Top Ten Reasons for Global Regulation of FinTech
Different regulatory environments around the world create challenges for businesses and consumers. They impede the free flow of capital needed for economic growth, and foster income inequality. Ideally, a harmonization of regulations globally would solve these and other problems and create greater opportunities. To go even further and have the exact same regulations apply regardless of geography would streamline financial services. Regulators must strike a balance between protecting markets and consumers and promoting innovation and growth. Legal uncertainty with respect to FinTech stymies innovation and growth.
Countries take separate approaches to FinTech regulation. In the U.S. there is a fractured regulatory structure governing financial services generally. The OCC, CFPB, CFTC, FTC and SEC all are addressing FinTech in some way, but not the same way, at the Federal level. Some states address it at the state level, adding even another layer of complexity.
Internationally, Asia, has a fractured approach with regulators in various countries governing their own jurisdictions, but not really addressing problems holistically. In the U.K. and other places, the financial regulators have adopted a collaborative approach with entrepreneurs, reaching out to them for input prior to making regulations, but with a narrow geographic focus.
Is there a way to resolve these differences? One approach would be to take a limited set of issues, with common problems and common goals, to regulate. This would set the course and address problems around the world. By addressing common problems and having common goals, coordination would be faster and more efficient, benefitting the global economy. Having said all that, here are my Top Ten Reasons for Global FinTech Regulation.
10. Anti-Money Laundering/Anti-Terrorist Funding/Electronic Crimes
Electronic crimes, including money-laundering and terrorist funding, are a global issue. Allowing criminals’ funds to cross borders without impunity only encourages illegal behavior, and hurts consumers and other victims of fraud. Protection of consumers is a common goal of all countries’ financial regulators. FinTech can be used to counter and mitigate these types of crimes.
9. Bubbles and Busts
Recovery from a financial crash often requires international cooperation. Regulators may seek to protect their own markets, but with international movements of funds, a crash in one country can quickly spread to another. This happened in 2008-2010 and in previous crashes. Global FinTech regulation would give regulators real time data on funds flows, in time to minimize or even avert cross-border contagion from financial crashes.
8. Digital Currencies
The last decade has seen further development in technology and a merger of technology and financial services. One of the most fascinating, of course, has been the development of digital currencies, the first of which was of course, Bitcoin.
Despite what some regulators may say, companies such as Overstock.com, Microsoft, and Virgin Galactic accept payment in Bitcoin, as if it were money, and the number of merchants doing so is increasing.
People don’t buy things with other asset classes such as gold or silver, but they do buy things with Bitcoin. It is a “de facto” global currency. It is accepted on the Internet which has no borders, and can be accessed regardless of national borders. Digital currencies are hard to hack and more secure than banks. Because of this, Bitcoin and other digital currencies are likely to grow in acceptance and usage.
It is also likely is that one or more governments will launch their own digital currency. China has announced plans to do just that. This would allow control over the money supply and monetary policy. It would also facilitate taxation and fight money laundering and other illegal activities. Also, because digital currencies eventually draw more and more data processing and storage needs, governments have the resources to facilitate them.
There are more digital currencies being introduced and Bitcoin usage continues to grow. Global cooperation on digital currencies is fast becoming a necessity.
The Internet of Things will give us more and more devices enabled with “smart” technology. There will be more global commerce happening, all faster than before. Soon refrigerators will be able to order food, watches will have the same capabilities as smart phones do today, cars will operate without drivers, office buildings will be maintained automatically – all of it linked to commerce and our financial systems. By removing legal uncertainty and streamlining commerce, global FinTech regulation could speed integration and acceptance of IoT capabilities.
6. Banking the Underbanked
FinTech is spreading even in the developing world. In Africa, financial transactions that never occurred a generation earlier are being done directly from cell phones by simply texting. Peer to peer payments in Africa have grown from 16 million users in 2009 to over 100 million in 2016. This is giving a huge number of underbanked people access to banking that never existed a decade ago. FinTech can be used to help underbanked people around the globe, even those in developed nations.
Another common problem that could benefit from global regulation is the “know your customer” or KYC requirement that all financial services companies face. It makes sense firms must know who they are dealing with. Still this is a common requirement across countries. FinTech regulation could be used to streamline these requirements and help identify customers. Having a standard reporting format and specifications, or even a standard database of known digital identities, would ease the account opening process, giving new customers faster access to their money and allow the firms to open accounts quicker. Both financial service firms and their customers would benefit.
4. Innovation and Growth.
Innovation gives productivity gains which leads to growth. In his book The Upside of Inequality, Edward Conard argues that innovation and growth is spawned by a combination of 2 things. First, investment in innovations that are so ground breaking that they essentially “create their own demand”. You didn’t know you needed it until you had it in your hands. Second, the availability of qualified workers able to make those inventions a reality. By streamlining international commerce, global FinTech regulation would allowing freer flow of capital across borders, allowing money to flow to where it could best be invested. Also, because of its inherent international capabilities, a global digital currency would enable those qualified workers to be compensated regardless of their geography.
Nobody enjoys paying taxes. However, differing tax schemes around the globe have created a headache for businesses worldwide. Floors of accountants are devoted to understanding, interpreting and helping businesses maneuver this labyrinth. Technology could, of course, help manage this. TaxTech is the new buzzword. But coordinating tax policies among countries can also help, coupled with common standards and specs, would greatly help businesses by streamlining this process and help policymakers and governments by expediting compliance.
2. Monetary Policy
Cross border capital flows can impact the effectiveness of monetary policy, especially international monetary policy, that has been coordinated by G20 countries for decades.
However, there are no current standard requirements for reporting and consequently there can be gaps and inaccuracies in the data. If every country used the same standards, formats, fields, codes and other specs, reporting would be simpler, more accurate and timely.
Policymakers would have better data and make better decisions in managing the world’s economy. FinTech can facilitate better reporting and monitoring of cross border capital flows. This would lower costs and increase efficiency for policymakers.
Does anyone believe that cybersecurity is not a global problem? Most recently the WannaCry and Petra ransomware attacks demonstrated international nature of this problem. In order to secure our financial system, a global effort must be made to have current standards, and specs, protecting against international efforts at hacking, ransomware and other cybersecurity issues. Global agreement on this common problem is FinTech’s most pressing issue.