Fintech as a Macro-Level Regulatory Challenge

Saule T. Omarova, Cornell University School of Law

-- Fintech is the hottest topic in today’s finance. New technologies are transforming the way we conduct financial transactions and interact with one another in virtual financial markets. As transacting becomes faster, cheaper, and more convenient, a wider swath of the world’s population is potentially able to enter the world of digital finance. This explains why fintech is often seen not only as a financial-market disruption but also as a force of social progress. Yet, it is important to remember that technology is simply a tool. How to use it, for what purposes and to what effects, however, is a choice. What does this choice involve in the context of fintech? And how can it be translated into a coherent strategy of fintech regulation?

My new article, Technology v. Technocracy: Fintech as a Regulatory Challenge, tackles these ‘big-picture’ questions. It takes a deliberately broad view of fintech as a systemic force disrupting the very enterprise of financial regulation, as opposed to any particular regulatory scheme (such as securities or bank regulation, consumer protection regimes, anti-money-laundering rules, and so on). From this perspective, fintech’s principal impact appears not merely as a mechanical sum of various regulatory ‘gaps’ but as a fundamental structural challenge to the very paradigm of modern financial regulation.

As the article argues, most jurisdictions currently follow a fundamentally technocratic paradigm of financial regulation. This dominant regulatory model operates primarily through the mechanisms of structural compartmentalization, bureaucratic specialization, and narrow targeting of specifically cognizable ‘market failures’ within the relevant agencies’ jurisdiction. One of the core premises of the technocratic paradigm is the possibility of identifying and isolating well-controlled micro-level phenomena and decision points, so that the desired macro-level outcomes are simply accretive.

Fintech, however, is transforming financial markets in ways that undermine basic assumptions built into, and shaping the operation of, this technocratic regulatory paradigm. Exploring these dynamics, the article develops a five-part taxonomy of the key tech-driven changes in the structure and operation of the financial system, and the corresponding challenges these systemic shifts pose to the continuing efficacy of the regulatory enterprise. Specifically, it shows how new technologies dramatically increase the scale and scope of the financial system, make it move at an unprecedented speed, shift financial markets’ decisional center of gravity from humans to algorithms, render finance less transparent and more complex, and blur traditional jurisdictional boundaries. In this tech-driven financial universe, it is increasingly difficult to isolate and target in a controlled manner specific points of ‘market failure’ and assume that a salutary system-wide outcome will follow.

This high-level taxonomic exercise reveals the fundamental tension at the core of the fintech problem. On the one hand, new technology is causing significant structural shifts in the financial system. On the other hand, the emerging regulatory responses to these macro-level changes continue to operate primarily on the micro-level. Using the U.S. experience as its principal example, the article surveys current efforts to regulate fintech (including regulatory sandboxes, special fintech charters, and so-called ‘RegTech’) and shows the limiting effects of the technocratic bias built into their design. It concludes by outlining a number of alternative regulatory options that would explicitly target the core macro-structural, as opposed to micro-transactional, aspects of the fintech challenge in a more comprehensive and normatively unified manner.

The article is forthcoming in Volume 6 of Journal of Financial Regulation.

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