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13 Oct 2017
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U.S. Regulators and the Fintech Industry: Unity for Innovation

The U.S. needs a “sandbox for regulators” that would encourage government agencies to explore blockchain and related technological innovations to avoid falling behind forces that are reshaping the markets they govern”.

Jeff Bandman, the owner of the advisory firm Bandman Advisors and former fintech advisor for the CFTC, presented a plan for U.S. regulators to help drive innovation for the fintech industry on October 12, 2017 at the U.S. Securities and Exchange Commission panel. Since the rise of blockchain technology there has been an increasing tension between the fintech industry and regulators; the foundation of the issue being that regulators have not agreed on a way to regulate the industry. Why? Because they both grow at different rates. This is evident through the growth of bitcoin (the most common use for blockchain technology so far). Bitcoin’s value in the past year has jumped from $400 per bitcoin to over $5,600. For the past year there has been a period of adjustment for regulators, but now they must decide how to react to an advancing industry. Blockchain technology has the potential to revolutionize clearing and settlement, in addition to other sectors such as decentralizing healthcare data. The fintech industry is revamping the way companies conduct business, how information is stored and exchanged, and the way in which people invest.

Regulators move at a much slower pace than the technology because they must ask the essential questions to safeguard the market and protect investors’ interests. Bandman poses the important question: “what is the proper role of the regulator?” Bandman explains that, yes regulators need to “ask the tough questions” and ensure “customer protection, market integrity, [and] financial stability”, yet they must also “engage with these new technologies and innovators, to learn about their capabilities, and make themselves accessible to innovators.” Essentially, for blockchain technology and fintech to progress, government agencies, particularly the SEC, need to become familiar with the application of these innovations when drawing up regulations. There needs to be active engagement on both ends.

As cybersecurity breaches for large companies and institutions, including the SEC, become a common occurrence, it is paramount that regulators play an active role with the fintech industry to safeguard sensitive data. Bandman explains that blockchain technology’s advance cryptography and decentralized nature “may make information stored in distributed ledgers safer than traditional methods”. However, this poses a new obstacle for regulators. The decentralized nature of blockchain technology means that regulators need to shift their focus from central actors to activities. For investor related activities this would actually be beneficial for regulators as they would be able to detect fraudulent and illicit activities quicker than by going through an intermediary party such as a broker or bank. Bandman asserts that if regulators integrate blockchain technology, it will give them access to “real-time regulation” on the markets instead of waiting for end of day reports. This in effect will greatly benefit regulators so that they can “see through the windshield instead of the rear-view mirror. They may be able to detect wrongdoing, or predator or deceptive practices, at a much earlier stage.”

The technology is new and continues to change day to day, however, U.S. regulations must reflect the nature of the fintech industry and ensure that new guidelines and laws integrate these innovations.

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