,
the crisis management procedures and cooperation between public and private
sector will be in place, so that it could be resolved efficiently. Taking into
account the very ambitious provisions of the NIS2 proposal, increased actions
of individual Member States should be expected in this regard.
Technology is the third pillar of digital sovereignty currently under dis-
cussion. Its origins and ability to produce its own solutions, as well as forcing
suppliers to comply with standards, are key elements of the technological
dimension of digital sovereignty. EU want to makes sure that technology used
in the critical and essential sector will be either create in Europe or certify in
one of the Members States, so that the third countries could not influence the
business continuity of European economy.
The Digital Revolution, therefore, created the need to define the digital
sovereignty and its detentions. It also forced the states to analyse how they
could protect its own interest and sovereignty in the cyberspace.

Notes
1 In 2019, the EU adopted the Cybersecurity Act, the second part of which concerns the
certification of ICT products and services in Europe. The process of preparing the first
certificates (so-called 5 G safety) is currently underway with the implementation of
certification systems in individual Member States.
2 See: https://www.enisa.europa.eu/topics/standards/adhoc_wg_calls/ad-hoc-working-
group-on-5g-cybersecurity-certification/faq
3 Based on: A. Heywood, Political Theory: An Introduction, PWN, Warsaw, 2006.
4 In this way, the sovereign rights of countries such as Turkey, Persia, China, Japan and
Siam, among others, were restricted.
5 In 1928, the Kellogg-Briand Pact was signed, with the immediate consequence being
that states no longer considered the right of war (jus ad bellum) to be an attribute of
sovereignty.
6 The Island of Palmas Case concerned a dispute between the USA and the Netherlands
90 Magdalena Wrzosek
over the affiliation of the islands to these countries. The Permanent Court of Arbitration
agreed with the arguments of the Netherlands.
7 The Pact was adopted on 28 June 1919 in Paris, during the conference ending the First
World War. The League of Nations existed from 1920 to 1946 and was the first in-
ternational organisation. It was established on the initiative of the President of the
United States, Woodrow Wilson.
8 An international agreement of 23 August 1939. Formally, it was a non-aggression pact
between the Third Reich and the Union of Soviet Socialist Republics, but according to
a secret additional protocol annexed to the official document of the agreement, the Pact
concerned the de facto partition of territories or the regulation of the independence of
sovereign states Poland, Lithuania, Latvia, Estonia, Finland and Romania.
9 The Charter of the United Nations is a multilateral international agreement that es-
tablished the United Nations and defined the organisation’s constitution. The Charter
was signed on 26 June 1945 in San Francisco by 50 of the 51 member states (Poland
signed on 16 October 1945) and came into force on 24 October of the same year.
10 NATO is a military alliance that came into effect on 24 August 1949, following the
signing of the North Atlantic Treaty on 4 April 1949. At the time of its creation, the
main purpose of NATO’s existence was military defence against attack by the USSR
and its satellite states, which from 1955 were organised into the structure of the Warsaw
Pact. After the collapse of the USSR and the dissolution of the Warsaw Pact (1991),
NATO has played a stabilising role and has taken steps to prevent the spread of regional
conflicts, and is a guarantor of the external security of the member states.
11 The digital revolution, or scientific and technological revolution, means the adoption
and spread of digital technologies. It is understood to have begun with the shift from
mechanical electronic technology to digital electronics in the late 1950s. The concept of
the digital revolution became popular in the mid-1970s, and its key phase is considered
to be the invention of the internet, the development of computer hardware and cellular
technology. Currently, the issues of automation as well as data exchange and processing
are also associated with the term digital revolution.
12 Founder and CEO of the French radio station Skyrock and the skyrock.com social network.
13 Digital sovereignty was first discussed at the end of 2018, when the European
Commission presented its work plan for 2019.
14 In the absence of any reaction from the international community and insufficient
evidence to attribute the attacks to the Russian Federation, Estonia decided against
invoking Art. 5 of the North Atlantic Treaty.
15 Group of Governmental Experts on Developments in the Field of Information and Telecommunications
in the Context of International Security.
16 The composition of the GGE group is geographically selected each time. Traditionally,
5 seats are allocated to the members of the Security Council, and the rest are allocated
among countries taking into account national interests, political and geographical bal-
ance, as well as involvement in the work of previous GGE groups. The final decision on
the composition of the group is made by the UN Secretary-General.
17 See: https://dig.watch/processes/un-gge
18 Based on: https://www.un.org/disarmament/group-of-governmental-experts/; https://
dig.watch/processes/un-gge
19 The publication was the result of the work of an international group of experts established
at the NATOCooperative Cyber Defence Centre of Excellence in Tallinn, which worked in the
years 2009-2012. The group was led by Professor Michael N. Schmitt, chairman of the
Department of International Law at the United States Naval War College.
20 In 2019, Russia introduced the Sovereign Internet Law, which allows for Runet to be
partitioned from the global network. This was justified by the threat to the state’s
cybersecurity, including the risk of Russia being disconnected from foreign servers by
 National digital sovereignty 91
third countries, primarily the USA; https://www.osw.waw.pl/pl/publikacje/analizy/
2019-03-13/rosja-zaostrzanie-cenzury-w-internet
21 See: the Russian definition of sovereignty according to Sapir.
22 See:Internet Governance [in:] J. Chipman and E. Tikk-Ringas, Evolution of the Cyber
Domain: The Implications for National and Global Security, International Institute for
Strategic Studies, 2015.
23 An anagram of the names of the Big Four companies: Google, Amazon, Facebook and
Google.
24 On 6 May 2015, the European Commission published the Communication from the
Commission to the European Parliament, the Council, the European Economic and Social
Committee and the Committee of the Regions: A Digital Single Market Strategy for Europe.
The document provides for the lifting of regulatory restrictions in digital matters in such
a way that it is possible to build a Common European Digital Market. This is to help
accelerate the development of digital services and thus build the competitiveness of
European companies.
25 A Digital Single Market Strategy for Europe –The DSM Strategy was presented by the
European Commission on 6 May 2015. The underlying premise of the DSM is to
remove regulatory restrictions on digital issues. This is to enable the construction of a
European Digital Single Market and therefore the faster development of digital services,
which will contribute to the competitiveness of European companies. One of the ac-
tivities related to the DSM is cybersecurity.
26 Directive (EU) 2016/1148 of the European Parliament and of the Council of 6 July
2016 concerning measures for a high common level of security of network and in-
formation systems across the Union.
27 To a large extent, this was due to the high penalties introduced in the GDPR, which
were not included in the NIS Directive.
28 More information can be found on the website of the ECSO (European Cyber Security
Organisation) at https://ecs-org.eu/
29 In order to carry out the certification process, it is necessary for the Member State to
have a national cybersecurity certification authority, a national accreditation body and
conformity assessment bodies.
30 On 11 December 2020, it was decided that this Centre would be built in Bucharest.
31 These Digital Innovation Hubs are intended to support companies looking to imple-
ment Industry 4.0 solutions.

Bibliography
Bieleń, S., Polityka w stosunkach międzynarodowych [Politics in International Relations], Oficyna
Wydawnicza ASPRA‐JR, Warsaw, 2010.
Chipman J. and Tikk-Ringas E., Evolution of the Cyber Domain: The Implications for National
and Global Security, International Institute for Strategic Studies, London, 2015.
Convention of the League of Nations [in:] K. Kocot and K. Wolfke, Wybór dokumentów do nauki
prawa międzynarodowego [Selection of Documents For the Study of International Law],
Wrocław, Państwowe Wydawnictwo Naukowe, 1978.
Cybersecurity Strategy of the European Union: An Open, Safe and Secure Cyberspace, 7 February 2013.
Directive (EU) 2016/1148 of the European Parliament and of the Council of 6 July 2016
concerning measures for a high common level of security of network and information
systems across the Union.
Filipowicz, S., Historia myśli polityczno – prawnej [History of Political and Legal Thought],
Arche, Gdańsk, 2007.
92 Magdalena Wrzosek
Galloway, S., Wielka Czwórka. Ukryte DNA: Amazon, Apple, Facebook i Google [The Four:
The Hidden DNA of Amazon, Apple, Facebook and Google], Warsaw, REBIS, 2017.
Gueham, F., Digital Sovereignty, Fondation Pour L’Innovation Politique, January 2017.
Heywood, A., Political Theory: An Introduction, PWN, Warsaw, 2006.
Island of Palmasarbitral Award, https://legal.un.org/riaa/cases/vol_II/829-871.pdf
Krasner, S.D., Power, The State, and Sovereignty, Routledge, London – New York, 2009.
Król, M., Historia myśli politycznej od Machiavellego po czasy współczesne [History of Political
Thought from Machiavelli to the Present Day], Arche, Gdańsk, 1998, pp. 51–56.
Sapir, J., Nowy XXI wiek. Od „wieku Ameryki” do powrotu narodów [The New 21st Century:
From “America’s Age” to the Return of Nations], Dialog, 2009.
Skarzyński, R., Anarchia i policentryzm. Elementy teorii stosunków międzynarodowych [Anarchy
and Polycentrism: Elements of the Theory of International Relations], Białystok, Wydawnictwo
Wyższej Szkoły Ekonomicznej w Białymstoku, 2006.
Tallinn Manual 2.0 on the International Law Applicable to Cyber Operations; General Editor:
Michael N. Schmitt, International Group of Experts, Cambridge University Press,
Cambridge, 2017.
Wrzosek, M. (ed.), Cyberbezpieczeństwo A.D. 2018. Strategia. Policy. Rekomendacje –
cyberbezpieczeństwo w perspektywie policy [Cybersecurity AD 2018: Strategy, Policy,
Recommendations – Cybersecurity in the Perspective of Policy], NASK, Warsaw, 2019.
5 The state in the era of digital
revolution and digital finance
Marek Ratajczak

5.1 Introductory remarks

The spectrum of views on the role of the state in economic and social life
ranges from libertarian minarchism to extreme statism. In recent years the
debate over the role of the state has been sparked again in the aftermath of two
events that took place within a short period of each other. The first one was
the financial crisis that happened at the end of the first decade of 21st century.
In the context of discussions regarding the causes of that crisis and in the face
of growing financialisation, a number of questions have been posed as to the
role of the state and its potential capacity of preventing or at least alleviating
such severe economic slumps, and, in the event of them actually occurring, the
state’s ability to take effective remedial measures. Barely more than 10 years
after the outbreak of the financial crisis, both the global economy and society
was affected by the Covid-19 pandemic. This second event triggered a second
wave of discussions about responsibilities of the state and tools available to
carry them out in the conditions of the ongoing digital revolution.
When referring to the digital revolution, it is necessary to note that tech-
nological changes, which are the basis for identifying consecutive industrial, or
industrial-technological revolutions, are occurring at an increasing pace.
About a hundred years passed between the start of the first revolution at the
end of the 18th century, famous for inventions such as the steam engine, and
the start of the second one, which took place in the last decades of the 19th
century, which is associated with the use of electricity; a similar period of time
separates the beginnings of the second and third revolution, which marked the
advent of computer technology, while the third and fourth revolution are only
separated by about 50 years. However, the closer we are to modern times, the
more care is advised, especially with respect to conclusions that can be drawn
about possible consequences of observable technological changes. For it is only
with the benefit of hindsight that one can assess whether and which of the
elements believed by contemporaries to be manifestations of the ongoing
revolution actually turned out to be lasting and significant in terms of their
consequences. It is also important at this point to note the differences in the
way the most recent industrial revolutions of the 20th and 21st centuries have

DOI: 10.4324/9781003264101-8
94 Marek Ratajczak
been identified. Just several dozen years ago, there were a number of pub-
lications in which the third industrial revolution was linked with the har-
nessing of nuclear energy, which seemed logical given the criterion of
increasingly powerful energy sources: steam (the first revolution at the end of
the 18th century), fossil fuels and electricity (the second revolution during the
last decades of the 19th century), and, finally, nuclear energy (20th century).
Nowadays, the start of the third industrial revolution is associated, above all,
with the advent of automation, robotisation and informatisation of economic
processes at the turn of 1960s and 1970 s. According to some authors, the stage
of computerisation and informatisation is not viewed as a separate phenom-
enon but as the introductory phase of the digital revolution.
It is worth noting that while technological changes, including those taking
place in the field of digital economy, are perceived, according to some studies,
as being less positive than was the case in the past, the majority of people still
largely believe that problems of the surrounding world can be solved by
broadly understood technological changes (Edelman Trust Barometer, 2020).
To some extent, the social and economic aspects of the world continue to be
perceived in the light of ideas derived from Newtonian physics, where ev-
erything came down to discovering a certain mechanism and finding “tech-
nical” solutions to problems. Technological changes are incredibly important
but, in and of themselves, do not provide ultimate solutions or determine
outcomes. This view should not be seen as a detraction from their importance
or a failure to notice that technological changes, such as those associated with
the digital revolution, can be and, on numerous occasions, are among the most
crucial factors that effect changes in the social and economic sphere. This faith
in the importance of technological changes, to some extent, dates back to the
heritage of the Enlightenment and its conviction that, thanks to the power of
human reason, applied in the field of technology, the humanity is, in principle,
capable of solving any problem and that changes accompanying new phases of
our civilization will be manifestations of progress and development.

5.2 The digital revolution: from naïve visions to

pessimistic scenarios
The aforementioned faith in the role of technological changes became man-
ifest at the beginnings of what is now referred to as the digital revolution. It led
to the creation of oversimplified, or even naïve scenarios of future social and
economic development. In the field of economy, that faith resulted in the
emergence of the so-called New Economy, which became increasingly
popular at the turn of the 20th and 21st centuries. According to advocates of
the new economy, technological changes associated with the development of
information technology and digitalisation, were supposed to undermine, or
even eliminate, traditional shortcomings of the market economy resulting
from the cyclical nature of economic growth. The growing popularity of the
new economy, especially in the context of the unprecedented period of
 Digital revolution and digital finance 95
growth experienced by the US economy, was accompanied by serious dis-
cussions about whether there was still any point in teaching students about
business cycles, which seemed to be a thing of the past. This particular faith in
radical and positive socio-economic effects of technological changes was
shaken, though only slightly, by the dot-com bubble of the late 1990s.
During this rather naïve, first stage consequences of the digital revolution
were perceived as generally positive for they were believed to strengthen such
values as freedom, liberal democracy, individual sovereignty and increase the
equality of opportunities for individuals by facilitating access to knowledge and
education. The Internet, as a special manifestation of the digital revolution,
was to be a kind of commonwealth of free users, taking advantage of essentially
unlimited access to information and the possibility of mutual communication.
The digital revolution was also supposed to be accompanied by the declining
role of the state (Birnhack, Elkin, 2008).
As time went by and the digital revolution entered its subsequent stages, one
of which was the implementation of successive generations of data transmis-
sion in cellular networks,1 the optimism pervading the early visions, which
inspired discussions about the digital revolution and its social and economic
consequences, gave way to more diverse views. Nowadays, particularly
newsworthy are these analyses whose authors present the digital revolution in
grey or black colours.2 One can even get the impression that this profoundly
skeptical perception of the digital revolution has currently become more
visible than views represented by authors who, even if they cannot be regarded
as apologists of the digital economy, put more emphasis on the potential
benefits rather than threats associated with the digitalisation of the surrounding
reality.

5.3 The state in the digital world

In all discussions regarding the digital revolution, questions about different
roles of the state are raised at some point. Before starting any further con-
siderations about the state in the context of the digital economy, it is necessary
to identify four basic functions of the state. Above all, it should act as a
protector. This function comprises all aspects relating to the state’s regulatory
activities as well as its efforts to safeguard the rule of law. Playing the role of a
protector also involves certain activities in the social sphere, such as taking
steps to prevent social exclusion, including digital exclusion, as well as security
measures, including those related to cybersecurity. Another function of the
state is that of a promotor, which consists in, among other things, supporting
research and development as well as innovation. The third function is asso-
ciated with the role of a producer, which most often involves activities aimed
at providing access to public goods and broadly defined infrastructure, in-
cluding what is required to maintain the provision of services developed by the
digital economy. Finally, the fourth function is that of a forecaster, whose task
is to create scenarios of the future regarding social and economic changes. In
96 Marek Ratajczak
addition to being sources of information for private entities that make mi-
croeconomic decisions, these scenarios should, above all, be the foundation of
measures implemented by the state as part of its development strategies and
long-term policies. These should also include everything to do with the digital
revolution instead of being merely a collection of ad hoc measures undertaken
in response to ongoing social and economic changes.
The discussion about the state in the context of the digital economy goes far
beyond what is associated with e-government, though, obviously, e-
government is one of the components of the digital economy, which the state
uses as a set of tools in its dealings with citizens and economic entities. In the
following section, the focus is placed on three aspects of the state’s functioning
in the conditions of the digital revolution, namely on the role of the state as a
regulator, its role as a producer, that is, creator and co-creator of the digital
revolution, and, finally, its role as a user of everything that the digital re-
volution creates, especially the wealth of information.

5.4 The state as a creator and co-creator of the digital

world
Technical inventions and other results of innovation associated with techno-
logical revolutions are generally presented as a manifestation of the so-called
invisible hand and as an argument in favour of the belief that the invisible hand
of the market helps to achieve better economic effects than what can be
achieved by the so-called visible hand of the state. The problem is that such a
view is, to some extent, the result of equating the final effect of innovation,
commercialised by private entities, with the entire process that leads to that
final commercial effect. Innovation that takes place before and during com-
mercialisation involves a high degree of risk. The market does not guarantee
that solutions that are, objectively speaking, technologically superior will ac-
tually be adopted (the VHS system, which once dominated the market of
videocassette recorders and is completely obsolete nowadays, was objectively
inferior to Betamax, its competitor, and yet the market rejected the techno-
logically superior solution). The market and microeconomic cost-benefit
analyses tend to encourage companies to maximally exploit solutions that have
already been implemented and well established rather than incur costs of in-
novation, especially where barriers to entry and exit limit or even eliminate
real competition, in addition to minimising the risk of so-called potential
competition and the resulting emergence of contestable markets. This largely
applies to broadly defined infrastructure and services provided by exploiting it,
including ICT services. The tendency to keep relying on well-established
technological solutions that provide satisfying economic results for as long as
possible can be very strong.
Everything that can be perceived as market arguments in favour of limited
or delayed innovation can be neutralised by activities of the state, which does
not have to, and, frequently, should not and cannot take into account market
 Digital revolution and digital finance 97
criteria to determine the allocation of public funds. One special area where the
state can exercise its autonomy with respect to the market is science and
everything that involves supporting innovation. This is closely connected with
Mariana Mazzucato’s idea of entrepreneurial state (Mazzucato, 2016). In the
reality of market economies after World War II, headed by the USA, the
overwhelming majority of great technical inventions were made with the
assistance from the state. The state acted as an ordering party, especially in the
military sector or in the field of space exploration, as a co-financer (e.g. in the
form of research grants) and as a participant involved in the creation of a given
solution (the role of state-owned agencies and R&D units).
The state’s role as a creator of innovation can be exemplified by what is
connected with the digital revolution, especially the creation of the Internet.
The origins of what came to be known as the Internet should be traced back to
the activities of the US Department of Defense, which wanted to implement a
system of communication and data transfer capable of transmitting large
amounts of data, which were increasingly essential from the perspective of
changes in the area of national defence. However, during the next stage of
development, the US practically shifted away from the idea of a state-owned
IT system, or at least one closely connected with the state (with the exception
of its components used for strictly military purposes) and passed the baton to
the private sector. What happened was, in fact, the opposite of what could be
observed during the previous industrial revolutions, when components of the
transportation and communication infrastructure were largely created by
private entities, while the state either took over control through nationalisa-
tion (the European model) or left them in private hands but exercised su-
pervision as a regulator (the American model).
It is difficult to give an unequivocal explanation as to why the state, at the
outset of the digital revolution, rather than maintain its unique position of
being a de facto creator of certain solutions, effectively decided to give it up. To
some extent, it was probably because the development of the digital revolution
coincided with a period when neoliberal ideas were particularly popular.
Neoliberals, by definition, assumed that as regards the economic sphere, the
invisible hand of the market was more effective than the visible hand of the
state and that private ownership was ultimately better than state ownership.
The economy, according to neoliberal thought, should be privatised and
deregulated, which is the same approach that was sometimes applied, with
questionable results, to infrastructural components of the economy to do with
transport and communication. Given such assumptions, it was logical that the
state should also not claim the right to continue operating in its role of owner
or co-owner in areas connected with the digital revolution, even if the de-
velopment of particular components of the digital reality was made possible
largely thanks to public funding. Today, the state’s withdrawal from being the
administrator of wholesale cellular networks is sometimes perceived as ques-
tionable and some countries make attempts to introduce solutions that
strengthen the position of the state. For example, in Poland work is underway
98 Marek Ratajczak
to develop a programme for the rollout of 5 G technology, where leading
private providers operating within a kind of public-private partnership, in
cooperation with a state-owned company called Exatel, will create a wholesale
mobile network, with a goal, among other things, of increasing the level of
cybersecurity in the country. However, opponents of this solution are con-
cerned that the state, operating through the agency of a completely sub-
ordinate entity, will gain an almost unlimited possibility of exerting influence
on what services will be offered to Polish Internet users, who will provide
them and using what kind of equipment and technology, also in terms of the
country of origin.
When referring to the state’s role as a creator or co-creator of solutions in
the digital economy, it is useful to mention the idea of creative destruction,
usually identified with Joseph Schumpeter. Industrial or industrial-
technological revolutions are the most evident manifestation of creative de-
struction, whereby solutions that were once synonymous with progress and
development are replaced by more advanced and more efficient ones.
Nowadays, however, attention is more and more frequently paid to the risk of
what can be called destructive creation. The name describes a situation when
certain innovations, for example in the broad sphere of finance or those that
are part of financialisation, can lead to destruction, for example affecting the
way in which the traditionally understood real economy functions
(Mazzucato, 2013). The sphere of finance is one particular area where the
tools of the digital economy are used intensively (Prasad, 2021). The appli-
cation of these tools is viewed as a factor facilitating the progress of fi-
nancialisation, as a result of which the sphere of finance, instead of being, more
or less, a provider of services to the real sphere, starts to dominate, also in the
sense of encouraging entities in the real sphere to get more involved in purely
financial activities. The role played by the tools of the digital economy in
financialisation and, more broadly, in processes of destructive creation, has led
some authors to the conclusion that the period of the digital revolution re-
quires more involvement of the state in the economy than was the case in
earlier periods, especially when it comes to regulation.

5.5 The state as a regulator

While the state’s role as a creator, co-creator or initiator of technological
changes arouses controversies resulting from what are sometimes conflicting
assessments of the effectiveness of the invisible hand of the market and the
visible hand of the state, nobody, in principle, questions the need for the state
to act as a regulator. Even advocates of liberalism, except for proponents of
extreme libertarianism, see the need of regulation on the part of the state,
which is required to perform its aforementioned function of a protector.
However, one of the consequences of the digital revolution is that the state is
faced with new challenges, some of which are to do with attempts to
 Digital revolution and digital finance 99
undermine the state’s position of a sovereign in some areas, including one as
important as money creation.
The discussion about regulatory activities of the state in the digital re-
volution should start with the most frequently debated question, also in the
media, namely the economic power of the main market players. Four or five
of the biggest tech companies associated with the digital economy, known as
Big Tech and represented by acronyms GAFA or GAFAM, happen to be
among the six largest companies in the world in terms of market capitalization:
Apple (1), Microsoft (2), Amazon (4), Google – Alphabet (5), Facebook –
Meta (6) (Statistica 2021). Their combined market capitalisation in April 2021
amounted to nearly 8350 billion dollars, which accounted for about 10% of
the global GDP.
The state’s task of regulating the activity of such companies is not only
challenging because of their size and global scope of operation. What makes it
difficult is also their propensity to unlimited expansion, which goes beyond
what is traditionally understood as strengthening market power. This problem
can be illustrated by the title of Stacy Mitchell’s article from 2018: “Amazon
doesn’t just want to dominate the market – it wants to become the market”
(Mitchell, 2018). Therefore, the question as to how to regulate Big Tech
companies that drive the digital revolution should go far beyond what has so
far been understood as the state’s regulatory activity. The task of regulating
companies like Amazon or Facebook cannot be treated the same way as that of
regulating even very large companies operating in the energy or transport
industry. Moreover, given their technological possibilities, companies engaged
in the digital economy can develop business models other than traditional
manufacturing or service companies, which entails new challenges for the
regulators. Since these companies operate globally, even countries like the
USA, where most key players of the digital economy are headquartered, find it
difficult to regulate their activity independently and effectively. At an inter-
national level, coordinated regulatory measures are often inhibited by con-
flicting economic and political interests of particular states.3
The above-mentioned problems with the regulation of entities of the digital
economy, especially the Big Tech companies, do not mean, however, that the
state cannot attempt, sometimes quite effectively, to exert its influence over
them. The state may feel inclined to make such efforts by virtue of its role as a
protector in the field of security, including cybersecurity. The issue of security
has become particularly crucial after the September 11 attacks and the start of
the so-called “war on terror,” which is a peculiar kind of war, given all the
historical evidence indicating that terrorism cannot be completely eradicated,
which is not to say that its threat cannot be radically mitigated.
The influence of the state on entities of the digital economy can take various
forms. In authoritarian states, in particular, it can be manifested as directly
formulated demands, such as that citizens of the country should not be able to
access certain online content in return for allowing companies to continue its
business operations. In extreme cases, the state can strive to complete block
100 Marek Ratajczak
access to certain sources of information and create its own, strictly supervised
and censored information and communication platforms.
In democracies, the state rarely resorts to measures that can be perceived as
direct violations of the exercise of free speech. Instead, democratic states try,
either by means of persuasion or through specific regulations, to ensure they
are able to access certain kinds of data or shape digital content in areas regarded
as particularly vital, such as security and public order. It is worth noting at this
point that the occasionally criticised high level of market concentration in the
digital economy is viewed by some analysts as essentially beneficial for the
state, as it limits the number of entities the state is obliged to ally with for the
purpose of various forms of supervision over end users of the digital market.
This situation is sometimes referred to as an unholy alliance between gov-
ernments and the private sector or the invisible handshake, whereby the state
tries to obtain guarantees of certain behaviours on the part of so-called gate-
keepers, guarantees which are especially crucial from the perspective of se-
curity and public order (Birnhack, Elkin, 2008). In return, gatekeepers expect
that regulatory measures imposed by the state will not excessively disturb their
business plans and operations.
Unfortunately, the situation described above is associated with the threat of a
kind of takeover, whereby entities regulated by the state take various actions
that, in extreme cases, can cause regulatory bodies and their regulations to serve
the interests of regulated entities rather than protect the interests of end con-
sumers. The above-mentioned alliance between governments and major service
providers in the digital economy can also lead to the state, as it were, em-
powering private companies to fulfil functions traditionally associated with the
state, including decisions about citizens’ right to access certain information or
communicate with others. This issue is closely connected with the recently
widely discussed question of so-called moderation, which refers to gatekeepers
acting as de facto censors on the one hand, and as influencers on the other, being
in a position to control what content reaches particular users.4 Another relevant
question that needs to be asked in this context is whether the state, even as
powerful as the USA, is able or willing to limit or supervise more strictly this
unique role played by the most essential entities of the digital economy. This
question is all the most relevant since it is closely connected with increasingly
frequent debates about the impact of the digital revolution on democracy and
the respect for individual rights (Gavet, 2017). Unfortunately, because of various
connections between governments and entities of the digital economy, in-
cluding those providing state agencies with indispensable software and hardware,
intentions of particular states to impose stricter controls on entities of the digital
economy can be effectively undermined.
As already mentioned, the development of companies in the digital
economy is increasingly associated with activities perceived as attempts to limit
the state’s sovereign power, including areas traditionally regarded as the ex-
clusive domain of the state. One example of such activities is related to the idea
of so-called free banking and the development of cryptocurrencies, which can
 Digital revolution and digital finance 101
be viewed as attempts to create competition to fiat (sovereign) money issued
by the state. If the cryptocurrency market, including commercial entities with
economic means that outweigh those available to many states, were to develop
to the point of being a real competition for fiat money issued by states, it
would indeed mean an entirely new playing field for market economies. So
far, however, as evidenced by the fate of Facebook’s Libra project, now
known as Diem, there is no real alternative to sovereign money. Nonetheless,
we are likely to see the continuation of the process dubbed as the Uberisation
of money, which Jon Baldwin describes as follows: “Trust moves from trust in
banks or states to trust in algorithms and encryption software. There is a move
from conventional trust in the gold standard –‘In Gold We Trust’ (…) to trust
in software and networks – ‘In Digital We Trust’.” (Baldwin 2018). This can
also be connected with the emergency of a new phase of financialisation,
which is not only increasingly facilitated by digital solutions but is also, or
perhaps particularly associated with the growing role of key players of the
digital services market, which are participants, creators and beneficiaries of
financialisation. That ideas such as Libra are, nonetheless, treated as real threats
to the traditional role of the state as a regulator of the finance sector and as a
sole issuer of sovereign money is evidence by the range of measures intended
to disincentivise the Libra project. In December 2019, finance ministers of UE
member states, following theearlier example of their counterparts representing
the G7 countries, highlighted the risk associated with allowing Libra or other
digital currencies to be legally used by individual consumers and expressed
their opposition to the launch of such products until a common European
approach to regulation was established. However, in view of efforts made by
some countries to introduce their own cryptocurrencies known as “sta-
blecoins,” it is hard to determine to what extent the reluctance towards Libra-
style digital currencies is motivated by the concern for consumers and their
financial security and how much of its really stems from the desire to maintain
one of the most essential powers of the state.

5.6 The state as a user of tools provided by the digital

economy: relations between the state and citizens
Any discussion about the state as a user of tools provided by the digital
economy in relations with citizens should involve three major areas. The first
one concerns all kinds of aspects to do with the state’s role as a provider of
various services for citizens, in other words, to the concept of e-government,
which includes the extremely important question of the state’s use of algo-
rithmic solutions. The second area encompasses hotly disputed questions
concerning the state’s power over citizens, including discussions about the
right to privacy, and more broadly, civil liberties. The third area has to do with
the state’s activities regarding social policy, which should be aimed at elim-
inating social exclusion, including digital exclusion.
102 Marek Ratajczak
The problem of e-government is one of the most widely analysed and best
described elements of the digital economy. There is no doubt that the state
which uses tools provided by the digital economy can significantly change the
mode of contacts with citizens by obviating the need for in-person visits in
offices and eliminating paper-based documentation together with related and
frequently burdensome requirements. Above all, however, the state can con-
siderably increase the range of services available to citizens, which, in addition to
providing time-saving benefits, should better satisfy their expectations.
It is worth noting, however, that the development of e-government ser-
vices, in itself, does not automatically entail a fundamental, qualitative change
in relations between the state and citizens. What can be observed nowadays is,
above all, a series of technological improvements. Moreover, if the techno-
logical dimension is perceived as the essence of changes associated with e-
government, they could actually result in the dehumanisation of state-citizen
relations (Belov, 2021). To make sure that the development of e-government
really contributes to qualitative changes in these relations towards civil society
and democracy, it must be treated as a tool facilitating changes in the sphere of
e-governance (Calista, Melitski, 2008). Simply put, through e-government
citizens must gain access to new applications that open new areas of relations
with the broadly understood apparatus of the state, but they must see that this
technological change increases their subjectivity and the sense of having an
influence on what the state does and how it does it (Carillo, Jimenez-Gomez,
Falcone, 2017; Mergel, 2017). If this does not happen, then e-government,
rather than being an improvement of governance, can actually contribute to
the weakening of democracy and the dehumanization of state-citizen relations.
Bad practices associated with the development of e-government, especially
those resulting from the reliance on algorithms, can lead to the emergence of a
reality similar to that depicted in Franz Kafka’s novel The Trial, where the role
played by the court in the novel is carried out by the system of e-government,
which is independent of the will of individual persons acting on behalf of the
state and makes certain demands, grants certain permissions, rules out possi-
bilities and makes certain prohibitions. In extreme cases, this can lead to the
emergence of so-called algocracy, a semblance of democracy based on algo-
rithms (Rybiński, 2020; Stark, Stegmann, 2020; Śledziewska, Włoch, 2020).
The growing popularity of algorithmic tools in public administration is
related, among other things, with the question of responsibility. Tools de-
veloped by formal methods and officially sanctioned by existing legislation, are
much more effective in removing direct responsibility from those acting on
behalf of the state than solutions based on expert analyses, or strictly discre-
tionary procedures. Formal tools, including algorithms, are also partly treated
as a shield against lobbying, though this kind of protection is not always very
effective given that algorithms are partly the result of attempts to accom-
modate conflicting interests of end users, who are more or less effective in
articulating those interests by means of their classic lobbying efforts. The re-
liance on formal and algorithmic solutions is also strongly connected with the
 Digital revolution and digital finance 103
question of citizens’ trust towards the state and vice versa, as well as mutual
trust among citizens. The lower the level of trust, the stronger the belief that
solutions based on expert knowledge and experience of decision-makers lack
objectivity, which is why it is preferable to rely on algorithmic solutions that
can “objectivise” the decision-making process.
In media and in the literature of the subject, more and more attention is
devoted to the state’s use of digital tools to collect as much information about
its citizens as possible, which the state justifies by its concerns about security
and various kinds of threats that it apparently wants to eliminate. One won-
ders, however, to what extent the state uses digital tools to better serve its
citizens and how often it exploits them to actually intrude on the private
sphere while formally observing the rules of democracy and respecting civil
liberties. Such concerns are associated with the danger of a symbiosis between
surveillance capitalism and surveillance state. One can get the impression –
which is probably partly due to media attention generated by certain gov-
ernment activities that are generally not discussed in public but which
sometimes come to light, like the famous case of the Pegasus system – that the
state is much better at using digital tools to collect more and more information
about its citizens, sometimes without them fully realising it, than providing
them with real benefits derived from the digital economy.
Of course, the state has to undertake activities in the area of internal and
external security and for this reason needs to have access to information en-
abling it to avert potential threats or track those who violate national security.
The problem is that, given the amount of information that is being collected,
especially by private companies operating in the digital market, the state is
tempted to gather and gain access to as much data as possible just in case. Such
intentions are repeatedly confronted with the question as to whether the state
is capable of exploiting such vast stores of information, even with the help of
the most advanced techniques of big data analysis. While Moore’s observation
about the density of transistors in an integrated circuit doubling roughly every
18 months has not been confirmed by trends observed in recent years, it does
not mean that currently available technologies of producing semiconductors,
let alone new solutions that could be developed in the future, will not be
capable of processing even greater amounts of data per unit of time. This
means that stores of information will keep growing. At the same time, data
collection or at least greater access to data increases the risk of such data being
accessed by unauthorised parties.
Data collection also considerably limits the real sphere of privacy, which is
why the role of the state as a guardian of information resources is so important
( Jarrar, 2017). The desire to strengthen this role led to the passing of the
General Data Protection Regulationin the European Union (EU).5 The pro-
blem, highlighted above, is that in view of activities undertaken by the state,
which is also interested in having access to sensitive data, one can ask whether
particular states are not going to use a double standard: one with respect to
104 Marek Ratajczak
commercial entities and another one applied to its own activities regarding the
collection of data about citizens.
It is worth noting at this point how important it is to have a well-
functioning tripartite system of powers, including the judicial branch based on
the rule of law. If the tripartite separation of powers is not maintained and if
the judicial power starts to be subordinate, especially to the executive power,
there is a greater risk of citizens being deprived of even minimal guarantees of
protection and possibilities of legal redress in the case of activities that can be
perceived as unwarranted intrusions of individual privacy by the state or
private entities. It is no coincidence that advanced systems of surveillance,
based on face recognition technology, or systems collecting all kinds of data
about citizens’ behaviour, are particularly popular in countries that are not
known for respecting the idea of freedom and individual rights. One special
example of this phenomenon is the Chinese Social Credit System, which is an
attempt to integrate information about individuals from various sources, such
as administrative registers or surveillance cameras (e.g. road traffic behaviours).
Officially, the system is designed to improve the rule of law and facilitate
business activity by supplying information about potential clients. However, it
arouses serious reservations and questions, for example regarding its key
component, which involves the creation of a ranking of social trust, where
every person is assigned a score that can, for example, make it easier or harder
for them to get a bank loan.
With respect to the role of law in the age of the digital revolution, one
cannot forget about what is sometimes referred to as the structural asymmetry
between law and technology. By its very nature, law changes much more
slowly than the pace at which technological changes take place (Belov, 2021).
This, however, should not be viewed as a kind of justification for the lack of
reaction to various phenomena resulting from technological changes. It is also
necessary to raise awareness of threats associated with the growing role of
technological solutions, including algorithmic ones, to the traditional notion
of constitutionalism and its foundational principles relating to how the roles of
the human being, individual and citizen are perceived.
Tools of the digital economy available to the state are also utilised to prevent
social exclusion, including digital exclusion, and to limit other negative social
outcomes of the development of the digital reality. These objectives are
pursued in two ways. The first one involves all kinds of educational activity,
also conducted by means of solutions provided by the digital economy. The
goal behind these efforts is not only, or perhaps less and less so, to equip people
with basic technical skills enabling them to use these digital tools. The growing
challenge nowadays is to teach people how to use these tools as sources of
information, as a gateway to, say, banking services, as an alternative to tradi-
tional shopping or as a new form of entertainment. Unfortunately, all of these
areas are plagued by numerous problems, ranging from fake news, addiction to
video games and escapism from the real world to virtual reality, to criminal
activities, such as identity theft and other forms of digital fraud.
 Digital revolution and digital finance 105
Measures aimed at preventing digital exclusion should also include actions,
taken directly by the state or on its behalf, to provide universal access to the
digital infrastructure, such as broadband Internet, which is essential for en-
abling users to benefit from the achievements of the digital economy regardless
of their place of residence.

5.7 Conclusion
Because in most of the areas discussed above the digital revolution has been
underway for a relatively short time, research into this topic is still in its
preliminary stage and it is too early to formulate definitive conclusions. It is
also worth noting that technological changes in themselves rarely provide
ultimate solutions or determine outcomes. They are merely tools that can be
used both to support socially useful actions and, unfortunately, to undermine
further socio-economic development. In other words, technological changes
can be both a manifestation of creative destruction and, unfortunately, de-
structive creation. It is precisely because technological changes can lead to
significant and not always favourable consequences in the economic and social
sphere that the state cannot afford to remain a passive observer and a mere
recipient of changes associated with the digital revolution. The state has to
react to what is happening in the digital economy by adjusting its own reg-
ulatory measures. The state also needs to cooperate with entities of the digital
economy, especially with those that, because of their market power, can
considerably affect the supply and demand side of the economy, as well as the
situation in the social sphere. However, it is important that the state should
retain its sovereign position with respect to those entities and that relations
between the state and participants of the digital services market should be
transparent and subject to regulation.
The state also has to maintain its role as a creator, or co-creator, of changes
related to the digital revolution. Obviously, the special nature of these changes
does not justify steps aimed at undermining the foundations of a market
economy and replacing the invisible hand of the market with the visible hand
of government, manifested in various forms of statism, which is particularly
evident in some countries that, instead of opting for a market economy, have
adopted the model of so-called neostatist dirigisme (for example Russia).
The goal of being a creator or co-creator of changes related to the digital
revolution should be an element of the state’s long-term strategic policy and
should not be undermined by short-term political interests, so typical of politics.
By exploiting the tools provided by the digital economy and by developing
the system of e-government, the state should strive to improve e-governance
and avoid measures that could lead to the dehumanization of citizen-state
relations. Algorithms cannot replace humans, especially as regards matters of
vital importance to citizens.
Various threats that exist in the modern world, such as those connected with
security, cannot justify measures that result in the growing erosion of privacy
106 Marek Ratajczak
and cause the traditionally defined sphere of civil liberties to shrink; when the
state does take such measures, they must be accompanied by mechanisms of
control and protection that can be employed, for example, by the judiciary.
Obviously, many dubious (to say the least) consequences of the digital revolution
cannot be treated as an argument supporting the claim that, unlike the previous
revolutions, the current one is mainly about destruction not creation. It can be
argued that as a result of a very unfortunate coincidence involving the rise of the
digital revolution and the outbreak of the war on terror, which helped to strengthen
the importance of security at the cost of weakening or limiting the traditionally
defined notion of freedom, as well other crises of the first decade of the 21st
century, especially the financial crisis and the COVID-19 pandemic, the focus of
discussions about the digital revolution, also as regard the role of the state, has shifted
towards various threats faced by citizens. However, despite all these reservations, the
digital revolution is, above all, a source of opportunities, also for the development of
civil society, for example thanks to the spread of knowledge and education and by
facilitating self-organisation of society and the emergence of grassroots initiatives.
The digital revolution is sometimes touted as the greatest human achievement
to date. Is it really how it should be perceived? What is discovered or invented at
any given stage of history is usually considered to be the greatest achievement. In
and of itself, the digital revolution does not undermine many of the fundamental
principles that are the basis of the economy and society, nor does it necessarily
result in rejecting existing roles of the state. It does, however, pose huge
challenges for the state, particularly with regard to regulation.

Notes
1 The transition from 1 G to 5 G technology has taken over 40 years, while from 4 G do 5
G only about 10 years.
2 One example of this trend is the widely discussed book by Shoshana Zuboff entitled The
Age of Surveillance Capitalism (Zuboff, 2020).
3 In the EU work is underway on the Digital Services Act, which seeks “to set common
but tailored obligations and accountability rules for providers of network infrastructure
(such as Internet access providers), hosting service providers, and in particular for online
platforms (i.e. online marketplaces and social media platforms. […] These new rules
would cover providers that provide services in the union, even if they are not established
in the EU” (Ledger, 2021).
4 Recently, in the USA there has been much discussion about the so-called Section 230of
Title 47 of the United States Code enacted as part of the Communications Decency Act
(Protection For “Good Samaritan” Blocking and Screening of Offensive Material),
which provides immunity for website platforms against any legal consequences resulting
from third-party content. Advocates of Section 230 believe that its present form, created
in the second half of 1990s, that is in the period when technological changes were still
perceived with a good deal of naivety, is not suited to current technological conditions,
nor does it account for the realities of the digital economy and society with access to
digital media (Smith, Van Alstyne, 2021).
5 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April
2016 on the protection of natural persons with regard to the processing of personal data
and on the free movement of such data.
 Digital revolution and digital finance 107
Bibliography
Baldwin, J. (2018) In digital we trust: Bitcoin discourse, digital currencies, and decentralized
network fetishism, Palgrave Communications, Vol. 4, No. 14, pp. 1–10.
Belov, M. (2021) The IT Revolution and its Impact on State, Constitutionalism and Public Law,
Oxford, Bloomsbury Publishing PLC.
Birnhack, M. D., & Elkin, N. (2008) The invisible handshake: The reemergence of the
State in the Digital Environment, Tel Aviv University Law Faculty Papers, Working Paper
54, https://law.bepress.com/taulwps/art54/
Calista, D. J., & Melitski, J. (2008) E-government and e-governance: Converging con-
structs of public sector information and communications technologies, Public
Administration Quarterly, Vol. 31, No. 1–2 (Spring 2007–Summer 2007), pp. 87–120.
Carillo, J. C., Jimenez-Gomez, C.E., & Falcone, Fr. (2017) Investigating a two headed
monster. E-Government: Crossing over from electronic era to digital resolution, ACM
Computers & Society, Vol. 46, No. 4, pp. 12–17.
Gavet, M. (2017) The digital revolution is destroying our democracies. It doesn’t have to be
that way, World Economic Forum, https://www.weforum.org/agenda/2017/02/the-
digital-revolution-is-destroying-our-democracies-it-doesn-t-have-to-be-that-way/
Hanna, N. (2018) A role for the state in the digital age, Journal of Innovation and
Entrepreneurship, Vol. 7, 5. 10.1186/s13731-018-0086-3. https://www.nature.com/
articles/s41599-018-0065-0
Jarrar, Y. (2017) What is the role of government in the digital age? World Economic Forum,
https://www.weforum.org/agenda/2017/02/role-of-government-digital-age-data
Ledger, M. (2021) DSA Tracker: Overview of proposed rules, key contacts and milestones
of the Digital Services Act, Cullen International, https://www.cullen-international.
com/news/2021/02/DSA-Tracker--overview-of-proposed-rules--key-contacts-and-
milestones-of-the-Digital-Services-Act.html?gclid=EAIaIQobChMIqou0uryN9AIVB-
h3Ch0ibg2tEAAYASAAEgL9ePD_BwE
Mazzucato, M. (2013) Financing innovation: Creative destruction vs. destructive creation,
Industrial and Corporate Change, Vol. 22, No. 4, pp. 851–867.
Mazzucato, M. (2016) Przedsiębiorcze państwo. Obalić mi o relacji sektora publicznego i pry-
watnego, Poznań, Wydawnictwo Ekonomiczne Heterodox
Mergel, I. (2017) Digital service teams: Challenges and recommendations for government, IBM
Center for The Business of Government, https://www.businessofgovernment.org/sites/
default/files/Digital%20Service%20Teams%20-%20Challenges%20and%20Recommendations
%20for%20Government.pdf
Mitchell, St. (2018) Amazon doesn’t just want to dominate the market—It wants to become
the market, The Nation, 15.02.2018. https://www.thenation.com/article/archive/
amazon-doesnt-just-want-to-dominate-the-market-it-wants-to-become-the-market/
Prasad, E. S. (2021) The Future of Money: How the Digital Revolution Is Transforming Currencies
and Finance, Cambridge, The Belknap Press of Harvard University Press.
Rybiński, K. (2020) Demokracja zanika i zastępuje ją algokracja, Rzeczpospolita,
19.01.2020. https://cyfrowa.rp.pl/opinie/43383-krzysztof-rybinski-demokracja-zanika-
i-zastepuje-ja-algokracja
Śledziewska, K., & Włoch, R. (2020) Gospodarka cyfrowa. Jak nowe technologie zmieniają świat,
Warszawa, Wydawnictwo Uniwersytetu Warszawskiego.
Special Report: Trust in Technology, Edelman Trust Barometer, 2020, https://www.edelman.
com/sites/g/files/aatuss191/files/2020-02/2020%20Edelman%20Trust%20Barometer%20Tech
%20Sector%20Report_1.pdf
108 Marek Ratajczak
Stark, B., & Stegmann, D. (2020) Are algorithms a threat to democracy? The rise of inter-
mediaries: A challenge for public discourse, governing platforms, https://algorithmwatch.
org/en/wp-content/uploads/2020/05/Governing-Platforms-communications-study-Stark-
May-2020-AlgorithmWatch.pdf
The 100 largest companies in the world by market capitalization in 2021, Statista, https://
www.statista.com/statistics/263264/top-companies-in-the-world-by-market-capitalization/
Zuboff, S. (2020) Wiek kapitalizmu inwigilacji. Walka o przyszłość ludzkości na nowej granicy
władzy, Poznań, Wydawnictwo Zysk i S-ka
6 Digitalising the Public Financial
System: the road ahead
Joanna Węgrzyn and Agata Zaczek

6.1 Introduction
The dynamics of the development of digitalisation and the crises of the 21st
century, including the actions taken by states to counteract the effects of the
Covid-19, are undoubtedly opening up a new stage in the scientific debate on
the digitalisation of the public finance sector. Digital technology in the fi-
nancial services industry during the 2008 global financial crisis was not as
ubiquitous as it is today. During the 2020 crisis, the digitalisation of the public
finance sector and the use of digital finance solutions enabled governments to
react with unprecedented speed.
Changes in the economy and the proactive adaptation of society to
the new conditions caused by Covid-19 have resulted in the need to
set out the next stage of digitalisation of the public finance sector,
taking into account the 2020 post-crisis conclusions. The growing ex-
posure to systemic risks, tasks in the field of economic reconstruction after
controlling the epidemic, and the long-term challenges will all put the state’s
ability to mobilise its resources at the centre of the debate. It will become
necessary to assess the effectiveness of planned activities based on the perso-
nalisation of needs and to ensure the security of the identity of stakeholders, in
view of the fact that technology based on data, and the information derived
from it, allows better and better identification.
In this chapter, we will attempt to look at the issue of digitalisation of the
public finance sector in selected aspects, taking into account various per-
spectives: (1) digital tools and the way in which the public finance sector uses
them to carry out its current tasks; (2) the development of digitalisation and
the way in which it now allows the needs of the sector to be met in terms of
creating simple, agile and cheap public services; (3) the digitalisation and
personalisation of the needs of stakeholders, and building new values – setting
out the new direction of activities after Covid-19.
To this end, we have defined the digitalisation of the public finance sector
as the use of digital technologies and the use of digitalised information that
contribute to the evolution of the model of this sector, and which allow for
the transformation of interactions between stakeholders and also the creation

DOI: 10.4324/9781003264101-9
110 Joanna Węgrzyn and Agata Zaczek
of new values. In this chapter, which is an overview of this subject, we present
the issues connected with digitalisation of the public finance sector and add to
the ongoing debate on the need to digitalise this sector with possible directions
for further development, in view of the necessity to function in the post-
pandemic socio-economic reality. Consequently, we explain the correlations
between the digitalisation of the public finance sector and a country’s citizens.
We indicate possible directions of activity, based on the needs of the latter
(human-centric) and the use of digital technologies to personalise services for
each participant in economic life.
Technology has become a meta-topic present in every area of societal life.
With a chapter of this length, however, it is impossible to present these specific
issues in detail. Because the subject area related to this topic is so wide, it
therefore became necessary to make certain decisions regarding the selection
of specific parameters, and subsequently the conscious omission oftheseabove-
mentioned issues.

6.1.1 Literature review and the purpose of the chapter

Of particular interest is the use of digitalisation as an innovation promoting the
efficiency, effectiveness and efficacy of e-government (Bharadwaj et al., 2013;
Politou et al., 2019). Innovations allow the migration of physical activity to
digital platforms in order to build online interaction. With regard to the public
finance sector digitalisation involves the transfer of bureaucratic processes to
digital platforms ( Janssen and Estevez, 2013). One of the most frequently
discussed forms of modernisation is the process of simplification by standar-
dising activities to increase efficiency and reduce response times (Calvo and
Campos, 2017). It is emphasised that digitalisation leads to savings in ad-
ministrative costs (Falk et al., 2017) and reduces the problems associated with
bureaucracy and inefficiency in traditional processes (Lindgren et al., 2019),
including the improvement of costly and ineffective vertical and horizontal
processes ( Janssen and Estevez, 2013). A problem often cited is that, despite
the usefulness of digitalisation, practical problems resulting from differences
between stakeholders in terms of access to technology and related resources
should be kept in mind (Calvo and Campos, 2017). Significant challenges in
the digitalisation of the public finance system are the problems resulting from
the structure of the public sector and its relationship with state policy
(Beynon-Davies, 2007), the resistance of civil servants to innovation (Zhao
and Khan, 2013), digital exclusion and an inadequate Information and
Communication Technology (ICT) infrastructure (Bertot et al., 2010). In this
functional approach, the digitalisation of the public finance sectorcan be de-
fined as undertakings and projects related to the introduction of new tech-
nologies and innovations, thanks to which the scope of public services
available electronically increases.
Nevertheless, in the field of the digitalisation of the public finance system,
apart from research into the above-mentioned area, there has been no research
 Digitalising the Public Financial System 111
into the digitalisation of the public finance sector where the role of the
government and the impact of its actions on the economy are analysed in
macroeconomic terms. This requires an attempt to solve the fundamental issue
of how to identify the real needs of stakeholders and implement fiscal and
monetary policy based on the analysis of individual data (ex-ante analysis). The
classic “analogue” model of the digital finance sector based on general data and
aggregated results (ex-post analysis) cannot meet this challenge. What is de-
sirable is a digitalised model of a public finance system that learns from ob-
servation and constantly evolves. This requires a departure from the analysis of
data on individual income, towards an extended ex-ante analysis of stake-
holder needs (customer-centric, taxpayer-centric, public-centric) based on the effects
of previous changes in fiscal policy versus the expected results at the con-
struction stage.
Knowledge of how the state budget is built and the practical implications of
ineffective policies that result in socio-economic and political repercussions
indicates a fundamental difference in the directions of digitalisation of the
private and public finance sector. In private finance, sources of income are
limited, while in the case of public finance, the government can use its power
to impose taxes or print additional money. This requires the government to be
disciplined if it wants to build a solid and stable macroeconomic system of the
state (Stanley, 2018). It is also necessary to extend the further discussion on the
digitalisation of the financial sector with the use of digitalisation as a tool
supporting the decision-making process in the field of government policy
(monetary and fiscal), which allows for a quick analysis and assessment of the
impact of planned changes on society and the economy. This topic is be-
coming increasingly important and urgent. Covid-19 somewhat accelerated
the discussion in this direction, forcing countries to react very quickly.
Moving in this direction, the research question we are trying to answer focuses
on how digitalisation, new technologies and human creativity can be used to
provide more effective, pro-social and personalised digital public services in
the future.

6.1.2 Digitalisation of public finance – “doing what we do now but

better”
The need for process changes and digitalisation of the public finance sector was
recognised by Sanjeev Gupta, Michael Keen, Alpa Shah and Geneviève
Verdier (2017, 2): “Through digitalisation, government can potentially conduct current
fiscal policy more effectively – doing what we do now, but better – and perhaps before too
long, design policy in new ways – doing things, that is, that we do not, and cannot, do
now.” Therefore, the new solutions currently being implemented should allow
for better data to be obtained and more effective systems to be built, which in
the future will allow the design and implementation of the aforementioned
“better” policies based to a large extent on automatism, algorithms collecting
112 Joanna Węgrzyn and Agata Zaczek
personal and non-personal data, and data integration from different systems
(OECD, 2020).
An important element that appears in the ongoing projects of digitalisation
of the public finance sector, therefore, is the issue of the platformisation and
personalisation of services. This direction requires the development and
consolidation of e-services, and improved electronic communication between
public institutions, citizens and the economy (Falk et al., 2017). It also requires
increasing the digitalisation of internal administrative processes, in particular
thanks to the introduction of default digital documents and the electronic
handling of cases, as well as the use of more advanced analytical tools to
identify threats related to non-compliance (OECD, 2020). Wider use of
technologies and mobile applications reduces the administrative burden for
citizens and entrepreneurs, helps introduce them to the digital formal
economy (e.g. access to digital finance, state aid and financial guarantees),
provides access to financing sources (e.g. building financial credibility) and
assists in development. Digital technologies allow access to many services
without charging additional fees. From the side of the individual stakeholder,
all that is needed is a mobile device and consent to provide these services with
the use of their data.
For the state, technologies provide an opportunity to expand the tax base by
improving the identification and monitoring of taxpayers’ financial activity or
by making it easier for them to pay their liabilities through the use of mobile
technology. On the one hand, thanks to the increased capacity to store
and analyse data, governments can use the correlation of tax revenues
with the business cycle to anticipate and possibly prevent an economic
crisis, or monitor their cash reserves to assess liquidity and borrowing
needs. On the other hand, they can benefit from attempts to build
taxpayers’ profiles (taxpayer-centric). In the UK, for instance, HMRC’s
Connect computer system uses extensive access to government and corporate
sources as well as individual digital footprints to build a taxpayer’s total income
profile that can then be used to verify the accuracy of the financial information
they voluntarily declare (Rigney, 2016). The system can pull information from
banks, peer-to-peer lenders and even digital platforms to recreate a picture of a
person’s spending.
Wide access to information has allowed many countries to introduce so-
lutions in the field of advanced digital technologies in public aid during the
Covid-19. To mitigate its negative effects, governments around the world
very quickly introduced fiscal, monetary and financial instruments for
households, businesses and healthcare systems, as well as government guar-
antees for the banking sector.
Moreover, for the first time on a global scale digital finance enables states to
counteract the effects of an unprecedented crisis situation, allowing them to
reach a wide range of citizens with almost immediate financial aid.
Based on an analysis carried out by the World Bank (2020, 67) measures
introduced included, among other things, simplified application procedures
 Digitalising the Public Financial System 113
and alternative data sources for making credit decisions and granting digital
loans – allowing for a quick application, online verification and acceptance
processes using mobile devices. Internet platforms were used for reverse fac-
toring transactions, which facilitated the financing of the supply chain and
shortened payment terms. For example, the US Treasury authorised PayPal,
Square, Kabbage and Funding Circle to provide small business loans under the
US Small Business Administration programme. Digital lending platforms also
partnered with banks to pay out loans. For example, the Chinese online
bankMYBank, or Alipay, in cooperation with 100 local Chinese banks, of-
fered “Zero Contact” loans to small entrepreneurs from Wuhan. Over
350,000 business people used this service. The Business Development Bank of
Canada rolled out small business online loans up to a certain threshold with a
48-hour turnaround time. Fintech solutions allowed for the expansion and
acceleration of access to loans, including those covered by government sup-
port, granted in response to the crisis. The Monetary Authority of Singapore
decided to launch a special grant of 6 million Singapore dollars to keep
Fintechs operating and enable them to continue to innovate.
In its published Europe 2020 strategy, the European Union’s plan is to increase
the role of digital finance in supporting the European strategy for economic re-
covery and the broader economic transformation (European Commission, 2020).
However, observation of the actions taken by the member states to counter the
2020 crisis shows that many of them still have a lot of work to do in this area.

6.2 The public finance system facing the challenges of the

21st century – key directions
Digitalisation, and its impact on the economy, has become the subject of lively
debate in the area of state financial security (Politou et al., 2019). One of the main
goals to be achieved is improving the resilience of the public finance sector to the
external shocks of the 21st century (OECD, 2021). The common denominator in
these discussions is the use of digital technologies (Bosco et al., 2015).
The digitalisation of public finances and tax policy allows benefits to be
identified in at least four areas (Gupta et al., 2017). The first is government
payments to private persons, where it is possible to improve the efficiency of
transfers made under social benefit programmes through better identification
of beneficiaries and the use of digital authentication methods. The second is
tax collection and improved efficiency through digital methods (e.g. electronic
tax filing, which allows for better collection and reduces collection and
handling costs). For other non-tax revenues (e.g. fees) digital payments can be
used. The third area is tax enforcement, where access to real-time or near real-
time information on financial transactions can help improve tax enforcement
on the part of the tax authority. Individuals and businesses are integrated into
the digital economy, accepting and making digital payments in transactions
that leave traces, thus helping to identify tax avoidance or evasion. The fourth
aspect is e-government and the use of digitalisation to improve the efficiency
114 Joanna Węgrzyn and Agata Zaczek
of management, for example the digitalisation of procedures and ensuring
better access to information for citizens and entrepreneurs by making it
available on platforms, as happened during the Covid-19.
However, the potential that the use of digital technologies has for the de-
livery of online public services does require certain necessary conditions:
namely, the infrastructure for governments to provide these digital services and
also widely available internet access (TUFTS University, 2021). On the one
hand, countries like Great Britain, Sweden, New Zealand, Singapore have a
wide range of platforms and e-government services because their societies are
so digitalised that they generate demand for this type of service. There are
8 million BankID holders in Sweden, and 95% of the population use the
internet. In Singapore, over 93% of private individuals and almost 100% of
enterprises used e-services in 2019. On the other hand, many countries are
lagging behind when it comes to e-office services (with the Philippines at the
very bottom) and widespread internet access (e.g. in India only 40% of its
citizens have permanent access). This greatly limits the use of digital solutions.

6.2.1 Platformisation and personalisation of digital public services

The development of networking accelerated the datafication process. As a
result, analogue data and information became digital, which then accelerated
their “generation” on the web. It should be noted that in the case of the
development of computerisation, automation and Internetisation, we are
talking about the economy of knowledge and information, and economy 3.0.
On the other hand, data modification also enabled personalisation – the
adaptation of services and goods provided both by public institutions and
businesses to meet the needs of society. It became the driving force of the
digital economy, leading to the fourth technological revolution. The result of
the intensity and universality of these digital transformation processes has been
a change in the functioning of society, the financial system and enterprises.
In today’s information society, it is common practice to access cloud ser-
vices in cyberspace via the internet. These technological changes were noticed
within the EU, prompting the Estonian initiative 20 years ago to launch the
first version of the X-Road platform, which ensured the interoperability of
distributed databases and the exchange of information. Then, the Estonian
government introduced a compulsory digital ID card that allowed for the
identification of the citizen and the use of electronic signatures (E-estonia
Briefing Centre, 2021). As a result, the public gained access to any public
service, such as filing their tax return online (Kattel, Mergel 2018). The
e-Residency programme is an Estonian example of the changes taking place in
the relationship between citizens and government. The entire process of ap-
plying for the document to establish a company, available to anyone interested
in any country, takes place electronically (except for collection of the docu-
ment itself). Therefore, e-Residency significantly influenced the development
of banking services provided electronically (Siniavski, 2018).
 Digitalising the Public Financial System 115
The lockdown and economic crisis caused by the Covid-19 have radically
changed the perception of the digital transformation in societies. As part of the
discussion, there is the view that the current society 4.0. has reached its
maximum level of development (Science and Technology Basic Plan, 2021).
A number of the challenges and problems it faces can be resolved through the
combination of digital transformation with human imagination and creativity.
The question, therefore, remains as to how digitalisation, new tech-
nologies and human creativity can be used to more effectively deliver
pro-social and personalised digital public services.
Considering the above, an interesting solution in terms of ensuring the
further development of society is the Japanese model of social relations –
society 5.0. The problems of the aging Japanese society cannot be effectively
solved without the use of modern technologies. These needs were recognised
by the government, which developed the 5th Science and Technology Basic
Plan (Government of Japan, 2021). The Japanese have developed a new model
of social relations focused on a human-centric society., (based on the inter-
penetration of the digital and physical reality). The automation of industry,
robotisation of society and development of artificial intelligence (AI) all help to
stimulate economic growth and solve social problems. The goal is to develop
the economy 4.0 and, at the same time, solve the problems of an aging society.
This model focuses oni.a.areas: promoting so-called smart factories; the use of
infrastructure and smart cities; using innovation in finance.
A creative society has been defined as “a human-centered society that bal-
ances economic advancement with the resolution of social problems by a system
that highly integrates cyberspace and physical space” (Keidanren, 2016, 5). In
this society, and more specifically in cyberspace, a huge amount of information
is collected from sensors located in the physical space and analysed by AI. The
results of analyses obtained in this way are subsequently communicated and
presented in the appropriate form to people in the physical space. The Japanese
concept based on personalisation (customer-centric) uses digitalisation and AI to
create a new value that allows the delivery of only those products and services
that are needed at a specific moment (“at your fingertips”) (OECD, 2020).
As in the case with Japan, Europe’s structural weakness is its increasingly
aging population. With this in mind, according to the European Commission
(2021a), the digital environment, including digital services and administration,
should be easily accessible and human-centred. In 2018, the European
Commission (2018) announced actions on retail financial services to facilitate
cross-border electronic identification and remote customer verification
(“know your customer”) procedures. The Commission wanted to enable
banks to identify customers by making full use of the electronic identification
and authentication tools provided for in the eIDAS Regulation, based on anti-
money laundering and data protection requirements. Currently, a European
digital identity is available through digital wallets in mobile apps on mobile
phones and other devices. Another EU target for 2030 is to ensure that all
citizens can fully benefit from online public services. The European
116 Joanna Węgrzyn and Agata Zaczek
Commission’s plans remain ambitious – 80% of EU citizens should benefit
from European digital identity solutions by 2030, which includes user checks
of the identities of their personal contacts and also an online presence. The
basic principle is that you will be able to prove your identity to access public or
private public services in the EU. According to the European Commission,
this will have a positive impact on the provision of financial services, parti-
cularly those based on innovation. The largest user of digital technologies is
the financial sector, and with digitally connected users, it will be possible to
provide them with better access to finance. Moreover, the cross-border re-
cognition of electronic means of identification provided for in the eIDAS
Regulation provides guarantees and reduces the risk posed by new technol-
ogies. At the same time, it facilitates compliance with the requirements for due
customer verification, anti-money laundering and ensuring the strong au-
thentication of parties in the digital environment. Thanks to the subsequent
changes to the eIDAS Regulation (European Commission, 2021b), the
European Digital Identity will make it easier, for example, to apply for a bank
loan. The applicant (European Digital Identity user) will only have to select
the necessary documents required by the bank from their digital wallet. Digital
documents will then be created, which, after they are sent to the bank, can be
verified in order to continue the process of examining the application.
Moreover, thanks to the creation of digital public services like “Government
as a Platform” (Pope, 2019) in countries such as the United Kingdom and
Estonia, it will be possible in the future to provide comprehensive and relatively
“easy” access to public services that offer trouble-free use of advanced solutions
combining AI and virtual reality (Margetts and Naumann, 2017). Such profiled
public services will be user-friendly due to the age and digital skills of the user,
and improved through the use of machine learning and interaction analysis.
As part of the Government Digital Service strategy for 2014–2024, the UK
government launched, among other things, the GOV.UK platform.
Currently, the strategy focuses on personalising services and elements related
to building data security and quality. On the other hand, the current pandemic
has shown that the key to the future will be providing effective support
through quick interaction with the authorities, for example through self-
adaptation (using machine learning). This involves building innovative services
and ensuring full online access to them, guided by the needs of the citizen in a
social (human-centric) or financial (taxpayer-centric) context. Without the ac-
ceptance of the citizen, however, these innovative services will be useless. As a
result, citizen consent will be a decisive factor in the development of digita-
lisation and public administration.

6.2.2 Collecting taxes and securing budget funds

Looking at the role of fiscal policy in the realities of today’s economy, access to
information and its use in the most real time possible is becoming one of the
key factors in improving its effectiveness. This comes down to two basic
 Digitalising the Public Financial System 117
directions that determined the international discussion on the reform of the
public finance system after the 2008 and 2020 crises. The first direction is to
use digitalisation as an innovation in the activities and processes involved in
building a coherent and fair tax system. The other direction is the afore-
mentioned need to properly respond to a crisis situation in very close to real
time and use digitalisation to shape government policy that would allow for
the proper protection and use of financial resources for the purposes of current
social policy and economic development.
After the 2008, two areas of tax policy were common to many countries.
The first direction was supporting economic growth based on preferential tax
solutions to encourage investment activity. However, this also required actions
in the second area, which was the consolidation of state budgets based on the
use of digital tools. The increase in public debt required states to start limiting
the ineffectiveness of the collection of budget revenues due to, among other
things, international tax fraud and tax avoidance, e.g. legislative initiatives
stimulated by the scandals (Fuchs, 2018; Dietsch and Rixen, 2016) around
Starbucks, Apple, the LuxLeaks, the Panama Papers the Malta Leaks, or tax
avoidance by companies such as Apple, Google Facebook.
The main direction of introducing digital tools is to counteract and elim-
inate the identified forms of tax evasion or avoidance, such as tax fraud or
economic activity conducted in the shadow economy. The result is solutions
that allow companies to submit reports with financial data from their own
accounting systems, for example Standard Audit Fileand use e-invoices or split
payment mechanisms.
AI solutions are increasingly being used to identify and prevent tax fraud. In
Brazil, the Public Digital Accounting System enables the authorities to de-
termine the amount of the company’s tax liability. Meanwhile, China is using
invoice matching technology to verify that entrepreneurs claiming Value
Added Tax (VAT) reimbursement have actually been charged it, which is a big
step towards solving a global problem that has long made it difficult to verify
the correct VAT settlement.
The next step is the increasingly popular concept of using blockchain tech-
nology. Thanks to the features that distinguish it from traditional database so-
lutions (e.g. the permanent transaction records that cannot be lost, changed or
stolen), it has the potential to revolutionise the method of tax settlement: tax
collection and refund, settlements and transaction verification, tax compliance
and the invoicing mechanism (Frankowski et al., 2017). If used, it can effectively
help to solve the basic problem of the tax system – reducing the tax gap.
However, the assessment of the scale of the benefits depends on the mechanisms
developed, and the methods and areas of implementation that are still ahead of
us, such as the digitalisation of invoices, the concept of creating VATCoin, a
special cryptocurrency for VAT settlements. These concepts still need to be
refined before they will become a viable alternative to existing solutions.
The concept also requires a new vision of tax administration 3.0 (OECD,
2020). It is based on the use of “natural systems” (processes) integrated with
118 Joanna Węgrzyn and Agata Zaczek
the daily functioning of citizens and the activities of enterprises in a given
country. This requires the development of innovative and connected Fintech
services based on government-private sector collaboration that will reduce
administrative burdens and also ensure data security and highly reliable results.
It is about applying the “make tax just happen” rule, based on the adjustment of
tax processes (e.g. the automatic collection of receivables at the time of a
business transaction) to the natural digital activity of taxpayers. Tax policy will
be implemented as part of the networking of cooperating entities. Currently,
such networking concerns the involvement of enterprises in the collection and
settlement of (VAT), and in the pay-as-you-earn system (PAYE). In the near
future, the network will be expanded to include digital platforms. Some
platforms will collect taxes and settle tax payments, while others will identify
tax liabilities regarding transactions, sharing results and data.
An interesting supplement to the tax administration 3.0 model will un-
doubtedly be the use of AI in contacts with taxpayers. Such a solution has
already been introduced by Spain, for example. Asistente Virtual de IVA – a
chatbot – provides information related to, among other things, tax rates and
obligations. It is also able to ask for the necessary additional information in
order to give the right answer.

6.2.3 Directions for improving the efficiency of the public finance sector –
research after the 2020 crisis
Counteracting the effects of the pandemic has undoubtedly opened up a new
stage in the scientific debate on the digitalisation of the public finance sector,
which is the need for an appropriate response to a crisis situation in very close
to real time and a prediction of the effectiveness of actions taken to support
economic development based on the personalised needs of stakeholders.
Having databases and digital tools requires the public finance sector to in-
crease the efficiency of its financial planning, budgeting, forecasting and
performance management by using new technologies for this purpose, such as
predictive analytical tools, robotics, cloud-based platforms, automation and AI.
This fact results in the need to revise the current approach to the method and
scope of expanding knowledge within public finances, taking into account the
scenario of the possible future displacement of the traditional economic model
by technology: (1) towards enterprises that do not have characteristic assets
currently providing high profitability (Suárez Serrato and Zidar, 2016); and (2)
the symbiosis of human and AI in creating more dynamic and satisfying ser-
vices and jobs (machine learning) (Paschkewitz and Patt, 2020). In shaping
long-term fiscal policy, the wide use ofAI solutions becomes necessary –
which will enable the analysis of data from many economies over a long period
and a “split-second” assessment of tax policy in terms of the effects of in-
troducing these solutions into the real economy. While digital technology can
be used to improve existing systems and solutions, it also offers the tools to
develop new ones. For example, current income tax systems arbitrarily use a
 Digitalising the Public Financial System 119
period of one year as the basis for the assessment of, for example, financial
assistance during Covid-19. This is too short a time horizon to adjust services
to current needs.
Creating an effective economic policy is complicated by the almost infinite
number of contingencies that can be considered (Brink, 2021). Experimenting with
taxes in the real world is almost impossible (and even reprehensible from an eco-
nomic perspective), and economic simulations using AI and machine learning can
help to find more effective solutions in line with the socio-economic expectations
of individuals, entrepreneurs and decision-makers. The question that needs to be
asked is not if, but when, it will be possible to build tax policy simulations using AI.
This is quite a challenge. Apart from simple economic and behavioural
relationships, there are many structural factors at play: abrupt tax thresholds
and tax rates, as well as differences between tax solutions in different countries.
Nevertheless, John Paschkewitz and Dan Patt (2020) proposed one of the
possible directions in which AI could be used to counteract the long-term
effects of the crisis. The simulation would allow the desired outcomes to be
written into law (e.g. an acceptable unemployment threshold) accompanied by
a supporting mechanism (e.g. state aid, tax incentives to increase employment)
that could be automatically regulated according to an algorithm until an ac-
ceptable level of unemployment has again been reached. Also emerging are the
first machine learning algorithms to simulate the economy and their impact on
taxes, such as the AI Economist (Zheng et al., 2021). In this case, AI systems
can for the first time control the behaviour of taxpayers separately from the
operation of the tax authorities. Contrary to the existing tax scales, which are
usually progressive or regressive (i.e. levying higher taxes on the lowest or
highest earners), the best results emerged in the scenario where the lowest and
highest earners paid the highest taxes and the middle earners paid the lowest.

6.3 Conclusions
The areas of digitalisation of the public finance sector will be marked by the
crises of the 21st century. During the unprecedented pandemic caused by
Covid-19, we have seen a global acceleration in the development of digital
solutions aimed at streamlining, increasing efficiency, automating processes
and building innovative services. Globally, countries with a high level of di-
gitalisation development have had the opportunity to respond quickly to
current pandemic-related social needs – quickly, simply and cheaply. As a
result, this crisis has radically changed the role, perception and acceptance of
digital transformation in societies and economies, contributing to, among
other things, the growing importance of digital technologies. In particular, the
pandemic has made it necessary to develop “better” digital solutions (services)
forusers – citizens, industry and public administration – in order not to “pa-
ralyse” their functioning. As a result, it has also allowed for the transition to the
next level of digitalisation, that is retrieving specific and personalised in-
formation from data that enables new solutions to be shaped and personalised
120 Joanna Węgrzyn and Agata Zaczek
public services to be provided in accordance with the needs of the recipients.
The digital transformation of public finance requires the automation of pro-
cesses. Digital tools and AI algorithms will support the analysis and assessment
of liabilities and increasingly influence political decision-making. Such a model
requires interconnection with other services and functions of the public sector,
including private entities, using models of citizen and business involvement.
Personalisation is becoming the focal point around which the processes of
digitalisation of the public finance sector are structured and regulated. The very
fast progress of digitalisation of the economy has created the need for the state to
make it possible for every citizen or entrepreneur to “better” settle any matter
when dealing with public administration by electronic means. This requires the
improvement of solutions and efforts to ensure that everyone, regardless of age
and digital skills, can take advantage of the opportunities currently offered, and
the ones which will be offered in future, by public digital services.
The pandemic has clearly shown that there is a huge gap between countries
when it comes to the level of digitalisation, access to the infrastructure and
cheap internet. Changing the model of mutual contacts between citizens and
governments, while also ensuring interoperability in all public services, is only
possible thanks to the digital transformation.
This is important due to the postulate of the Covid-19 experience, namely,
that the full use of digital technologies and mobile apps reduces the burden on
citizens and entrepreneurs, helps to introduce them to the digital formal
economy and provides access to financing sources and assistance with devel-
opment. The requirement is to increase the effectiveness of financial planning,
budgeting, forecasting and performance management through the use of new
technologies, such as predictive analytical tools, robotics, cloud-based plat-
forms, automation and AI.
It should be emphasised that despite the use of digitalisation and new tech-
nologies personalised and public financial services based on the most important
needs of the citizen in a social (human-centric) or financial (taxpayer-centric) context,
as well as ensuring the adequate infrastructure and interoperability of information
systems and reducing costs, all these activities will not ensure quality of life in the
new creative society. However, without the acceptance of the citizens, these
innovative services will be useless. As a result, citizen consent will be a decisive
factor in the development of digitalisation and public administration.

Bibliography
Bertot, J.C., Jaeger, P.T. and Grimes, J.M. (2010). Using ICTs to Create a Culture of
Transparency: E-Government and Social Media as Openness and Anti-Corruption Tools for
Societies. Government Information Quarterly, 27, 3, pp. 264–271. 10.1016/j.giq.2010.03.001
Beynon-Davies, P. (2007). Models for e-Government. Transforming Government: People,
Process and Policy, 1, 1, pp. 7–28. 10.1108/17506160710733670
Bharadwaj, A., El Sawy, O.A., Palvou, P.A. and Venkatraman N.V. (2013). Digital Business
Strategy: Toward a Next Generation of Insights. MIS Quarterly, 37, 2, pp. 471–482.
 Digitalising the Public Financial System 121
Bosco, F., Creemers, N., Ferraris, V., Guagnin, D. and Koops, B.J. (2015). Profiling
Technologies and Fundamental Rights and Values: Regulatory Challenges and Perspectives from
European Data Protection Authorities. Reforming European Data Protection Law (pp. 3–33).
Springer, Dordrecht. 10.1007/978-94-017-9385-8_1
Brink. Can AI Build a Tax System That Supports Equality?. https://www.brinknews.com/can-
ai-build-a-better-tax-system-during-coronavirus-equality/ (Accessed 2 October 2021).
Calvo, A.S. and Campos, C. (2017). Mexico: Single Window for Foreign Trade. In: Falk, S.,
Römmele, A. and Silverman, M. (Eds.). Digital Government: Leveraging Innovation to Improve
Public Sector Performance and Outcomes for Citizens (pp. 85–104), Springer. 10.1007/978-3-31
9-38795-6
Dietsch, P. and Rixen, T. (2016). Global Tax Governance: What It Is and Why It Matters
https://www.researchgate.net/publication/302565455_Global_tax_governance_What_
It_is_and_Why_it_Matter (Accessed 10 October 2021).
e-Estonia Briefing Centre. Estonia Introduced a New ID Card. https://e-estonia.com/
(Accessed 10 October 2021).
European Commission, COM (2018) 109.
European Commission, COM (2020) 591 final.
European Commission, COM (2021a) 118.
European Commission,COM (2021b) 281.
Falk, S., Römmele, A. and Silverman, M. (2017). The Promise of Digital Government. In:
Falk, S., Römmele, A. and Silverman, M. (Eds.). Digital Government: Leveraging Innovation
to Improve Public Sector Performance and Outcomes for Citizens (pp. 3–24). Springer.
Frankowski, E., Barański, P. and Bronowska, M. (2017). Blockchain Technology and Its
Potential in Taxes. Deloitte.
Fuchs, C. (2018). The Online Advertising Tax as the Foundation of a Public Service Internet.
University of Westminster Press. 10.16997/book23
Government of Japan. Society 5.0. https://www8.cao.go.jp/cstp/english/society5_0/
index.html (Accessed 10 October 2021).
Gupta, S., Keen, M., Shah, A. and Verdier, G. (2017). Digital Revolutions in Public
Finance. IMF 2017. 10.5089/9781484315224.071
Janssen, M. and Estevez, E. (2013). Lean Government and Platform-based Governance –
Doing More with Less. Government Information Quarterly, 30, 1, S1–S8. 10.1016/j.giq.2
012.11.003
Japan Business Federation (Keidanren) (2016). Toward Realization of the New Economy and
Society, Reform of the Economy and Society by the Deepening of “Society 5.0”. https://www.
keidanren.or.jp/en/policy/2016/029.html
Kattel, R., Mergel, I. (2018). Estonia’s digital transformation: Mission mystique and the hiding
hand. UCL Institute for Innovation and Public Purpose Working Paper Series, 9, pp. 1–3.
Lindgren, I., Madsen, C., Hofmann, S., and Melin, U. (2019). Close Encounters of the
Digital Kind: A Research Agenda for the Digitalization of Public Services. Government
Information Quarterly, 36, pp. 427–436. 10.1016/j.giq.2019.03.002
Margetts, H. and Naumann, A. (2017). Government as a Platform: What Can Estonia Show the
World?. Research paper, University of Oxford.
OECD (2020). Tax Administration 3.0: The Digital Transformation of Tax Administration.
OECD, Paris.
OECD (2021). Tax Administration: Digital Resilience in the COVID-19 Environment. OECD, Paris.
Paschkewitz, J. and Patt, D. (2020). Can AI Make Your Job More Interesting? Issues in
Science and Technology, 37, 1, pp. 74–78.
122 Joanna Węgrzyn and Agata Zaczek
Politou, E., Alepis, E. and Patsakis, C. (2019). Profiling Tax and Financial Behaviour with
Big Data under the GDPR. Computer Law & Security Review, 35, 3, pp. 306–329. 10.101
6/j.clsr.2019.01.003
Pope, R. (2019). Playbook: Government as a Platform. Ash Center for Democratic
Governance and Innovation, Harvard Kennedy School.
Rigney, P. (2016). The All Seeing Eye: An HMRC Success Story? Institute of Financial
Accountants. London.
Siniavski, S. (2018). We’ve been testing e-Residency community features. https://medium.com/
e-residency-blog/weve-been-testing-e-residency-community-features-4d4d64dd9dc1.
(Accessed 2 October 2021).
Stanley, L.E. (2018). Emerging Market Economies and Financial Globalisation: Argentina, Brazil,
China, India and South Korea. Anthem Press, London.
Suárez Serrato, J.C. and Zidar, O. (2016). Who Benefits from State Corporate Tax Cuts? A
Local Labor Markets Approach with Heterogeneous Firms. American Economic Review,
106, 9, pp. 2582–2624. 10.1257/aer.20141702
TUFTS University. Delivering Public Services During COVID-19 A Country-by-Country
Analysis. https://sites.tufts.edu/digitalplanet/which-governments-are-best-equipped-to-
deliver-public-services-online-during-a-lockdown/ (Accessed 2 October 2021).
World Bank (2020). Promoting Digital and Innovative SME Financing. International Bank for
Reconstruction and Development.
Zhao, F. and Khan, M.S. (2013). An Empirical Study of E-Government Service Adoption:
Culture and Behavioral Intention. International Journal of Public Administration, 36, 10, pp.
710–722. 10.1080/01900692.2013.791314
Zheng, S., Trott, A., Srinivasa, S., Parkes, D.C. and Socher, R. (2021). The AI Economist:
Optimal Economic Policy Design via Two-Level Deep Reinforcement Learning, Salesforce
Research, Harvard University, 24 August 2021. https://arxiv.org/abs/2108.02755v1
7 Digitalisation of the tax system
Joanna Węgrzyn and Marlena Syliwoniuk

7.1 Introduction
An important distinguishing feature between the digital and traditional
economies are the services of online platforms that facilitate transactions of
goods and services on the web. These new solutions in the way of doing
business require a flexible and creative approach to shaping methods of
taxation. The tax system should be able to adapt to the digitalisation of the
economy if countries want to continue to perform their functions effectively.
In addition to flexibility, the tax system of the digital age should be super-
smart to fully respond to the needs of stakeholders in as close to real time as
possible, addressing the issues of megatrends present in the global economy.
Developing an international political and economic consensus is not easy
and requires time, which is lacking due to the rapid transformation of the
economy. Therefore, those in power focus on point solutions intended to
shape the taxation of the broadest possible scope of activities of citizens and
entrepreneurs. The overarching goal is to try to treat both forms equally: the
digital economy and traditional sectors (especially those of strategic im-
portance). Both forms are necessary to ensure the balance of the proper
functioning of the world.
These activities should not obscure what is most important, that is systemic
taxation reform that will form the basis for building a tax system operating in
cyberspace. The need to define the cyberspace tax system arises from the
framing of an area of taxation that cannot be described using typical, physical
measures (characteristic for the traditional economy) and is not subject to
simple geographical division. Our attempt to define the concept of a “cy-
berspace tax system” combines the traditional model with a model closely
integrated with the internet (but not only).
In this chapter, we will present an analysis of the existing taxation model
and outline the directions for the future. We will focus on the alternatives and
not on the proposed changes to the existing framework of the international tax
system. We will look at this problem in macroeconomic terms, due to the
prevailing consensus that innovation, that is automation and robotisation, is
the engine of economic growth. Unfortunately, the main measure, namely

DOI: 10.4324/9781003264101-10
124 Joanna Węgrzyn and Marlena Syliwoniuk
Gross Domestic Product (GDP), has its limitations. GDP measures the profits
of platforms from ads sold, but does not measure the added value generated by
the users of a platform that is “ostensibly for free.” It is the user data that is the
real value that needs to be measured. Digital products and services are difficult
to include in economic statistics, which results in an underestimation of the
GDP and an increase in the level of inflation in many countries. Research
limitations result from the fact that the data on transactions of services and
goods on the internet, which are necessary to analyse the digital economy and
its impact on tax systems, are available primarily to digital platforms. Work to
create a reporting system has only recently started, for example, Organisation
of Economic Co-operation and Development (OECD) or European Union.
The first solutions, if there are no delays, will be implemented by the member
states by the end of 2022 and only then will it be possible to obtain the ne-
cessary data from the platforms for proper analysis.
With these limitations in mind, this chapter will focus on the characteristics
of the digital economy and their impact on taxation. We will also analyse the
megatrends affecting international tax policy and review the existing reg-
ulatory initiatives and tax debates. Finally, using foresight to identify and assess
possible future events, we will present the possible directions in which tax
policy may be shaped in the future, endeavouring to supplement the principles
of traditional tax theory with a theory in the digital dimension.

7.1.1 Taxation and digitalisation: issues and insights

The digitalisation of the economy has determined a scientific debate on the need for
change in taxation and the model of public finances. Tax analysis mainly focuses on
the subcategories of disruptive digital business models and their negative impact on
taxes by comparing them with traditional business models (Lucas-Mas and
Junquera-Varela, 2021). The discussion in this direction became more important
after the publication of the OECD (2018) report on the tax challenges arising from
digitalisation and the European Commission’s proposal (2018a,b). Both initiatives
called for the introduction of tax regulations targeted at digital companies. The basic
problem therefore defined, and widely discussed in the literature, is the fact that the
existing international regulations do not allow for the appropriate taxation of a
company’s digital activity if it is not physically present in the territory of a given
country (Devereux and Vella, 2018). Another challenge is the evaluation of data as a
source of profit for digital platforms and the place of their taxation – hence the need
to define the user’s location for tax purposes – in order to allocate the platform’s
profits to a given country (Appleby, 2021). It is also related to the activities of digital
platforms within the sharing economy, where individuals share their assets with
other users for a fee, and the proper taxation of this activity (Beretta, 2017).
The lack of a digital tax presence has highlighted the wider problem that tax
law has become obsolete. There have been comments, therefore, that the
partial actions are not enough as the entire tax system requires reform
(Devereux and Vella, 2018). An important condition is the development of a
 Digitalisation of the tax system 125
framework for the fair taxation of both traditional and digital companies. The
goal is for all sectors of the economy to pay their due share of tax, which
requires tax systems to capture the transformation of multinational tech cor-
porations (Christensen and Hearson, 2019) like GAFA (Google, Amazon,
Facebook and Apple). This is due to the fact that despite the ongoing changes
related to the digitalisation of the economy, implementation of the principle of
sustainable tax efficiency and tax fairness will remain the overriding direction
of the tax system. In this context, concepts of a broader reform than just tax
law are emerging. It is about a super-smart tax system, which allows for the
effective handling of tax policy and the monitoring of tax risk thanks to the
standardisation of tax behaviour, the reduction of costs and the use of AI in
improving the development of the tax system (Zhou, 2019). Here, attention is
drawn to the taxpayer-centric approach that was discussed in Chapter 6.

7.1.2 The need to adapt the tax system to the economy of the 21st century
The current rules of the international tax system are adjusted to the standards
of brick and mortar economy. Its architecture is not adapted for digital business
models, such as providing services/selling goods on many markets simulta-
neously using digital platforms. These entities pay insufficiently low taxes.
States do not have the necessary power to levy a tax, even though it is in their
territory that the value is created (Kaplow, 2019). Hence, it is important that
the new taxation rules (what to tax and where) embrace the standards of the
digital economy (Harpaz, 2021). The tax policy of the 21st century must take
into account the creation of tax value increasingly linked to the digital pre-
sence of the taxpayer in a given country.
Based on the principles of the 20th century, the right to impose a tax on the
profits of international enterprises is primarily granted to residence countries, that
is those in which entities are physically present, where they have a permanent
establishment, for example. On the other hand, states have no basis for taxing
physically absent enterprises that use digital technologies and make profits in
their territories (De Mooij, Klemm and Perry, 2021). An important issue here
is intangible assets, in particular intellectual property. Work is still ongoing in
the international forum to limit the possibility of transferring the profit from
the country where the income is earned to a country with a lower tax rate by
transferring payments related to this value.
The Covid-19 pandemic has accelerated the automation and robotisation
process in the labour market, and the global experiment of working in home
office mode has permanently changed the model of work (World Economic
Forum, 2020). These changes require a systemic analysis of the effect of in-
dividual taxes and how they can be better coordinated with the challenges of
megatrends. The Covid-19 pandemic has once again proved that state inter-
vention during a crisis is crucial for the recovery of the economy. The state,
incurring debt for future generations, must financially support its citizens, who
are usually its main source of income. The tax system of developed countries,
126 Joanna Węgrzyn and Marlena Syliwoniuk
which imposes a huge fiscal burden on employment (high taxation of wages)
and consumption in order to guarantee revenues to the state budget, must, in a
situation of economic lockdown, consider new sources such as climate taxa-
tion and digital taxes.

7.2 The cyberspace tax system in the digital economy era

7.2.1 Definition of the cyberspace tax system

Adjusting taxation to the global, increasingly digital, economic and political
reality requires a redefinition of the tax system. Therefore, we propose that the
tax system of the digital age should be treated as the comprehensive
management of state public revenues and expenditure in a globally integrated
digital environment in order to create a cyberspace strategy for the devel-
opment of economy 4.0 and creative society 5.0, securing the functional and
climatic risk of current and future generations. It is necessary at this point to try
to define the concept of a “cyberspace tax system.” This concept combines
the traditional model with a model (Figure 7.1) tightly integrated with the
internet, monitored by algorithms, in which actors interact in many ways on
different spatial scales (Filippov et al., 2019).
First, this approach results from the chaos of definition (Strelkova, 2018) – the
adjective “digital” in “digital economy” has more and more synonyms, such as
“network,” “electronic,” “post-industrial,” “API,” “Internet,” “economy of
applications,” “programmed,” “creative.” Second, cyberspace covers a wider
range than the sum of the physical components – systems, networks, software and
the information processed in them, or a simple reference to the internet. Third, it
should also be borne in mind that outer space is now playing an increasingly
important role in telecommunications and digitalisation. Space has turned out to
be a critical infrastructure for the computerised economy and plays a fundamental
role in the competition between states and continents (Gregg, 2021). Fourthly,
such a system embraces a new dimension of human actions and needs, in which
machines interact both with each other and with people (Popkova and
Haabazoka, 2019). The need to define the cyberspace tax system arises from the
framing of an area of taxation that cannot be described using typical, physical
measures (characteristic for brickand mortar economy) and is not subject to simple
geographical division. This requires the use of datafication. Thus, it is the data that
will determine the strategic autonomy and digital sovereignty of countries and
their geo-technological position. The position will result from the possibility of
controlling the process of producing technological solutions and, consequently,
increasing the possibilities of projecting and building geopolitical and geo-
economic advantages (Nagy, 2018). In such a system, the key is to have a huge
amount of data, the ability to organise, process and use it, a dynamic environment
of entrepreneurs open to change, AI specialists and a political environment fa-
vourable to the development of technology (Lee, 2018).
 Digitalisation of the tax system 127

Industry
new tax 4.0
value

Big Green
Data robots
as a recovery
tax digital service
AUTO-
identity DIGITAL MATION/
Internet DATA ROBOTS
Of
AI
Things
CYBERSPACE
TAX
SYSTEM

social
HYPER- DIGITAL USER
(TAXPAYER)
media
broadband CONNECTIVITY
access

platforms
Cloud mobile apps
Smart: gov, creative
Computing
city, village, society
factory

assistive technologies

applications

Figure 7.1 Diagram of the cyberspace tax system.

Source: Own study.

7.2.2 Features of the digital economy to be taxed

The model of the tax system requires the relationship between digital and
traditional activities to be considered. It is necessary to describe the features
that allow a certain activity to be considered “digital.” This is due to the
specific features of the digital economy business models identified by the
OECD (2020). The specificity of these models is the possibility of doing
business across borders without having a physical presence in the source country
where the income is earned or where the users of the digital service are
present. The scope proposed by the OECD covers both automated digital
128 Joanna Węgrzyn and Marlena Syliwoniuk
services (ADS) and consumer-facing businesses (CFB). ADS covers an open list of
business models, such as search engines, social media as it is broadly under-
stood, including social networks, streaming digital content, online games,
cloud computing and online advertising. These services exclude the online
sales of goods, personalised professional services and internet access. CFBs
generate revenue from goods and services commonly sold to consumers. This
category excludes financial services, the mining sector, construction, and in-
ternational airlines and shipping. The definition of the material scope and
separation of digital entities was intended to constitute Pillar One of the
taxation of digital activities. A determination of the scope (i.e. what we tax)
was needed in order to determine the allocation of tax resources between the
individual countries where the value is created (how much to be allocated and
to whom). Regardless of the outcome of OCED discussions and political
decisions, this is the first attempt on such a global scale to add a digital di-
mension to traditional taxation rules.
Another issue is the change to the principle of assigning taxable income based
on the physical presence of an enterprise in a given country, which applies in
traditional tax models. It should be linked to the activity of entities in a given
market jurisdiction, regardless of their physical presence. In line with this trend,
revenues should be allocated where the end-user or consumer is located, that is
where the goods are used and where the services are provided. Assignment of
income to the so-called end market jurisdictions is beneficial to countries where
the digital giants, even though they are not established there, do business. In a
way, this allows the global mobility of entrepreneurs and consumers to be taken
into account, as well as the complex, spatial, multi-dimensional and multi-stage
networks of connections between consumers and entrepreneurs and, in the case
of the sharing economy, producers and consumers at the same time.
For the digital economy, data are both a generator and a carrier of various
types of value (value creation), the foundation of new and disruptive tech-
nologies, ranging from AI, blockchain, the Internet of Things and cloud
computing through to the analysis of Big Data sets. They are the capital ne-
cessary to maintain the competitiveness of economies. Digital businesses use
user data (e.g. the placement of personalised, targeted advertising), services that
connect users (e.g. online platforms and marketplaces) and other digital ser-
vices (e.g. digital content streaming, cloud computing). Additionally, data can
be copied and reused endlessly; conveyed worldwide in milliseconds; and used
for multiple simultaneous and separate purposes (Olbert and Spengel, 2019).
For the tax system, a huge amount of generated, collected, processed and
monetised data requires the development of a model that allows the taxation of
digital products and services based on the proper allocation of profits to a given
country. The OECD’s (2021) proposal under BEPS 2.0 for revenuesourcing is a
challenge for tax systems. The digital value created follows the consumer, who
does not necessarily have the same tax residence as the service provider. In the
absence of better concepts and being aware of the flaws in its solution, OECD
recommends using the user’s IP address as a determinant of the consumer’s
 Digitalisation of the tax system 129
country. The disadvantage of this solution is that when using a virtual private
network (VPN), the IP is changed from that of the consumer to that of the
service provider, which means the user who views the content could be as-
signed to the country where the VPN is located (OECD, 2020).
Digital entities can easily move between jurisdictions and avoid being phy-
sically present in high tax countries (Hadzhieva, 2019). The lack of a digital
identity in allows them to bear a disproportionately low tax burden in relation to
traditional companies. According to European Commission (2017) estimates,
the effective tax rate for digital enterprises in 2017 was 8.5%, while for tradi-
tional enterprises, 20.9%. A similar trend was demonstrated in an analysis of
financial statements and tax declarations of Facebook, Apple, Amazon, Netflix,
Google and Microsoft (the Silicon Six). Given that overseas operations ac-
counted for more than half of the Silicon Six’s booked revenues and two-thirds
of booked profits, foreign tax accounted for just 8.4% of identified overseas
earnings (Fair Tax Mark, 2019). Therefore, the most costly challenge in in-
ternational tax reform is the lack of a digital tax identity. The scale of the
silicon Six’s impact on the global economy is evidenced by the value of their
capitalisation, which amounts to approximately $4.5 trillion.
Also, the transition to online work during the Covid-19 pandemic and the
change of location where the management and employees carried out their work
opened a discussion on the OECD forum as to whether these changes would result
in the creation of new permanent establishments for international companies. At that
time, the prevailing view was that the home office (HO) mode was a result of
force majeure and was of a temporary nature related to the pandemic. However, if
HO becomes common practice for performing work, the question arises about the
potential change of place of effective management by the CEOs or members of
senior management. HO may result in a change to the company’s registered office
in accordance with the relevant national laws and affect the determination of the
country in which the company is considered resident for tax purposes.

7.2.3 Global megatrends and their impact on 21st century taxation

Tax policy in the digital age should be one of the tools useful for solving key
issues as: climate change, energy efficiency and security, health issues and
unfavourable demographic changes. Then the tax system expresses itself in
achieving the fiscal goal and influencing the economic and social sphere in a
holistic manner: shaping purchasing power (e.g. by lowering individual taxes),
stabilising and influencing the change in economic activity or by selectively
influencing specific sectors of the economy towards accelerating their devel-
opment (e.g. tax incentives for the R&D&I sector; tax exemptions dedicated
to specific economic sectors). This approach allows for the identification of the
most significant megatrends for the tax systems of the 21st century, including
in the field of automation and robotisation of the world economy: (1) the
impact of technology; (2) global demographic changes; (3) environmental
issues; (4) economic globalisation and geopolitics.
130 Joanna Węgrzyn and Marlena Syliwoniuk
The impact of technology is the megatrend that has the greatest impact
on the day-to-day operation of tax systems. It is also the most difficult one to
analyse due to the high dynamic of technological development and its impact
on the shaping of the 4.0 economy, as well as its interpenetration with other
megatrends (Table 7.1).
A prerequisite is the proper formulation of the state’s economy digitalisation
programme using the architecture of cyberspace (Frey and Osborne, 2017). The
aim of the programme is to improve the productivity of enterprises, which
requires the innovative processes and supporting systems, so that fully automated
and robotised production processes are developed. Industry is a sector of the
economy that often connects the digital world and the physical environment.
Hence, the concept of the factories of the future (in Japan, the USA, China) is
based primarily on a whole range of automation and advanced analytics pro-
cesses that focus on collecting and analysing data, increasing productivity, re-
ducing waste and improving employee safety ( Jiang, 2018). The result is
changes between traditional and new forms of employment, automation and
robotisation, which translates into the need to find new fiscal spaces. This re-
quires the tax system to take into account the financial consequences of the
automation and robotisation of the labour market (De Backer et al., 2018).
Thus, taxation of the digital economy is becoming one of the key measures
to build a new fiscal space and increase tax revenues. This requires looking at
the correlations between the automation and robotisation of enterprises, the
labour market and fiscal policy (Figure 7.2).
Significant global demographic changes (Table 7.1, Figure 7.2), and above all
the asymmetric population growth and aging, and the consequent increase in
government expenditureare playing an increasingly important role.). The labour
market and reforms of the insurance system are failing to keep pace with these
changes, which may result in an increase in structural unemployment, especially
among low-skilled people, adversely affecting the stability of traditional forms of
employment (Leduc and Liu, 2019), resignation from institutional solutions
combining employment flexibility with active labour market policies and an
extensive welfare state system (flexicurity model) (Bredgaard and Madsen,
2018). The number of highly skilled jobs is growing globally, while employ-
ment in jobs requiring medium and low qualifications that can be easily replaced
by automation is declining. Lower employment means a decrease in labour
taxation (a pillar of tax systems, especially in high-income countries).
In addition to the taxation of automation and robotisation, green taxation is
also becoming a new source of budget revenues (Table 7.1). The work carried
out under the Green Recovery (OECD) or the EU’s Green Deal and Fit for 55 is
intended to provide national budgets with the necessary funds to finance the
reconstruction and development of their economies. In the longer term, states,
through green taxation, can encourage companies to introduce innovative
green business models (Fan, Li and Yin, 2019). Incentives, tax breaks (not only
for R&D) and subsidies should then be properly calibrated to the intended
fiscal goals. Green taxation also makes it possible to protect the competitive
 Digitalisation of the tax system 131
Table 7.1 The impact of megatrends on tax policy related to the development of tech-
nologies in the field of automation and robotisation of the economy

Changes to Tax Policy Related to Automation and Robotisation

Technological development and expected effect Possible budgetary impact

THE IMPACT OF TECHNOLOGY

Higher work efficiency desired by reducing the demand for the work of the
enterprises (by eliminating human lowest-qualified employees plus high
mistakes) retraining costs mainly financed by the
state
Expected higher remuneration of a large disproportion between incomes
highly qualified employees – as a in society – the need for an
result of an increase in the supply of appropriate fiscal policy (taxation of
specialists in relation to the demand wages) and redistribution (reduction
of unemployment)
GLOBAL DEMOGRAPHIC CHANGES
Expanding the scope of automation – repetitive tasks replaced by
the work of robots fills the gaps robotisationnew tasks require critical
associated with an aging society thinking and interpersonal
relationships challenges in the field of
organisation and team management,
issues of the conflict of traditions and
social norms in relation to the modern
approach to the workplace
Creation of new jobs to support new large migrations of workers and entire
technologies social groups high costs of their
adaptation incurred by the state (social
policy)
New paths of education related to the leaving the state with the problem of
creation of new professions and activating inactive groups using
cooperation of research centres in benefits and cash transfers
building innovative solutions
GREEN TAXATION
Development of technology and the use of automation on an
innovation – displacement of unprecedented scale generates very
traditional forms of the economy fast consumption of traditional energy
sources the issue of public costs related
to the search and adaptation of
renewable energy sources
ECONOMIC GLOBALISATION AND GEOPOLITICS
Integration of economies, dependence on economic supply chains
international trade, flow of – impact on the volume of
investments, technologies and consumption (demand, supply of
capital services in the traditional economy)
geo-blocking of services/products –
competitive advantage is built on
prices (geo-barriers affect the structure
of purchases)

(Continued)
132 Joanna Węgrzyn and Marlena Syliwoniuk
Table 7.1 (Continued)

Changes to Tax Policy Related to Automation and Robotisation

Technological development and expected effect Possible budgetary impact

Development of the digital economy the requirement to adapt tax policy to

and adaptation to the current new social expectations in terms of
changes in international tax policy redistributive functions (e.g.
guaranteed income, benefits for
economically inactive people) and
changes in the structure of tax
revenues (taxation of the digital
economy, robotisation) on an
international level

Source: Own study.

position of domestic or local producers. This is the goal of the Carbon Border
Adjustment Mechanism (CBAM), drafted by the EU, which is to protect EU
entrepreneurs in the steel and iron, aluminium, cement, fertilisers and elec-
tricity sectors against price competition from producers from outside the EU
(especially from countries such as China), where environmental regulations are
less costly for manufacturers.
Looking more broadly at economic globalisation and geopolitics (Table 7.1),
thanks to the use of technology, the high cost barriers to entering the inter-
national market are being reduced (approximately 15% within 20 years) (WTO,
2018) and the e-commerce market is growing by 2024 it will account for 21.8%
of world trade (Statista, 2021). The process of integrating national economies
with the world economy is taking place simultaneously on many levels, mainly
through international trade, the flow of investments, technologies, short-term
capital and labour migrations. Covid-19 pandemic has accelerated the devel-
opment of digital platforms and services. On the other hand, it has strengthened
the reverse process of regionalisation. A consequence of closing borders and
freezing certain sectors of the economy was the actual stopping of the global
flows of people, goods and services. This resulted in countries (or groups of
countries) refocusing attention on their own needs and budgets.

7.3 The future of the tax system in the digital age

7.3.1 The ecosystem of the cyberspace tax system

It is quite a challenge to understand the physical and virtual interactions taking
place between the entities that create economic policy and the stakeholders
towards whom economic policy is directed and whom it affects. It is enough
to look at how complicated the connections are that are generated by, for
example, peer-to-peer platforms (e.g. Spotify), platforms connecting similar
types of users (e.g. BlaBlaCar), platforms connecting buyers and sellers (e.g.
 High Income Countries Low & middle income Countries
25 10 25 10

20 8 20 8

15 6 15 6

10 4 10 4

5 2 5 2

UNEMPLOYEMT RATE %
UNEMPLOYEMT RATE %

0 0 0 0

2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019

Labor tax and contributions Labor tax and contributions

(% of commercial profits) (% of commercial profits)

Population ages 65 and above Population ages 65 and above

(% of total population) (% of total population)

Unemployment, total Unemployment, total

(% of total labor force) (% of total labor force)
Source: World Bank Database

Figure 7.2 Structure of labour taxation, unemployment rates and aging populations in high income and low- & middle-income countries 2005–2019.
Digitalisation of the tax system 133

Source: World Bank Database.

134 Joanna Węgrzyn and Marlena Syliwoniuk
eBay, Airbnb or Amazon Marketplace) and search engines and digital social
platforms (such as Google and Facebook). One such example is targeted online
advertising that uses user data and the digital content they provide (Lucas-Mas
and Junquera-Varela, 2021). Online content providers put their user profiles
up for sale. A standard transaction in the real-time bidding (RTB) model
begins when the browser connects to the page that the user is trying to load
onto their device. The website sets their profile, and smartphone users are
even assigned a permanent advertising ID: a Google Advertising ID (AAID) or
IDFA (Identifier for Advertising). It then notifies the ad server, which con-
nects to the Supply Side Platforms (SSP) and provides it with the data about
the available ad space and information about the user who is waiting for the ad
to load. This information is provided to the cooperating Demand Side
Platforms (DSP). User data is then monetised by selling them to create per-
sonalised ads – a single impression is worth an average of 0.0005USD. Profits
from such activities are not necessarily taxed in the country of the user (who is
also the recipient of the advertisement), but usually in the country where the
owner of the platform has their tax residence. This seemingly simple business
model, which only requires the user to log in to the platform, generates big
problems for countries with regard to the proper allocation of tax and the
proportional satisfaction of claims of all countries in which the app operates
(Gupta et al., 2017).
Using the example presented, the direction of the changes in the tax system
can be divided into two stages:

1 Ongoing actions in the short term are needed to develop a modern

and stable framework for taxing the widest possible scope of activity of
society and entrepreneurs in the digital environment. This will allow for
the ongoing financing of the state budget and ensure sufficient funds to
finance investments in infrastructure, research, technology and green
energy, as well as providing access to broadband internet. The stimulus
function of the tax system is aimed at increasing the competitiveness of
companies by eliminating incentives for offshore investments, limiting
profit shifting, counteracting tax competition and providing new tax
preferences for clean energy production.
2 Long-term reform is needed to build the most fair tax system that
includes the physical and digital activity of the stakeholders of the tax
system, that is the activities of tech-companies and user activity in a given
country, to compensate for their impact on other sectors of the economy
or public expenditure on infrastructure.

In the long term (point 2), the virtualisation of the digital space creates new
opportunities and challenges for the tax policy towards designing a super-smart
tax system based on AI solutions (as discussed in Chapter 6). This requires an
approach to the transfer of socio-economic life also to cyberspace, including:
 Digitalisation of the tax system 135
• cyberspace geopolitics – tax sovereignty concerning cross-border digital
transformation and the impact of AI will be built on the basis of
international alliances with countries with similar strategies (e.g. the
AUKUS alliance). This is because cyberspace at the physical level is made
up of interconnected cables, computers, network devices and more. They
are all located in the physical space and, as such, are subject to the
limitations of both physical and political geography. Additionally, these
devices are manufactured by various manufacturers and used by various
entities operating under different political and legal regimes. This makes
control of the digital infrastructure geopolitically important;
• the new nature of cyberspace will require governments to go beyond
standard tools for implementing public policies due to the challenges
related to, among other things, the users’ protection. An example of such
activities may be the creation of dedicated platforms or mechanisms of
cooperation between individuals, state authorities and technology com-
panies. The low code is law principle paraphrasing L. Lessig addresses the
key role of software in shaping the framework of the digital world, and
this is now emphasised even more in the context of the development of
artificial intelligence and autonomous systems.

The fast pace at which new technologies become obsolete, and also economic
models, is contributing to the fact that legislators do not have enough time to
update the tax law currently in force. The structure of income taxation
(Figure 7.3), regardless of the size of the economies aggregated on the basis of
Gross National Income (GNI), aims at a similar tax mix – which indicates the
growing cyberspace (trade and tax) connections between entities in the global
economy. The taxation of consumption does not show such a trend.

35.0
28.0
21.0
14.0
7.0
0.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

High income -Taxes on income, profits and capital gains (% of revenue)

Low & middle income -Taxes on income, profits and capital gains (% of revenue)
High income -Taxes on goods and services (% of revenue)
Low & middle income -Taxes on goods and services (% of revenue)

Figure 7.3 Structure of the share of income and indirect taxes in high and lower income
countries 2008–2019.
Source: World Bank Database.
136 Joanna Węgrzyn and Marlena Syliwoniuk
Looking at the above structure, when we are talking about taxation of the
digital economy, two directions of action are noticeable:

1 What to tax and where – mainly to establish new rights to tax corporate
income regardless of physical presence within a given country but instead
based on the level of income earned within its borders. The appropriate
approach to disruptive business models and the online work formula will
also become important in the future. By this formula, the costs of the
workplace are transferred to the employees who perform the work online,
thus reducing the costs and increasing the taxable profit of the enterprises.
On the other hand, the challenge will be to properly determine the level
of state taxation of earned income for work performed online from
anywhere in the world.
2 How to give virtual enterprises the status of taxpayer versus payer –
the changes are aimed at involving intermediaries (platforms) in tax settlement,
(e.g. European Union e-commerce VAT package). Digital platforms that
supply goods have been recognised as taxable persons for such supplies, even
though they only mediate sales between the underlying supplier and the
consumer. The transaction is split into purchases between B2B (underlying
supplier – platform) and sales between B2C (platform – consumer). In
geopolitical terms, this allows limitations to be imposed on the inflow of goods
whose quality is questionable, and whose competitive advantage is built only
on a low price – regardless of tax settlement. The provisions are intended to
ensure equal treatment of EU and non-EU companies, and simplify VAT
obligations for companies involved in cross-border e-commerce.

7.3.2 Possible scenarios for the tax system of the digital age
Assuming a scenario where an increase in robotisation and AI solutions in
developed countries will increase production due to lower costs (a positive
effect), and in developing economies it will cause unemployment (a negative
effect), we should now responsibly consider and try to analyse the economic
and social challenges of fiscal policy globally. The causal relationship that will
take place between the financial effects related to the automation of enterprises
and the shaping of the labour market and fiscal policy based on the observation
of the megatrends described in this chapter allows for at least three basic di-
rections of fiscal policy to be proposed (Figure 7.4).
In the first scenario, the model of tax competition in the field of corporate
taxation policy remains valid in the absence of an international consensus on
taxing the income of the digital economy. Moreover, this system also influ-
ences the location of the real economic activity. Effective CIT rates remain
low due to tax competition, with preferential tax tools for promoting in-
novation, even with the significant risk of significantly understated budget
revenues. States are willing to give up some of their tax bases or consciously
allow their erosion (e.g. by introducing extremely preferential tax reliefs). Tax
 Digitalisation of the tax system 137

low CIT taxation–current trend

[scenario 1]
HIGHER TAXATION OF
tax burden CONSUMPTION
on consumption wage taxation – current or
declining trend

Fiscal policy EFFECTIVE CIT TAXATION

of the [scenario 2]
digital age – burden on consumption – current trend
possible entrepreneurs'
scenarios income wage taxation – current or
declining trend

effective taxation of CIT TAX ON

[scenario 3] NEW
taxation of ROBOTS*
taxation of wages
automation ecological
taxation of consumption tax

Figure 7.4 Possible scenarios for changes in fiscal policies related to social and economic
changes in the development and wide use of the potential of technology.
Source: Own study.

competition between states thus further destabilises the already “fragile” in-
ternational tax system, and it will do so after G20/OECD Base erosion and
profit shifting action plan (known as BEPS) (Devereux and Vella, 2018).
In developed economies, a greater share of automation in generating en-
terprise revenues will lower PIT revenue as well as social security contribu-
tions. It is possible to compensate for this loss with higher income from current
consumption that might be seen in part as an indirect way of taxing the ac-
tivities of robots and AI benefiting from the value of data provided by un-
conscious users/clients or from the sale of a robots and AI (Oberson, 2019).
This involves the analysis and verification of the currently applicable tax rates
and the effectiveness of the collection process. The final consumers will be
burdened with the state costs related to the economic migration of workers
not adjusted to labour market changes.
Digitalisation will improve the technologies for tax enforcement – pro-
cessing a wider range of information about taxpayers’ economic activities, such
as their earnings, capital income and consumption expenditure, for example
thanks to the automatic exchange of information, the DAC7 formula, or the
voluntary sharing of data by users (strategy for growth through the sharing
economy e.g. introduced in Denmark). As a result, information from various
sources can be used more easily to identify non-compliant taxpayers.
Accordingly, revenues will grow by reducing the gaps, but without changing
the tax structure (Gupta et al., 2017).
In the second scenario, tax competition is abandoned, which is often
characterised by disproportionately low taxation under CIT (race to the
138 Joanna Węgrzyn and Marlena Syliwoniuk
bottom). Tax rates allow for a proportional share in the budget revenues of
enterprises in terms of creating added value by them. Source countries have basic
taxation rights to the active income of a business, while residence countries have
basic rights to tax passive income such as dividends, royalties and interest. The
taxation of the active income of enterprises takes into account preferential tax
tools supporting the development of production automation, such as tax
super-amortisation (an increase in depreciation allowances) or even the hyper-
amortisation (a significant increase in the value of acquired fixed assets) of
robots (e.g. Germany, Singapore, the United States, Italy), research and de-
velopment allowances, a patentbox and tax reliefs related to investing in start-
ups. The social costs related to digitalisation are borne more jointly – the tax
burden from the consumer is partly shifted to business entities (limited soli-
darity of bearing the tax burden).
In the third scenario, enterprises jointly and severally bear the tax burden
of digitalisation by implementing into the tax systems tools that include the
taxation of robotisation and green taxes. The tax base of the new robots could
be based on determining the changes to the structure of generating revenues
and the costs of enterprises in connection with replacing a given post with a
robot. Because a company always prepares estimates of the profitability of such
an investment when making a decision on robotisation, they can be the basis
for a tax valuation of the company’s profit. Applying preferential taxation only
to new robots allows for the creation of the expected new value for en-
trepreneurs, while for governments it guarantees that the purposefulness of tax
preferences can be traced. Without the assumption that the robots are new and
the cost catalogue remains open, it will be a simple tax break for the auto-
mation of all processes, regardless of their level of innovation, which is con-
trary to the overarching goal. Then, on the basis of data analysis, a proportional
tax rate should be established using an algorithm, taking into account the fair
share of enterprises in financing the social effects of the changes in the
economy (digital tax justice) in relation to other taxpayers. The tax on au-
tomation should be applied to all possible technological solutions (Ooi and
Goh, 2019) and the tax policy of the state should not limit the possibility for
enterprises to use preferential taxation of the development of automation
(scenario two). A necessary condition here is that an obligation to contribute
to state costs should be imposed on those enterprises in which automation
contributes to negative consequences.

7.4 Conclusions
An important innovation that should be addressed in the tax system is the
impact of service users, in terms of their activity and the data they create, on
the income generated by enterprises incorporating digital business models.
Technology is becoming an increasingly important source that should feed the
state budget. This fact results in the need to revise the current approach to the
method and scope of expanding knowledge about public finance. First, we
 Digitalisation of the tax system 139
should look at the tax system in the cyberspace dimension. Second, we should
consider the scenario of a possible future technological displacement of the
traditional economic model towards companies without characteristic fixed
assets which can be taxed. These changes should be included in the budget
structure by the tax system.
The most costly challenge facing international tax reform is the lack of a
digital tax identity. The requirement to establish international standards is
crucial, bearing in mind the importance of their quality in the face of time
pressures and technological progress. In order to successfully meet the chal-
lenges related to international tax planning, such as tax avoidance or the
challenges of the digitalisation of the global economy, an international con-
sensus is necessary that will enable a fairer allocation of taxes due to countries
that are the sources of income on a global scale. In the short term, these will be
point solutions, significantly limited by the particular interests of the largest
economies. In geopolitical terms, the tax system will certainly be more
commonly used to limit the competitive advantages built only on a low price –
often through tax non-compliant.
In the long term, a 21st century cyberspace tax system will become indis-
pensable. When properly designed, it should ensure fair taxation and equal
opportunities for entrepreneurs, and also play an important role in supporting
the digital and green transformations. Building a system that responds to the
challenges outlined by the megatrends influencing the automation and ro-
botisation of the economy requires a directional change in tax policy. A di-
agnosis of the ecosystem in which enterprises and countries operate is
necessary in order to build tailor-made solutions based on knowledge in many
fields, and it also requires an interdisciplinary approach.

Bibliography
Appleby, A. D. (2021). Subnational Digital Services Taxation, Maryland Law Review, 81,
Stetson University College of Law Research Paper No. 2021-3.
Beretta, G. (2017). Taxation of Individuals in the Sharing Economy, Intertax, 45, 1, pp. 2 – 11.
Bredgaard, T. and Madsen, P. K. (2018). Farewell Flexicurity? Danish Flexicurity and the
Crisis, Transfer: European Review of Labour and Research, 24, 4, pp. 375–386. 10.1177/1
024258918768613
De Mooij, R., Klemm, A. and Perry, V. (Eds.) (2021). Corporate Income Taxes under Pressure:
Why Reform Is Needed and How It Could Be Designed, International Monetary Fund. 10.5
089/9781513511771.071
Christensen, R. C. and Hearson, M. (2019). The new politics of global tax governance:
taking stock a decade after the financial crisis, Review of International Political Economy, 26,
5, pp. 1068–1088. 10.1080/09692290.2019.1625802
De Backer, K., DeStefano, T., Menon, C. and Suh, J. R. (2018). Industrial Robotics and
the Global Organisation of Production, OECD Science, Technology and Industry Working
Papers, 3, OECD Publishing. 10.1787/dd98ff58-en
Devereux, M. P. and Vella, J. (2018). Debate: Implications of Digitalization for
International Corporate Tax Reform, Intertax, 46, 6–7, pp. 550–559.
140 Joanna Węgrzyn and Marlena Syliwoniuk
European Commission, COM (2017) 547 final.
European Commission, COM (2018a) 147 final.
European Commission, COM (2018b) 1650 final.
Fair Tax Mark (2019). The Silicon Six and their $100 Billion Global Tax Gap, Manchaster,
United Kingdom.
Fan, X., Li, X. and Yin, J. (2019). Impact of Environmental Tax on Green Development: A
Nonlinear Dynamical System Analysis, PLoS ONE, 14, 9. 10.1371/journal.pone.0221264
Filippov, V., Chursin, A., Ragulina, J. V. and Popkova, E. G.(Eds.) (2019). The Cyber
Economy: Opportunities and Challenges for Artificial Intelligence in the Digital Workplace,
Springer. 10.1007/978-3-030-31566-5
Frey, C. and Osborne, M. (2017). The future of employment: How susceptible are jobs to
computerization, Technological Forecasting & Social Change, 114, pp. 254–280. 10.1016/
j.techfore.2016.08.019
Gregg, J. (2021). The Cosmos Economy, The Industrialization of Space. 10.1007/978-3-030-
62569-6
Gupta, S., Keen, M., Shah, A. and Verdier, G. (2017). Digital Revolutions in Public Finance,
International Monetary Fund. 10.5089/9781484315224.071
Hadzhieva, E. (2019). Impact of the Digitalisation on International Tax Matters. Challenges and
Remedies, European Parliament.
Harpaz, A. (2021). Taxation of the Digital Economy: Adapting a Twentieth-Century Tax
System to a Twenty-First-Century Economy, Yale Journal of International Law, 46, 1.
Jiang, J. (2018). An improved cyber-physical systems architecture for Industry 4.0 smart
factories, Advances in Mechanical Engineering, 10, 6, pp. 1–15. 10.1177/1687814018784192
Kaplow, L. (2019). Market Power and Income Taxation, Harvard Law School John M. Olin
Center Discussion Paper No. 994.
Leduc, S. and Liu, Z. (2019). Robots or Workers? A Macro Analysis of Automation and Labor Markets,
Federal Reserve Bank of San Francisco, Working Paper 2019-17. 10.24148/wp2019-17
Lee, K. F. (2018). AI Superpowers: China, Silicon Valley, and the New World Order, Houghton
Mifflin Harcourt.
Lucas-Mas, C. O. and Junquera-Varela, R. F. (2021). Tax Theory Applied to the Digital
Economy: A Proposal for a Digital Data Tax and a Global Internet Tax Agency, World Bank.
Nagy, S. R. (2018). Geotechnology Meets Geopolitics: US-China AI Rivalry and
Implication for Trade and Security, World Commerce Review.
Oberson, X. (2019). Taxing Robots. Helping the Economy to Adapt to the Use of Artificial
Intelligence, Edward Elgar.
OECD (2018). Tax Challenges Arising from Digitalisation – Interim Report 2018. Paris: OECD
Publishing.
OECD (2020). Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint:
Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD
Publishing. 10.1787/beba0634-en
OECD (2021). Revised Fifth Annual Progress Report of the Inclusive Framework on BEPS,
OECD Publishing.
Olbert, M. and Spengel, Ch. (2019). Taxation in the Digital Economy – Recent Policy
Developments and the Question of Value Creation. ZEW-Centre for European Economic
Research Discussion Paper No. 19-010, 10.2139/ssrn.3368092
Ooi, V. and Goh, G. (2019). Taxation of Automation and Artificial Intelligence as a Tool of
Labour Policy, eJournal of Tax Research, 19,1, SMU Centre for AI & Data Governance
Research Paper No. 2019/01. 10.2139/ssrn.3322306
 Digitalisation of the tax system 141
Popkova, E. G. and Haabazoka, L. (2019). The Cyber Economy as an Outcome of Digital
Modernization Based on the Breakthrough Technologies of Industry 4.0, In: Filippov, V.,
Chursin, A., Ragulina, J. V. and Popkova, E. G. (Eds.) The Cyber Economy: Opportunities
and Challenges for Artificial Intelligence in the Digital Workplace, Springer. 10.1007/978-3-03
0-31566-5
Statista. E-commerce worldwide. https://www.statista.com/topics/871/online-shopping/
(Accessed 5 October 2021).
Strelkova, I. (2018). The Digital Economy: New Opportunities and Threats for
Development of the World Economy, Economics Taxes Law, 2, pp. 18–26. 10.26794/1
999-849X-2018-11-2-18-26
World Economic Forum (2020). The Future of Jobs Report 2020, Geneva, Switzerland:
World Economic Forum.
WTO (2018). World Trade Report 2018. The Future of World Trade: How Digital Technologies
Are Transforming Global Commerce.
Zhou, L. (2019). Opportunities and Challenges of Artificial Intelligence in the Application
of Taxation System, Advances in Economics, Business and Management Research, 109,
ICEMCI, pp. 201–206. 10.2991/aebmr.k.191217.038
Part III

Financial consumer in
digital space: new issues
and approaches
8 Ethics in digital finance:
towards a new paradigm of
self-regulation 1
Paweł Skuczyński

8.1 Introduction
In the 20th century, a type of moral reflection developed that can be described
as the ethics of technology. The dynamic and uncontrolled development of
such technology led to a completely non-trivial functional change; namely, it
ceased to be just a tool for changing material reality, and gained the power to
transform social reality (it is possible, of course, that technology had such
power before the 20th century). Thus, it does not only provide new instru-
ments for dealing with natural objects, but transforms interpersonal and inter-
institutional relations. This is especially true when it affects communication
(Goody: 10ff.). As a consequence, a key problem of ethics has become re-
sponsibility understood not only in terms of the possibility of assigning to the
subject the consequences of their actions carried out with the use of tech-
nological tools (morally neutral in themselves). This concept has gained a new
dimension that regarded the shared responsibility of many entities for the use
of knowledge to develop new technologies, their dissemination and applica-
tion in the infrastructure of other social institutions. A presupposition behind
the extended concept of responsibility is a departure from a morally neutral
understanding of technology, and in particular, its development understood as
innovation. For its value is determined by the direction in which it transforms
interpersonal relations and social institutions, and not by individual uses (Jonas:
chaps. IV and V). Thus, it depends on whether, for example, it increases the
sense of security, creates opportunities for development, improves distribution
of other values, or just the opposite – increases the sense of menace, makes one
dependent on arbitrary decisions of others or escalates inequalities.
Recent decades prove that this type of moral reflection is still relevant, which
is due to a dynamic development of new technologies also known as digital. As
in many cases before, they have the power to transform interpersonal relations
and social institutions, and due to their dissemination and ease of use, this
happens almost overnight. This chapter analyses the ethical aspects of finance
digitalisation, which should be understood as the process of increasing the use of
new technologies in the operation and organisation of financial institutions and
capital markets. It is therefore not only about the use of digital instruments by

DOI: 10.4324/9781003264101-12
146 Paweł Skuczyński
individual entities, but also about the technological changes in the infrastructure
that determines the conditions for their operation. It has already been discussed
in detail in the previous chapters what exactly digitalisation of finance is and
what technologies drive this process. For the purposes of further considerations,
in a simplified way, it has been assumed that the impact of these technologies
concerns three main areas: (1) creates a new communication medium that
does not require personal contacts and occurs in real time, (2) significantly in-
creases cognitive abilities of entities, primarily through the ability to analyse a
practically unlimited amount of data in a short time, (3) significantly increases
operational capabilities, mainly due to the ability to handle a practically un-
limited number of processes simultaneously.
Hence, the impact of digitalisation on finance requires a new look at its
ethics. This new look will be outlined taking into account the division of two
areas of analysis: the impact of digitalisation on ethical standards and on the
forms of their institutionalisation. When it comes to the first area, the starting
point is the thesis that the effects of digitalisation cannot be reduced to a
change in the model of relations between financial institutions and their clients
that is forced by the new communication medium. This is an important issue,
but attention should also be paid to the effects of expanding the cognitive and
operational abilities of entities. This extension should be reflected in the un-
derstanding of the scope of their moral responsibility. In the second area of
analysis, the problems of differentiation of models of ethical self-regulation and
the application of standards are discussed. Digitalisation creates new oppor-
tunities in this respect that are primarily related to the inclusion of the control
over norm compliance at the operational level in a comprehensive and low-
cost way. In digital reality, they can be applied automatically. If such a me-
chanism is used by platforms that offer infrastructure for conducting business
by other entities, then fully effective self-regulation is possible. It raises specific
problems and does not always have to be assessed positively.
The analyses are based primarily on the works of G. Teubner, who is
known as the creator of the theory of reflexive law and a supporter of social
constitutionalism. It is neither possible nor necessary to present here the details
of his theory (Teubner, 1983: 239 ff., Winczorek, 2015: 178ff.). It seems
important to emphasise that it allows for a systemic and institutional analysis of
bottom-up, social creation of norms of behaviour, which can be opposed to
government regulation. It is assumed that the manner in which these processes
occur and the content of these norms is determined by the functional dif-
ferentiation of society. Its consequence is the division of society into sub-
systems such as law, politics, science, medicine, media, etc. Finance is also one
of such subsystems. Each of the subsystems is distinguished by a specific and
characteristic only to itself code of communication and functions towards the
entire social system. This specification is reflected by the bottom-up creation
of norms within each of these subsystems. In simple terms, when analysing the
standards of behaviour that have been developed from the bottom up within a
given subsystem, it is possible to assess how its functions are perceived within
 Ethics in digital finance 147
this subsystem. If these are ethical standards, then they can be considered as a
result of self-reflection of the subsystem over its own identity and relationship
to the social environment (other subsystems). This is in line with the tradi-
tional understanding of professional ethics as articulating in moral terms the
functions of a given profession (Goldman: 90, 106–112). Moreover, there is
also an inverse relationship when formulating ethical postulates. For example,
with regard to finance in the digital reality, one expresses a certain view of its
social role. The following sections discuss this in more detail.

8.2 The impact of digitalisation on the standards of

financial ethics

8.2.1 Values: development and stability

The answer to the question to the extent to which digitalisation affects the
ethical standards of finance must be preceded by at least a general description
of reflection on this area so far. There is no doubt that it was shaped to a large
extent by the interest in financial ethics related to the financial crisis of 2008.
The weakness of ethical standards was indicated as one of the reasons for its
outbreak (Szulczewski: 80). The prevalence of negative role models in the pre-
crisis period that promulgated a personality structure based on unrestrained
acquisitiveness was to blame. Another problem was identified as the lack of
bottom-up ethical boundaries in financial activity that would fill the regulatory
gap. The size of the gap may vary, but in principle, it is unavoidable due to the
far-reaching innovation of finance, occurring mainly in capital markets. The
use of advanced knowledge to create instruments with a diversified structure
and risk level created a situation in which the public regulator was not able to
undertake timely actions aimed at maintaining the balance on the market. It
could only do so at the cost of subjecting trading to such extreme bureaucracy
that it would result in a significant increase in operating costs, which would
disrupt the functioning of the market.
As said, this gap has not been filled by bottom-up shaping of norms, and the
widespread role models rather encouraged taking advantage of it in the name
of multiplying funds. This incurred imbalance, destabilisation and crisis with
consequences that extended far beyond financial markets. The diagnosis
presented here is therefore based on the recognition of the conflict of values
inherent in finance, between effectiveness and stability (Czechowska: 34, 36).
It often takes the form of a dilemma, for example, in which an owner deciding
on how to invest their funds has to choose between a desired rate of return and
sense of security. However, it is not – as it might apparently seem – a matter of
individual choice and the acceptable level of risk, which is different for ev-
eryone because a precondition for such a choice is the existence of a systemic
balance. Its disturbance as a result of many erroneous individual decisions has
effects not only on a given fund owner, but also on all market participants, and
may also have consequences in the real economy. It can therefore be said that
148 Paweł Skuczyński
the choice is reflexively limited by the conditions of its possibility. If the
system is not balanced, the range of possible decisions regarding individually
acceptable risks is drastically reduced.
Digitalisation does not remove this fundamental conflict of values and re-
lated dilemmas, but it changes the forms in which they manifest. This applies
especially to decisions made in relations between financial institutions and
their clients. This issue will be discussed in the context of various models of
these relations. Yet, digitalisation also creates new opportunities for exacer-
bating this conflict as well as offering new ways to resolve it. The former are
primarily related to increasing the cognitive capabilities of financial institu-
tions, which allows them to create innovative products and thus gain a
competitive advantage. The latter are the result of a similar phenomenon in
relation to operating activities. Digitalisation increases the self-regulatory
abilities of the institutions in question because control over compliance with
norms can be carried out as a parallel process to practically any series of ac-
tivities performed within an organisation as long they are in digital form. Of
course, neither financial innovations nor the adoption of restrictions on their
use are new, and they were not created at the present stage of the digital age.
However, thanks to today’s new technologies and their general use, we can
observe a significant acceleration in this regard. This will be discussed later.

8.2.2 Relations: trust and loyalty in relations with clients

Digitalisation transforms interpersonal relations and social institutions, and it is
no different in the case of financial institutions and their clients. The char-
acteristics of the changes taking place in this area require indicating the ex-
istence of three basic models of relations between these entities: (1) symmetric,
(2) asymmetric, fiduciary, (3) asymmetric, consumer. In the first, both sides of
the relationship are treated as fully autonomous and equally capable of assessing
their actions, for example, in terms of risk. Therefore, they benefit fully from
contractual freedom and shape mutual relations according to their needs. The
second model assumes an asymmetry between entities, first of all, in the sphere
of available information and the possibility of understanding one’s actions, and
of course, it is financial institutions that are privileged in this respect
(Dembinski: 57, 59). This asymmetry is compensated for by basing mutual
relations on a fiduciary contract in which the client entrusts a financial in-
stitution with certain goods, and the institution has a special obligation, re-
sulting from the very essence of the relationship, to act in the client’s interests.
For this reason, we can talk in this case about relations based on loyalty to the
client and individualised trust between entities. The third model also assumes
the existence of deficits of information and understanding on the client’s side.
Instead of individualised relations of trust and special loyalty, it propounds
generalised information and guarantee obligations on the part of financial
institutions. Therefore, it assumes that it is neither possible nor desirable (e.g.
due to costs) to build a fiduciary relationship with each client. The client
 Ethics in digital finance 149
should rather be treated as an anonymous consumer, which of course does not
mean that their treatment may be in some way worse (Gasparski et al., 38ff).
It is not easy to tell how digitalisation influences the choice of the model of
relationships between financial institutions and clients. The impact in this re-
spect seems to be manifold. First, new technologies shape their own medium of
communication – different from the previous ones – which, as we know, is
never neutral as regards the conveyed content and always co-shapes it.
Intuitively, it can be said that they definitely give clients better access to in-
formation about the offer of financial institutions, as well as about how in-
dividual instruments work. They provide the opportunity to make comparisons,
consult other entities, etc. It could suggest that, because of the accessibility of
information in the new medium, the asymmetry in this respect is automatically
levelled out. It could even be an argument for a more symmetrical approach to
the relationship between financial institutions and their clients.
Second, digital technologies, with the use of various instruments, facilitate
making financial decisions. It is common practice, for example, to quickly
allocate funds under traditional banking, take insurance, or enter the capital
market directly or through investment funds, all of which may be carried out
using a single platform and require similar steps to be taken just in a few clicks.
The same pertains to incurring liabilities. This could also be an argument for a
more symmetrical model of the relationship, because a client who is well-
informed on their own can make financial decisions independently and au-
tonomously, without direct interference from institutions.
However, neither argument takes into account the fact that the actual
asymmetry of the discussed relations is not only the deficit of information, but is
related to the problem of understanding the essence of the actions taken, their
riskiness and consequences. The digitalisation of finance works to rather op-
posite effects in this respect, that is it increases the deficit of understanding and
thus the asymmetry of relations. This is because increasing the amount of
available information without expanding the cognitive abilities of the client can
make it harder for them to take decisions that are good from the point of view
of their interests. Moreover, if at the same time the process of taking them is
significantly simplified, it is easy to commit funds or incur liabilities over hastily.
This applies in particular to a situation in which a single platform offers in-
struments governed by different rules, such as traditional banking products and
investment funds, and thus instruments that distribute risk differently.
All this means that digitalisation, by increasing the actual asymmetry of un-
derstanding at the level of communication, makes one of the asymmetric models
more desirable. The traditional fiduciary model seems to be the most attractive in
this respect because within the framework of personalised relationships there is
the greatest chance to compensate for the deficit in understanding on the client’s
side. This compensation is due to direct communication, which allows for asking
questions, clarifying any doubts, making sure one understands the essence of the
discussed, actions, etc. However, such a postulate would, in fact, involve the
rejection of the new media of communication provided by digital technologies
150 Paweł Skuczyński
and forfeit all their advantages, primarily including those related to costs. Thus,
this postulate, as any expectation of rejection of technological innovations and
return to the previous state, seems unrealistic. A characteristic feature of the
discussed media of communication is a significant depersonalisation of relations.
Therefore, some alternatives to compensating for the deficits in understanding
through direct relations based on individualised trust should be found.
The only way out seems to be the adoption of an asymmetric consumer
model, in which the emphasis is on the generalised obligations of institutions
towards the weaker side in the relationship. Elements of this are the obligation
to provide additional information to the consumer, and burden of making sure
that the knowledge passed on to the client is understood (Monkiewicz et al.,
33ff). This does not solve the fundamental problem, because the answer to the
excess of information, causing the deficits in understanding, is to yet increase
its scope. Another element of this model seems to be of key importance. This
element takes the form of all kinds of additional protective measures and
guarantees provided by the stronger side of the relationship, in this case, fi-
nancial institutions. Their function is to take over some of the risks that are
due to wrong decision-making by the consumer resulting from deficits in their
understanding (Kasiewicz et al., 110ff). In ethical terms, it can also be defined
as accepting shared responsibility or extending responsibility. As mentioned
above, this postulate is often formulated in connection with the transformation
of relations and institutions by new technologies. It should be emphasised that,
if the obligations to provide protective measures and guarantees were not to
result from legal regulations, then from an ethical point of view they should be
accepted as obligations under self-regulation (Rutkowska-Tomaszewska: 121).
Of course, the question arises as to what could motivate institutions to adopt
such solutions and, consequently, allow to treat the postulates concerning the
consumer model understood in this way not as idealistic.
Before answering these questions, it is worth noting that the increase in the
asymmetry of understanding also stems from elements of digitalisation other
than just the novelty of the communication medium. It is about the afore-
mentioned increased cognitive and operational abilities of financial institu-
tions, which result, among other things, in driving financial innovation,
primarily through the ability to analyse large amounts of data and easily in-
troduce them to the offer. Any enrichment of the latter may seem beneficial as
an increase in choice. However, due to the increasing complexity and the fact
that the mechanisms of their operation are based on digital technologies, the
cognitive privilege of financial institutions is growing. It should be emphasised
that there is no theoretical obstacle to focus the discussed innovation on
preparing a personalised offer tailored to the needs of a specific client, based on
profiling with the use of data related to the client. In such a situation, the
asymmetry in the relation may take a form in which the institution knows
more about the client than they do and better understands their situation.
It could be argued that this form of individualisation creates added value for
the client, and even if it does affect the asymmetry of understanding, it is not
 Ethics in digital finance 151
ethically inappropriate. Profiling can be treated as a useful tool in building a
client’s loyalty towards a financial institution. Profiling is then an element of
relationship marketing, and in its case positive values are perceived even in
conservative professional groups which are sceptical about any methods of
building a position on the market other than professionalism and reputation. In
such groups, the commodification of one’s own activity is questioned, and
therefore it excludes tools characteristic of product marketing with its focus on
acquiring clients, use of advertising, etc. But, if a client has already been ac-
quired, then adjusting to their needs not only allows for keeping them, but it is
also complementary to the ethical principle of acting loyally for their benefit
and caring for trust in the relationship. This complementarity relies on the fact
that thanks to the loyalty of the institution to the client, based on ethics, and
the client’s loyalty towards the institution, based on added value, there can be
full mutual trust, which is the most desirable condition in the fiduciary model.
Unfortunately, as has already been said, in the conditions of depersonalised
communication in a digital medium, this model does not seem to have a solid
foundation in reality. The ethical standards of the relations are based rather on
depersonalised relations characteristic of the consumer model and on general
obligations of institutions towards the weaker side of the relationship.
Therefore, there is no complementarity, because the latter are not able to fulfil
the same function in relations with clients as trust based on a personal re-
lationship with a representative of the institution. They compensate to some
extent for the deficit of understanding but do not establish any special bond or
loyalty. However, as the value for the client can be built with the help of
digital tools, which give institutions a cognitive advantage over the client, the
question about their motivation to reduce this advantage by rebalancing the
understanding deficit through ethical self-regulation returns. Some argue that
there is in fact no such motivation. As a consequence, we are dealing with the
growing phenomenon of phishing understood more broadly than just frauds
carried out with the use of IT tools. They include all techniques of catching
customers that take advantage of their naïve and vulnerability to manipulation
(Akerlof et al., 3ff).
It seems that the main factor in this respect may be such an expectation on
the part of potential clients and the resulting market necessity to build a re-
putation of an institution that gives a sense of security even to people accepting
a high level of risk. On the one hand, it would mean a return to the traditional
ethos of banking institutions based on public trust. On the other hand, it
would also mean that financial institutions must take the burden of caring for
the system stability, because only then are they able to effectively and effi-
ciently respond to such expectations by providing protective measures and
guarantees. At the same time, this burden must be taken truly and not only
seemingly, because systemic balance is a precondition for the client’s choice.
By expanding these possibilities through financial innovations constructed
with the help of new technologies, it is necessary to increase the scope of
responsibility not only for their impact on the decisions of individual clients,
152 Paweł Skuczyński
but also on the entire system. In this way, we come to another important area
of the impact of digitalisation on ethical standards in the discussed field, that is
social responsibility, and thus responsibility for non-financial effects of activ-
ities occurring outside the relationship with the clients.

8.2.3 Responsibility: financial innovations versus institutional

innovations
As with the ethics of finance in general, the interest in the social responsibility
of finance is not related to its digitalisation, but to the recent crisis. This in-
terest is sometimes explained as a reaction to the belief allegedly widespread in
the pre-crisis times that an ideal financial market is depersonalised and
therefore free from any liability for the effects outside the market, naturally,
not counting the obligations resulting from legal regulations (Filek: 133–134).
It is worth noting that, in terms of the theory of social subsystems, adopted
here as a point of reference, when participants of a given practice realise only
its internal values and do not take into account any external consequences, this
creates the conditions for a practically unlimited expansion of this subsystem.
The dependence between the scope of moral responsibility assumed by in-
dividual institutions and the systemic balance once again comes to the fore. If
there are no internal restrictions resulting from ethical self-regulation, then
what can limit the expansion are only the effects exerted on the environment
and the resulting pressure of the environment due to these effects. This can be
easily noticed in the pre-crisis expansion of finance and increased social
control, and state supervision over it when the expansion led to negative
economic consequences.
In this background, two main approaches to social responsibility of business
in general, and finance in particular, have developed. The first considers this
responsibility as undertaking all non-economic activities that are socially ex-
pected. The main rationale for this is that social responsibility is a kind of
resource that builds reputation and generalised trust in an institution and,
consequently, gives it a competitive advantage (Duda: 35–36). The main
problem of this approach is far-reaching relativism based on the assumption of
“profitability” of ethics. Taking socially responsible actions depends on its
reception by the environment. It is also not necessary that such activities aim at
maintaining the systemic balance of finance if it does not bring reputational
benefits.
The second approach avoids this drawback and understands social respon-
sibility as taking into account the non-economic effects of activities regardless
of how much they are articulated as social expectations or how taking them
into account could bring benefits in terms of reputation. This approach is the
most exemplarily expressed by the concept of “sustainable finance”
(Dembinski et al.: 203ff). The concept means constructing financial products
in a way that takes into account their non-financial effect, such as by taking
into account only those assets that meet ethical criteria related to various
 Ethics in digital finance 153
spheres of social life. This is crucial for the idea of socially responsible investing
(Czerwonka: 78). A disadvantage of this approach is the fact that the scale of
shared responsibility adopted by institutions is essentially a derivative of clients’
interest in sustainable products.
Therefore, a third approach can be proposed, according to which social
responsibility of finance should be realised regardless of the anticipated benefits
of such activity or the choices made by clients. These criteria are met when
financial institutions undertake initiatives whenever there is a possibility of a
negative impact of their activities on the social environment. It will therefore
apply to the situation of potential occurrence of negative non-financial effects
of the functioning of an institution because ethical extension of responsibility
in terms of legal regulation must also mean anticipating and avoiding evil, and
not only post factum reaction and removal of harmful effects. It seems that the
best – though perhaps not the only – way to implement this approach is to
understand corporate social responsibility as the ability to propose institutional
innovations that are able to prevent such consequences.
The concept of institutional innovations is related to the theory of social
subsystems and should be understood as systemic solutions that introduce such
modifications to the institution that allow the system to maintain stability,
limit its expansion caused by, for example, technical innovations, and thus
maintain balance in relations with the social environment (Kjaer: 20). These
modifications can be organisational and regulatory in nature. As concerns the
ability to propose institutional innovations, we mean both the cognitive and
practical aspects. The former is to possess cognitive abilities that are sufficient
to identify the problem, design institutional solutions, and analyse their po-
tential consequences. The latter is about the ability to take actions aimed at
implementation of these solutions in a direct way, through, for example,
ethical self-regulation, or indirectly, for example, by making appropriate
proposals to the regulatory body or creators of public policies.
Thus understood institutional innovations and the ability to propose them
can also be interpreted in terms of “market reforms” postulated and im-
plemented by financial institutions (Zadroga: 64). In themselves, institutional
innovations are not an option due to digitisation. The understanding of social
responsibility of finance as the ability to propose them is rather related to their
more generally understood innovativeness. The latter is characteristic of recent
decades and occurs primarily in capital markets, but of course not only.
Practically, every financial institution can create new products. Technological
development has always played a large role in this respect by driving the
emergence of financial innovations. In the digital age, we should expect not
only a continuation but also an increase in innovation in this area, because – as
has already been mentioned – the nature of new technologies significantly
increases the cognitive and operational capacity of institutions. This is parti-
cularly true for data analysis and process management. As a consequence, one
could expect that innovations will be easily brought to the market both by
traditional institutions, such as banks and insurance companies, and fintechs
154 Paweł Skuczyński
specialising in these issues, as well as technological companies, which, due to
the nature of their activity as online platform operators, have enormous
amounts of data at their disposal.
The concept of social responsibility of finance proposed here assumes, in
line with the more general assumptions adopted at the beginning, that the
increase in technological possibilities of introducing financial innovations by
institutions should be accompanied by an ethical extension of responsibility
consisting in assuming joint responsibility for the state of systemic equilibrium.
The responsibility shared, of course, with the fund owners and the regulator.
In this approach, financial innovation is of key importance, as it is creativity in
this area that can drive the expansion of finance and emergence of various
non-economic effects. In response to new product solutions introduced by
institutions, they should propose such institutional innovations that would
protect the system and thus its environment against the negative impact of
using these products. Importantly, both financial and institutional innovation
can be based on the same cognitive abilities of institutions radically enhanced
by new technologies. Therefore, the point is that they should not be used
unilaterally, only for growth, but also for the purposes of stability, which
creates the conditions for this growth.

8.3 The impact of digitalisation on the institutionalisation

of ethics of finance

8.3.1 Models of ethical self-regulation

The approach to financial ethics standards in digital conditions outlined above
would not be complete without addressing the issue of changes that these
conditions induce as regards the forms of institutionalisation of these standards
(Vasiljeviene et al., 323ff). This is all the more important as these changes seem
to be conducive to the implementation of both the postulated model of re-
lations with clients, i.e. the asymmetric consumer one, and the concept of
social responsibility of finance as the ability to propose institutional innova-
tions, which concept is consistent with the model. This is because digitalisa-
tion provides tools for more effective ethical self-regulation, which has been
mentioned many times. This mainly concerns the ability to integrate the
processes of controlling compliance with standards with other processes taking
place in the institution and, consequently, immediate identification of viola-
tions and their correction. However, a more detailed discussion of this issue
should be preceded by description of the available models of ethical self-
regulation. In further considerations, four such models will be distinguished:
(1) individual, (2) diffused, (3) collective top-down, (4) collective bottom-up.
Before they are discussed, it should be emphasised that each of these models
concerns self-regulation, namely the creation of standards for the behaviour of
individuals and for the operation of institutions by the addressees themselves or
their organisations. Thus, in principle, self-regulation is possible in the sphere
 Ethics in digital finance 155
free from governmental regulation. Undoubtedly, when a certain sector or
social subsystem is deregulated, there arises the space for self-regulation.
However, it would be a simplification to say that these are the best conditions
for it, or that it will certainly occur then. For we could also take the necessity
to supplement governmental regulation with self-regulation as a starting point.
This is especially important in those areas where, for various reasons, the
regulator is unable to provide stable and functional legal solutions. The reason
for this is most often too great a pace of dynamics of changes, which means
that the regulator cannot keep up with the changes, so the burden of devel-
oping standards falls on the addressees. Another important aspect may be the
already mentioned cognitive abilities, which in the case of institutions oper-
ating in a given social subsystem are most probably much greater than in those
of a governmental body external to the subsystem. The government will be
able to achieve a comparable level only by expanding multi-layer and complex
systems of control and supervision (Monkiewicz: 67).
Ethical self-regulation is not a phenomenon that always needs to be viewed
positively. Much depends on the accompanying intention and the standards
according to which the self-regulation is developed. On the one hand, as a
form of institutionalisation of ethics, it creates opportunities, for example, to
protect clients against excessive risk, both in the individual aspect (asymmetry
of understanding) and in the systemic aspect (institutional innovations). On the
other hand, as a form of social control, it can be used to pursue the interests of
the self-regulating entities. This interest may be about, for example,
strengthening its position in relation to clients or protecting the market against
new entities operating outside banking institutions and capital markets, such as
entrepreneurs from alternative finance, fintechs or technology companies in-
terested in this area. This ambiguity of ethical self-regulation can provide
criteria for which model will be optimal in a given organisational setting.
The first of these models was defined as individual. It is the simplest and
proposes that individual financial institutions or professionals accept ethical
standards and responsibility as voluntary obligations. Therefore, these standards
may be different for each entity and there is no coordination whatsoever.
The second model is distributed self-regulation. It also involves accepting
ethical standards as voluntary obligations, with the difference that this happens
within the organisation of entrepreneurs or professionals, such as associations or
economic self-governments. Depending on the scope of operation of these
organisations, the differences between individual institutions in terms of the
content of the adopted standards may vary. It is possible that two professional or
industry organisations will adopt separate, very different self-regulations. Yet,
undoubtedly, there is coordination by organisations, which at least concerns the
creation of norms, but may also apply to their compliance, reporting, etc.
The third model is more complicated and is known as the collective top-
down model. “Collective” means here that self-regulation applies to an entire
industry, sector or profession. Thus, in contrast to individual and distributed
models, a uniform standard is adopted in all institutions operating in a given
156 Paweł Skuczyński
area. In the top-down variant, it is enforced by the regulator, who creates
meta-regulation, namely the regulation of self-regulation. This meta-
regulation is just a formal requirement that standards be adopted by organi-
sations of entrepreneurs or professionals, but the content of the self-regulation
is not defined, or defined to an insignificant extent. Thus, apart from the
function of coordination, the function of complementarity of state regulation
and self-regulation is present here (Pichlak: 197–204).
The fourth model, the most complex, can be described as a bottom-up
collective. Its core is the concept of self-constitution of social subsystems
(Teubner 2012: 54–93). Like the distributed model, it is based on professional
and industry organisations. By contrast, their shaping of ethical self-regulation
standards is done collectively – for the entire profession or industry – and not
inside an organisation. The condition for this is that the organisations’ ability
to transform from ordinary associations into a kind of constitutive power. The
occurrence of such a transformation can be stated when organisations perform
three functions: (1) they establish the identity of a given social subsystem, that
is distinguish it from the environment not only functionally but also in-
stitutionally, (2) guarantee the subsystem’s autonomy, the ability to in-
dependently create norms of its own operations, (3) institutionalise the norms
of the subsystem’s operations, including its standards. By creating norms, they
are able to limit the expansion of a given subsystem onto the environment, and
thus ensure its balance. If this is not the case, and self-regulation supports the
expansion of the subsystem by not imposing any restrictions on individual
institutions, then it is not working well. It can be said that self-regulation is
subject to negatively understood instrumentalisation. For this not to happen, it
is optimal when self-regulation takes place in a triangle consisting of three
groups of entities: (1) organisations making collective (self-regulatory) deci-
sions, (2) organisations operating in a given subsystem, (3) spontaneous sphere
(public, clients, consumers). The latter group is particularly important as a
counterbalance to the interests of a given profession or industry. Self-
regulation should include mechanisms for articulating expectations, as well as
ways of taking them into account. If appropriate channels are used, then this
group is not deprived of the possibility of influencing. The best-known means
are consumer campaigns and boycotts, which can enforce appropriate self-
regulatory measures.
It cannot be said that digitalisation is a condition for self-regulation. As
already mentioned, it provides new tools to increase the cognitive abilities of
financial institutions, and this facilitates designing solutions aimed at in-
stitutionalizing ethical standards. Therefore, the implementation of institu-
tional innovations that could otherwise only be proposed to the public
regulator may take this form. Moreover, as will be discussed in the next
section, the digitalisation of new technologies provides tools for the applica-
tion of standards that can become essentially self-executing. It is a key quali-
tative change resulting from the dissemination of new technologies and, at the
same time, the main argument for the advantage of self-regulation over
 Ethics in digital finance 157
regulation. However, none of these arguments determines which of the above
models is the most optimal from the point of view of digital finance. It seems
that it is difficult to draw precise conclusions here, and it depends on many
circumstances related to the shaping of the market, the position of professional
and industry organisations, etc. It should be noted, however, that the bottom-
up collective model (the most complicated one, but at the same time having
many advantages), can be implemented in digital conditions easily, provided
that entities that are owners or managers of digital finance infrastructure can
assume the functions of organisations taking collective decisions regarding the
entire social subsystem. It is therefore primarily about such platforms that are
able to enforce compliance with ethical standards from financial institutions
and at the same time create communication channels for groups that had been
identified as a spontaneous sphere. How viable this is, must remain un-
answered here.

8.3.2 Models of ethical application of rules

As regards institutionalisation, digitisation primarily provides a new model of
standards application, which is based on novel technological possibilities. It
should be emphasised that this is about institutionalisation, and not the logic of
standards application. Therefore, it is not an alternative to, for example, de-
ductive, argumentative or hermeneutic models, which focus on the issues of
relating norms to facts and on methods of resolving specific cases. The digital
model can be opposed to the previously existing community and code models,
which can be distinguished in professional and economic ethics. New tech-
nologies provide a clear alternative here, which manifests their power to
transform institutions. It is highly probable that this model will not lead to
ousting of the previous ones because the development of communication
media leads to the accumulation of methods of communication and action
rather than the elimination of some by the other (Mencwel: 35–36).
For the sake of order, it is only worth briefly pointing to the main features
of the community model. It presupposes the existence of highly integrated
professional or industry groups, which develop a common understanding of
individual standards and how to apply them to specific cases. These com-
munities usually refer to tradition treated as the source of these standards. They
are often organised in the form of professional self-governments and are based
on mutual loyalty, collegiality and trust between their members. When norms
are violated, other members of the community identify such a situation, and
through direct contacts make an impact that enforces a change of this beha-
viour. If the change did not occur, there would be an informal, temporary or
permanent exclusion from the community. Thus, sanctions occur primarily in
the sphere of social status, credibility, etc. This model may operate mainly in
small communities where relations are not anonymous.
The code model developed when such communities disintegrated, due, for
example, to the increase in the scale of activities, weakening of internal ties
158 Paweł Skuczyński
between members, and an increase in anonymity. This resulted in being cut
off from tradition. Many professions and industries at the time made an effort
to codify standards that could no longer be based on informal and direct
contacts. This process consisted primarily in writing down these standards in
the form of rules defining quite precisely the scope of their application and the
required models of conduct. It also entailed clarification of rules of liability for
violations, including the determination of sanctions, the system of organs
imposing them, as well as the procedures under which this is done. In general,
the code model is based on the juridisation of ethics and responsibility. It shifts
the burden of applying standards from informal and dispersed members of the
community to formally authorised and specialised bodies.
Digitalisation means the emergence of new technological possibilities in this
area, which we have already defined as the self-execution of standards (Teubner
2004: 47). It consists of three elements: (1) automatic enforcement of rules in the
digital reality if they are found to be violated, (2) integrating the control over
compliance with other operational processes in real time, (3) the use of artificial
intelligence to identify and verify rule violations, and to their possible sanc-
tioning. As already mentioned, this model is fostered by entities that operate as
platforms offering digital infrastructure for products of their own or other en-
tities, and here fully effective self-regulation is possible. This is an unquestioned
advantage of this model, as it creates opportunities to eliminate violations of
ethical standards, and the only limitation here is the reach of the digital form of
operations. Even if it is not complete, it allows to significantly curb the “grey
area” of dishonesty, abuse and simple unreliability. However, it also un-
doubtedly has disadvantages. First of all, the lack of reflection and no direct
responsibility of an individual for identifying violations, their elimination and
sanctioning. While it is conceivable that compliance processes can be fully
automatic, intervention in other processes, as well as determining the con-
sequences of non-compliance with standards, are not so easily automated. They
require some feeling and the ability to assess circumstances that are difficult to
include in an algorithm. Hence, it is usually said that in settling specific cases,
such as legal disputes, new technologies should only be an auxiliary tool, but
ultimately their use should always be subject to human control. The minimum
condition is to create the possibility of appealing against a digital decision.
Nevertheless, it seems that with the spread of new technologies as the basis
of the infrastructure for financial activities, it is this model that will be widely
used. It should be emphasised that, with regard to it, as well as forms of in-
stitutionalisation of ethics in general, the principle formulated at the beginning
applies, that is that the expansion of the possibilities of institutions due to
digitalisation should also entail expansion of their moral responsibility. So, if it
is possible that thanks to new technologies, we can not only cut customer
service costs and introduce new or innovative products, but also increase the
degree of implementation of ethical standards, including those designed as
institutional innovations balancing the use of digital tools in other areas, then it
is a matter of responsibility to use these possibilities.
 Ethics in digital finance 159
8.4 Conclusion
This chapter does not aim to provide a full discussion of the ethical implications of
finance entering the digital age, but merely to signal some of the changes entailed by
the development of new technologies. In conclusion to these reflections, it is worth
noting that they constitute a coherent whole, in which the separation of the level of
ethical standards and responsibility from the level of their institutionalisation is
primarily of analytical nature. In reality, the understanding of the fundamental values
of finance and their normative consequences influences the forms of their im-
plementation by institutions, and conversely – technological change of form creates
conditions for expansion. Due to this coherence, it can be said that we are dealing
with elements of an emerging paradigm of digital finance ethics. To provide fully
theoretical integration to these elements is a task that can be realised together with
the increasing use of new technologies in practice.

Note
1 The chapter was created as part of the research project No. 2015/19/B/HS5/00132
entitled “The Policy of Law in View of Professional Self-governments. Towards a
Reflexive Law-making Model,” financed by the National Science Centre.

Bibliography
Akerlof, G. and Shiller, R.J. (2015) Phishing for Phools: The Economics of Manipulation and
Deception, Princeton, Princeton University Press.
Czechowska, I.D. (2016) “Zarys problematyki etyki finansów” [in:] I.D. Czechowska (ed.),
Etyka w relacjach instytucji finansowych z gospodarstwami domowymi, Łódź, Wydawnictwo
Uniwersytetu Łódzkiego, pp. 23–48.
Czerwonka, M. (2012) “The concept of socially responsible investing (SRI) in Poland,”
Journal of Management and Financial Sciences 8, pp. 76–90.
Dembinski, P.H. (2017) Ethics and Responsibility in Finance, Routledge.
Dembinski, P.H., Bonvin, J.-M., Dommen, E. and Monnet, F.-M. (2003) “The Ethical
Foundations of Responsible Investment,” Journal of Business Ethics 48, pp. 203–213.
Duda, T. (2016) “Standardy etyki zawodowej profesjonalistów na rynkach finansowych w
Polsce i na świecie a kwestia zaufania do instytucji rynków finansowych,” Prace Naukowe
Uniwersytetu Ekonomicznego we Wrocławiu, No. 462, pp. 32–45.
Filek, J. (2004) “Niektóre przyczyny niskiej etyczności w świecie finansów” [in:]
W. Gasparski (ed.), Uczciwość w świecie finansów, Warsaw, Wydawnictwo Wyższej Szkoły
Przedsiębiorczości i Zarządzania im. Leona Koźmińskiego, pp. 127–136.
Gasparski, W., Lewicka-Strzałecka, A., Rok B. and Szulczewski, G. (2004) “Etyka w
świecie finansów: pojęcia i zagadnienia” [in:] W. Gasparski (ed.), Uczciwość w świecie
finansów, Warsaw, Wydawnictwo Wyższej Szkoły Przedsiębiorczości i Zarządzania im.
Leona Koźmińskiego, pp. 21–50.
Goldman, A.H. (1982) The Moral Foundations of Professional Ethics, Totowa, Rowman and
Littlefield.
Goody, J. (1986) The Logic of Writing and the Organization of Society, Cambridge, Cambridge
University Press.
160 Paweł Skuczyński
Jonas, H. (1984) The Imperative of Responsibility. In Search of an Ethics for the Technological Age,
Chicago, University of Chicago Press.
Kasiewicz, S. and Kurkliński L. (2017) “Ryzyko klienta i kultura ryzyka a rozwój
bankowości cyfrowej,” Bezpieczny Bank 3(68), pp. 106–126.
Kjaer, P.F. (2015) “From Corporatism To Governance Dimensions Of A Theory Of
Intermediary Institutions” [in:] E. Hartmann, P.F. Kjaer (eds.), The Evolution of
Intermediary Institutions Europe: From Corporatism to Governance, Basingstoke: Palgrave
Macmillan, pp. 11–25.
Mencwel, A. (2006) Wyobraźnia antropologiczna. Próby i studia, Warsaw, Wydawnictwa
Uniwersytetu Warszawskiego.
Monkiewicz, J. (2019) “Wyzwania współczesnego nadzoru nad rynkiem finansowym” [in:]
L. Gąsiorkiewicz, J. Monkiewicz (eds.), Wyzwania współczesnych rynków finansowych,
Warsaw, Wydział Zarządzania – Politechnika Warszawska, pp. 61–73.
Monkiewicz, J. and Monkiewicz, M. (2019) “W poszukiwaniu nowego paradygmatu
ochrony konsumentów na rynkach finansowych” [in:] J. Monkiewicz, E. Rutkowska-
Tomaszewska (eds.), Ochrona konsumenta na polskim i międzynarodowym rynku finansowym,
Warsaw, Wolters Kluwer, pp. 33–51.
Pichlak, M. (2019) Refleksyjność prawa. Od teorii społecznej do strategii regulacji i z powrotem,
Łódź, Wydawnictwo Uniwersytetu Łódzkiego.
Rutkowska-Tomaszewska, E. (2018) “Idea odpowiedzialnego pożyczania na rynku nie-
bankowych kredytów konsumenckich w Polsce” [in:] A. Ćwiąkała-Małys, M. Karpińska
(eds.), Wyzwania współczesnych finansów – wybrane problemy, Wrocław, Wydział Prawa,
Administracji i Ekonomii Uniwersytetu Wrocławskiego, pp. 113–136.
Szulczewski, G. (2009) “Światowy kryzys finansowy 2008 w świetle etyki finansów,”
Annales. Etyka w życiugospodarczym 1(12), pp. 81–90.
Teubner, G. (1983) “Substantive and Reflexive Elements in Modern Law,” Law and Society
Review 2, pp. 239–285.
Teubner, G. (2004) Societal Constitutionalism. Alternatives to State-Centered Constitutional
Theory, Warsaw.Fundacja “Ius et Lex”.
Teubner, G. (2012) Constitutional Fragments: Societal Constitutionalism and Globalization,
Oxford, Oxford University Press.
Vasiljeviene, N. and Kubka J. (2007) “Instytucjonalizacja etyki organizacji jako technologia
zarządcza,” Annales: etyka w życiu gospodarczym 1(10), pp. 323–332.
Winczorek, J. (2015) “O ujęciach refleksyjności u GuntheraTeubnera i Niklasa Luhmanna i
o tym, co z nich wynika dla nauki prawa” [in:] K.J. Kaleta, P. Skuczyński (eds.),
Refleksyjność w prawie: konteksty i zastosowania, Warsaw, Wydawnictwa Uniwersytetu
Warszawskiego, pp. 177–206.
Zadroga, A. (2008) “Świat finansów w perspektywie etycznej,” Roczniki Nauk Społecznych
XXXVI(3), pp. 59–74.
9 Consumer protection in the
financial market in the era of
digital transformation
Ewa Kornacka1 and Marek Monkiewicz

9.1 Introduction
In the second decade of the 21st century, the issue of the protection of the
rights and interests of consumers in the financial market became an important
subject of scientific interest and practical activities around the world. The role
of the consumer perspective in the implemented regulatory standards, super-
visory practices and business initiatives increased. Implementing the concept of
corporate social responsibility, counteracting fraud and manipulation, popu-
larising the idea of financial education, combating financial exclusion and
developing out-of-court dispute resolution systems are examples of some of
the aspects raised both in the research and in practice in relation to consumer
issues.
This is connected with a number of factors, including advances in the
theory of economics and behavioural finance over recent years, the transfor-
mations that have occurred in modern financial systems under the influence of
the financialisation processes, and also the changes in the general regulatory
and supervisory paradigm in the financial sector due to the recent global fi-
nancial crisis. They clearly indicated the need for a new approach to consumer
rights and interests in the financial market. Old solutions and formulas were
considered increasingly useless and sometimes even harmful. Currently, we are
only at the beginning of the path towards change and the final result is still
unknown. This search for a new order is taking place after the reign of the old
lasting several decades, which means that change is not easy. An additional
element with enormous impact is the rapidly advancing digitalisation of the
financial markets.
The purpose of this chapter is to analyse and evaluate the current situation
in terms of the new approach to the protection of consumer rights in financial
markets and its main systemic conditions.
The first part attempts to analyse the direction of the changes taking place in
the views on the regulatory and supervisory model with regard to consumer
protection in financial markets. The second part discusses the conclusions
drawn in this context by the international community, which involves an
analysis of the recommended principles for protecting consumer interests in

DOI: 10.4324/9781003264101-13
162 Ewa Kornacka and Marek Monkiewicz
financial markets adopted by the G20 – the informal world government. The
third part examines the challenges facing consumer protection in the digital
finance era and the global initiatives undertaken in this regard, while the
fourth part contains an overview of the key issues relating to the personal data
protection system adopted by the EU against the background of global solu-
tions. The chapter ends with a summary and our conclusions.

9.2 The nature of the new canon of financial consumer

protection
The theoretical basis used to shape the policy of protecting consumer interests
in financial markets until the last global financial crisis was the theory of ra-
tional consumer choice.
This assumed that people are generally rational in their actions on the
market. They are able to assess all the possible economic choice options in
terms of their costs and benefits and choose the ones that best take their
preferences into account. These choices additionally had the advantage of
disciplining financial market entities in the direction desired by consumers. A
necessary condition for achieving this state of affairs, according to this para-
digm, was ensuring an appropriate level of disclosure and transparency by
financial market entities.
The role of financial market regulators, therefore, was to create the ne-
cessary conditions for the disclosure and transparency processes to be fully
implemented. This happened, among other things, through the use of the
widely developed mandated disclosure systems imposed administratively on
producers and intermediaries operating in financial markets. It was believed
that in such a situation, consumers would be able to make rational choices
based on the information provided, thus abandoning inferior products. In this
way, they would be able to shape the entire financial market in the optimal
way to address their needs. From this point of view, it was unnecessary and
even harmful to apply regulatory interference in the very process of consumer
selection or the market offer of producers.
Based on these assumptions, the main regulatory effort in this canon of
financial consumer protection was focused on ensuring the appropriate level
of information disclosure. This was to lead directly to the better protection of
consumer interests, indirectly achieving this goal by supporting the processes
of market competition between financial institutions (Pridgen, 2013).
The theory of rational choices assumed the existence of both the possibility
and will of consumers to make economically justified choices on the market
based on the information provided, as well as having the appropriate level of
cognitive perception. The rational consumer theory paradigm was seriously
brought into question on a practical level by the events of the 2007–2009 global
financial crisis, and in theoretical terms due to the rapidly growing importance
of findings connected with behavioural economics (Andenas and Chiu, 2014). It
turned out that the real consumer, as opposed to the imaginary one, doesn’t act
 Consumer protection in financial market 163
rationally when making market decisions. When making market choices, they
are guided by many other factors than purely economic ones, especially those of
a psychological nature such as mood, time of day, method of presentation and
fashion, etc. Behavioral economics questions the rationality of consumer be-
haviour adopted on the basis of classical economics. It is connected either with
their cognitive attitude, which may contain misinterpretations, their social at-
titude (e.g. herd behaviour), their emotional attitude (e.g. over-trust) or the
frequent tendency to avoid losses (Lefevre and Chapman, 2017).
Likewise, the consumer’s use of the benefits of “disclosure” or “openness”
has a specific character. Empirical research shows that they usually use the
information provided very selectively (Ben-Shahar and Schneider, 2014).
Contemporary financial products are often very complex structures based on a
complex legal, as well as statistical and economic, basis so the possibility of
understanding them often exceeds the capabilities of the average customer. It is
also not favoured by the fact that producers and intermediaries in the financial
market do not have any particular incentive to ensure the appropriate level of
“disclosure” for the needs of the consumer. All these observations have led to
the conclusion that the long-held vision of a simplified image of the consumer
as a rational and wise party to a transaction on the financial market should be
rejected. The truth is quite different. Following on from this, the view began
to spread that the “disclosure” regime is not a sufficient measure to protect
consumers, at least as long as it does not become a “comprehension” regime
(Sovern, 2010). The final conclusion resulting from these observations was the
justified need to replace the passive role of the consumer market regulator
with an active role that should not shy away from regulatory intervention
directly affecting possible consumer choices. This intervention could not only
cover issues connected with market behaviour but also the shape of the market
offer itself and its individual components. On a micro scale, this could mean,
among other things, the introduction of restrictions or a ban on the sale of
certain financial products, and on a macro scale the introduction of rationing
of the level of all sales, for example through counter-cyclical measures such as
limiting the dynamics of lending. It also involves assigning a new role to fi-
nancial institutions, which would have to take much more responsibility for
the choices made by consumers. The question is whether they are able to do
this effectively. Is the replacement of the dogma of a rational and wise client
with that of a rational and wise regulator and a financial intermediary full of
goodwill even possible, or is it merely a hypothetical mirage?

9.3 International rules of financial consumer protection –

the G20 model
During the first few years of the global financial crisis, the issues connected with
creating better conditions to protect the interests of consumers of financial
services were on the margins of interest for the G20 group, the institution that
has actually held global leadership in the global economy since 2008 and has
164 Ewa Kornacka and Marek Monkiewicz
been coordinating the global anti-crisis policy on an ongoing basis. Its pro-
gramme was initially filled with issues traditionally related to regulatory changes
in the prudential area of the financial system, especially its banking part, and the
search for a new international consensus in this regard. It was simple because the
international community had for many decades coordinated the standards ap-
plied globally, beginning with the First Basel Accord.
In terms of consumer protection standards, the situation was completely
different as there was no common agreement at the global level in this area. It
was therefore necessary to create an action agenda at that level and create a
substantive justification for it. This started with the summit in Seoul in 2010.
There is a short paragraph in the final document of this summit entitled
“Enhancing Consumer Protection,” a direct reference to improving the
protection of consumer interests in financial markets. It was worded as follows:
“We asked the FSB [Financial Stability Board, serving as the actual G20 se-
cretariat – author’s note] to work in collaboration with the OECD and other
international organisations to explore, and report back by the next summit, on
options to advance consumer finance protection through informed choice that
includes disclosure, transparency and education; protection from fraud, abuse
and errors; and recourse and advocacy” (G20, Seoul). At the request of the
French Presidency of the G20, the finance ministers and central bank gov-
ernors of the G20 countries supplemented this provision at their meeting in
Paris in February 2011 by calling on the Organization for Economic
Cooperation and Development (OECD), Financial Stability Board (FSB) and
other international organisations to develop, in addition to the G20 summit in
Cannes in November 2011, common rules of consumer protection.
In November 2011, both of these documents were presented and approved
at the summit of G20 leaders in Cannes. In the adopted final declaration, they
agreed that integration of financial consumer protection policies into reg-
ulatory and supervisory frameworks contributes to strengthening financial
stability, endorse the FSB report on consumer finance protection and the
high-level principles on financial consumer protection prepared by the OECD
together with the FSB. They also agreed to pursue the full application of these
principles in our jurisdictions and ask the FSB and OECD, along with other
relevant bodies, to report on progress on their implementation to the up-
coming Summits and develop further guidelines if appropriate . In this way,
the issue of protecting the rights and interests of consumers was placed in
global focus for the first time. The second document, directly initiated by the
finance ministers and central bank governors of the G20 countries in this area,
was presented in Cannes in November 2011 and entitled “G20 High-Level
Principles on financial Consumer Protection” (G20, 2011). This was a very
concise document consisting of two parts – the framework and a list of 10
recommendations. Its mission was to help the G20 countries and also any
others interested in strengthening financial consumer protection. It consisted
of a total of four pages of text. In subsequent years, these “Principles” were
supported by operational guidelines adopted at successive summits of the G20
 Consumer protection in financial market 165
leaders. The first part of these operational guidelines was adopted at the G20
summit in St Petersburg in 2013 (OECD, 2013), while the second and final
part was adopted at the Brisbane summit in 2014 (OECD, 2014).
The introduction to the “Principles” contains the basic premises for actions
taken by the G20 and the adopted rules of operation in this area. They open
with the statement that the confidence of consumers and their belief in a well-
functioning financial market support the long-term financial stability, growth,
efficiency and innovation of the economy.
The introduction emphasises that the principles presented are aimed at the
G20 countries and other stakeholders as a means of help for enhancing fi-
nancial consumer protection and are non-binding. Such a reservation clearly
weakens their importance as a new model for financial consumer protection.
On the other hand, all G20 countries and other interested states are advised at
the same time to evaluate their national solutions in this area in the context of
the principles presented. They are actually therefore encouraged to make the
appropriate adjustments to their applied national models, in accordance with
the approach presented in the assumptions. It must be recognised that the
adopted approach, although leaving a certain lack of satisfaction, is very
pragmatic in nature. It is difficult to imagine a binding set of protection
standards being adopted in such a short time without there being prior
achievements in this regard at the international level.
The list of principles that constituted the second part of the document
contained ten recommendations.

Principle 1 – on the legal, regulatory and supervisory framework – postulates

that financial consumer protection should be an integral part of a country’s legal,
regulatory and supervisory framework and it should take specific approaches
into account. The regulations should be adapted to the nature and type of fi-
nancial products and their consumers, and to their rights and obligations. They
should also allow the participation of non-governmental stakeholders.

Principle 2 – on the role of oversight bodies – presupposes the existence of

supervisory institutions clearly responsible for financial consumer protection,
with the necessary authority to fulfil their mandates.

Principle 3 – on the equitable and fair treatment of consumers – addresses the

issue of the approach to consumers. It calls for all consumers of financial
markets to be treated equitably, honestly and fairly at all stages of their re-
lationship with financial service providers.

Principle 4 – on disclosure and transparency – requires that financial service

providers and their authorised agents should provide consumers with key in-
formation about the fundamental benefits, risks and terms of the product of-
fered. This information should also include details about possible conflicts of
interest associated with the authorised agent through which the product is sold.
166 Ewa Kornacka and Marek Monkiewicz
Principle 5 – on financial education and awareness – calls for the development
of financial education and awareness to be supported by all relevant stake-
holders. Information on consumers’ rights and responsibilities should be clearly
displayed. Educational programmes should ensure that consumers develop the
skills to understand risk and its determinants, as well as the ability to make
informed choices and seek assistance.

Principle 6 – on responsible business conduct – recommends that financial

service providers and authorised agents should aim to act in the best interests of
their customers and be responsible for safeguarding the interests of consumers.

Principle 7 – on the protection of consumer assets – calls for the relevant in-
formation, control and protection mechanisms to properly protect consumers’
deposits, savings and other similar financial assets against theft or misuse.

Principle 8 – on the protection of consumer data and privacy – states that

consumers’ financial and personal information should be protected through
appropriate control and protection mechanisms. These mechanisms should
define the purposes for which the data may be collected, processed, used and
disclosed. They should also include the rights of consumers to be informed
about the use of their data.

Principle 9 – on complaints handling and redress – states that countries should

ensure that consumers have access to adequate complaints handling and redress
mechanisms. Such systems should be provided by the financial institutions and
their authorised agents. The operation of such systems for the resolution of
consumer disputes should also be ensured.

Principle 10 – on competition – proposes to support competition on domestic

and international markets in order to provide consumers with a better offer
and ensure lower prices.

As is clear from this review, the adopted principles were varied in nature. Some
of them are indisputable and have already been widely applied before, such as
the need to support financial education or the protection of consumer assets
and data. However, several of these recommendations should be considered as
demonstrations of a new approach and particularly important for the future
protection of consumers of financial services. One of the most important
findings contained in the “High-Level Principles” is the recommendation
concerning the need to create special consumer oversight bodies in the field of
financial services, with the necessary authority to properly fulfill their man-
dates. In particular, the need for clearly defined goals for their activities, the
appropriate shape, operational independence, defined sanctioning powers and
the principles of their public accountability are emphasised.
 Consumer protection in financial market 167
There are important implications for the future of financial consumer pro-
tection in the recommendations on the equitable and fair treatment of con-
sumers and also on disclosure and transparency. In terms of the equitable and fair
treatment of consumers, it is stated that all consumers of financial services should
be treated equitably and fairly at all stages of their relationship with financial
institutions and their agents. This is a poorly achieved standard today.
The proposal that the fair treatment of consumers should be part of the overall
corporate governance and corporate culture of financial institutions and their
agents should be considered as being of particular importance. The need to pay
special attention to vulnerable consumer groups is also emphasised.

9.4 New challenges for consumer protection in the era of

digital finance
The progressive digitalisation of modern financial services, based on a number
of breakthrough technological innovations, is having an ever-stronger impact
on the position, interests, benefits and risks of consumers (Saunders, 2019).
Digital technologies have led to a change in the way consumers access the
financial market and their interaction with financial market entities. They
enable better access to financial services and extend the process of financial
inclusion. They also change the way consumers interact with financial inter-
mediaries. The role of online channels, electronic money and the use of
mobile devices such as smartphones or special telephones is growing, while the
role of cash transactions and physical contact with market operators is defi-
nitely declining. The digital service of the financial market is being carried out
by an increasingly wide range of entities located outside the financial sector,
and thus also outside the jurisdiction of financial supervision.
The use of digital technologies in finance not only benefits consumers,
therefore, but also creates new risks for them, ones they either previously didn’t
know about or which occur incidentally. Data protection and privacy issues,
cybercrime, financial inclusion and digital literacy are now of key importance.
The growing ability of financial institutions to collect and process larger numbers
of increasingly diverse databases increases the risk of fraud in this area, as well as
data theft or manipulation, identity theft and theft of financial assets, etc. (Central
Bank of Ireland, 2017). These issues, among other things, were of central con-
cern to the G20 at their 2018 summit during the Argentinian Presidency, with
the issue of digitalisation repeatedly referred to in the summit’s final declaration
(G20 Leaders Declaration, 2018). For example, point nine of the declaration
states the following: “To maximise the benefits of digitalisation and emerging
technologies for innovative growth and productivity, we will promote measures
to boost micro, small and medium enterprises … further digital inclusion, support
consumer protection, and improve digital government, digital infrastructure and
measurement of the digital economy.” In point thirteen, the declaration states:
“We endorse the G20 Financial Inclusion Policy Guide, which provides vo-
luntary policy recommendations to facilitate digital financial services.”
168 Ewa Kornacka and Marek Monkiewicz
At the request of the G20 finance ministers, an operational document was
also prepared for the Buenos Aires summit, which contained recommenda-
tions on how to approach financial consumer protection in the digital age
(G20, 2018a). This document pays particular attention to the risks connected
with digital finance and their impact on consumers. All these risks are divided
into four categories:

1 Market driven: this can include, among other things, the use of
inappropriate financial products, targeting the wrong consumers, new
types of financial crime, the lack of protection of personal data privacy and
excessive digital profiling to identify potential consumers which may lead
to them being excluded from the offer, etc.,
2 Regulation and supervision driven: this can include, among other things,
uneven levels of protection within and across countries, inadequate
regulatory solutions or unprofessional activities of the supervisory bodies,
3 Consumer driven: this may include, first of all, insufficient digital and
financial literacy levels, limited direct contact with suppliers, risks related
to cooperation with various new partners from outside the financial
sector, and risks related to the technologically conditioned acceleration of
decision-making processes, etc. (Central Bank of Ireland, 2017).
4 Technology driven: this can include, among other things, the use of wrong
algorithms, the misuse of big data and small data, and cybersecurity risks.

Additionally, two other important documents were also prepared for the
summit. The first one was devoted to the digitalisation of finance and financial
inclusion. The consumer-related recommendations included in it were di-
vided into three groups (G20, Policy, 2018). The first group covered the issues
of better consumer protection in the digital financial market by improving the
supervision of this market and having better transparency and disclosure from
the financial institutions. In this first aspect, the importance of achieving the
right balance between the pro-innovative approach of supervision and con-
sumer safety is emphasised, as well as the need for the supervisory bodies and
consumers to acquire the relevant skills in the field of digital financial services.
With regard to transparency and disclosure, the recommendations underline
the need to adapt the existing requirements to the digital reality, as well as to
the new opportunities that appear in this area. The use of big data technology
offers special opportunities as it can be used, among other things, to publish
indicators characterising financial products or services, such as the disclosure of
customer complaints about them, or for the use of robo-consultancy. The
second area mentioned in the document’s recommendations relates to fi-
nancial literacy. The recommendations propose, among other things, sup-
porting data collection initiatives, identifying new key skills in the field of
digital finance and strengthening financial education related to digital financial
services. The third and final area of the recommendations relates to data
 Consumer protection in financial market 169
protection. The recommendations attach particular importance to ensuring the
security and effectiveness of obtaining consent to access data from interested
parties, who consider it to be a fundamental element of data privacy and
consumer protection. In this context, they recommend, among other things,
that interested entities should keep records of consents obtained from clients
and adopt the “optin” philosophy in place of the currently applied “optout”
approach regarding the disclosure of their personal data. Finally, the re-
commendations draw attention to data security issues, emphasising that data
are becoming a basic asset today and that data theft is one of the main con-
sumer risks. They state, therefore, that the financial supervisory bodies should
ensure that financial institutions take appropriate actions in this respect. The
second document was devoted entirely to the issues of digitalisation and fi-
nancial education (G20/OECD, 2018b). According to the assumptions of the
G20, it is intended to be auxiliary material for the G20 countries in shaping
their policy in the field of education in digital finance. It contains, among
other things, a checklist of recommended actions in this regard and an ex-
tensive overview of the issue.

9.5 Personal data protection as the basic area of activity for

safeguarding consumers
In order to meet the requirements of the new century, the European
Commission has undertaken a number of activities since 2014 aimed at
building digital trust among its citizens. The crowning achievement in this
respect was the preparation of the General Data Protection Regulation
(GDPR), which became applicable throughout the European Union from 25
May 2018 (EU, Regulation, 2016).
The overriding aim of the GDPR is to protect the fundamental rights and
freedoms of natural persons, in particular their right to the protection of their
personal data.
According to the accepted definition, “personal data means any information re-
lating to an identified or identifiable natural person (‘data subject’); an identifiable natural
person is one who can be identified, directly or indirectly, in particular by reference to an
identifier such as a name, an identification number, location data, an online identifier or to
one or more factors specific to the physical, physiological, genetic, mental, economic, cultural
or social identity of that natural person” (Article 4 item 1 of the GDPR).
The very definition of personal data shows that data such as the IP address of
a computer may also constitute personal data in certain situations. The division
of personal data into ordinary, specific and criminal offence data adopted by
the GDPR significantly affects the level of security required for individual
types of data. It is true that the GDPR is a neutral and flexible act of law that
gives the data controller the freedom to select measures that ensure an ade-
quate level of security. However, for processing special categories of personal
data, additional legal safeguards are required, such as written authorisations for
170 Ewa Kornacka and Marek Monkiewicz

name and surname, telephone number, email address,

Ordinary data home address; PESEL, identity card number, bank
account number; insurance policy number, claim number

Data from specific categories health condition, political views, religious or philosophical
(closed catalogue) beliefs; denominational, party or union affiliation; racial
or ethnic origin; sexual orientation; biometric data

Data on criminal offences data on convictions, fines

Figure 9.1 Division of personal data according to GDPR.

Source: The authors’ own elaboration.

the people processing these categories of data. This division also affects the
assessment of when a violation has occurred, that is the assessment of the level
of risk that rights and freedoms may be violated.
The regulation introduces the following division of personal data:
(Figure 9.1)
What is the processing of personal data? “Processing [personal data] means any
operation or set of operations which is performed on personal data or on sets of personal
data, whether or not by automated means, such as collection, recording, organisation,
structuring, storage, adaptation or alteration, retrieval, consultation, use, disclosure by
transmission, dissemination or otherwise making available, alignment or combination,
restriction, erasure or destruction” (Article 4 item 2 of the GDPR).
The basic principles of data processing are: (Figure 9.2).

principle of lawfulness, fairness and transparency

purpose limitation

data minimisation

accuracy

storage limitation

integrity and confidentiality

Figure 9.2 Basic principles of data processing according to GDP.

Source: The authors’ own elaboration.
 Consumer protection in financial market 171
The controller is obliged to comply with the above rules when processing
personal data. With individual items of data, the controller must have a legal
basis for the data processing, a specific purpose, and collect only as much data
as is necessary for the purpose of achieving that goal. They must also specify
how long the data will be retained for. In addition, they must ensure that the
data are correct, which can be achieved by regularly reviewing them, and then
subsequently updating them.
The GDPR forces the controller to “keep order” within the databases. The
implementation of restrictive regulations with high fines resulted in the
“cleaning of databases” where data had been collected for years and become
out-of-date. The next step that enterprises took was to make an inventory of
their data, and then update them, which significantly influenced the data
quality and transparency, consequently increasing their level of security and
making it easier to manage them.
Managing the area of personal data is a continuous process that requires the
controller to constantly monitor the data and conduct a risk analysis on a
regular basis. In the currently dynamically changing legal and information
environment, a risk analysis is the basic tool for assessing the risk of the impact
of implemented solutions on the rights and freedoms of natural persons. The
word “risk” appears 76 times in the GDPR. In addition to technological
neutrality, the second fundamental assumption is the risk-based approach,
since a risk analysis is the basis for ensuring compliance with the GDPR. A
properly conducted risk analysis will ensure the selection of the appropriate
technical and organisational measures that will minimise the risk of personal
data processing, while ensuring the adequate level of protection of the rights of
the persons whose data is being processed. The GDPR, by requiring a risk
analysis and the above processing rules, forces the controller to identify po-
tential risks and the rules for dealing with them, thus ensuring the controller’s
compliance with the provisions. This means, in turn, that the personal data of
natural persons are processed with the appropriate level of security. In addi-
tion, the controller, when identifying a high risk for the rights and freedoms of
natural persons, as well as the list of types of operations indicated by the su-
pervisory authority in Monitor Polski, must assess the data protection im-
plications in a so-called DPIA (Data Protection Impact Assessment). The list of
data processing operations for which an impact assessment needs to be carried
out is not a closed catalogue. Currently, the indicated operations include the
following.

a Automated decision-making with a legal, financial or similarly significant effect:

for example online shops offering promotional prices for specific customer
groups – a customer profiling system to identify purchasing preferences;
b Systematic monitoring: processing used to observe, monitor or check data
subjects, including data collected via the network or as part of the “large-
scale systematic monitoring of places accessible to the public,” for example
public transport, cities offering a bicycle or car rental system;
172 Ewa Kornacka and Marek Monkiewicz
c Processing of special categories of personal data and data concerning
convictions and prohibited acts – for political parties, election committees
or telecommunications operators, and media providers (electricity, gas,
water) in the field of smart metering – regular processing of measurement
data enabling observation of lifestyle, intensity of media use;
d Genetic data processing – laboratories, companies or hospitals offering
genetic diagnostics – medical diagnosis, DNA tests, medical research;
e Innovative use or application of technological or organisational solutions,
for example websites processing data from devices such as the Internet of
Things, photos with geolocation data or the use of communication
between devices (Internet of Things – e.g. beacons, drones) in the public
space and in public places, systems for analysing and transferring data to
service providers using mobile applications from mobile devices such as
smartwatches, smart bands, beacons, etc.
f When conducting a risk analysis or a DPIA, it should be remembered that
the controller does not perform these analyses from the perspective of
securing the company, enterprise or entity but in terms of violation of the
rights and freedoms of natural persons.

The key responsibilities of controllers include implementing the rights that the
GDPR grants to natural persons in the processing of their personal data. These
rights are described in detail in Chapter 3 of the GDPR.
The General Data Protection Regulation provides, above all, for its cost-free
implementation for natural persons, including digital consumers. Another
principle that is strongly emphasised is the language and form by which all
information must be provided to customer requests. According to the GDPR,
any communication with individuals must be concise, transparent, under-
standable and communicated in an easily accessible form, and in clear and simple
language. The controller has one month to respond toany request of a natural
person whose data is being processed. The GDPR also “took care” to ensure
that each natural person’s data remains confidential by requiring the verification
of the identity of the person submitting the request to the controller. This is of
particular value in the current pandemic as the situation has forced organisations
such as banks, insurers and state offices to work remotely, and it is not possible to
identify the person submitting the request on the basis of, for example, showing
an ID card and a direct comparison of the photo with the person. The in-
formation obligation imposed on enterprises in the previous provisions on the
protection of personal data from 1995 was additionally extended to ensure the
fullest possible information is provided to a natural person in connection with
the processing of their personal data. From 25 May 2018, each entity processing
personal data that acts as a controller is obliged to provide information about:

a its identity and contact details;

b where applicable – the contact details of the Data Protection Officer;
 Consumer protection in financial market 173
c the purposes of processing the personal data and the legal basis for the
processing;
d if the processing is based on Article 6 item 1 point f – the legitimate
interest pursued by the controller;
e the recipients of personal data or categories of recipients;
f where applicable – information on the intention to transfer personal data
to a third country;
g the period for which personal data will be stored;
h your rights: the right to access the data, rectify or delete it, or restrict the
processing, the right to object to the processing, as well as the right to
transfer the data;
i if the processing is based on consent – information on the right to
withdraw consent at any time;
j lodge a legal complaint with a supervisory authority;
k whether the provision of personal data is a statutory or contractual
requirement, or a requirement necessary to enter into a contract, as well as
whether the data subject is obliged to provide the personal data, and the
possible consequences of the failure to provide such data;
l automated decision-making, including profiling.

The significantly extended scope of the information obligation imposed on

natural persons by the EU legislator means that the controller ceases to be
anonymous. They have to provide a specific purpose and basis for the pro-
cessing of the personal data, and they cannot process the data for an indefinite
period of time. They are also obliged to provide information about any
possible data transfer outside the European Union, about the rights of cus-
tomers or employees, as well as about automated processing, including pro-
filing, which is of particular importance in the digital age.
In this way, the digital consumer receives full information regarding the
circulation of their personal data, and also acquires knowledge about the rights
granted to them.

9.6 Digital finance and the right to data

Particularly important in the area of digital finance are the three rights that
natural persons have under the GDPR, that is the rights to transfer data, give
consent and erase data. When analysing individual rights, the right to data
portability and the right to erase data deserve special attention with regard to
digital finance.
Article 20 of the GDPR grants the consumer the right to data portability:
“The data subject shall have the right to receive the personal data concerning him or her,
which he or she has provided to a controller, in a structured, commonly used and machine-
readable format and have the right to transmit those data to another controller without
hindrance from the controller to which the personal data have been provided, where:
174 Ewa Kornacka and Marek Monkiewicz
a the processing is based on consent (…) or on a contract (…); and
b the processing is carried out by automated means.”

This means that a natural person has the right to request that their personal data
be sent by the controller directly to another controller. The condition is that it
must be technically possible. This right is one of the new rights that was
introduced by the current act on the protection of personal data. It is a pro-
consumer law that facilitates a change of service provider, for example a
banking or insurance entity. It is also often used when transferring accounts on
social networks or a shopping history between online stores. However, it
should be remembered that the data transfer will only relate to the data that the
natural person has provided to the controller. This right does not apply to data
generated by the controller. At the same time, it is worth underlining that it
applies only to data processed in an automated manner.
The European Commission, in its data strategy of 19 February 2020, de-
clared as one of its key actions: “Explore enhancing the portability right for in-
dividuals under Article 20 of the GDPR giving them more control over who can access
and use machine-generated data (possibly as part of the Data Act in 2021).”
This right is not currently being uniformly exercised even within the
European Union. This applies to sectors such as the health and energy sectors. In
the case of enterprises using different computing clouds, exercising the right to
data portability is problematic. An additional challenge is ensuring an adequate
level of data transfer security. The new Digital Europe programme for
2021–2027 aims to shape the digital transformation in Europe. One of the
objectives is to empower individuals with regard to their data. It is planned to
strengthen the right to data portability by granting more control over the data of
a physical person through the introduction of stricter requirements for interfaces
enabling real-time data access and the mandatory provision of machine-readable
formats for data whose source is certain products and services.
Another extremely important right is the right to erase data. In accordance
with Article 17 of the GDPR, every natural person has the right to have his or
her data erased (“right to be forgotten”). This provision covers two powers of
a natural person. The first is the request to erase data and the second is the
request to be forgotten. Implementation of this request requires the controller
to erase personal data. For personal data to be recognised as having been
completely erased, it should be deleted from all possible places where it may
have appeared, for example from servers, email accounts, Microsoft Office
files, external and portable drives and paper copies. In practice, controllers
look for the possibility to limit this right by, for example, indicating a legal
provision that allows them to carry out further data processing, for example
accounting regulations or when data processing is necessary to pursue or de-
fend against possible claims. However, the controller may process personal
data only as long as the grounds for their processing continue to exist. In
summary, this law does not work always and everywhere. It is a law that is
associated with many problems both for controllers and the individuals
 Consumer protection in financial market 175
concerned. For a bank or insurer, for example, there are also the provisions of
the Act on Counteracting Money Laundering and the Financing of Terrorism,
which impose on these institutions the obligation to continue storing in-
formation about an economic relationship for 5 years after it ends. The cus-
tomer takes the provision of the article “verbatim” and goes to the controller
with a request to have their data erased (to be forgotten), expecting the task to
be completed immediately, which in practice may only apply to data processed
for marketing purposes, with the data not being transferred to entities from the
capital group.
Other rights granted to natural persons under the GDPR are:

a the right to rectify data;

b the right to restrict processing;
c the notification obligation regardingrectification or erasure of personal
data or the restriction of processing;
d the right to object;
e the right to allow automated individual decision-making, including
profiling.

The most controversial basis for the processing of personal data is consent.
According to the GDPR, “Consent of the data subject means any freely given,
specific, informed and unambiguous indication of the data subject’s wishes by which he or
she, by a statement or by a clear affirmative action, signifies agreement to the processing
of personal data relating to him or her.” And further: “The data subject shall have the
right to withdraw his or her consent at any time. The withdrawal of consent shall not
affect the lawfulness of processing based on consent before its withdrawal. Prior to giving
consent, the data subject shall be informed thereof. It shall be as easy to withdraw as to
give consent.” This is an advantage for the consumer as the amendment to the
provisions on the protection of personal data gives them the opportunity to
withdraw consent more easily, whilst for controllers, whose activities are
mainly based on consent, it is a disadvantage. At the same time, it should be
remembered that consent may be the basis for data processing only if there are
no other legalising grounds. The biggest problem for many companies is
implementing the legitimate interest of the controller as the legal basis for
marketing activities, since in order to carry out direct marketing by means of,
for example, telephone or email, they must have obtained consent in ac-
cordance with the GDPR.
In the context of consent, Recital 43 of the GDPR is also very important,
stating that “In order to ensure that consent is freely given, consent should not provide a
valid legal ground for the processing of personal data in a specific case where there is a
clear imbalance between the data subject and the controller, in particular where the
controller is a public authority and it is therefore unlikely that consent was freely given in
all the circumstances of that specific situation. Consent is presumed not to be freely given
if it does not allow separate consent to be given to different personal data processing
operations despite it being appropriate in the individual case, or if the performance of a
176 Ewa Kornacka and Marek Monkiewicz
contract, including the provision of a service, is dependent on the consent despite such
consent not being necessary for such performance.”
It is worth noting the obligation that the GDPR imposes on the controller
in the event of a breach. In accordance with Article 34 of the Regulation,
when a personal data breach is likely to result in a high risk to the rights and
freedoms of natural persons, the controller shall communicate this personal
data breach to the data subject without undue delay. The notification must
include, among other things: the nature of the breach; the name and contact
details of the data protection officer or another point of contact; a description
of the possible consequences of a breach of personal data protection; a de-
scription of the measures taken or proposed by the controller to remedy the
breach, as well as measures to minimise its possible negative effects. The
purpose of such notification is to enable natural persons to take the necessary
preventive measures to protect their data against the negative effects of the
breach. The obligation regarding infringements is also specified, for example
in the Telecommunications Act of 16 July 2004. According to its provisions,
telecommunications companies are among the entities that, in the event of a
violation, are obliged to notify both the President of the Office for Personal
Data Protection as well as subscribers or end users.
After 2 years of the application of the General Data Protection Regulation,
the European Commission published an evaluation report on its im-
plementation. According to the GDPR Report, it has strengthened the po-
sition of citizens, providing them with a number of rights regarding the
processing of their personal data, and created a new European system for
managing and enforcing data protection regulations (EU, 2020).
The GDPR has proved to be flexible in supporting digital solutions in un-
foreseen circumstances, such as the recent Covid-19 pandemic crisis. Thanks to
the implementation of the GDPR, EU citizens are more aware of their rights.
The GDPR empowers individuals when it comes to deciding what happens to
their data in connection with the digital transformation. It has also contributed
to fostering trustworthy innovation, notably through a risk-based approach and
principles such as data protection by design and data protection by default.
The GDPR has also been an international success. Several countries around
the world want to duplicate the EU regulation, while all others that have any
provisions on the protection of personal data refer to the GDPR in their own
doctrines. And even if they do not agree with it, they explain to their citizens
why they are not introducing European-style solutions. Those who want to go
the European way include Chile, South Korea, Brazil, Japan, Kenya, India,
Tunisia, Indonesia, Taiwan and California.
Since May 2018, the Commission has intensified its bilateral, regional and
multilateral dialogue, fostering a global privacy culture and convergence be-
tween different privacy regimes for the benefit of both citizens and businesses.
At a time when privacy breaches can affect large numbers of people si-
multaneously in several parts of the world, there should be increased inter-
national cooperation between data protection enforcement authorities.
 Consumer protection in financial market 177
Therefore, the Commission will ask the Council to authorise the opening of
negotiations with a view to concluding mutual assistance and cooperation
agreements with relevant third countries.

9.7 Summary and conclusions

The need to strengthen the protection of the rights and interests of consumers
in financial markets is currently a non-contestable issue, both in theoretical and
practical terms. The G20 recommendations on the principles of financial
consumer protection are an important and breakthrough event in this context.
It is the first time that the international community has spoken on this matter
in such a universal and comprehensive manner, emphasising that the proper
functioning of financial systems requires the maintaining of consumer con-
fidence in them. Consumers have therefore stepped out of the shadows of the
financial institutions and markets and taken on their own identity and im-
portance. It is doubtful whether the measures and mechanisms currently
proposed are capable of achieving an improvement in the level of protection
through an increased regulatory offensive. Do improved information regula-
tions, intensified regulations governing market behaviour and innovative
product regulations have the chance to change the consumer’s position? Of
course, we do not know this, but we can suspect that it will not be possible
without introducing restrictions on the financial market itself and on the fi-
nancial products offered. In this context, Stanisław Flejterski quotes John
C. Bogle’s thoughts, who assessed the current approach to money, business
and life in his recently published work. He sees what is happening as a de-
parture from the basic values of the past. “We have too much cost and not
enough value, too much speculation and not enough investment, too much
calculating and not enough trust, too much commercialism and not enough
professionalism, too much buying and not enough service, too much man-
agerialism and not enough leadership, too much focus on things and not
enough responsibility, too many 21st century values and not enough 18th
century values” (Bogle, 2009). We have to agree with Paul Dembinski that
without a rational return to these values, it is difficult to imagine giving a new
dynamic to financial consumer protection. It will also not be possible if the
ethics of financial markets and institutions are not given a new dimension
(Dembinski, 2017). As Tomasz Michalski so rightly states, “We are observing
the disturbing phenomenon of the disappearance of basic ethical principles
that should be followed by every entity providing services on the financial
market …” and further “So we are dealing with dangerous anomalies …” and
that “these anomalies resulted in greed triumphing over servitude in every
sector” (Michalski, 2017). Particular challenges for the consumer protection
system are created by the digitalisation of the economy and the financial
world. It not only brings great new opportunities but also huge new risks.
Datafication and internet networking create the need for the ever-stronger
protection of personal data and privacy. They also evoke the need to develop
178 Ewa Kornacka and Marek Monkiewicz
binding international rules in this area. New digital products and new services.
as well as the new shape of the value chain in the financial market, increase the
demand for digital regulation and supervision. In turn, the growing threats in
cyberspace also create the need to developthe prevention and supervision
systems in this area.

Note
1 EwaKornacka is a personal data protection expert and entrepreneur, while Marek
Monkiewicz, a specialist in insurance and consumer protection, is a professor at the
Warsaw School of Economics.

Bibliography
Andenas, M. and Chiu, IH-Y. (2014) The Foundations and Future of Financial Regulation.
Governance for Responsibility, Routledge, NY.
Ben-Shahar, O. and Schneider, C.E. (2010) The Failure of Mandated Disclosure, University
of Pennsylvania Law Review, vol. 159, pp. 649–749.
Ben-Shahar, O. and Schneider, C.E. (2014) The Futility of Cost Benefit Analysis in Financial
Disclosure Regulation, University of Chicago Law School, Institute for Law and
Economics, Working Paper no. 680, 2014.
Bieri, D.S. (2015) Financial Stability Rearticulated: Institutional Reform, Post-Crisis
Governance and the New Regulatory Landscape in the United States, February 2015,
GFURR Working Paper.
Bogle, J.C. (2009) Enough: True Measures of Wealth, Business and Life, PTE, Warsaw.
Central Bank of Ireland (2017) Discussion paper on the Consumer Protection Code and the
Digitalisation of Financial Services, Dublin.
Dembinski, P.H. (2017) Ethics and Responsibility in Finance, Studio Emka Publishers, Warsaw.
EU (2014) Regulation of the European Parliament and of the Council (EU) 2014/910.
EU (2016) Regulation of the European Parliament and of the Council (EU) 2016/679 of 27
April 2016 on the protection of natural persons with regard to the processing of personal data.
EU (2020) Communication from the Commission to the European Parliament and the
Council (EU), Data Protection as a Pillar of Citizens’ Empowerment and the
EU’sApproach to the Digital Transition, Brussels 24.6.2020, Com (2020) 264, final.
G20 Final Declaration, Cannes, 2011.
G20 High-Level Principles on Financial Consumer Protection, OECD, October 2011.
G20 Leaders’ Declaration, Buenos Aires, 1 December 2018.
G20 (2018) Policy Guide: Digitisation and Informality – Harnessing Digital Financial Inclusion for
Individuals and MSMEs in the Informal Economy, GPFI.
G20/OECD (2018a) Financial Consumer Protection Approaches in the Digital Age.
G20/OECD (2018b) Digitalisation and Financial Literacy.
Lefevre, A.F. and Chapman, M. (2017) Behavioral Economics and Financial Consumer
Protection, OECD.
Michalski, T. (2017) Anomalie na rynku finansowym. Co z paradygmatem finansów
[Anomalies in the Financial Market: What about the Financial Paradigm], in: Kwiecień, I
(ed) – Ubezpieczenia we współczesnym świecie. Problemyitendencje [Insurance in the Modern
World: Problems and Tendencies], UE Publishing House, Wrocław, pp. 137–144.
 Consumer protection in financial market 179
OECD (2013) Update Report on the Work to Support the Implementation of the G20 High-Level
Principles on Financial Consumer Protection, OECD, September 2013.
OECD (2014) Effective Approaches to Support the Implementation of the Remaining High-Level
Principles on Financial Consumer Protection, 9 September 2014.
Pridgen, D. (2013) Sea Changes in Consumer Financial Protection: Stronger Agency and
Stronger Laws, ssrn.com/abstract=2186035
Saunders, L. (2019) Fintech and Consumer Protection, National Consumer Law Center, March
Sławiński, A. (2019) Czy i na ile można liczyć na zmiany w systemach bankowych? [Can
We Count on Structural Changes in Banking?] in: Hausner, J and Paprocki, W (scientific
editor) – Dewiacjefinansjalizacji [Deviations of Financialisation], Cedewu Publishers,
Warsaw, pp. 24–39.
Sovern, J. (2010) Preventing Future Economic Crises through Consumer Protection Law
or How the Truth in Lending Act Failed the Subprime Borrowers, St John’s School of
Law, Legal Studies Research Paper Series, Paper 10-0189, December 2010.
10 Digital exclusion in the financial
system: emerging agenda
Bogumił Czerwiński

10.1 Introduction
The growing importance of digital economy observed in recent years concerns
financial services to a large extent. Therefore, financial institutions are wit-
nessing a revolutionary (although in some areas also evolutionary) adjustment
to changes in their environment. They are the digital leaders, both on a global
scale and on the Polish market. The digitalization of traditional financial
services is additionally driven by increasingly strong competition in the form of
technology companies that provide financial services (FinTech). The digita-
lization of financial services is usually performed taking into account customer
expectations, but nevertheless, an increasingly serious challenge for these en-
tities is the digital exclusion of some service users. Digital exclusion refers to
the differences between persons who have regular access to information and
digital technologies and are able to use them effectively, and those who do not.
The unavailability of digital services to some customers may also become a
significant hindrance to the growth of the financial services market.
The aim of this study is to present the phenomenon of digital exclusion on
the financial services market from the international perspective and in relation
to the Polish market. Key determinants and consequences of the digital ex-
clusion for the market will also be identified. Moreover, on the basis of sta-
tistical data, an attempt will be made to determine the scale of digital exclusion
in financial services in Poland compared to other countries.

10.2 Digital exclusion in the literature

Digital exclusion as a specific element of social exclusion is a situation of
limited access of certain groups or individuals to rights, resources and op-
portunities available to other groups or individuals living in a given area
(Widawska, Wysocka, Wieczorek, 2014, p. 10). Digital exclusion can also be
defined as the phenomenon of social inequalities between individuals,
households, enterprises and regions at the level of socio-economic develop-
ment related to access and use of information and communication technolo-
gies in all spheres of economic activity.

DOI: 10.4324/9781003264101-14
 Digital exclusion in the financial system 181
Digital exclusion, sometimes figuratively called digital divide, thus can be
defined as the instance of a difference between individuals or social groups
with and without access to modern information technologies (Chang et al.,
2004, p. 449; Widawska, Wysocka, Wieczorek, 2014, p. 14). The use of these
technologies is a measure of social differentiation, which is in itself a natural
state, however, significant stratification may contribute to social exclusion. It
should be borne in mind that the problem of digital exclusion does not only
concern factors important in the use of modern technologies, but also the
differences that lead to social exclusion. The skills and methods of Internet use
are of course important as not every way brings positive consequences and
increases the individual’s chances in social life (Batorski, 2009, pp. 243–246).
Based on the literature review, in line with van Dijk’s concept, we can
distinguish barriers that create the actual four basic levels of digital exclusion
related to access to new media (Van Dijk, 2010, p. 248):

• motivation to use new technologies,

• physical access (having a computer, access to the Internet),
• skills (strategic, informational, operational),
• use (various ways of technology use).

A particularly important area that requires in-depth research in the form of the
analysis of needs for the use of new technologies is the first of the indicated
levels, that is the motivation to use innovative technologies. The motivational
level determines taking real actions related to ensuring physical availability.
The most important reasons for not using computers and the Internet are
mental barriers such as, no need, time or interest, and other factors of less
importance such as, lack of skills, equipment and access that are too costly, and
resentment due to the dangers of the Internet (Wilk, 2014, p. 77; GUS, 2019,
p. 153). Among persons who do not use the Internet, a reason that is not
expressed directly may also be technophobia, the fear of using modern in-
formation and communication technologies and the belief that its impact on
both personal and professional life is neutral at most. Another matter of im-
portance is that negative motivations remain a part of (albeit with less intensity)
the awareness of potentially excluded persons, despite subsequent experiences
with the computers and the Internet (Wilk, 2014, p. 78). These phenomena
concern mainly the elderly and those with a lower level of education. Digital
exclusion concerns women to a slightly greater extent, although it should be
emphasized that the digital gap between the two sexes is gradually decreasing,
and, moreover, the use of digital technologies may contribute to the equal-
ization of social position between women and men (GUS, 2019, p. 146).
The second level of digital exclusion is the barrier related to physical access
to the computer and the Internet. In this case, attention should be paid to
access in the household as well as in public places and at work. From the point
of view of limitations involved in the use of financial services via the Internet,
safe access at the place of residence is crucial, but especially important for
182 Bogumił Czerwiński
persons who have overcome mental barriers related to the Internet use. The
factor that influences the physical access to the Internet is, along with tech-
nological changes, the reduction of the costs of IT hardware, software and
Internet access. Differentiation of physical access due to socio-demographic
characteristics such as, age, sex, level of education or professional status is also
important, both at the level of individuals and social groups. It is already at this
level that the differences related to physical access, determined by the level of
digital skills and the activities of state institutions, are also visible. In com-
parative studies determining the level of digital exclusion on the national and
global scale, the level that is most frequently featured is the one related to
physical access to ICT devices and technologies. For the purpose of this study,
as is the case with other analyzes on digital exclusion, the focus was primarily
put on the assessment of physical access to a computer and the Internet in
direct relation to the use of financial services.
Another barrier related to the third level of digital exclusion mentioned
above is the ability to use modern technologies. Primary qualifications in this
area concern primary operational activities related to work with computer
hardware. Along with the growing digital competencies, it is possible to use
them to search, select and process information on the Internet. The highest
level of digital skills is strategic. Mastering them means that one knows how to
use computer hardware in combination with having substantive knowledge in
a given field, for example e-banking or e-insurance. Efficient use of strategic
skills is an important element limiting the scope of digital exclusion in in-
dividual areas of economic and social life (Wilk, 2014, p. 80).
The last level of digital exclusion concerns user access to websites, taking
into account the diversity and frequency of their use. The following factors are
important in this context (Van Dijk, 2013, p. 43):

• time and frequency of use,

• number and variety of functional use,
• using broadband or narrowband internet connections,
• more or less active or creative use.

The presented aspects of user access are to a large extent a consequence of breaking
down the barriers on the first three levels (however, they are mostly related to the
use of digital skills), and they summarize various aspects of digital exclusion.
A slightly different, more technical approach to the issue of digital exclusion
can be observed in the works of Manuel Castells (Castells, 2003, p. 276).
According to his concept, the first two dimensions concern, respectively: the
possibility of using the Internet in various places, and the actual access to the
Internet. The third dimension is related to competencies in the possession of
key skills in using the computer and the Internet skills. The last dimension
concerns global digital exclusion.
In connection with the indicated levels of digital exclusion, it is possible to
identify categories of resources that are necessary for the use of new digital
 Digital exclusion in the financial system 183
technologies. These include physical, digital, human and social resources
(Warschauer, 2003, p. 301). Physical resources should be understood as pri-
mary (in the context of digital exclusion) access to computers and connection
to the Internet. Digital resources concern digital materials available on the
web. The next category, human resources, focuses on education, with parti-
cular attention paid to the skills necessary to work with the computer and use
the Internet. The last category, that is social resources, is related to social and
institutional structures supporting access to modern information and com-
munication technologies. In the field of digital exclusion in financial services,
human and social resources are particularly important (but unfortunately often
underestimated) factors. In the literature on the subject, one can also en-
counter a different approach to digital exclusion – as a negative social phe-
nomenon, indicating that it is conditioned by two primary groups of factors:
technological (the so-called hard) and individual (the so-called soft) (Widawska,
Wysocka, Wieczorek, 2014, p. 13). Technological factors result from the rapid
development of information technologies, as well as from the limited avail-
ability of infrastructure, computer hardware and appropriate software. The risk
of hindered access to information technologies for example applies especially
to residents of small towns and rural areas. Due to greater population density in
metropolises and large cities, most IT investments are concentrated in that
area, with an obvious relatively high rate of underinvestment in the remaining
areas. On the other hand, individual factors are associated with a whole group of
barriers that make it difficult, and sometimes even impossible, to use digital
technologies. They are of a very diverse nature, focusing primarily on the areas of
awareness, mentality, competence and motivation, as well as concerning natural
barriers and limitations of access to digital information among the disabled.
A consequence of digital exclusion is the lack of or unequal access to in-
formation. Thus, digital exclusion can be treated as information exclusion. In
contemporary societies, where access to information can be a key determinant
of social position, it may also become an important element of social exclu-
sion. Therefore, it is also necessary to name social inequalities that contribute
to unequal access to digital technologies. There are two basic groups of in-
equalities contributing to digital exclusion: individual and positional
(Widawska, Wysocka, Wieczorek, 2014, p. 14). The prevalence of individual
inequalities is related to age, gender, ethnicity, intelligence, personality, health
and disability. On the other hand, positional social inequalities are usually
identified as position held, work performed, level of education, role in the
household, wealth level of the state and the region of residence. All the
abovementioned factors result in unequal access to new media. When ana-
lyzing the indicated factors, one should also take into account the fast pace of
the following changes in technological development. Thus, active users of
new technologies are expected to constantly increase their competencies.
Mastering applicable knowledge at a certain stage in consumer’s life on its own
is not enough to avoid digital exclusion. Lifelong learning is essential, which
may take the form of, for example, continuing education. This seems to be a
184 Bogumił Czerwiński
particularly great challenge for persons with significant age-related limitations.
At the same time, one should realize that by not improving their qualifications
in the field of new technologies, persons at risk of exclusion, although they are
the primary users of computer equipment and the Internet, may at the same
time become digitally excluded.

10.3 Financial exclusion and digital exclusion

While explaining the problem of digital exclusion in the case of financial
intermediation services, it is also important to pay attention to the concept of
financial exclusion, which may be considered comparable to digital exclusion
in some conceptual areas. Financial exclusion, when considered (similarly to
digital exclusion) a part of social exclusion, means at least partial deprivation of
person’s access to financial services (Caplan, Birkenmaier, Bae, 2020, pp. 5–6).
Consumers excluded from financial services become indirectly excluded from
modern society. The use of financial services is treated as one of the key
elements of full participation in social life.
Financial exclusion, just like social exclusion, is a complex process, and at
the same time it affects the digital exclusion itself in financial intermediation
services. It is influenced by factors of a social, economic, legal and spatial
nature. As part of financial exclusion, we can identify processes that limit
access to the financial system for specific social groups (Marcinkowska,
Ziemba, Świeszczak, 2014, p. 147). The key factor limiting access to financial
services is the level of income. It is possible to identify several types of financial
exclusion at the same time, depending on its source. Exclusion is particularly
important in view of (Kempson, Whyley, 1999, pp. 14–21):

• availability,
• conditions,
• price,
• marketing,
• geographic availability,
• self-exclusion.

The financial exclusion applies to banking services, but it affects access to other
financial services as well. According to the European Commission, it concerns
the following areas (European Commission, 2008, pp. 11–14):

• transaction banking,
• savings,
• loans,
• insurance.

Based on the analysis of statistical data, it can be concluded that the relative level
of financial exclusion in Poland is most noticeable with regard to savings and
 Digital exclusion in the financial system 185
credit products. In the case of more common products related to transaction
banking and insurance, the financial exclusion applies to a smaller group of
Polish consumers. At the same time, it should be added that the phenomenon of
financial exclusion, taking into account the age criterion, both in Poland and in
the entire European Union, concerns mainly the youngest consumers (up to
24 years of age to a greater extent in the entire EU) and the oldest (from 65 years
of age to a greater extent in Poland) (Czerwiński, 2019, p. 91). The large-scale
occurrence of financial exclusion in Poland among the oldest consumers, mainly
in the area of savings and loans, is also associated with the phenomenon of digital
exclusion, being also the most severe among older age groups.
Depending on the specific type of financial exclusion in the indicated areas, it
is possible to identify factors influencing the intensity of the phenomenon.
However, it is of key importance to identify three basic groups of factors in-
fluencing financial exclusion (Iwanicz-Drozdowska et al., 2009, pp. 12–13).
These include supply, demand, and social factors. In the context of digital ex-
clusion, it is particularly important to indicate that supply changes introduced by
financial institutions should take different forms depending on the groups of
clients they are targeted at. For example, for younger clients, it is advisable to
offer products supported by modern technologies, and for older clients, simple
digital products, offered with considerable support in bank branches, and with
advisory services from bank advisers (Czerwiński, 2019, pp. 88–91).
When considering the determinants of financial exclusion, also in the context
of digital exclusion, particular attention should be paid to the socio-
demographic features that characterize consumers of financial services. It is
worthwhile to target inclusive activities primarily at groups particularly exposed
to financial exclusion. They include, among others, persons with lower income,
the elderly and young, the less educated, ethnic minorities, the disabled and the
unemployed. The implementation of inclusive activities, from the point of view
of financial institutions, should go hand in hand with reducing the scale of digital
exclusion in financial products, as they are targeted at, at least partially, similar
groups of persons. It can also be argued that there is a high risk that digital
exclusion may lead directly to financial exclusion. This is related to, inter alia,
economically justified intensive marketing activities that feature financial ser-
vices primarily in the digital version (Ozili, 2018, p. 333). Taking into account
the presented determinants, it is important to introduce coordinated, inclusive
measures in the field of digital and financial exclusion, which should contribute
to reducing the risk of social exclusion of disadvantaged persons. A practical
example of such activities may be the dissemination of simple biometric iden-
tification systems or the development of infrastructure facilitating the processing
of payments (Yuhelson et al., 2020, pp. 241–242).

10.4 The scale of digital exclusion in the financial market

According to the fourth level of digital exclusion presented in van Dijk’s
concept of user access, the primary measure of digital exclusion in the financial
186 Bogumił Czerwiński
market is the use of financial services through e-services. Due to the particular
importance of banking services, both among all financial intermediation ser-
vices, as well as from the point of view of the entire economy and the needs of
consumers, in the comparative analysis of the digital exclusion in the financial
market, attention should first be paid to the widespread use of internet banking.
Internet banking is becoming more and more popular among bank custo-
mers in Europe.1 Within nine years, the popularity of this way of banking in
the European Union has increased from 40% to 63%. It can therefore be
concluded that the majority of citizens of the studied European countries treat
online banking as an obvious way of using these services. Among the countries
surveyed, the Nordic countries stand out, in which as much as over 90% of the
population uses online banking (in 2019: Norway: 96%, Finland: 95%). A
certain geographical dependence can also be observed among the countries
where online banking is least popular. In this respect, the countries of Central
and Eastern Europe and the south of the continent stand out above all. In this
context, attention should be paid primarily to Bulgaria and Romania, where
no more than 15% of citizens use online banking. A special case in this group is
the country of Estonia – the only country among the “new” members of the
European Union, which, while being also one of the leaders of the digital
economy in Europe, also serves as an example with a very effective im-
plementation of financial e-services, both banking and other. Taking into
account the indicated cases, it can be concluded that the level of economic
development is a significant, but certainly not the only factor determining the
level of digital exclusion in financial services. The digitalization of the Polish
banking sector can be assessed as close to the average level observed in the
European Union.
The use of other financial products via the Internet is much less frequent
than the active use of Internet banking. In the comparison of online purchases
of any of the other popular financial products (i.e. loans, insurance services,
shares, bonds, investment funds), a much lower popularity of these services in
digital form was noted than of that recorded in the case of online banking.2
This regularity applies to all of the analyzed European countries.
In the case of the abovementioned other financial products, as in the case of
internet banking, a systematic increase in the level of digitalization of financial
services was observed. Another observation made is a similar geographic dis-
tribution of countries where consumers use internet-based services to a greater
or lesser extent. However, there are also some differences. The European
leader in other digital financial services in the United Kingdom. Most of the
country’s citizens used this form of financial services (56% in 2019). This is
mainly due to a very high popularity of insurance services purchased or re-
newed by 49% of the country’s population. Other digital financial products are
also very widespread in the Nordic countries, Estonia and the Netherlands.
On the other hand, there was a particularly low level of digitalization of
other financial services in the Balkan countries. In three countries: Albania,
Kosovo and Montenegro, it was below 1% in 2019. Among the European
 Digital exclusion in the financial system 187
Union countries, the lowest level of digitalization was recorded in Romania
and Cyprus (2% and 3% respectively). In Poland, the relatively low popularity
of other digital financial services can also be observed (7% in 2019). In this
respect, the difference between Poland and the average level recorded in the
European Union was clearly visible (20% in 2019). Despite the noticeable
annual increase, the actual “digital divide” in the case of other financial services
between Poland and most European countries, is unfortunately increasing.
To illustrate the scale of digital exclusion on the financial market, the basic
parameters of this phenomenon are presented with the example of Poland
compared to its immediate neighbors in the European Union. The Central
European countries, having many socio-cultural similarities and mostly a si-
milar level of economic development (except for Germany), seem to be an
obvious reference for Poland. Unfortunately, the Polish financial sector is
generally less digitalized than in neighboring countries. Only in years
2010–2013 online banking in the Czech Republic was less widespread than in
Poland. In the remaining years, the entire financial market was least digitalized
in Poland. Despite the noticeable reduction in the scope of the digital ex-
clusion in Polish financial services in subsequent years (banking: an increase
from 37% in 2010 to 60% in 2019, and other financial services: an increase
from 4% in 2016 to 7% in 2019), similar processes taking place in other
countries (including the closest neighbors) took on a slightly more dynamic
character, as a result of which the difference between Poland and other
European countries did not decrease. In the case of online banking, the digital
banking gap (between the European Union and Poland) in the analyzed
period remained at an average level of approx. 3 percentage points. However,
in the case of other financial services, it increased from 10 to 13 percentage
points. Among Poland’s neighbors, online banking services are most com-
monly used in Lithuania (an increase from 50% in 2010 to 75% in 2019),
following in the footsteps of a geographically close digital leader Estonia. On
the other hand, the most digitalized other financial services can be found in
Germany (an increase from 16% in 2016 to 21% in 2019). Also in this case,
there are noticeable differences in the prevalence of the use of banking and
other financial services on the Internet (Figure 10.1).
In order to estimate the scale of digital exclusion in Poland, the popularity
of using different financial products in the online version is also presented
compared to the entire European Union. According to the previous sum-
maries (Tables 10.1 and 10.2), online banking services used in 2019 by 60% by
Poles are by far the most popular. E-banking is the most common financial
product in Poland, and is also characterized by the relatively smallest digital
gap in relation to the entire European Union.
The remaining digital financial products are incomparably less widespread.
Among them, insurance services stand out, which are bought or renewed via
the Internet by 5% of Poles (in 2019), but they remain far less popular than in
the entire European Union (16% in 2019). On the other hand, the remaining
product categories: stocks, bonds and units of investment funds as well as
188 Bogumił Czerwiński

Figure 10.1 Percentage of residents using online financial products in selected Central
European countries in 2010–2019 (%).
Source: Own study based on Eurostat data [ https://ec.europa.eu/eurostat/databrowser/view/ISOC_
BDE15CBC$DV_623/default/table; download date: 15/11/2020; https://ec.europa.eu/eurostat/
databrowser/view/isoc_ec_ifi/default/table?lang=en; download date: November 15, 2020].

credits and loans granted by banks and other financial institutions are pur-
chased via the Internet by only 1 in 100 Poles (Figure 10.2).
It should be emphasized here that in other EU countries, these products are
also not very digitalized, but their popularity is much greater than in Poland.
For example, in 2019, shares, bonds and units of investment funds were
purchased by 5% of EU citizens via the Internet, while credits and loans were
granted to only 4%. Such a definite lack of popularity of these products
purchased on the Internet is partly related to the digital exclusion, but also to a
large extent to their financial exclusion indicated above.

10.5 Digital exclusion in financial services

The identified low level of digital competencies of Poles in the use of financial
intermediation services is also related to the relatively low (compared to other
European Union and OECD countries) level of digital skills of Polish citizens
and insufficient saturation of households with computers with Internet access
(OECD Publishing, 2019, pp. 58–59). Additionally, when developing the
thesis about the relatively low level of digitalization of Poland, one should
refer to the Index of Digital Economy and Society published annually by the
European Commission. In the latest ranking Poland came 23rd, ahead of only
five EU countries, obtaining a better than the EU average ranking in the area
of connectivity (access to the Internet) and much worse ratings in the areas of
 Digital exclusion in the financial system 189
Table 10.1 Percentage of residents using internet banking in selected European countries in
2010–2019 (%)

Country/Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Norway 87 83 n/a 93 92 94 90 95 94 96
Finland 84 85 87 90 91 91 91 92 93 95
Iceland n/a 83 88 89 93 n/a n/a 95 95 94
Denmark 78 79 85 87 88 87 91 93 90 93
Netherlands 78 80 82 83 85 87 86 89 90 92
Sweden 83 83 83 85 84 83 87 87 87 85
Estonia 68 70 73 77 80 82 82 82 81 82
United Kingdom 46 n/a 50 53 55 56 61 70 n/a 79
Luxembourg 52 54 n/a 64 71 69 70 76 71 76
Lithuania 50 53 54 58 64 60 66 68 71 75
Czech Republic 29 36 42 43 54 53 56 61 67 74
Switzerland n/a n/a n/a n/a 55 n/a n/a 66 n/a 73
Ireland 40 35 n/a 52 56 59 60 67 69 73
Latvia 53 57 55 59 60 68 66 63 69 72
France 56 55 56 60 58 60 61 64 64 68
Belgium 51 53 52 56 57 60 61 62 65 67
Austria 41 46 50 54 53 57 60 65 61 66
Germany 45 48 n/a 50 52 55 57 59 63 64
Slovakia 43 47 53 52 50 47 55 57 64 63
European Union 40 41 45 47 49 50 53 57 58 63
Poland 37 39 45 45 46 43 52 53 57 60
Spain 30 32 35 38 42 45 49 51 54 60
Hungary 28 30 38 38 40 42 48 50 55 58
Croatia 29 28 29 31 27 46 46 40 48 54
Malta 37 44 41 41 44 47 50 49 51 51
Slovenia 32 35 28 41 40 37 45 42 50 51
Portugal 26 29 30 28 31 34 35 38 45 50
Cyprus 23 25 n/a 30 30 26 34 34 37 45
Italy 21 24 26 26 30 32 32 34 37 40
Greece 8 11 n/a n/a 17 17 24 32 33 38
North Macedonia n/a n/a n/a n/a n/a n/a n/a n/a 13 18
Romania 7 8 7 9 9 10 9 14 13 15
Bulgaria 5 5 9 8 8 9 7 9 11 12

Source: Own study based on Eurostat data (https://ec.europa.eu/eurostat/databrowser/view/ISOC_

BDE15CBC$DV_623/default/table; download date: November 15, 2020).

digital public services, human capital, use of Internet services and integration
digital technology (DESI, 2020, p. 14).
Based on the cyclical research carried out by CBOS, titled, in the case of
Poland, “Using the Internet,” as persons exposed to digital exclusion we can
primarily identify (Fundacja Centrum Badania Opinii Społecznej, 2020, pp. 2–4):

• persons aged 55 and above (with a marked increase in the scale of

exclusion with age);
• persons with primary and basic education;
190 Bogumił Czerwiński
Table 10.2 Percentage of residents using the Internet to purchase other financial products in
selected European countries in 2016–2019 (%)

Country/Year 2016 2017 2018 2019

United Kingdom 38 41 47 56
Sweden 33 43 45 50
Estonia 32 32 44 50
Iceland n/a 39 40 49
Norway 37 38 40 46
Netherlands 35 38 40 43
Ireland 16 16 20 40
Finland 31 34 36 39
Latvia 25 21 31 30
Denmark n/a 21 27 25
Germany 16 17 17 21
European Union 14 15 17 20
Lithuania 11 14 16 20
Switzerland n/a 16 n/a 18
Czech Republic 11 11 15 16
Malta 8 11 13 14
Luxembourg 18 21 12 13
Belgium 8 9 9 12
France 8 8 9 12
Spain 6 8 10 11
Hungary 4 4 8 11
Slovakia 10 7 10 10
Portugal 6 9 9 10
Austria 6 7 7 9
Slovenia 3 4 9 8
Italy 7 7 8 8
Turkey 4 6 8 7
Poland 4 4 5 7
Greece 3 4 4 5
Croatia 3 4 3 5
Bulgaria 2 3 2 4
Cyprus 3 4 3 3
Bosnia and Herzegovina n/a n/a n/a 2
Romania 2 2 2 2
Serbia n/a 1 1 2
North Macedonia 3 2 2 1
Montenegro n/a 0 1 0
Kosovo n/a 0 1 0
Albania n/a n/a 0 n/a

Source: Own study based on Eurostat data (https://ec.europa.eu/eurostat/databrowser/view/isoc_ec_

ifi/default/table?lang=en; download date: November 15, 2020).

• persons who perform manual labor (farmers, unskilled and skilled workers);
• persons in a poor financial situation;
• residents of villages and small towns;
• the disabled.
 Digital exclusion in the financial system 191

Figure 10.2 The percentage of individual clients using financial products in the online
version in Poland and in the European Union in 2010–2019 (%).
Source: Own study based on Eurostat data [ https://ec.europa.eu/eurostat/databrowser/view/ISOC_
BDE15CBC$DV_623/default/table; download date: 15/11/2020; https://ec.europa.eu/eurostat/
databrowser/view/isoc_ec_ifi/default/table?lang=en; download date: November 15, 2020].

In the case of financial services, digital exclusion concerns mainly mature and
elderly persons who, for instance, use online banking noticeably less frequently
(Gorbacheva et al., 2011, p. 8; Adamek, Solarz, 2020, pp. 17–18; Friedline,
Chen, 2020, pp. 20–22). It concerns to a lesser extent:

• persons with a lower level of education,

• persons in a poor financial situation;
• residents of villages and small towns;
• women (to a slightly higher degree than men).

In addition to socio-demographic variables and digital competencies in a broad

sense, it has been observed that the intention to use and, consequently, the
actual use of online banking is also particularly influenced by the effective (and
being in line with consumer expectations) use of two technological factors by
financial institutions:

• perceived security,
• conditions that facilitate use.
192 Bogumił Czerwiński
The practice of internet banking indicates that the listed factors may be im-
plemented in some contradiction with each other, as the perceived security
(e.g. in the form of additional access security) may make it difficult to use
e-banking. However, it can be concluded that the factor slightly more im-
portant than all of the above-mentioned, with a greater impact on the use of the
system, is the security of transactions, which indicates a certain priority in
the situation where it is impossible to meet all the expectations of potential users
at the same time. It seems, however, that the optimal solution that combines the
indicated expectations at the current stage of development of digital financial
services is the advanced use of biometrics (Yuhelson et al., 2020, p. 242).
Persons who are digitally excluded in the field of financial services can
experience a number of negative phenomena related to the information gap.
The phenomena concern both these services directly, as well as social activities
to which these persons have limited access, and include the following lim-
itations and difficulties (Widawska, Wysocka, Wieczorek, 2014, p. 14):

• the inability to use certain financial products;

• incurring higher costs for these services;
• difficulties in self-realization due to limitations in some social activities;
• problems with institutional participation in social, professional and cultural life.

In addition to the consequences that affect digitally excluded persons directly,

the consequences for financial institutions that are not able to take full ad-
vantage of technological development opportunities, thus incurring higher
costs and losing their competitive advantage over other entities on the do-
mestic and non-domestic market should also be indicated. In turn, for the state
and its institutions, this exclusion may result, above all, in the weakening of
ties between citizens and the necessity to incur excessive financial and social
costs related to the activation of digitally, and consequently also socially, ex-
cluded persons. Neglects in the field of digital society development may even
lead to some form of marginalization of the country in the international arena
(Jedlińska, 2018, p. 228).
In the context of the low digitalization of the Polish financial market, it is
important to take actions that will help reduce the scale of digital exclusion.
Among them, two basic groups of undertakings can be identified: those related
to the increase in digital competencies of Poles and another related directly to
the digitalization of financial services. Taking into account the reasons for the
lack of access to the Internet most often indicated by persons who do not use it
(GUS, 2019, p. 153), (No need to use the Internet and Lack of skills) with much
less frequently indicated economic reasons, it should be noted that hard bar-
riers (infrastructural or financial) are becoming less and less significant, while
soft barriers related to attitude or competencies play a significant role (Batorski,
2009, p. 234). Most likely, it can be concluded that the increase in digital
competencies will not be easy to achieve in a short period of time. However, it
 Digital exclusion in the financial system 193
can be assumed that the increase in digital competencies should be achieved
through a set of activities, the key of which seem to be:

• support for the educational and training offer regarding new technologies,
addressed primarily to digitally excluded persons (the elderly, persons with
lower level of education, the unemployed or professionally inactive);
administrative investments especially in the increase of digital competen-
cies of young persons seem to be economically unjustified, as the problem
of digital exclusion does not generally occur in this group;
• popularization of home access to the Internet (e.g. by investing in
infrastructure in poorly urbanized areas);
• development of e-administration, allowing for the settlement of official
matters via the Internet;
• institutional support related to high technology for investments in
enterprises and business areas (instead of investments in enterprises
operating in traditional areas of activity), which should contribute to
structural changes in the Polish economy.

Financial institutions, on the other hand, through their activity in the area of
digital financial services should primarily try to reduce the mental barriers of
consumers caused by lack of use of these services. This activity should focus on
reducing the negative impact of the limitations identified in this paper:

• safe use of services,

• conditions facilitating their use.

At the same time, it should be emphasized that the main course of action
should be securing appropriate safety standards for the use of financial services.

10.6 Summary
In recent years, financial services have experienced very dynamic changes
related to the dissemination of digital technologies. Although the use of these
technologies is a natural solution for a large group of consumers of banking
services and other financial services, a significant part of them still do not use
financial products via the Internet.
In this study, with reference to the financial and social exclusion, the phe-
nomenon of digital exclusion on the financial market is presented in the global
context and in relation to the Polish market. The key determinants of the digital
exclusion for the financial market were also identified, which concern the digital
competencies of consumers and actions taken by financial institutions. Socio-
demographic characteristics that are conducive to digital exclusion in financial
services, with particular risk among older and mature persons, were also iden-
tified. The consequences of the digital exclusion for financial entities, their
clients and for you and your institutions were also established.
194 Bogumił Czerwiński
Based on statistical data, the scale of digital exclusion in financial services in
Poland has also been established, which is broader than the analogous phe-
nomenon in most European countries. Taking into account the significant
(albeit decreasing) scope of the digital exclusion on the Polish financial market,
recommendations were also indicated, the implementation of which should
contribute to the popularization of digital financial intermediation services.

Notes
1 The presented summaries, according to Eurostat data, include the EU, EFTA, and several
other Balkan countries.
2 The lower popularity of these products is also the reason why Eurostat later starts ana-
lyzing these products and, consequently, uses a shorter comparison period in this text.

Bibliography
Adamek, J. and Solarz, M. 2020. The digital skills conducive to using the Internet and mobile
banking services in light of nationwide own research results. Prace Naukowe Uniwersytetu
Ekonomicznego we Wrocławiu, nr 64(6).
Batorski, D. 2009. Wykluczenie cyfrowe w Polsce. Studia Biura Analiz Sejmowych Kancelarii
Sejmu, 3(19).Wydawnictwo Sejmowe Kancelarii Sejmu.
Caplan, M. A., Birkenmaier, J. and Bae, J., 2020. Financial exclusion in OECD countries:
A scoping review. International Journal of Social Welfare.
Castells, M. 2003. Galaktyka Internetu: refleksje nad Internetem, biznesem i społeczeństwem. Dom
Wydawniczy Rebis.
Chang, B. L., Bakken, S., Brown, S. S., Houston, T. K., Kreps, G. L., Kukafka, R. and
Stavri, P. Z. 2004. Bridging the digital divide: Reaching vulnerable populations. Journal
of the American Medical Informatics Association, 11(6), pp. 448–457.
Czerwiński, B. 2019. Zjawisko wykluczenia na rynku usług finansowych. in Gąsiorkiewicz L.,
Monkiewicz J. (eds.) Wyzwania współczesnych rynków finansowych. Wydział Zarządzania
Politechniki Warszawskiej.
Digital Economy and Society Index (DESI) 2020, 2020. European Commission 2020, https://
ec.europa.eu/digital-single-market/en/digital-economy-and-society-index-desi
Financial Services Provision and Prevention of Financial Exclusion. 2008. Brussels: European
Commission, http://ec.europa.eu/social/BlobServlet?docId=760&langId=en
Friedline, T. and Chen, Z. 2021. Digital redlining and the Fintech marketplace: Evidence
from US zip codes. Journal of Consumer Affairs.55 /2021, 10.1111/joca.12297
Gorbacheva, E., Niehaves, B., Plattfaut, R. and Becker, J. 2011. Acceptance and use of internet
banking: A digital divide perspective. AIS Electronic Library (AISeL).
Iwanicz-Drozdowska, M., Matuszyk, A., Nowak, A. K. and Kitala, R. 2009. Produkty
finansowe i edukacja finansowa w Polsce na tle wybranych krajów wysoko rozwiniętych. Raport z
badań statutowych nr 4. Warszawa: Szkoła Główna Handlowa.
Jedlińska, R. 2018. Wykluczenie cyfrowe w Polsce na tle krajów Unii Europejskiej.
Ekonomiczne Problemy Usług, 131(2).
Kempson, E. and Whyley, C. 1999. Kept out or opted out. Understanding and combating fi-
nancial exclusionand. Bristol: Thee Policy Press.
Korzystanie z internetu. Komunikat z badań nr 85/2020, 2020. Fundacja Centrum Badania
Opinii Społecznej(CBOS).
 Digital exclusion in the financial system 195
Marcinkowska, M., Ziemba, M. and Świeszczak, K. 2014. Wykluczenie finansowe osób 50+
w kontekście dostępnej oferty bankowej. Warszawa: Finanse: Czasopismo Komitetu Nauk o
Finansach PAN, 1(7).
Ozili, P. K. 2018. Impact of digital finance on financial inclusion and stability. Borsa Istanbul
Review, 18(4), pp. 329–340.
Skills matter: Additional results from the survey of adult skills, OECD skills studies. 2019. Paris:
OECD Publishing, 10.1787/1f029d8f-en
Społeczeństwo informacyjne w Polsce w 2019 r. 2019. Główny Urząd Statystyczny (GUS).
Van Dijk, J. 2010. Społeczne aspekty nowych mediów. Warszawa: Wydawnictwo
Naukowe PWN.
Van Dijk, J. 2013. A theory of the digital divide. The digital divide: The internet and social
inequality in international perspective. Taylor and Francis.
Warschauer, M. 2003. Dissecting the “digital divide”: A case study in Egypt. The Information
Society, 19(4), pp. 297–304.
Widawska, E., Wysocka E. and Wieczorek Z. 2014. Wyznaczniki wykluczenia cyfrowego i
dostępności stron internetowych instytucji publicznych. Wydawnictwo im. S. Podobińskiego
Akademii im. Jana Długosza.
Wilk, S. 2014. Elektroniczna administracja w społeczeństwie informacyjnym. Model a rzeczywistość
na przykładzie województwa podkarpackiego. Wydawnictwo Uniwersytetu Rzeszowskiego.
Yuhelson, Ariyanto D., Ernawati, Soejono F. and Dewi, S. P. 2020. Digital economy and
financial inclusion. Journal of Environmental Treatment Techniques, 8(1), pp. 241–243.
https://ec.europa.eu/eurostat/databrowser/view/ISOC_BDE15CBC$DV_623/default/table
https://ec.europa.eu/eurostat/databrowser/view/isoc_ec_ifi/default/table?lang=en
Part IV

Risks and challenges of

digital finance
11 Systemic and cyber risk: the two
monsters of financial system
Adam Głogowski1

11.1 Digitalisation of financial services and risk in finance:

introductory remarks
Finance, and especially banking, is an economic activity that heavily relies on
processing information. Therefore it comes as no surprise that technological
advancements which improve processing, storage and transfer of information
have always been readily adopted into finance. This chapter focuses on the
consequences of innovations in information and communication technology
(ICT) for systemic risk in the financial system and the rise – and potential
systemic character – of cyber risk in finance.
The development of digital technologies in the second half of the 20th
century and in the 21st century resulted in a rapid increase in ease and decrease
in cost of processing information. As an illustration, Nordhaus (2015) pointed
out that the cost of processing power (calculated as the cost of a device capable
of executing a set number of mathematical operations per unit of time) had
been falling at an annualized rate of 50% between 1940 and 2012, at constant
prices. Mearian (2017) points to a similar trajectory of prices for digital data
storage. Furthermore, the development of network technologies – both in
terms of availability and performance – resulted in the emergence of cloud
computing, enabling flexible utilisation of processing power and data storage.
These processes led to “commoditisation” of many IT resources – enterprises
are able to buy and use them according to their needs, and the access to these
technologies is not anymore a source of competitive advantage.
However, demand factors also contribute to their popularity.

• The use of the internet for financial services has become widespread. As
an example, Eurostat data show that as of 2019, 55% of individuals in the
EU have used internet banking services, up from 34% in 2010. The
popularity of internet banking increases the willingness of consumers to
use digital financial services in general. The growth in use of digital
services in non-financial parts of the economy, such as retail trade,
transport and communication (including social networks) has resulted in a
shift of consumer expectations regarding the convenience ease of use,

DOI: 10.4324/9781003264101-16
200 Adam Głogowski
speed, cost and user-friendliness of financial services, especially among
younger clients (Financial Stability Board, 2017; World Economic Forum
[WEF], 2017; EY, 2019).
• In emerging economies and low-income countries, financial inclusion is
also an important factor driving demand for innovative financial services.
For example in Sub-Saharan Africa, simple financial services such as
money transfers and payment accounts accessed through mobile phones
have become an important financial service.

The application of these technologies to financial services leads to a rapid

growth of new forms of financial intermediation, as well as changes in the
operations of traditional financial institutions (e.g. the development of digital
distribution channels for banking, insurance and asset management products).
This topic is gaining attention of the international supervisory and regulatory
community (see e.g. Financial Stability Board, 2017).
A useful approach to analyse the supply-side factors driving the digitalisation
of finance is the “fintech tree” concept presented by Financial Stability Institute
(2020). The authors analyse the development of innovative business models in
finance, as well as the entry of new types of entities into the market of financial
services taking into account not only the availability of new technologies but
also the regulatory and public policy environment (see Figure 11.1).
However, demand factors also contribute to the growth of innovative business
models in finance. The growth in use of digital services in non-financial parts of
the economy, such as retail trade, transport and communication (including social
networks) has resulted in a shift of consumer expectations regarding the con-
venience ease of use, speed, cost and user-friendliness of financial services, espe-
cially among younger clients (Financial Stability Board, 2017; World Economic
Forum [WEF], 2017; EY, 2019). In emerging economies and low-income
countries, financial inclusion is also an important factor driving demand for in-
novative financial services. For example in Sub-Saharan Africa, simple financial
services such as money transfers and payment accounts accessed through mobile
phones have become an important financial service, constituting a “gateway” to
financial services. According to GSM Association (2021), around 159 million
inhabitants of that region actively used (at least once a month) mobile money
accounts as of 2020, out of almost 550 million accounts registered – a significant
number, compared to the region’s around 1.2 billion inhabitants.

11.2 Selected structural implications of digitalisation for

the financial system
Digitalisation of finance has multiple aspects, as the overview in Figure 11.1
suggests. This section reviews the developments in digital finance which may
have the most relevance for systemic risks and cyber risk, namely the emer-
gence of new business models in lending and the entry of so-called Big Tech
firms into finance.
 New business models and market entrants

• Digital banking
• Internet lenders
• Crowdfunding
• Robo-advice
• E-money and digital payments
• Insurtech
• Cryptoassets

Key technologies

• API
• Cloud computing
• Biometrics
• DLT
• Machine learning and artificial intelligence

Foundations of digitalisation including public policy

• Digital identity
• Data protection framework
• Open banking / open finance
• Sandboxes and business incubators
• Cybersecurity framework

Figure 11.1 The “fintech tree”.

Source: Adapted from Financial Stability Institute (2020).
Systemic and cyber risk 201
202 Adam Głogowski
11.2.1 Lending
Digital technologies are used to develop new models of lending. Committee
on Global Financial System and Financial Stability Board [CGFS & FSB]
(2017), as well as CCAF (2021) and Cornelli, Frost, Gambacorta, Rau,
Wardrop & Ziegler (2020) document the emergence of new types of lending
activities. The most prominent example are platforms that connect individual
lenders and borrowers in a direct or indirect way, leading to lenders obtaining
credit exposures on borrowers (P2P platforms). The platforms may provide
credit scoring on the basis of information provided by the prospective bor-
rowers, as well as repayment history of previous loans taken out through the
platform. Platforms may also report and use information from credit bureaus.
The key argument for the development of lending platforms is the potential
to offer lower costs for borrowers and higher returns for lenders. Lending
platform operators are typically outside the regulatory perimeter or subject
only to light regulation as credit intermediaries and consequently bear lower
costs related to regulation. However, empirical evidence on loan costs and
returns for creditors reviewed by CGFS and FSB (2017) does not yield
conclusive results. Lending platforms may also attract lower-quality borrowers,
who may expect that it would be easier for them to obtain credit there due to
less comprehensive information available to platforms and consequently to
investors. Research by Cornaggia, Wolfe and Yoo (2018) suggests that for
higher risks unsecured loans in the US, P2P platforms substitute bank lending,
leading to increased competition between banks and P2P lenders.
However, P2P lending platforms are not the only non-bank lending ac-
tivities developing using digital tools. According to Cambridge Centre for
Alternative Finance [CCAF] (2021) data on alternative finance activities, P2P
lending to consumers, businesses and for real estate together comprise around
48% of alternative finance flows globally in 2020. “Balance sheet lending” –
where non-bank digital lenders, funding their activity through debt issuance,
extend loans directly to borrowers – accounts for around 39% of the market.
This development of non-traditional lenders is not even across jurisdictions.
CCAF data document the divergent paths of this lending in China – where a
boom in P2P platforms led to the Chinese market being responsible for 86% of
global volumes in 2017, before stricter regulations brought this market almost
to a complete stop as of 2020 – and in other countries, which saw a more
steady growth. The Chinese P2P boom may be linked both to supply (low
supply of high-yielding savings products for consumers leading to search for
yield) and demand (underserved opaque borrowers looking for non-bank fi-
nancing) factors (Claessens, Frost, Turner & Zhu, 2018). A permissive reg-
ulatory environment was another factor supporting the growth of FinTech
credit. These factors led to a boom in lending platforms between 2013 and
2015, a side effect of which was an increase in defaults and fraudulent activity,
which resulted in regulatory action and a significant reduction in the number
of platforms2 (Figure 11.2).
700 000 2.50% 200 000 0.20% 12 000 0.09%
600 000 0.08%
2.00% 10 000
150 000 0.15% 0.07%
500 000
8 000 0.06%
400 000 1.50%
0.05%
100 000 0.10% 6 000
300 000 0.04%
1.00%
4 000 0.03%
200 000 50 000 0.05%
0.50% 0.02%
100 000 2 000
0.01%
- 0.00% - 0.00% - 0.00%

2013
2014
2015
2016
2017
2018
2019
2013
2014
2015
2016
2017
2018
2019
2013
2014
2015
2016
2017
2018
2019

Fintech credit flow (USD million) BigTech credit flow (USD million) Total alternative credit flow as % of stock of
total domestic credit by financial sector (RHS)

Figure 11.2 Big Tech and Fintech credit flows in China (left panel), G20 excluding China and including all EU countries (middle panel) and other
countries (right panel).
Source: Data from Cornelli, Frost, Gambacorta, Rau, Wardrop & Ziegler (2020), author’s calculations.
Systemic and cyber risk 203
204 Adam Głogowski
From the perspective of financial risk, lending platforms differ from deposit-
taking lenders (banks and institutions with equivalent business models). Lending
platforms typically do not perform maturity or liquidity transformation.
Furthermore, credit risk is typically borne by the investors, except for the cases
where the platform or the original lender fully or partly guarantees the loan
(which in economic terms would be equivalent to a tranche structure employed
in securitisation, with the loan originator retaining an equity tranche).
The source of income for lending platforms are typically fees charged for
matching borrowers and lenders. The risks generated by lending platforms
show strong similarities to risks of the “originate to distribute” business model
used by some lenders in the runup to the financial crisis of 2007–2009.3 This
similarity is even more pronounced when the source of funding is taken into
account. CCAF (2021) reports that a significant portion of funding comes
from institutional investors. In 2020 alternative lenders in US and Canada –
which together form the largest market globally – sourced 98% of their
funding from institutional investors, while for Europe (excluding UK) the
figure was around 50%, and 66% for UK. This may be a form of “search for
yield” in a low interest rate environment and may signify that the structural
change stemming from the “peer to peer” aspect is limited. There is little
difference in economic substance between an institutional investor purchasing
a portfolio of consumer or business loans from a lender and the same investor
supplying funds to a peer-to-peer lending platform where consumers or
businesses can apply for loans.
It seems that in highly developed economies alternative lenders partly
transform into a form of shadow banking entities. Furthermore, there are some
notable examples of alternative lenders actually obtaining banking licenses,
including through purchasing banks.4 Interestingly, the regions with the
lowest share of institutional funding are Middle East and Africa (20% to 30%)
which suggests than at least in some emerging markets the peer-to-peer aspect
of alternative lending is present and some of the declared benefits of disin-
termediation – for example the provision of higher-yielding investment op-
portunities to consumers – may be realised.

11.2.2 Entry of technology firms into financial services: the case of big tech
Another development that influences the structure of the financial system is
the entry of large technology-focused firms (so-called Big Tech) into financial
services. While a complete list of these companies is to some extent subjective,
typically the largest companies operating in e-commerce, internet search
services, consumer electronics and software are included in this category.5
While the global regulatory discussion focuses on the globally active BigTech
firms and despite the seemingly boundaryless nature of digital services, there
are also companies that have a very strong position in digital services in specific
countries. They may be termed “local Big Techs” and, while not enjoying the
same global reach as their international counterparts, may also play an
 Systemic and cyber risk 205
important role in local economic and financial systems.6 BigTech companies
entering into finance have a number of advantages. They enter finance with
established client bases. Their core business models often exhibit positive
network externalities i.e. their services become more attractive to new users as
the number of users increases and a growing user data pool can be analysed to
improve the services creating, as identified by the BIS (2019), a positive
feedback loop.
This is most evident in the case of technology firms that provide platforms
for user interaction – typical examples include social networks as well as e-
commerce platforms where both sellers and buyers use the platform developed
by the BigTech company for transactions. Indeed, in several cases, the mo-
tivation of entry of BigTech into financial services was to provide payment
solutions for the users of their non-financial business and support its growth, as
payment services are complementary for example to e-commerce. The pro-
vision of financial services thus may further increase the economies of scale for
BigTech companies. For example, e-commerce platforms can use the financial
data for developing lending services to vendors, making it more attractive for
them to use the platform. The provision of additional services to vendors may
also incentivise them to provide the platform with as much data as possible
(e.g. by making it their only distribution channel) and thus obtain funding at
more favourable terms.7 E-commerce platforms can also offer loans to buyers
to finance their purchases (either as traditional loans or “deferred payment”
services), drawing on the history of purchases – and successful payments – for
credit scoring. In this fashion, they can increase their share in the value chain
of internet sales.
On the other hand, BigTechs with a focus on social networks or search
engines collect data on individuals and their preferences (observed from their
activity or inferred from their search queries), as well as their network of
connections (in the case of social networks). They can then use the in-
formation on users’ preferences to market, distribute and price third-party
financial services. EBA (2021) points out that large technology companies are
active in the EU as providers of at least two types of digital platforms for
financial services – “ecosystems,” which enable the marketing and distribution
of financial products from multiple providers, as well as “platforms with
banking or payments as side service” where financial services are offered to
augment the products and services sold through the platform.
The data-reliant business model of BigTech firms underscores the im-
portance of legislation governing data protection for the development of their
activities. In this context, it is worth noting that there is a multitude of reg-
ulatory approaches across countries to customer data protection (see e.g.
Crisanto, Ehrentraud, Lawson & Restoy (2021) for a broader overview of
emerging Big Tech regulation). These requirements will determine to what
extent methods used by BigTech companies in non-financial services, which
to a large extent rely on fully automated data processing, may be applied to
regulated activities such as finance.
206 Adam Głogowski
Finally, Big Tech companies are important providers of IT services, soft-
ware and infrastructure, such as cloud computing services. In this aspect, they
are becoming critical service providers for both financial and non-financial
enterprises. This has implications for cyber risk in the financial system and its
possible systemic nature (see section 11.4 below).

11.3 Selected implications of digitalisation in finance for

systemic risk
The definitions of systemic risk in the financial system in the economic lit-
erature are varied (for a brief discussion see e.g. Arnold, Borio, Ellis &
Moshirian 2012, Allen & Carletti, 2012). The definition used by policymakers
in practice is usually close to the one used by EU in EU Regulation 1092/
20108 which established the European Systemic Risk Board (ESRB). The
Regulation defines systemic risk as “a risk of disruption in the financial system
with the potential to have serious negative consequences for the internal
market and the real economy,” while noting that “all types of financial in-
termediaries, markets and infrastructure may be potentially systemically im-
portant to some degree.” A more operational approach to systemic risk
identification is based on the ESRB framework of intermediate policy ob-
jectives.9 The macroprudential policy objectives can be seen as a “catalogue”
or typology of aspects of systemic risk. In this section, we focus on the first
(excessive credit growth), fourth (too-big-to-fail), while the fifth objective
(infrastructure resilience) is relevant from the point of view of cyber risk,
discussed in the next section.
The first intermediate macroprudential policy objective relates to pre-
venting excessive credit growth and leverage. Excessive credit growth has
been identified as a key driver of asset price bubbles and subsequent financial
crises, with leverage acting as an amplifying channel.
The scale of new types of lending (such as conducted through peer-to-peer
lending platforms) is minor so far compared to traditional instruments such as
bank lending in most countries, as illustrated by the data quoted in section 11.2.
A feature specific to peer-to-peer lending platforms is the decentralisation of
entities that bear credit risk, in contrast to bank lending, where credit risk is
borne first by banks and depositors bear the residual credit risk of the bank.
While the peer-to-peer lending model changes somewhat the principal-agent
problem inherent in banking,10 it does not fully eliminate the incentives that
may lead to excessive supply of credit. Moreover, if the activity of lending
platforms results in overindebteness of the real sector, the resultant macro-
economic risks are still present, even if the holders of debt are dispersed.
While creditors ultimately take on the credit risk of loans, they rely on
information processed and analysed by lending platforms, which is an obvious
asymmetry of information. The revenue model of platforms, based on the
volume of extended loans may incentivise platform operators to maximise
loans extended by presenting information to creditors in a way that creates
 Systemic and cyber risk 207
mispricing of risk. The relatively short history of the lending platform model,
which in most cases has not gone through a downturn of the financial cycle
yet, and has for the most part developed during a period of low interest rates,
increases the likelihood of a procyclical lending policy, with excessive credit
provision in upswing and strong retrenchment in downturn (FSB, 2019).
The growing role of institutional investors in the funding of lending plat-
forms may contribute to procyclicality of this lending segment as large cred-
itors may be more prone to herding behaviour. While an argument could be
made that the involvement of institutional investors could result in better due
diligence of loan origination, the history of the originate-to-distribute model
in the period preceding the subprime crisis suggests otherwise.
The similarities between the risks inherent in peer-to-peer lending model and
the ones related to lending in an originate-to-distribute model suggest similar
possible responses from the regulator – namely a requirement for the platform
operator to take on some of the risk of loans originated through the platform
could better align the incentives of the platform operator and creditors.
The fourth intermediate objective of macroprudential policy refers to
misaligned incentives and moral hazard – more precisely, it refers to the ex-
istence of institutions that are “too big to fail.”
In this context, we focus on the possible emergence of new systemically
important providers of financial services. The activities of BigTech firms are
particularly interesting from this perspective. Their large established networks
of clients as well as their competences in analysing large sets of data on their
clients in order to continuously refine their services and attract new clients
provide them with a strong base for expansion in financial services. It has to be
noted, however, that their growth to date has happened (mostly) in lightly
regulated industries and predates regulation concerning consumer data rights.
It remains to be seen to what extent the BigTech companies can replicate their
market success in finance.

11.4 Cyber risk and its systemic aspects

Cyber risk can be seen as a subset of operational risks. The Basel Committee
defines operational risk as risk of loss arising from inadequate or failed internal
processes, actions of people or systems, or external events – including legal
risk, but excluding strategic or reputational risk. Cyber risk, on the other hand,
is defined by the FSB (2018) as risk which materialises through events that
violate the confidentiality, integrity or availability of information processed
through digital systems, or events where the security policies of these systems
are violated. An important feature of cyber risk is that it can materialise both
due to unintentional errors or failures and due to actions undertaken with
malicious intent by actors internal or external to the affected firm. Such actors
can include criminals motivated by financial gain, state actors or proxy groups
acting for geopolitical or ideological goals, activists or terrorists motivated by
ideology as well inside actors motivated by discontent with their employer.
208 Adam Głogowski
Cyber risk events can take the form of destruction (of data or of physical IT
infrastructure), disruption (such as denial-of-service attacks or disruption of the
operation of key systems) or theft (of financial resources, for example through
fraudulent transfers of funds or of information, for espionage, credential theft
or defamatory purposes). The type of attack often depends on the goal of the
attacker – for example actors with espionage goals are likely to focus on non-
destructive goals such as information theft, while actors aiming for disruption
of the targeted institutions may choose methods that include data destruction.
There are several features of cyber risk that distinguish it from other forms
of operational risk. One is the speed of materialisation and propagation of
cyber risk events and the scale that they can reach. Malicious actors exploiting
a vulnerability that is present in widely used software can quickly affect large
numbers of computers across multiple entities and countries, as exemplified by
the WannaCry attack, which affected 230 thousand computers in 150 coun-
tries within a few days (Ros, 2020). Another is the strong role of intent of
perpetrators in cyber risk events. They are most often not the result of “ac-
cidents” but arise from active seeking of vulnerabilities by the perpetrators.
Cyber risk also has a global nature – any information system which has some
form of connection to the Internet can be attacked from anywhere in the
world. While the most sophisticated threat actors develop their solutions
themselves, attacks targeting well-known vulnerabilities can be “outsourced”
from criminal groups for a fee.11 The availability of “ready-made” tools for
cybercrime increases the probability of cyber events, as it lowers the required
technical proficiency that threat actors must possess in order to execute a
successful attack against targets – at least ones with some flaws in cyber risk
management.
One of the defining trends of digitalisation in finance is the increased role of
self-service digital channels of contact between the financial institutions and its
clients. While it provides new ways of servicing customers, it also exposes
more of the financial institution’s systems to attacks through the Internet. The
rise of “open banking/open finance” solutions also can potentially increases
the risk exposure.
Several characteristics of the financial sector increase the importance of
cyber risk to its functioning. Financial institutions are interdependent in many
ways – not only through mutual financial exposures but also through the use
of common systems (such as payment and settlement systems, CCPs, etc.). A
key element of finance is information processing, therefore disruptions in this
area have a significant impact on financial institutions. Furthermore, cyber risk
events can lead to a loss of confidence in financial institutions by their clients
or counterparts, with negative results such as loss of funding or revenue.
While cyber risk can be seen as a firm-level threat first, there are circum-
stances in which it can have wide-ranging consequences. Adelman, Elliott,
Ergen, Gaidosch, Jenkinson, Khiaonarong, Morozova, Schwarz & Wilson
(2020) and Ros (2020) identify conditions when the materialisation of cyber risk
can have a systemic effect. This can happen when the affected entity or system
 Systemic and cyber risk 209
has a key role in the financial system which cannot be easily substituted – such as
the central bank’s payment system. This could be a result of a cyber attack of a
destructive nature, which leads to the unavailability of key functions. Cyber risk
can also have systemic effects when it materialisation leads to a widespread loss of
confidence in financial institutions. Such a situation can arise due to data cor-
ruption or theft, or large losses due to financial theft which question the viability
of affected firms. Finally, cyber risk can become systemic when contagion effects
arise with problems affecting multiple firms at once. This scenario can materi-
alise when an IT services provider used by many institutions is affected. In this
context, the concentration of cloud computing market is an important global
risk factor, as the top 3 providers of cloud services account for over 60% of the
market as of 2021.12

11.5 Conclusions and policy implications

The brief review presented in this chapter suggests that the increasing digi-
talisation of financial services has implications both for systemic risk and in-
creases the importance – and systemic relevance – of cyber risk.
In most jurisdictions, new business models of lending have so far failed to
achieve sufficient scale to have systemic relevance. The challenges arising from
their functioning are mostly in the area of consumer protection. However, the
experience of the Chinese peer-to-peer lending market illustrates that when
gaps in market regulation coincide with demand for financial services, digital
business models can scale quickly and become relevant for the economy. This
underlines the need for supervisors to monitor new market developments
closely.13 In highly developed markets, the large role of institutional funding –
likely driven by search for yield – in the functioning of non-bank lenders seems
to transform them into “shadow banking” entities, with certain aspects of the
“originate to distribute” business model present. In this area, the lessons learned
by the regulators from the experience with securitisation can be applied.
The entry of Big Tech companies into finance has the potential to reshape the
competitive landscape in the financial sector, or at least some markets within it.
Given the existing user bases of BigTechs, they have the potential to quickly
become systemic financial services providers. It remains to be seen, however, to
what extent BigTech business models can be adapted to financial services. They
are also important for the functioning of the financial system due to their role as
IT service providers, which has also implications for cyber risk.
The digitalisation of finance increases the importance and systemic re-
levance of cyber risk. Consequently, the supervision of cyber risk should go
beyond the single company level and attempt to identify vulnerabilities that
can affect multiple firms. Higher resilience standards for entities providing
critical services for the whole sector could be contemplated, in order to lower
the probability of cyber risk events with systemic consequences. The im-
portant role of IT services providers which serve multiple entities should also
be reflected in the regulatory framework. An example of such regulatory
210 Adam Głogowski
response is the proposed EU regulation on Digital Operational Resilience for
financial entities (DORA), which proposes a regulatory and supervisor regime
for critical IT service providers.
Digitalisation of finance leads to a regulatory response that covers not only
macro and microprudential supervision but also data protection, competition and
consumer protection. as summarised for example by Financial Stability Institute
(2020) or by Carstens (2021). Digital financial services can be provided in a cross-
border fashion leading to a need for cooperation at the international level.

Notes
1 Narodowy Bank Polski, Payment System Department, [email protected]. All
views expressed in this chapter are solely the author’s personal opinions and do not
represent the official view of the Narodowy Bank Polski.
2 The number of active peer-to-peer lending platforms in China went down from 2 680
in 2016 to 343 in December 2019. See Pymnts.com (2020).
3 For a discussion and empirical investigation of risks related to the “originate to dis-
tribute” model see e.g. ECB (2008).
4 For example, the US lending platform Lending Club acquired Radius bank in February 2021.
5 See BIS (2019), table III.1, for an illustrative list of Big Tech companies.
6 An example would be the Polish e-commerce marketplace Allegro which has a very
strong position on the Polish market – according to a PwC analysis, around 47% out of
Poland’s 150 thousand enterprises with internet sales sell their products only through
Allegro’s marketplace.
7 See Frost et al. (2019) and Gambacorta, Huang, Qiu & Wang (2019) on the advantages
of BigTechs in credit scoring.
8 Regulation (EU) No 1092/2010 of the European Parliament and of the Council of 24
November 2010 on European Union macro-prudential oversight of the financial system
and establishing a European Systemic Risk Board.
9 See European Systemic Risk Board (2014) as well as the Recommendation of the
European Systemic Risk Board of 4 April 2013 on intermediate objectives and in-
struments of macro-prudential policy (ESRB/2013/1).
10 The function of banking seen as intermediation between depositors and borrowers
involves a double principal-agent problem. The first one relates to the loan contract
between the borrower and the bank (and includes risks such as fraudulent borrowing
etc.), the second one relates to the relationship between depositors and the bank. In the
second one, bank management may take excessively risky lending decisions in the
expectation of high returns from loans to risky borrowers, leading to high remuneration
for managers. This may lead to an asset allocation that is incompatible with the risk
preferences of depositors.
11 Some developers of malicious software used to extort payments from targeted entities
make it available to attackers for a fee, leading to this modus operandi being called
“ransomware as a service.”
12 Synergy Research Group (2021).
13 At the international level, this is done e.g. by the Financial Stability Board. At national
level, numerous supervisory agencies and central banks have established financial in-
novation teams, tasked with monitoring and, in many cases, supporting financial in-
novation. For example, as Financial Stability Institute (2020) reports, 26 out of 31
surveyed countries established some form of innovation facilitator arrangement aiming
to support innovations in digital financial services that are judged by country authorities
to provide benefits to the market.
 Systemic and cyber risk 211
Bibliography
Adelman, F., Elliott, J., Ergen, I., Gaidosch, T., Khiaonarong, T., Morozova, A., Schwarz,
N., & Wilson, C. (2020). Cyber risk and financial stability: It’s a small world after all.
IMF Staff Discussion Note 2020/07.
Allen, F., & Carletti, E. (2012). Systemic risk and macroprudential regulation in Allen, F.,
Aoki, M., Fitoussi, J.-P., Kiyotaki, N., Gordon, R., & Stiglitz, J., The Global Macro
Economy and Finance, 191–210. doi: 10.1057/9781137034250_11
Arnold, B., Borio, C., Ellis, L., & Moshirian, F. (2012). Systemic risk, macroprudential
policy frameworks, monitoring financial systems and the evolution of capital adequacy.
Journal of Banking & Finance, 36(12), 3125–3132. doi: 10.1016/j.jbankfin.2012.07.023
Bank For International Settlements (2019). Retrieved from: www.bis.org/publ/arpdf/
ar2019e.htm.Annual Economic Report
Cambridge Centre for Alternative Finance (2021). The 2nd Global Alternative Finance
Market Benchmarking Report. Retrieved from: https://www.jbs.cam.ac.uk/faculty-
research/centres/alternative-finance/publications/the-2nd-global-alternative-finance-
market-benchmarking-report/
Carstens, A. Regulating big tech in the public interest. Speech at the BIS conference
“Regulating big tech: Between financial regulation, antitrust and data privacy”, 6–7
October 2021. Retrieved from: https://www.bis.org/speeches/sp211006.htm
Claessens S., Frost J., Turner G., & Zhu F. (2018). Fintech credit markets around the
world: Size, drivers and policy issues. BIS Quarterly Review, September 2018, 29–49.
Retrieved from: https://www.bis.org/publ/qtrpdf/r_qt1809.htm
Committee on the Global Financial System and the Financial Stability Board (2017).
FinTech credit. Market structure, business models and financial stability implications.
Report prepared by a Working Group established by the Committee on the Global
Financial System (CGFS) and the Financial Stability Board (FSB). Retrieved from:
https://www.fsb.org/2017/05/fintech-credit-market-structure-business-models-and-
financial-stability-implications/
Cornaggia, J., Wolfe, B., & Yoo, W. (2018). Crowding out banks: Credit substitution by
peer-to-peer lending. Paper presented at The First New York Fed Research Conference
on FinTech, 10.2139/ssrn.3000593
Cornelli, G., Frost J., Gambacorta L., Rau, R., Wardrop, R., & Ziegler, T. (2020). Fintech
and big tech credit: A new database, BIS Working Paper 887
Crisanto, J., Ehrentraud, J., Lawson, A., & Restoy, F. (2021). Big tech regulation: What is
going on?. FSI Insights No 36.
European Banking Authority (2021). Report on the use of digital platforms in the EU
banking and payments sector. Retrieved from: https://www.eba.europa.eu/eba-sees-
rapid-growth-use-digital-platforms-eu%E2%80%99s-banking-and-payments-sector-
and-identifies-steps
European Central Bank (2008). The incentive structure of the ‘originate and distribute’
model. Retrieved from: https://www.ecb.europa.eu/pub/pdf/other/incentivestructure
originatedistributemodel200812en.pdf
European Systemic Risk Board (2014). Flagship report on macro-prudential policy in the
banking sector. Retrieved from: https://www.esrb.europa.eu/pub/pdf/reports/140303_
flagship_report.pdf
EY (2019). EY Global FinTech Adoption Index 2019. Retrieved from: https://www.ey.
com/en_gl/ey-global-fintech-adoption-index
212 Adam Głogowski
Financial Stability Board (2018). Cyber Lexicon. Retrieved from: https://www.fsb.org/
2018/11/cyber-lexicon/
Financial Stability Board (2017). Financial stability implications from FinTech. Supervisory
and regulatory issues that merit authorities’ attention. Retrieved from: https://www.fsb.
org/2017/06/financial-stability-implications-from-fintech/
Financial Stability Board (2019). Decentralised financial technologies. Report on financial
stability, regulatory and governance implications. Retrieved from: https://www.fsb.org/
2019/06/decentralised-financial-technologies-report-on-financial-stability-regulatory-
and-governance-implications/
Financial Stability Institute (2020). Policy responses to fintech: A cross-country overview.
FSI Insights on policy implementation No 23. Retrieved from: https://www.bis.org/fsi/
publ/insights23.htm
Frost J., Gambacorta L., Huang Y., Shin H.S., & Zbinden P. (2019). BigTech and the
changing structure of financial intermediation, BIS Working Paper 779
Gambacorta L., Huang Y., Qiu H., & Wang J. (2019). How do machine learning and non-
traditional data affect credit scoring? New evidence from a Chinese fintech firm. BIS
Working Paper 834
GSM Association (2021). The Mobile Economy. Sub-Saharan Africa 2021. Retrieved from:
https://www.gsma.com/mobileeconomy/wp-content/uploads/2021/09/GSMA_ME_SSA_
2021_English_Web_Singles.pdf
Mearian, L. (2017). Data storage goes from $1M to 2 cents per gigabyte. Retrieved from:
https://www.computerworld.com/article/3182207/cw50-data-storage-goes-from-1m-
to-2-cents-per-gigabyte.html
Nordhaus, W.D. (2015). Are we approaching an economic singularity? Information
technology and the future of economic growth. Cowles Foundation Discussion Paper
2021. 10.2139/ssrn.2658259
Pymnts.com (2020). China likely to see more P2P shutdowns this year. Retrieved from:
https://www.pymnts.com/news/international/2020/china-likely-to-see-more-p2p-
shutdowns-this-year/
Ros, G. (2020). The making of a cyber crash: A conceptual model for systemic risk in the
financial sector. ESRB Occasional Paper 16.
Synergy Research Group (2021). Quarterly cloud market leaps to $42B – Amazon, Microsoft &
Google Pocket 63% of dollars spent. Retrieved from: https://www.srgresearch.com/articles/
quarterly-cloud-market-leaps-to-42b-amazon-microsoft-google-pocket-63-of-dollars-spent
World Economic Forum (2017). Beyond Fintech: A pragmatic assessment of disruptive
potential in financial services. Retrieved from: https://www.weforum.org/reports/
beyond-fintech-a-pragmatic-assessment-of-disruptive-potential-in-financial-services
12 Financial supervision in digital
age: innovations and data
abundance
Jan Monkiewicz

12.1 Introduction
Supervision over the financial sector, also referred to as financial market su-
pervision, or simply financial supervision, means the application by the state of
the rules of administrative law to supervised financial institutions in order to
ensure compliance with the law. It may relate to various areas of their activity
and be exercised by more or less numerous specialised entities.
From the institutional point of view, supervision over the financial market
means all organisational and legal solutions regulating the relations between
the supervising entity or entities and the supervised entities.
The components of supervision include oversight over the supervised entities,
and exerting influence on them to modify their activities, by means of applied
supervisory instruments. Supervision, therefore, not only examines whether the
facts of a case comply with the legal requirements, but it must also be able to take
enforcement measures against the operations of the supervised entities. It should
be noted here that administrative supervision over someone’s activity means the
position of authority held by the supervising entity over the supervised ones. The
scope of this authority determines, on the one hand, the limits of the possible
influence of the supervisory system on the activities of individual institutions, and
on the other, the limits of the autonomy and independence of those institutions.
In other words, it sets the limits of their economic freedom and the limits of using
ownership rights. Interestingly, from what has been seen in practice so far, the
supervisory authorities, when influencing and modifying the activities of financial
institutions and applying enforcement measures against them, have not taken
direct responsibility for the result of activities undertaken by the supervised entities
following supervisory decisions, or for their commercial fate. Supervisory activity
is closely related to the shaping of the regulation of financial markets and in-
stitutions. Regulations provide a framework for the activities of financial in-
stitutions. They determine their scope, functions and principles. They also
influence, among other things, the available product offer, business models,
market behaviour and, finally, the organisational structure and legal form of those
entities. The regulatory system must keep pace with emerging market innovations
and respond to them appropriately.

DOI: 10.4324/9781003264101-17
214 Jan Monkiewicz
For a long time, both these activities of the state, that is supervision and
regulation, functioned together and they only began to move away from each
other after the far-reaching liberalisation of the financial systems around the
world that took place at the end of the 1970s. It was only then that the need
arose to establish entities that would look after the safety of financial institu-
tions released from the straitjacket of administrative restrictions (Masciandaro
and Quintyn, 2013).
Towards the end of the 20th century, these activities became clearly se-
parated and were transferred to different government structures on account of
their different characteristics. A somewhat symbolic moment marking this
separation was the publication by the Basel Committee on Banking
Supervision in 1996 of the Basel Core Principles for Effective Banking
Supervision (BCP), where international rules for exercising prudential su-
pervision over banks were adopted for the first time. A few years later, similar
documents concerning insurance and the securities market were published.
From then on, it can be concluded that supervision over the financial market
had formally been born.
Regulatory activity, which relates to the setting of binding standards, is
naturally closely related to the law-making process and thus subject to political
influence. The situation is different with supervision, which, in contrast to
regulatory activity, is only involved in creating binding standards to a limited
extent, and uses all its potential to ensure the introduction of regulatory re-
quirements on the supervised institutions and the financial market as a whole.
For this reason, supervision is closer to the technical side of the financial ac-
tivity being conducted.
It is obvious that supervision is not only a passive recipient of legislative
“production,” but that it also participates formally or informally in its creation,
providing the necessary expert elements. In addition, it also participates in the
creation of regulatory standards by establishing its own “soft law” in the form
of various interpretations, recommendations, sets of good practices, etc.
The shape and instruments of financial sector supervision are undergoing
significant changes during the era of digitalisation. The development of digital
technologies, and their application in supervisory processes, has enabled the
more effective and proactive monitoring of risk and compliance issues in the
supervised institutions, and also led to a reduction in the costs of supervision
both for the supervisory systems and the supervised institutions. The devel-
opment of tools of supervision for the supervisory bodies is a logical con-
sequence of the digitalisation of activities on the financial market, and an
inevitable outcome of the process (Toronto Centre, 2017).
Their extensive use for supervisory purposes requires that a number of
conditions be fulfilled, including ensuring data standardisation, as well as their
high quality and completeness. It also requires building the appropriate
competencies on the side of the supervisory bodies to avoid additional legal,
operational and reputational risks (Zetzsche et al., 2019, p. 48). These issues
are the subject of our analysis later in this study.
 Financial supervision in digital age 215
12.2 The representation hypothesis as a premise for
financial sector supervision
The special role of the public oversight system and its powers in relation to
financial institutions, as well as its far-reaching quasi-ownership powers that
are incomparable to any other sectoral solutions, have not been the subject of
intense theoretical interest to date. Considerably more consideration has been
given to the issue of how to perform various supervisory tasks than to the
prerequisites for special empowerment of supervision and its limits. The factors
usually cited to justify its unique role are the special importance of the financial
system and financial institutions in both the micro and macroeconomic sys-
tems, as well as the need to carefully manage customer funds (Zawadzka, 2017,
pp. 24–25). This is not, as it seems, a convincing argument because many
other examples of equally important activities can be cited, for example in the
fields of health, safety, energy, transport, nuclear energy, and the functioning
of the internet and the digital economy, etc., in which, nevertheless, public
regulatory and supervisory intervention is much weaker. Unlike in the case of
financial institutions, for instance, there is no control or certification of their
access to the market, no control or certification of the qualifications of their
shareholders, no control or certification of the key persons in the institution,
including members of the management board or supervisory board, no control
or certification of the internal corporate governance or business models ap-
plied, no control or certification of the IT systems used, no determination of
the rules for leaving the market, no product policy control, no specific rules of
market behaviour, etc.
The best-known theoretical attempt to explain this problem is the “re-
presentation hypothesis” put forward by Mathias Dewatripont and Jean Tirole
(Dewatripont and Tirole, 1994). According to this concept, the special em-
powerment of public supervision in the financial market is the result of a
combination of a number of unique factors, the most important of which is the
fact that basic financial institutions such as banks and insurance companies use
a specific business model, the essence of which is to finance their activities
predominantly using external funds, that is debt, and not their own funds. The
leverage ratio, measured as the ratio of the value of assets to own funds, is
usually above 10, and can be much higher. This debt is incurred mainly by
unprofessional market participants who are not able to control or effectively
influence the way it is used by financial institutions, as banks do in the case of
non-financial corporations. This would require, among other things, having
the appropriate competences and economic potential.
In practice, such a business model means that there is a strong tendency
among financial institutions to overburden their resources with risk. The
burden of possible losses is mostly borne by customers who finance the lion’s
share of their activities using own funds. On the other hand, if the activity
brings positive results, then the entire surplus goes to the financial institutions,
which do not share their financial success with others. This non-symmetrical
216 Jan Monkiewicz
balance in the financing of losses and taking over of additional benefits may
ultimately induce the shareholders of financial institutions to exert pressure on
their management boards to take excessive risks.
Second, the management boards themselves may be a source of the ex-
cessive level of risk assumed by the institutions they manage due to the ar-
chitecture of the remuneration system applied to them. A characteristic feature
is the widespread use of variable remuneration components that depend on the
current, that is short-term, economic results of the institutions they manage.
This is justified by the shareholders’ striving to eliminate the unfavourable
behaviour of management boards, which has found its theoretical justification
in the “agency theory.” Such a policy of management boards is additionally
favoured by the dispersion of shareholding and its high volatility due to the
long-observed predominance of speculative thinking and the strategy applied
on the capital market. This leads to the management structures enjoying
significant autonomy from the shareholder structure, and limits the possibilities
of shareholders exercising a controlling function over the entities they own.
In this situation, taking into account the macroeconomic importance of the
financial system and the threats to financial stability which result when it
doesn’t function properly, it becomes justified to limit the ownership rights
and economic freedom of financial institutions. This is done by creating a
public entity that will function as a proxy supervisor over the risk management
system in financial institutions not only for their clients but also, in many cases,
their owners. The growing degree of supervisory penetration in contemporary
financial systems indicates that this line of thought is gaining increasing ac-
ceptance.

12.3 Financial supervision in the digital era – general issues

The digitalisation of economic activity and the financial system has led, among
other things, to a massive explosion in data. There are estimates that the
volume of information is currently doubling every 12 hours (AIR, Regtech
Manifesto, 2018, p. 7). This means a serious practical challenge for the systems
of financial supervision, a fact pointed out in a speech in 2019 by former Bank
of England Governor Mark Carney. Justifying the use of artificial intelligence
in the supervision process, he said: “The Bank now receives 65 billion data
points each year of firm-related information. To put that into context, re-
viewing it all would be the equivalent of each supervisor reading the complete
works of Shakespeare twice a week, every week of the year.” (AIR, Regtech
Manifesto, 2018, p. 8). Handling such a tsunami is only possible with the use
of automation processes.
The financial supervisory bodies not only have to deal with this rapidly
growing amount of information but also generally with its quality in the
broadest sense. An additional problem is the validation and completeness of
the data, and having the appropriate analysis tools and personnel with analy-
tical skills.
 Financial supervision in digital age 217
It should also be noted that the data generated directly by financial firms in
the supervisory process constitute, to an increasing extent, only a small part of
the data generated about them and the environment in which they operate.
These large datasets include information from online activities, social media,
media publications, cameras, the Internet of Things and public datasets, etc.
The availability of these data and the possibility of their quick processing as a
result of the use of new solutions has enabled, among other things, new quality
in the identification and assessment of risk and the time when it occurs.
An additional element adding to the complexity of the new supervisory
system of finance in the digital environment is the expansion of its scope, as
well as the progressive growth of its trans-sectoral nature.
On the one hand, this is related to the fact that the digitalisation of the
economy and finance, by leading to an explosion in the databases used in
management processes, naturally creates an ever-stronger need for the privacy of
the personal and non-personal data stored thereto be protected. This, in turn,
leads to the emergence of institutions responsible for this protection, usually of a
trans-sectoral nature. At the same time, the digitalisation of the economy and
finance intensifies the processes of expanding the financial services consumer
protection programmes initiated following the new regulatory paradigm resulting
from the Global Financial Crisis. This paradigm identified the protection of fi-
nancial services consumers as an important component of the financial stability of
the network and made it the subject of international attention. The same applies
to the development of macroprudential supervision, which has been functionally
and often institutionally separated from the existing supervisory institutions and
located in other bodies as a result of the Global Financial Crisis.
The digitalisation of the economy and finance has led to a huge increase in
the role of cyber security and the expansion of monitoring and supervisory
systems in this area, usually built on a trans-sectoral principle. Additionally,
digitalisation has changed the nature and scale of illegal activity in the financial
area, a fact that is increasingly reflected in the development of specialised in-
stitutions supervising this part of finance. All in all, a new shape of the archi-
tecture of the supervisory system over the financial sector is emerging more and
more strongly. It is a less sectoral and more horizontal architecture, less universal
and more specialised. The analysed changes are presented in Figure 12.1.
The digitalisation of the economy and finance has led to a clear increase in
the importance of operational risk related to the widespread use of new
technologies such as artificial intelligence, cloud computing, large databases,
data security, etc. This means, among other things, that there is a need to
expand the supervisory field with new these issues and new risks.

12.4 The new nature of supervisory relationships with

supervised entities with regard to reporting
For many decades, the basis for exercising supervision over the financial sector
has been the process of cyclical financial reporting by entities on the financial
218 Jan Monkiewicz

Competition
Authority

Data
Financial Protection
Authority Authority

BIG TECH

Consumer
AML/CFT
Protection
Agency
Agency

Cyber
Agency

Figure 12.1 Hexagon of contemporary financial sector supervision.

Source: Own elaboration based on Crisanto et al. (2021).

market, supplemented by on-site inspections. Due to the experience of the

global crisis, however, this regular reporting programme has recently been
significantly expanded. For example, insurance companies in Poland currently
submit 12 regular supervisory reports a year. These reports are intended to
enable the supervisory body to obtain a correct picture of the supervised in-
stitution and its environment, as well as the actions it takes. The information
collected is mainly of a statistical and supervisory nature. The former mainly
includes balance sheet data which help the supervisory authority to see the
broader context of the entity’s operations. The latter, on the other hand,
constitutes the vast majority of the information collected and includes data on
compliance with prudential requirements. It consists of data on the situation in
terms of equity, reserves, liquidity, and the size of the risk, and its individual
components, to which the entity is exposed. These data are primarily used to
perform the micro and macroprudential tasks of supervision and its obligations
related to crisis management (FSI, 2020, p. 3).
The reporting process consists of a series of stages (see Figure 12.2).
In the first stage, the reporting entity obtains operational data from the
activity being conducted in order to prepare the data for supervision purposes.
In the second step, based on the transformation rules, the data are transformed
into the required supervisory information and then made available to the
supervisory authorities. These, in turn, distribute them in the internal system
and subject them to the appropriate analytical process.
 Financial supervision in digital age 219

A simplified representation of a typical regulatory reporting process,

highlighting the points in the process where innovations are taking place.

Transformation Data
rules Transmission

Operational Input Required Regulatory Financial

Reporting data data reporting data data authority
intitutions

Innovations in terms of data standardisation. Innovations in terms of granularity of required reporting data.
Innovations in transformation rules. Innovations in the means of data transmission.
Innovations in the format of required reporting data. Innovations in terms of data access.

Figure 12.2 Common key points in the regulatory reporting process.

Source: FSI (2020).

In fact, the analogue reporting process was essentially done on paper. The
transferred data was then entered into IT systems for further processing.
Today, the reporting process is increasingly digitised and automated. The new
solutions are used mainly for the needs of supervisory reporting, real-time
monitoring, database management and virtual assistance. An example is the
retrieval of data directly from the IT systems of financial institutions, the
automation of data validation and consolidation, and the use of artificial in-
telligence to communicate with consumers and supervised entities.
Figure 12.2 shows the main areas of innovative activities resulting from the
digitalisation of the financial system. They are primarily comprised of the
standardisation activities required by the new technology. This concept in-
cludes standards regarding the properties, terminology, structure, organisation
and format of the data (Gal and Rubinfeld, 2019). Data standardisation sim-
plifies the retrieval of data by the reporting entities and improves the quality.
Standardisation also makes it possible to facilitate the process of applying the
transformation rules and formalising them. An important event in the devel-
opment of reporting was the implementation of innovations in the reporting
formats applied. The most fundamental change was related to the transition
from paper reporting to reporting in digital format, in the form of Excel files.
Currently, many countries are moving towards more advanced reporting
formats that can cover much larger datasets and enable more advanced ana-
lytics. As a result, they may also allow for the progressive granulation of the
retrieved data. An important element in streamlining the reporting process is
the restructuring of the transmission system, which aims at replacing emails
with special internet portals set up by the supervisory institutions where the
supervised entities can submit their reports. The use of machine-to-machine
direct data transmission using API technology has also begun (FSI, 2020). The
final part is the direct retrieval of data from the IT resources of the reporting
220 Jan Monkiewicz
entities. This may lead to reports from supervised institutions being abandoned
in favour of direct and continuous data retrieval from their IT systems instead,
and then their automatic validation and consolidation, and possibly visualisa-
tion. However, this requires many technological, legal and financial issues to
be resolved. A pioneer in this regard is the National Bank of Rwanda, which
has been implementing the idea of collecting supervisory data directly from
supervised institutions since 2017. The collection process takes place auto-
matically every 24 hours, and in some cases every 15 minutes. The supervisory
body in the Philippines has intended to implement a similar project.
Obtaining the relevant data and reporting them for supervisory purposes is a
complex and costly process, both for the supervised entity and the supervisory
body.
An extensive study in this area by the European Commission in 2019,
carried out among over 100 financial institutions from leading EU countries,
shows that the average costs of reporting for supervisory purposes accounted
for over 30% of the total compliance costs in the analysed institutions, and
approximately 2% of the total operating costs. Particularly high shares of su-
pervisory reporting costs in the compliance costs were recorded in the in-
surance sector and on the capital market (EU, 2019, p. 205). The breadth and
complexity of reporting for supervisory purposes results, among other things,
from the extensive tasks of these institutions and the lack of adequate internal
coordination, as well as the use of ineffective methods of obtaining data. The
high costs of acquiring these data may also result from their low quality. A
2018 study by the American consulting company BFA was conducted among
supervisory bodies from ten countries from South America (Brazil, Peru),
Central America (Mexico), Asia (Philippines) and Africa (Morocco, Egypt,
Kenya, Ghana, Mozambique and Nigeria), shows that the key issues are delays
in data delivery (as many as 92% of cases), incompleteness of the data provided
(67% of cases), the low quality of the data (58% of cases), the incorrect in-
terpretation of requirements (42% of cases) and data manipulation (17% of
cases) (BFA, 2018, p. 11). Other studies in the US and the EU have shown
that the total compliance costs of financial institutions are generally a few
percentage points of their operating costs. For 2018, over 35% of financial
companies claimed that their compliance costs were 1–5% of operating costs,
10% of companies rated them at 6–10% and 4% of companies assessed them at
over 10%. The same studies indicate that supervisory costs constitute a sig-
nificant burden for the supervised entities. In 2018, the ECB estimated them
for the EU at nearly USD 600 million, while the Federal Reserve System
estimated these costs for the US at over USD 2 billion (Auer, 2019, p. 6).

12.5 Digitalisation of supervisory analytics: big data and

artificial intelligence
The analytical activity of the supervision is based on the data and information
collected. The whole process can be described in the digital environment
 Financial supervision in digital age 221

Information from RPA,

commercial APIs, portals Cloud based
database chatbots, IVR environment

Diagnostic
Information from
analysis
other authorities
Early warning
Data indicators Data
Data
Unstructured Web processing Quality Visualisation
collection
information controls Predictive
Data analysis
Structured lake Risk analysis
reporting from micro
financial
institutions
(financial Risk analysis Prescriptive
statements) macro analysis

Text mining, Automatic

Information from Sensitive Analysis Machine learning
on site inspections Info-sharing
Image recognition, algorithms
cross-border
Cloud computing Cloud computing

Figure 12.3 Digitalization of supervisory analytics.

Abbreviations: IVR – Interactive Voice Response; RPA – Robotic Process Automation.
Source: Own elaboration, based on Loiacono et al. (2020).

through five basic stages: collection, organisation, analysis, storage and appli-
cation (Gal and Rubinfeld, 2019, p. 737). This is illustrated in Figure 12.3.
The collection stage includes finding data, saving them in a data lake and
then aggregating them into a form that allows them to be subjected to data
mining. The purpose of this process is to automatically discover statistical
dependencies and connections in the collected data and then present them in
the form of logical rules, decision trees or neural networks. Organising in-
volves structuring the database, including synthesising certain records and
entering explanatory notes. At the organising stage, therefore, data is trans-
formed into information (Gal and Rubinfeld, 2019). The analysis stage in-
volves the integration and processing of various data and it is at this stage that
information is turned into knowledge. Data storage includes archiving data in
a form that can be retrieved later. The stage of data application, on the other
hand, comprises the use of the acquired knowledge to diagnose phenomena
(diagnostic analysis), predict their development (predictive analysis) and un-
dertake current supervisory activities (prescriptive analysis).
In the digital environment, supervisory bodies obtain information not only
from the supervisory reports submitted to them by the regulated entities, as
well as their own findings made during inspections and ongoing interaction
with the stakeholders but also from many other sources. A natural source of
information may be other public databases, for example from tax offices,
statistical offices, labour offices, etc. Existing commercial databases may also be
an important source of information, as well as information available on the
222 Jan Monkiewicz
internet and obtained from market customers, for example through the use of
chatbots. Big database technologies include those used by the US Federal
Reserve Board in a special oversight programme for financial entities of sys-
temic importance to US financial stability. They are also used in a cyclical
stress test as part of examining the capital situation of large banking organi-
sations in the country. For this purpose, the Fed acquires monthly data relating
to the individual loans granted by the surveyed banks in order to project the
expected financial result from the conducted activity (Jagtiani et al., 2018).
Digital solutions enable the use of many different data sources for the needs of
analytical work, which may require both structured and descriptive data. For
example, for the purposes of researching money laundering processes, the
Bank of Italy uses both the reports of financial transactions concluded on the
market and also press reviews. Analyses conducted with the use of large da-
tabases are often used to analyse phenomena occurring in financial markets. To
detect insider trading, for example, the British Financial Conduct Authority
(FCA) receives detailed information daily on over 20 million transactions
taking place on the stock market. These data are analysed to detect signs of
market manipulation. Appropriate FCA units analyse the behaviour of the
sellers and detect deviations from the norm that may indicate the occurrence
of insider trading.
Digital applications can also be used for the purposes of microprudential
supervision. As an example, the Bank of Italy uses them to forecast bank-
ruptcies and assess fluctuations in the credit risk of banks. This is done through
the use of machine learning algorithms, by linking a number of databases such
as the Central Credit Register, the balance sheet data of non-financial en-
terprises and other data on the business activities of companies. Finally, suptech
applications can be used in the area of macroprudential supervision (FSB,
2017). For example, the Bank of Italy conducts systematic analyses of price
forecasting in construction and inflation. The Central Bank of the
Netherlands, on the other hand, uses suptech applications to detect risk signals
appearing in the financial system, using for this purpose a huge information
base from payment companies. In turn, the ECB and the Federal Reserve
Board in the USA use natural language processing technology as a form of
artificial intelligence to identify threats in terms of risks to financial stability
(Esma, 2019).

12.6 Issues of supervision over outsourced activities

Financial entities have been using outsourcing and other forms of operational
ties with external entities for many years. This most often included accounting
services, auditing, human resources management, legal services, and various
types of consulting services. As a rule, these were areas of secondary im-
portance to the operational activities of the financial entities and the risk in-
curred. The scope of their application was limited by the regulations in force.
For example, Article 6a Section 3 of the Polish Banking Law states that
 Financial supervision in digital age 223
outsourcing may not include the management of a bank. In particular, it may
not cover risk management related to banking activities, including asset and
liability management, the assessment of creditworthiness and a credit risk
analysis. Additionally, the bank’s internal audit also cannot be outsourced
(UKNF, 2019, p. 6).
For many years, the performance of outsourced activities has been mon-
itored on an ongoing basis by the supervisory bodies of the financial sector.
The digitalisation of the financial system has not introduced significant changes
to the developed principles of operation, but it has led to repercussions re-
sulting from the fact that many new entities in the financial system perform
outsourced activities based on the use of digital technologies and their network
nature. For this reason, there is increased activity among supervisory institu-
tions with regard to improving their regulatory basis in this respect. This in-
cludes, in particular, the risk management of third parties in new value chains,
business continuity management in new conditions, data protection, cyber-
security and operational risk management (FSB, 2020). A special place in these
new areas is occupied by issues connected with using a groundbreaking digital
innovation, meaning – in the context of finance – the use of cloud computing
and the risks arising from its use. These issues are thus generated both for
individual financial entities and also the entire financial system (FSB, 2019).
More and more often, this issue is subject to a separate regulation, in addition
to other types of outsourcing. This is the solution that has been adopted in
Poland, among other countries. In the introduction to the adopted reference
model, the Polish Financial Supervision Authority emphasises, “The super-
visory body recognises the protection of the processing of information relevant
to the processes or activities of the supervised entity, or constituting legally
protected information, as a priority issue” (UKNF, 2020, p. 5). The Authority
further states, “The widespread use of cloud computing services by supervised
entities may lead to the risk of the concentration of the processing of legally
protected information (…) in the same facilities (…) In addition, information
processing (…) causes risks related to the protection of the processed in-
formation (…) supervised entities will inform about the intention to process
information in cloud computing services” (UKNF, 2020, p. 6). An example of
the adoption of a different solution are the regulations proposed in 2017 by the
organisation associating state insurance supervisors in the USA – the NAIC
(National Association of Insurance Commissioners) – in the form of the
Insurance Data Security Model Law. It obliges American insurance entities,
among others, to create an IT security system to protect the data they collect,
including from entities providing outsourced services (NAIC, 2017). Another
approach is taken by the G7, which coordinates the international activities of
seven leading countries in the world – Canada, France, Germany, Great
Britain, Italy, Japan and the USA – and has shown special interest in cyber
security in the financial sector. In recent years, it has adopted three documents
in this regard. The first concerned the identification of the basic elements of
cybersecurity in the financial sector (G7, 2016), the second presented the basic
224 Jan Monkiewicz
elements of cybersecurity assessment in the financial sector (G7, 2017), and the
third looked at the basic elements of third-party cyber risk management in the
financial sector (G7, 2018).

12.7 Conclusion
The analysis conducted shows that the shape and instruments of financial
market supervision have been undergoing significant changes during the era of
digitalisation. The development of digital technologies, and their application
in the business processes of financial enterprises, has led to both the possibility
and the need to reconstruct the existing supervisory system. The possibility for
its reconstruction stems from the scale of availability of digital solutions for
monitoring, analysing and using supervisory information for the purposes of
achieving supervisory goals. The need for its reconstruction, on the other
hand, is a result of the emergence of new challenges and risks in the financial
system following changes to the type of products, services and business models
used by financial institutions and their ecosystems. The application of digital
technologies in supervisory processes has enabled the more effective and
proactive monitoring of risk and compliance issues in supervised institutions
and also led to a reduction in the costs of supervision for both the supervisory
systems and the supervised institutions. The development of tools of super-
vision for the supervisors is a logical consequence of the digitalisation of ac-
tivities on the financial market, and an inevitable outcome of the process.
Their extensive use for supervisory purposes requires that a number of con-
ditions be fulfilled, including ensuring data standardisation, as well as their high
quality and completeness. It also requires building the appropriate compe-
tencies on the side of the supervisory bodies to avoid additional legal, op-
erational and reputational risks.

Bibliography
AIR. A Regtech Manifesto: Redesigning Financial Regulation for the Digital Age, Barefoot J-A.,
2020.
Auer, R. Embedded Supervision: How to Build Regulation into Blockchain Finance, BIS Working
Papers, No. 811, September 2019.
BFA. Financial Authorities in the Era of Data Abundance: RegTech for Regulators and SupTech
Solutions, August 2018.
Broeders, D. and Prenio, J. Innovative Technology in Financial Supervision (SupTech): The
Experience of Early Users, BIS, Financial Stability Institute, FSI Insights on Policy
Implementation, No. 9, July 2018.
Coelho, R., DeSimoni M. and Prenio J. SupTech Applications for Anti-Money Laundering,
FSI, August 2019.
Crisanto, J.C., Ehrentraud J. and Fabian M. Big Techs in Finance: Regulatory
Approaches and Policy Options, FSI, March 2021, 2021.
Dewatripont, M. and Tirole J. The Prudential Regulation of Banks, MIT Press, 1994.
 Financial supervision in digital age 225
ESMA. RegTech and SupTech – Change for Markets and Authorities, Esma Report on Trends,
Risks and Vulnerabilities, No 1, 2019.
EU. Fitness Check of EU Supervisory Reporting Requirements, Commission Staff Working
Document, Brussels, SWD (2019) 402 final.
FSB. Financial Stability Implications from FinTech: Supervisory and Regulatory Issues that Merit
Authorities’ Attention, 27 June 2017.
FSB. Third-Party Dependencies in Cloud Services: Considerations on Financial Stability
Implications, 9 December 2019.
FSB. Regulatory and Supervisory Issues Relating to Outsourcing and Third-Party Relationships,
Discussion Paper, 9 November 2020.
FSI. Crisanto J.C., Kienecker K., Prenio J. and Tan E. From Data Reporting to Data Sharing:
How Far Can Suptech and Other Innovations Challenge the Status Quo of Regulatory
Reporting?, FSI Insights, No. 29, December 2020.
G7. Fundamental Elements of Cybersecurity for the Financial Sector, October 2016.
G7. Fundamental Elements for Effective Assessment of Cybersecurity in the Financial Sector,
October 2017.
G7. Fundamental Elements for Third-Party Cyber Risk Management in the Financial Sector,
October 2018.
Gal, M. and Rubinfeld, D. Data Standardization, New York University Law Review, Vol. 94,
No. 4, October 2019, pp. 737–780.
Jagtiani, J., Vermilyea T. and Wall L. The Roles of Big Data and Machine Learning in Bank
Supervision, Mimeo, 9 March 2018.
Loiacono, G., Mazzuloy A. and Rulli, E. Restech: innovative technologies for crisis
resolution, ssrn.com 3598527, (2020).
Masciandaro, D. and Quintyn M. The Evolution of Financial Supervision: The Continuing
Search for the Holy Grail, in: Balling M. and Gnan E. (eds.) 50 Years of Money and Finance:
Lessons and Challenges, SUERF, Larcier, Vienna, 2013, pp. 263–318.
NAIC. Insurance Data Security Model Law, 2017.
Toronto Centre, FinTech, RegTech and SupTech: What They Mean for Financial Supervision,
TC Notes, August 2017.
UKNF [PFSA]. Stanowisko UKNF dotyczącezagadnieńzwiązanych z wejściem w życieWytycznych
EBA ws. outsourcinguiichuwzględnienia w działalnościbanków, [The Authority’s Position on Issues
Related to the Entry into Force of the Eba Guidelines on Outsourcing and their Inclusion in the
Operations of Banks], 16 September 2019.
UKNF [PFSA]. Komunikat UKNF dotyczącyprzetwarzaniaprzezpodmiotynadzorowaneinformacji
w chmurzeobliczeniowejpublicznejlubhybrydowej [Announcement of the PFSA Regarding the
Processing of Information by Supervised Entities in a Public or Hybrid Cloud], Warsaw,
23 January 2020.
Zawadzka, P. Modelenadzorurynkufinansowego [Models of Financial Market Supervision],
Cedewu, 2017.
Zetzsche, D., Arner D.W., Buckley R.P. and Weber R.H. The Future of Data-Driven
Finance and RegTech: Lessons from EU Big Bang II, UNSW Law Research Series, March
2019.
Index

Note: Italicized and bold page numbers refer to figures and tables. Page numbers followed
by “n” refer to notes.

ABI/Inform Collection 4, 26 BASE model 58

ACID model 58 BCP; see Basel Core Principles for Effective
Act on Counteracting Money Laundering Banking Supervision
and the Financing of Terrorism 174 Beaumont, P. 14
Adelman, F. 208 Bellanger, P. 72
ADS; see automated digital services BEPS 137
advanced analytics 46, 54–56 BEPS 2.0 129
agency theory 216 Bettinger, A. 4, 26
Age of Surveillance Capitalism, The (Zuboff) BFA 220
106n2 Bieleñ, S. 68–70, 70–71
AI; see artificial intelligence Big Data 33, 34, 39, 40, 56, 220–222, 221;
Airbnb 134 analytics 24
algocracy 103 Big Tech 209; digitalisation of financial
algorithmic trading 19 services 204–206
Alipay 113 bigtechs/techfins 27–29, 28
Allen, F. 4, 14 biometrics 24
alternative finance 13 Bitcoin (BTC) 19
Althusius, J. 68 BlaBlaCar 132
Amazon 99, 129; Amazon Marketplace 134 Blockchain technology 21–23, 22, 46,
Aon 2 60–62
Apple 99, 117, 129 Bodin, J.: Six Books on the Commonwealth 68
artificial intelligence (AI) 23, 40, 115, Bogle, J. C. 177
118–120, 134, 135, 137, 220–222 Boucher, J. 68
Asistente Virtual de IVA 118 BPaaS; see business process as a service
AUKUS alliance 135 Brazil 77
automated digital services (ADS) 127–128 British Financial Conduct Authority
automated trading 18 (FCA) 222
Brutus, J. 68
“Balkanisation” of the internet 77 BTC; see Bitcoin
bankMYBank 113 Buchman, G. 68
Banks, E. 4, 14, 39 budget funds, securing 116–118
Basel Committee on Banking Supervision Bulgaria 186
207, 214 Business Development Bank of Canada 113
Basel Core Principles for Effective Banking business functions 17–21
Supervision (BCP) 214 business process as a service (BPaaS) 48
 Index 227
CA; see Cybersecurity Act challenges 167–169; personal data
CaaS; see communication as a service protection 169–173, 170; right to data
Cambridge University Press: Tallinn 173–177
Manual 1.0 74; Tallinn Manual 2.0 75 Cornaggia, J. 202
Canada: lending 204 Cornelli, G. 202
Carbon Border Adjustment Mechanism Couldry, N. 34
(CBAM) 132 Covid-19: impact on financial sector 2, 4
Carney, M. 216, 217 creative society 115
Carstens, A. 210 Crosthwaite, P. 71, 76
Castells, M. 182 cryptocurrency 100, 101
CBAM; see Carbon Border Adjustment cryptography 24
Mechanism Cukier, K. 33, 35
CBOS 189 Culler, J. 70
CCAF 204 Cusk, R. 71
Cecez-Kecmanovic, D. 41 cyber and financial network, interaction
Central Europe 186 between 29, 30
CFB; see consumer-facing businesses cyber risk 207–209
CGFS; see Committee on Global Financial cybersecurity 2, 67, 82–85, 95; strategy and
System regulations in the EU 85
Chartered Institute of Management Cybersecurity Act (CA) 84, 86–88, 89n1
Accountants (CIMAs): Future of Finance Cybersecurity Package 83–84, 86
Report 45 Cybersecurity Strategy for the Digital Decade 84
Charter of the United Nations 73, 74, cyberspace: geopolitics 135; international
90n9; Article 2.1 70; Article 51 70 law in 72–78; militarisation of 74
Chen, S. 37 cyberspace tax system 126–132, 127;
China 1, 73, 77, 82; Chinese Social Credit definition of 126; ecosystem of 132–136,
System 104; data market 37; Department 133, 135; features of 127–129; global
of Commerce 85–86; digital economy megatrends of 129–132, 131–132
37; digital sovereignty 69; Export cyberwarfare 72
Administration Regulations 86; fintech Cyprus 187
and bigtech sectors 29; national digital Czech Republic 187
sovereignty 71; state intervention 42–43;
Value Added Tax 117 data and ownership 78–82
CIMAs; see Chartered Institute of datafication 33–43; benefits of 38–42;
Management Accountants definition of 34; in finance 34–36; global
cloud computing 24, 45–48, 48 data economy 36–38; risks of 38–42
cognitive systems 46, 56–58 data visualization 50–54, 52, 53
colonialism 69 DDoS attack 72
Committee on Global Financial System Declaration on Principles of International
(CGFS) 202 Law 70
communication as a service (CaaS) 48 Delloite 45
Communication from the Commission to the Delphi method 39
European Parliament, the Council, the Demand Side Platforms (DSP) 134
European Economic and Social Committee descriptive analytics 55
and the Committee of the Regions: A Digital Dewatripont, M. 215
Single Market Strategy for Europe 91n24 diagnostic analytics 55
Communications Decency Act (Protection digital divide 181, 187
For “Good Samaritan” Blocking and digital exclusion, in financial system
Screening of Offensive Material) 106n3 180–194; financial services 188–193,
consumer-facing businesses (CFB) 128 189, 190, 191; literature 180–184; scale
consumer protection, in financial market 185–188, 188
161–178; digital finance 173–177; G20 digital finance 2–5, 3, 5; advice 21;
model 163–167; nature of 162–163; new components of 14–17; cube 16, 16;
228 Index
definition of 14; institutions 25–29; Estonia 186; “Government as a Platform”
markets 25–29, 28; scheme 18; systemic 116; X-Road platform 114
framework of 13–30 ethical self-regulation, models of 154–157
Digital Innovation Hubs 88 ethics, in digital finance 145–159; ethical
digital insurance 20 application of rules, models of 157–158;
digital investments 17–18 ethical self-regulation, models of
digitalisation of financial services 199–200; 154–157; relations 148–152;
cyber risk 207–209; implications of responsibility 152–154; standards of
206–207; policy implications 209–210; 147–154; values 147–148
structural implications of 200–206, 201 Ethiopia: digital sovereignty 70
digital money 19–20, 61 EUCyCLONe; see European Cyber Crisis
Digital Operational Resilience for financial Liaison Organisation Network
entities (DORA) 210 EU Digital Transformation Strategy 77
digital payments 19–20 Europe 1; data and ownership 78–82; data
digital revolution 94–95 policy in 82
Digital Services Act 106n3 European Commission (EC) 36, 42, 72,
Digital Single Market 78, 80, 87 80–83, 86, 115–116, 124, 174
Digital Single Market Strategy for Europe -The European Cyber Crisis Liaison Organisation
DSM Strategy, A 91n25 Network (EUCyCLONe) 85
digital sovereignty: definition of 72; European Cybersecurity Competence
dimensions of 68; principles of 75–76 Centre 87
digital transactions, dimensions of 16 European Cybersecurity Industrial, Technology
digital transformation of finance 45–62 and Research Competence Centre and the
Directive on open data and the re-use of public Network of National Coordination
sector information 81–82 Centres 87
disaster recovery as a service (DRaaS) 48 European Digital Single Market initiative 41
DMCA; see US Digital Millennium European Parliament 2
Copyright Act European Systemic Risk Board (ESRB)
DORA; see Digital Operational Resilience 206, 210n9
for financial entities European Union (EU) 37, 77, 82, 83, 88,
DPIA (Data Protection Impact 89, 113, 116, 124, 187, 188; Carbon
Assessment) 171 Border Adjustment Mechanism 132;
DRaaS; see disaster recovery as a service cybersecurity strategy and regulations in
DSP; see Demand Side Platforms 85; Fit for 55 130; Green Deal 130;
Shaping Europe’s Digital Future 72; target
Eastern Europe 186 for 2030 115
EBA 205 EU’s Cybersecurity Strategy for the Digital
e-banking 187 Decade 87
eBay 134 EU; see European Union
EC; see European Commission EwaKornacka 178n1
effective power 68 e-wallet (electronic wallet) 20
e-finance (electronic finance) 4, 13, 14 external sovereignty 68, 76
eIDAS Regulation 116
Elliott, J. 208 Facebook (Meta) 99, 117, 129, 134; Libra
“Enhancing Consumer Protection” 164 project 101
ENISA 84 fast transfers 20
enterprise experience 58 FCA; see British Financial Conduct
entrepreneurial state 97 Authority
ePrivacy Regulation 79 financial exclusion 184–185
e-Residency 114 financial innovations 152–154
Ergen, I. 208 Financial Stability Board (FSB) 164, 202,
ESRB; see European Systemic Risk Board 207, 210n13
 Index 229
Financial Stability Institute 200, 210, “Government as a Platform” 116
210n13 GRC; see Governance Risk Compliance
financial supervision 213–224; artificial Great Britain/UK: fintech and bigtech
intelligence 220–222; Big Data 220–222, sectors 29, 186; “Government as a
221; general issues 216–217; issues over Platform” 116; Government Digital
outsourced activities 222–224; new Service strategy for 2014–2024 116;
nature of supervisory relationships with GOV.UK platform 116; HMRC’s
supervised entities 217–220, 218, 219; Connect computer system 112
representation hypothesis 215–216 Green Deal 130
fintech 4, 13, 26–27, 180 Green Recovery 130
First Basel Accord 164 Gross Domestic Product (GDP) 124
First World War 69, 70, 90n7 Group of Governmental Experts on
Fit for 55 130 Developments in the Field of Information and
5G 85–86, 89n1, 98 Telecommunications in the Context of
Four: The Hidden DNA of Amazon, Apple, International Security 90n15
Facebook and Google, The (Galloway) 78 Group of Government Experts (GGE on
France 73; French Revolution 69 Information and Telecommunications
Frost J. 202 Development in the Context of
FSB; see Financial Stability Board International Security) 73, 74, 75, 90n16
Funding Circle 113 GSM Association 200
Guidance on the Regulation of thefree flow of
G20 Financial Inclusion Policy Guide 167 personal and non-personal data in the EU 81
“G20 High-Level Principles on financial Guidelines on private sector data sharing 80
Consumer Protection” 164 Gupta, S. 111
G20 model 163–167
GAFA 78–82, 99, 125 HFT; see high-frequency trading
GAFAM 99 high-frequency trading (HFT) 18
Gaidosch, T. 208 HMRC’s Connect computer system 112
Galloway, S.: Four: The Hidden DNA of HO; see home office
Amazon, Apple, Facebook and Google, home office (HO) 129
The 78 Huawei 85
Gambacorta L. 202 humanity 58
Gattenio C.A. 4, 14 hybrid cloud 47
GDP; see Gross Domestic Product
GDPR; see General Data Protection IaaS; see Infrastructure as a Service
Regulation IANA (Internet Assigned Numbers
General Data Protection Regulation Authority) 77
(GDPR) 37, 79, 103, 169–175; Article IBM: Watson 57
17 174; Article 20 173–174; Article 34 ICANN (Internet Corporation for Assigned
176; personal data, division of 170; Names and Numbers) 76–77
Recital 43 175 ICO; see Initial Coin Offering
Germany 73, 187; digital sovereignty 70; ICT; see information and communications
fintech and bigtech sectors 29 technology
GGE; see Group of Government Experts IDFA (Identifier for Advertising) 134
(on Information and immunity of sovereignty 76
Telecommunications Development in information and communications
the Context of International Security) technology (ICT) 72, 74, 76, 87, 88, 96,
Ghasemaghaei, M. 41 110, 182, 199; systems, security of 82–85
global data economy 36–38 Infrastructure as a Service (IaaS) 47–48, 48
global financial crisis of 2008 109, 218 Initial Coin Offering (ICO) 17
Gomber, P. 15 In-memory databases 46
Google (Alphabet) 99, 117, 129, 134 in-memory databases 58–61, 60
Governance Risk Compliance (GRC) 57 institutional innovations 152–154
230 Index
intangible assets, valuation of 3 Mitchell 100
intelligent workflows 57 Mitchell, S. 99
internal sovereignty 68, 76 mobile payments 19
Internet 72–78, 95; banking 186 mobile trading 17
Internet of Things 23–24 Molotov-Ribbentrop Pact 70
inviolability 76 Monetary Authority of Singapore 113
Iraq: US intervention in 71 Monitor Polski 171
Island of Palmas Case of 1928 69, 89–90n6, Monkiewicz, M. 178n1
90n7 Moore 103
ISPs 77 Morozova, A. 208
Italy: digital sovereignty 70 Munich Pact of 1938 70

Japan: 5th Science and Technology Basic Nasi group 72

Plan 115; privacy laws 37 National Bank of Rwanda 220
Jarke, M. 98 national digital sovereignty 67–91;
Joint Cyber Unit 84 cyberspace, international law in 72–78;
data and ownership 78–82; security of
Kabbage 113 ICT systems 82–85; technology 85–88
Kafka, F.: Trial, The 102 NATO; see North Atlantic Treaty
Keen, M. 111 Organisation
Kellogg-Briand Pact (1928) 88n5 NATO Cooperative Cyber Defence Centre of
Khiaonarong, T. 208 Excellence in Tall 90n19
Kotarba financial ecosystem model 39 natural language processing technology
(NLP) 24
LDCs; see least developed countries near-field communication (NFC) 24–25
League of Nations 90n7 Netflix 129
League of Nations Covenant, Article 10 69 Netherlands, the 186; fintech and bigtech
least developed countries (LDCs) 1 sectors 29
legal sovereignty 68 New 21st Century, The (Sapir) 71
Lehrer, C. 42 NFC; see near-field communication
liberalism 98 NIS2 Directive 84, 85, 89
libertarianism 98 NIS Directive 67, 83
Lin, T. 71 NLP; see natural language processing
Louis XIV 68 technology
LuxLeaks 117 North Atlantic Treaty: Article 5 70, 73,
90n14
machine learning 23 North Atlantic Treaty Organisation
Malta Leaks 117 (NATO) 67, 90n10
Marjanovic, O. 41 NoSQL (Not-only SQL) 58–59
market-making business platforms 57
market reforms 153 OECD; see Organisation of Economic Co-
market supervision, tasks and structure of 29 operation and Development
Markus, M. L. 42 OEWG; see Open-Ended Working Group
Mayer-Schönberger, V. 33, 34 on Developments in the Field of ICTs in
Mazzucato, M. 97 the Context of International Security
McAndrews, J. 4, 14 Open-Ended Working Group (OEWG) on
Mejias, U. A. 34 Developments in the Field of ICTs in the
Merrill Lynch 4, 14 Context of International Security 74
Michalski, T. 177 operational resilience 2
‘microcycles’ of media ‘processing’ 96 Organisation of Economic Co-operation
Microsoft 99, 129; Azure 47 and Development (OECD) 124,
Mikalef, P. 40–41 127–129, 164, 188; Green Recovery 131
 Index 231
PaaS; see Platform as a Service relations 148–152
Panama Papers 117 Resilience, Deterrence and Defence: Building
Paschkewitz, J. 119 Strong Cybersecurity for the EU 86
Patt, D. 119 responsibility 152–154
pay-as-you-earn system (PAYE) 118 right to data 173–177
PAYE; see pay-as-you-earn system risk in finance 199–200
Pay Pal 20 robotic process automation (RPA) 48–50
PayPal 113 Romania 17, 186
PCV; see perceived customer value Ros, G. 208
Pegasus system 103 Rousseau, J.-J. 68
perceived customer value (PCV) 59 RPA; see robotic process automation
personal data protection 169–173, 170 RTB; see real-time bidding model
personalisation of digital public services Russia 73, 77; national digital sovereignty
114–116 71; Sovereign Internet Law 90–91n20
Pethes, N. 190
Piech, K. 21 SaaS; see Software as a Service
Platform as a Service (PaaS) 48, 48 Sapir, J.: New 21st Century, The 71
platformisation of digital public services 2, Schwarz, N. 208
114–116 Second World War 70
Plunkett, A.: Poetry Foundation 71 security of ICT systems 82–85
Poland 97–98; digital exclusion 185, Security Operations Centres 88
187–189; Kotarba financial ecosystem self-referentiality 70
model 39 shadow banking 209
Polish Banking Law: Article 6a Section 3 Shah, A. 111
222–223 Silicon Six 129
political sovereignty 68 Singapore: e-services 114
Ponemon Institute 2 Skarzyñski, R. 71
predictive analytics 55 Snowden, E. 78
prescriptive analytics 55, 56 social networks 23
private cloud 47 social responsibility of finance 154
PSI Directive (Directive from 2003 on the Social Science Research Network (SSRN)
re-use of public sector information) 81–82 4–5, 26
P2P(peer-to-peer or person-to-person): social trading 18
direct payments 19–20; system 25 Software as a Service (SaaS) 48, 48
public cloud 46–47 Spotify 132
public financial system, digitalising Square 113
109–120; budget funds, securing SSP; see Supply Side Platforms
116–118; efficiency, directions for SSRN; see Social Science Research
improving 118–119; key directions Network
113–119; literature review 110–111; Starbucks 117
platformisation and personalisation of state: and citizens, relations between
digital public services 114–116; tax 101–105; as creator and co-creator of the
collection 116–118 digital world 96–98; in digital world
punchline aesthetics 78 95–96; entrepreneurial 97; in the era of
digital revolution and digital finance
Rau, R. 202 93–106; as regulator 98 –; as user of tools
real-time bidding (RTB) model 134 101–105
Recommendations on access to and preservation of Stimson, H. L. 69
scientific information 80 Strahan, P. 4, 14
Regulation on a framework for the free flow of Strengthening European Cyber Resilience and
non-personal data 81 Fostering a Competitive and Innovative
Regulation on the Free Flow of Non- Cybersecurity Industry 86
Personal Data 37 Strengthening the European Cyber Resilience
232 Index
System and Supporting a Competitive and fintech and bigtech sectors 29;
Innovative Cybersecurity Industry 83 intervention in Iraq 71; lending 204;
structural implications, of digitalisation of Treasury 113
financial services 200–206, 201; Big
Tech 204–206; lending 202–204, 203 Value Added Tax (VAT) 117, 118
supervisory relationships, with supervised value creation 1
entities 217–220, 218, 219 values 147–148
Supply Side Platforms (SSP) 134 van Dijk, J. 181, 185
sustainable finance 152 VAT; see Value Added Tax
Synergy Research Group 210n12 VATCoin 117
systemic framework of digital finance 13–30 Verdier, G. 111
violation of sovereignty 76
tangible assets, valuation of 3 virtual private network (VPN) 129
tax administration 3.0 117–118 VPN; see virtual private network
tax collection 116–118
tax system, digitalisation of 123–139; WannaCry attack 208
cyberspace tax system 126–132; future of Wardrop, R. 202
133–138; issues and insights 124–125; Warsaw Pact (1991) 90n10
need to adapt 125–126; scenarios WEF; see World Economic Forum
136–138, 137 WikiLeaks 78
technology, nationality of 85–88 Wilson, C. 208
technophobia 181 Wilson, W. 90n7
Telecommunications Act of 16 July Wolfe, B. 202
2004 17 World Bank 112–113
Teubner, G. 146 World Economic Forum (WEF) 1
Tirole, J. 215 WSIS (World Summit on the Information
Towards a common European data sp 80 Society) 76
Trial, The (Kafka) 102
Yoo, W. 202
UBI; see usage-based insurance
UN GGN forum 77 Zhang, L. 37
United States Code: Section 230 of Title 47 Ziegler, T. 202
106n4 Zuboff, S.: Age of Surveillance Capitalism,
usage-based insurance (UBI) 20 The 106n2
US/USA 1, 73, 82, 95; Congress 30; data
economy 38; Department of Defense 97;