Regulation for FinTech – Innovation vs Risk

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With the rise of new technology and the impact it is having across industries, one topic that is often raised is that of regulation. This is a particularly hot issue for FinTech as the sector is much more developed than any other utilising these innovative developments; however, the situation here can be applied to the likely future situations in other sectors. Various reports have highlighted the rapid ingress that FinTech companies have made, but how to treat them is still up for debate.

The choice for regulators is either to restrict FinTech companies by applying the same standards as traditional financial services or to provide a more ‘hands-off’ approach to it, allowing them to experiment and develop more effectively. By adhering to tighter regulations it is hoped that the risk of using the services will be mitigated; whereas the explosive developments FinTech exhibits are more likely to be realised with more freedom.

Reactions of governments have differed. Some, such as Australia, have opted for a ‘regulatory sandbox’ in order to encourage and support creation of new financial products and services. The UK is working towards a regulatory approach which offers the greatest potential for innovation. Japan, which fell behind other countries initially due to stringent regulations, has recently experienced a huge boost due to the government introducing FinTech-friendly regulation. In Russia, whilst cryptocurrencies were initially banned and the government was seen to be anti-blockchain, a realisation that the country needs FinTech has led to a reversal of that stance.

Thomson Reuters published an article recently on the decision of regulatory level. In this they cited research initially carried out by Goldman Sachs, which stated that FinTech investment had risen more than tenfold from 2010 to reach $19 billion US in 2015, with a market currently valued at $4.7 trillion US. The huge investments have been driven partly by financial institutions investing in FinTech companies, but also due to the potential they have shown in providing financial services and products.

The same article also discussed the position of the vice chairman of the U.S. House of Representatives Financial Services Committee, Patrick McHenry, who has proposed an Act where regulators would be actively enabling innovation from FinTech, rather than treating financial service providers the same as traditional banks. The current decision to treat FinTech the same as banks is backed by The Office of the Comptroller of the Currency, who wish to hold all companies providing a banking service to the same standards.

Generally, the viewpoint in most regions seems to be that allowing FinTech companies to innovate and experiment with less stringent regulation will lead to faster and more significant developments. Given more freedom, greater benefits could be realised. Although people are wary of rapid change and new ideas, it should be noted that regulation does not necessarily prevent disasters from occurring in a sector.

It is also worth mentioning that applying regulation to a decentralised, distributed platform – as used by blockchain – is not necessarily achievable. Even when Russia banned cryptocurrencies, the way in which blockchain operates made it impossible for the government to enforce. Whilst companies may wish to operate under regulatory guidelines, there is difficulty in enforcing it on those who don’t want to.

Despite this, it seems natural that some form of regulation will form around FinTech in the long run. As the technology is so new and constantly evolving, it may be that regulators hold off until it stabilises before they can decide appropriate measures. It could also be the case that the nature of blockchain technology means that it ends up doing a large amount of the regulator’s work for them. As Adam Vizari, Director of Diacle, noted at the GamCrowd ICE presentation on blockchain in the gambling industry: Blockchain can be the regulator.