Disruptive technologies in the financial sector are great with both lots of enthusiasm and lots of concern. While blockchain, decentralized payment systems, and lending apps make lives of many people easier, the mechanisms of their proper legalization and
regulation are unclear.
In this post, we are going to talk about how fintech regulation happens, who is responsible for it, and what purpose it serves.
Three disruptive characteristics of fintech
First, what makes fintech so different from traditional financial services in terms of regulation? Chris Brummer, a law professor at Georgetown University, published a paper about the most disruptive characteristicsof FinTech. Let’s have a look.
Rapid innovation and adoption. Fintech has a high rate of adoption because the threshold of using the services is usually rather low.
Increased disintermediation. New services bypass traditional intermediaries in order to streamline service delivery and reduce prices.
Convergence of industries. Different industries face less barriers in collaboration.
Among other valuable characteristics of fintech, there are lower costs and fewer barriers to entry and overall democratization of opportunity. Decreased prices allow even small companies and individual professionals to deploy services and benefit from them.
All these disruptive characteristics allow fintech to grow very fast and exist above the traditional financial market. However, many governments and private organizations started to get concerned about how to guarantee stability and security to the users
What is regulation and what purpose does it serve?
Regulations are laws introduced by the government or other authoritative organizations aimed to control the way something is done or the way people behave. The need for orderly and reliable markets has caused the introduction of intelligible rules that govern
all the interactions between the providers and users of financial services in Fintech. This is needed not only for the security of the clients but also for the security of the whole market in general. In the absence of rules and regulations, it collapses;
entrepreneurs are less likely to enter a market as well if they are unsure what the rules are and whether their rights will be enforced.
Types of regulators
There are two types of regulators in Fintech:
Government regulators. When most people think of a regulator, they think of the government. Government is responsible for all the vital services provided inside the country or state, and fintech is one of those vital services. While elected governments can
regulate an industry or activity directly through legislation, they often delegate rule-making authority to a regulatory body. The agency's jurisdiction can expand over a particular period of time or a particular industry. There also can be multiple agencies
with overlapping powers that take care of regulating fintech.
Private regulators. There is also a lot of private regulation, when market participants regulate one other's behavior. Some examples are: formal self-regulatory organizations (SROs) with statutory authority to serve as regulators; sophisticated contractual
arrangements made by customers or competitors for the purposes of enforcing market partner agreements; and private litigation by consumers or competitors for the purposes of enforcing market partnerships.
Fintech is a relatively young field where many of the existing laws that govern traditional financial institutions don’t apply. However, today new measures are invented to promote safety and security of fintech. Both governments and private companies work
together to make the market safe and just for everyone. Without clear and effective legislation, fintech market would simply not exist.