Published on November 15th, 2017 | by Sunit Nandi0
Regulation must be “responsive”, CT Compliance’s Brian Connell-Tombs notes
Technological innovation in the financial services sector – known as FinTech for short – is a fast-moving field, to say the least. During a recent interview with Jim Cramer on CNBC’s “Mad Money,” PayPal CEO Dan Schulman said that he expects the financial services sector to change more in the next few years than it has in the previous 30 years.
“If you think about the under-30 generation, the millennial generation – GenTech, as I call them – they grew up with a screen in front of them. And so they think about everyday processes, like payments, differently than you and I do,” Schulman said.
With an average of 33 percent of consumers in large worldwide markets adopting FinTech, according to a recent report by Ernst & Young, it’s clear that the financial services sector is already changing due to its advent. Some of the areas that FinTech has affected include currency (in the form of cryptocurrency), ledgers and records, regulation, insurance, and banking.
Cryptocurrency, of which Bitcoin is one example, is a decentralized digital asset that is designed to use encryption to secure transactions and verify the transfer of assets. Since cryptocurrencies are decentralized, it means that they operate separately from a central bank or government.
The blockchain is a public ledger that keeps record of cryptocurrency transactions. The maintenance of the blockchain is performed by a network of communicating nodes (redistribution points or communicating endpoints). Like Bitcoin, and cryptocurrencies in general, the blockchain is designed to have no central oversight; transactions are published to all nodes, which allows the system to prevent double-spending.
Regulation technology (regtech) helps to solve challenges that come from the rise of digital products in the financial services sector. Regtech helps to address issues like data breaches, hacks, money laundering, and other illegal activities. It uses machine learning and big data to monitor transactions that are taking place online in real time and determine irregularities or improprieties, thereby assisting financial compliance departments and helping to minimize risk.
Insurtech refers to the use of machine-learning by insurance startups to exploit inefficiencies in the insurance marketplace, by, for example, finding a mix of policies that would provide better-fitting and cheaper coverage for an individual. There also exists a possibility that insurtech would create efficiencies that would allow coverage for discrete, one-time events, like borrowing someone else’s car.
Financial inclusion in banking
Financial inclusion in banking means providing access to financial services for consumers in developing nations or who otherwise have limited choices when it comes to banking, credit, and other services. Many FinTech companies are trying to find a way to allow these types of consumers to become bankable through technologies like mobile wallets and other innovations.
Regulations of FinTech
Given that FinTech is a constantly evolving field, there is a need for regulation to be similarly adaptive. At the same time, there is a concern that too much regulation or ineffective regulation may impede the growth of FinTech and its potential, both economic and otherwise.
In a recent interview, James Bullard, the president of the St. Louis Federal Reserve Bank, mentioned that FinTech is going to be a focus for the regulatory environment in the next decade. “The new issue now for the next 10 years is going to be fintech, and how fintech is going to affect financial intermediation in the US,” he said.
In Canada, while there is no agreement between Canadian regulators on the issue if cryptocurrencies are in fact currencies, and therefore governed by the Bank Act, or securities, governed by the provincial Securities Acts, there are still issues that securities dealers will need to address.
While the issue of currency is being resolved, and despite its critics, cryptocurrencies continue to explode in the country. A number of cryptocurrencies/exchanges are head officed in Canada, crypro-investments are (or will soon be) publicly traded and, if the recent “more than 400 portfolio managers, investment advisers and high net worth investors” who attended the October 25, 2017 event at the Design Exchange is evidence, there is an investor interest in crypto-investments.
Brian Connell-Tombs, founder of Toronto’s CT Compliance Consulting, a regulatory compliance service firm that serves the securities industry, notes that regulators should be responsive to innovations like FinTech while still fulfilling their investor protection mandate.
“Developments in financial services, like those in the FinTech sector, have the potential to contribute to enormous economic growth, in addition to providing increased access to investment, banking and insurance products. Regulations should recognize that potential and encourage innovation.”
Brian Connell-Tombs then adds, “It’s important that we [Canada] strike the right regulatory balance … There is risk in FinTech, just as there is risk in any new technology. But there’s also tremendous possibility and promise.”