Fintech and International Financial Regulation

Abstract

This Article shows that fintech exacerbates the difficulties of standard setting in international financial regulation. Earlier work introduced the “Innovation Trilemma” (the Trilemma). When seeking to balance the goals of achieving market integrity and innovation through clear and simple rulemaking, regulators can—at best—achieve only two out of these three objectives. Fintech’s unique characteristics—a reliance on automation and artificial intelligence, novel types of big data, as well as the use of disintermediating financial supply chains comprising a mix of traditional firms as well as technology specialists and newcomers—complicates the application of the Trilemma. Rulemaking struggles to achieve needed clarity where innovative algorithms introduce informational uncertainties and complex risks for market integrity. Further, regulation’s ability to impose compliance costs on firms in response to these risks is limited when a preference for innovation favors smaller upstarts and nontraditional players.

International financial regulation presents even steeper challenges when viewed through the lens of the Trilemma. First, rules clarity is harder to achieve owing to divergences in national legal systems, administrative processes, and market structures. Secondly, fintech increases negotiation costs in international standard setting owing to the emergence of a much more expansive cast of economies—like China and India—that dominate as fintech hubs alongside the traditional power players such as the United States or European Union (EU). With distinctive policy preferences, emerging economies constitute powerful voices that mean that negotiation must account for a wider range of distributive preferences. Finally, standard setting must bridge the particularities of domestic market structures that are experiencing varying degrees of disintermediation and transformations in financial supply chains. Rules that impose high compliance costs may be acceptable to economies dominated by traditional intermediaries but may lack buy-in from those where nonbank firms hold sway. In concluding, this Article briefly surveys strategies for fostering greater global cooperation in standard setting for fintech.

Keywords: fintech, blockchain, cryptocurrencies, securities regulation, fraud, Basel Committee, International Monetary Fund, prudential regulation, financial regulation.