Assessing the Risks Associated with Green Digital Finance and Policies for Coping with Them

Abstract

Digital financial technologies, especially the new generation of financial technology (FinTech) can promote green finance, but also can create new risks and unintended consequences for the environment and users, which can limit the potential to scale sustainable finance. This chapter describes risks associated with the environment, use of crypto assets, use of alternative finance, use of automated investment advice, and cybercrime. Digital technology can have negative side effects on the environment through hardware and software production, use, and disposal. Use of crypto assets involves risks related to crypto asset exchanges, illicit financial flows, and possible tax evasion. Alternative finance involves risks related to insufficient internalization of environmental spillovers, maturity mismatches, unclear definitions of green finance, information asymmetries, and the insufficient analytical capacities of banks and other investors. Robo-advisors can steer investors toward opportunities in green investments, but also can be risky for the uninitiated. Crime-related risks associated with the use of FinTech include the theft of sensitive consumer and corporate financial data through hacking, phishing, or other fraudulent means, and theft of online financial assets. International cooperation will be needed to address these risks and promote the development of digital green finance that is compatible with financial stability and consumer protection. Promotion of digital financial literacy is also vitally important.