RegTech: Leveling Fintech’s Playing Field
Fintech has been getting by in the finance sector as not a traditional financial medium allowing them to not have to comply with all the rules geared towards traditional financial firms. Regardless of the market, regulation is necessary, so how should we be approaching regulation in the financial technology industry?
While Fintech does operate on a different medium as opposed to traditional financial institutions, there are some vulnerabilities that it’s more prone to suffering from e.g., data privacy. Since these applications and websites hold highly sensitive information regarding finances, there’s a higher volume of cyberattacks for these platforms. The technology necessary to develop this software has been very up and coming for RegTech in the finance sector. Due to modernity, software engineers are still learning how to enable high level encryption on the data stored in FinTech’s databases.
A New York trial that gained a lot of popularity within the last decade is the Madden vs Midland case. Saliha Madden failed to pay $5000 and Midland Funding LLC (a Fintech debt collector company based in California) tried charging a 27% interest rate on that debt. Madden sued Midland under the usury law of New York which states that interest rates above 25% are considered usurious. Once taken to trial, the Southern District of New York voted against Madden claiming the National Bank Act would exempt Midland Funding from any usury laws. Later on, the Second Circuit Court of Appeals overruled the district court ruling since Midland Funding wasn't classified as a National Bank. This case brought to light the significance of regulation since Midland Funding LLC was a Fintech lender as opposed to a traditional financial institution.
The topic of RegTech in the finance sector has extended internationally as well. At the top of 2021, China banned the selling of deposit products through online mediums. The Chinese government has additionally frozen hundreds of thousands of customer deposit accounts, restricting access to the customers for approximately three months. In the United Kingdom, licenses are necessary to exchange cryptocurrencies. Throughout the pandemic, government officials have addressed the need for a more distinct legal network.
The European Union released an Anti Money Laundering directive at the beginning of 2020 geared towards ewallet providers, online brokerages, and platforms offering a space to exchange cryptocurrencies. This included mandatory registration with authorities and compliance with AML/Know Your Customer (KYC). A new structure will be brought into the EU to bring blockchain technology and assets to the Fintech sector.
What does this mean for the future?
Compliance is crucial when it comes to RegTech in the finance sector and this involves compliance from startups, multinational corporations, incumbents, financial institutions, and banks. So until a mutual agreement is reached between those parties, there may not be grand strides in regulation. Until then, small fixes like stablecoins, cryptocurrencies that tie their market value to an external asset, can help stabilize this part of the financial market.
Regulating a sector that is constantly changing and evolving comes with its own obstacles, but through education and information regulators, government agencies can continue to grow the world of Financial Technology while also making it a secure space for consumers.