Regulating the Fintech Disruption

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The fintech spectrum is developing rapidly every day. As more and more companies join efforts in amplifying this wave, the more imperative it is for regulators to take control. After the global crisis of 2008, people realized the sanctity of monitoring and regulating inflows, outflows, and all other finance-related activities, which otherwise could cause substantial damage. 

Technology has become the key to the expansion and growth of businesses in all sectors. In finance particularly, the corroboration of technology has challenged conventional methods to the extent that there is no going back for many of us. In times like these, where there are ongoing rapid developments, new challenges, and thousands of new participants, the need for regulations and monitoring has only intensified.

The first step in determining regulatory best practices is understanding the intent and objectives of these regulations.

Objectives of Regulations

Consumer Protection

The main objective of regulating any activities and practices is to protect the participants from unforeseen scenarios. The financial crisis of 2008 was a result of the gap in monitoring the everyday activities of people. Since then, companies, investors, and people have observed caution and made financial regulations an absolute priority.

Financial information is highly-sensitive in nature. Unsupervised actions vis-a-vis financial dealings can lead to catastrophic consequences. 

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Financial Stability

Digitalization of finance has prompted the system to become more decentralized, which was not the case with conventional methods. Since independent companies are innovating and digitalizing the financial space, the possibility of skewed information only grows. With so many participants functioning in a decentralized manner, the protection of both consumers and investors becomes a priority. Skewed data and information can lead to considerable financial instability, which can be easily evaded by placing adequate regulations.

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Market Integrity

One of the most important underlying factors enabling financial dealings is trust. Integrity is a key-attribute that potentially defines how healthy a system is. Introducing strict regulations and policies would intensify the effectiveness, but it would still leave some scope or gap for infiltration like frauds, money laundering, etc. To minimize this space, regulators need to incentivize market integrity by levying heavy penalties for outliers. 

Fintech is rapidly evolving with fierce momentum. The regulatory objectives outlined for fintech firms should be crystal-clear to enable appropriate assessment of activities and the risks involved.

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 General Regulatory Principles

The dynamic energy surrounding fintech can have both positive and negative consequences. While dynamism allows tremendous scope for innovation or, more appropriately put- “finnovation”, such unbalances also lead to more risks and frauds. In the digital finance context, basic policies should remain uncomplicated and supported by the majority. When the basics are clear and agreed upon, it leaves minimal scope for volatility and turbulence. Three primary areas are emphasised most that help increase the effectiveness of these principles:

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 Legal Boundations

The primary focus of regulations is to bring lucidity, in terms of legal obligations. All economies, involving digitalization of the financial sector, have legal terms which exclusively outline the scope of activities start-ups and companies can engage in. Clarity of such laws and permissions is essential in mitigating ambiguity. 

Other than clarity, the regulatory system governing fintech laws has to ensure that it remains robust. Fintech has caused a disruption in conventional finance practices by bringing in innovative technology, new business models, unimaginable ideas and more, which involves working with different market participants like investors, regulatory institutions, international laws, etc.

Even though big challenges pour in at every step, fintech regulations should be outlined clearly and adequately, to bring all aspects of fintech to a similar level.

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Technology Neutrality

Being neutral when it comes to innovative technology is crucial for regulators. It is impossible and even unwise to try and compete with the ever-changing world of digitalization and to assess and monitor all kinds of technological developments occurring in this space. The regulations should target their focus on the outcomes and the applications of technology. Ascertaining the usefulness, safety and security is more important, as a first step than to assess every upgrade or alteration that occurs. 

Also, when regulators are unbiased, it leaves the doors open for innovation. Backing a particular type of technology can often lead to an unintentional change of perceptions. Regulations need to balance themselves on the narrow path between accelerating innovation and redundancy resulting because of over-monitoring.

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 Proportionality

Factors like the size of a company, its business model, complexity and the nature and scope of its activities, determine the kind of regulations that would be suitable for its performance and functionality. Many fintech start-ups focus on only one aspect of banking like investments, e-payments or e-transfers. Levying all banking regulations on such businesses would result in their stunted growth. So, it is crucial for regulators to consider such factors that would help define the scope and extent of business operations.

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 Final Words

Regulations have often been compared to guiding lights which direct businesses towards the right path. All developments emerging in the fintech space are governed by their regulations. Other than mitigating issues like data protection and cyber security, these regulations also help define the path that new and old participants can take to reach the desired results. The fintech disruption has affected billions of people and households. The magnitude of possibilities is enough to understand the role regulations play in sustaining the entire system.

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