For the record, we want to note that putting this blog together wasn’t easy. Regulators are trying to find the balance between technology and financial regulation, and in some cases the lines are easily blurred. However, here are three fintech regulations which we predict will impact the global industry. Let us know if you think we are on the money or not…
- ICO regulation by the SEC
Cryptocurrencies, such as Bitcoin, Etherium and Ripple, have been rising in popularity. In 2017 alone, the cryptocurrency market increased in value by more than 1,200 percent thanks to an increase in the number of coins introduced to the market coupled with simultaneous trading activity. This influx of cryptocurrencies has also resulted in rising interest from the SEC, who in July of 2017 ruled that Initial Coin Offerings are subject to U.S. securities laws and therefore must be legally registered as securities. The cryptocurrency space is known for its lack of regulation, so SEC oversight has some fearing it could potentially slow down the industry.
We’ve already begun to see how serious the SEC is about properly registering crypto securities. In December, it shut down the Munchies ICO when the company tried to pass off its MUN token as a “utility” token. Munchies claimed to believe the MUN token would be primarily used within the Munchee ecosystem and not be used to fund operations. Utility tokens are not designed as investments; rather they represent future access to a company’s product or service. The defining characteristic of such tokens is that they can only be used within the platform, so there is no external value. Upon review, the SEC determined the MUN token could in fact be used to fund operations and was positioned to increase in value … meaning it must be registered as a security. We expect to see quite a bit more activity from the SEC as the ICO environment continues to grow in 2018.
- Financial Innovation Act
Introduced in the House of Representatives in 2016 by the Electronic Transactions Association, the Financial Innovation Act encourages a number of federal agencies that oversee financial services to set up “innovation offices.” Innovation Offices would be used to collaboratively explore new financial technologies and regulations to oversee them.
Currently, fintechs are left to face legislation roadblocks on their own with no roadmap to guide them. The benefit to setting up innovation offices is fintechs, and other innovative firms, would have a designated office to turn to when facing challenges with current regulations. Financial Services Innovation Offices (FSIOs) would then be able to work with fintech firms to understand their needs and challenges, submit petitions and assist them throughout the process of navigating the landscape. Essentially, each FISO would act as a counselor and advocate on behalf of emerging technologies in its designated area of focus.
Better yet, FISOs will use the knowledge gleaned from working hand-in-hand with fintechs to coordinate and share data with each other to establish procedures that will effectively reduce the time and cost of offering a financial innovation to the public and enable greater access to these financial innovations. The latest update is that the Financial Innovation Act is slated to be slightly altered this year which will hopefully help to progress it further for 2019.
- U.S. Regulatory Sandbox
The United Kingdom has been leading the race in fintech innovation and regulation, in large part due to its Regulatory Sandbox. Implemented in June 2016, the U.K. allows select businesses to test innovative products, services, business models and delivery mechanisms in the real market, with real consumers. By doing so in a small controlled environment, the government is then able to identify appropriate consumer protection safeguards and business operating procedures that can be applied to the greater fintech industry. While the U.S. does not currently have a regulatory sandbox on the docket, certain political figures are calling on Congress to take progressive action in a very similar way. A U.S. regulatory sandbox would be a great first step in better supporting this emerging industry.
As new technologies progress and obstruct traditional industries, regulation will be key to ensuring success for both the incumbents and the disruptors. Fintech regulation appears to be quickly rising on the priority list for Congress, making us hopeful that 2018 will be a year of progress.