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How Regulators Respond to Fintech: Evaluation of Different Approaches

Innovative technologies change the landscape of financial services. Thanks to decentralization and digitalization, essential financial services such as lending and money transfers are now accessible for everyone, regardless of their credit history and geographical locations. 

However, exactly because fintech services are so omnipresent, they also present certain risks, many of which are connected with their safe and fair use. In this post, we will talk about the challenges in fintech regulation and discuss the pros and cons of standard approaches to this issue. 

Challenges in regulation


Fintech raises multiple concerns about the consumer and investor privacy protection, the clarity and consistency of regulatory and legal frameworks, the adequacy of existing financial safety nets, and potential threats to financial integrity of a given society. This risks are hard to reduce for several reasons:

  • Borderless platforms. Fintech products are most often used internationally. That is why they go beyond the legislative power of any one country. Fintech’s international nature also makes monitoring global transactions quite difficult for public authorities. For example, there are some countries that recognize Bitcoin as a legit payment like the USA or Japan. In other countries, cryptocurrencies are considered illegal. Therefore, it is hard to find a regulatory consensus here. Some other examples are crypto exchanges and peer-to-peer lenders. 

  • Increased disintermediation. One of the things that fintech usually prides itself for is bypassing traditional intermediaries. This way fintech platforms often manage to speed up transitions and reduce commissions for their clients. However, that also means that for public authorities, it is more difficult to monitor financial operations and prevent illegal transactions or fraud.

  • Rapid growth. Fintech platforms scale very fast and their rapid development puts even more pressure on the regulators to react quickly to this change. Moreover, there is a lack of reliable information about how these platforms function, which complicates regulation and compliance check.

All in all, fintech is still a relatively new field. It demands flexibility and ability to adapt to changes, as well as developed technical skills from its regulators. 

Different approaches


Even though there are multiple factors that make fintech regulation tricky, several approaches have been invented to manage potential risks:

  • Wait-and-See. When regulators use this approach, they observe and monitor the emerging trends from a safe distance before intervening. This way regulators can get to know the service and gradually obtain the necessary skills around innovation, as the technology becomes more commonly adopted. The policymakers can also learn from the experiences of other countries before making any final decisions about regulations on their territory. This approach encourages innovation but allows space for intervention before things go out of control.

  • Test-and-Learn. For the test-and-learn approach, regulators need to create a tailored framework for every individual case. This provides wider opportunities for fintech development while it is still under oversight. The extensiveness of measures varies across jurisdictions. Sometimes the policymakers introduce a so-called “light-touch” framework where close supervision is not applied. There are also more extensive frameworks for cases that demand closer attention of supervisors. 

  • Innovative approach. Some public authorities welcome innovation in the digital finance sphere. They promote experimentation and introduce governmental measures to promote new initiatives. Some examples of supportive governmental institutions are innovation hubs and startup accelerators.

  • Regulatory Laws & Reforms. This approach can be combined with the previous ones. This method refers to the introduction of a new legislature that defines how fintech products should be legally developed and used. Some laws expand the mandate of fintech initiatives and create a friendly space for fintech development. Others, on the contrary, focus on the accountability and strict control of evolving systems.

Each approach has its own advantages and disadvantages, and many share similar risks. They are often used in combination too. If you have a fintech project in mind, you must make sure that you understand the regulatory landscape of your country or the countries you want to work with. The variations can be quite huge that is why you should always do profound research or consult with experts.

 

 

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Yulia Gavrilova

Yulia Gavrilova

Ethics of Tech Consultant

Serokell

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19 Apr

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Tallin

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This post is from a series of posts in the group:

Bond Fintech

Public loan and bond fintech forum.


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