The need for international fintech collaboration
Explosive technological development within the financial services sector has left regulators struggling to keep pace with innovation. In many jurisdictions, financial regulators have sought to strike a balance between supporting fintech businesses and upholding their mandates of protecting consumers, regulating industry, and creating financial stability. Achieving that balance has proven a challenge.
Regulators try to keep up with innovation in financial technology
Some forward-thinking regulators have attempted to achieve this elusive goal by creating a regulatory “sandbox”: a mechanism that permits businesses to test their ideas and innovative products in a live environment without following some or all legal requirements, under the supervision of the regulator. The Canadian Securities Administrators’ regulatory sandbox, for example, permits eligible businesses “to register and/or obtain exemptive relief from securities laws requirements, under a faster and more flexible process”.
Similarly, the Bank of England’s fintech accelerator program “will work with new technology firms to help us harness FinTech innovations for central banking. In return, it will offer firms the chance to demonstrate their solutions for real issues facing us as policymakers”. Not to be left out, the United States has several fintech initiatives underway, including the US Consumer Financial Protection Bureau’s (CFPB) Office of Innovation, launched in July 2018, and State lead initiatives, such as Arizona’s financial technology sandbox. Numerous other countries, including Australia, Japan, Singapore, the United Arab Emirates, and the EU have advanced initiatives to facilitate development and secure a foothold in this burgeoning sector.
These sandbox-arrangements between regulators and businesses create benefits for both parties. Regulators can work to ensure that the public interest is protected from the outset while businesses gain the opportunity to test the market viability of their product on a small scale. This is important, since fintech products and services are often novel: offering not just a faster way to run the books, but a restructuring of the underlying financial architecture. It’s not easy to predict whether potential customers will find a novel product useful and desirable. These regulatory sandboxes give fintech businesses the chance to test their ideas before investing further in licensing, regulatory and compliance costs. All the better, since the costs of ensuring compliance are often prohibitively high, underestimated or wholly unknown.
The trouble is, these sandbox initiatives are confined to the national or even to the state level, while tech innovators have their sights set on the global market.
Fintech without borders
Innovative technology unfolds on a global scale: new products and services are deployed simultaneously in different markets and across borders. The global aspirations of fintech increase the challenge for regulators and businesses alike. Businesses attempting to meet regulatory regimes across multiple jurisdictions face significant demands on their resources. Too much red tape could suppress growth. Regulators, for their part, face the unenviable challenge of weighing the risks and benefits of novel, unknown entities.
The creation of a global regulatory sandbox
The Global Financial Innovation Network (GFIN) was formed in August of 2018, building upon the UK Financial Conduct Authority’s (FCA) proposal to create a global sandbox. A network of 35 organisations, the GFIN has a strong Canadian contingent; the British Columbia Securities Commission (BCSC) is a member, as is the Ontario Securities Commission (OSC) and the Autorité des marchés financiers (AMF) in Québec. The GFIN seeks to “provide a more efficient way for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas”.
The consultation document published in August 2018, proposed the creation of GFIN, “a collaborative policy and knowledge sharing initiative”, which would serve three main functions. First, GFIN would allow regulators to share knowledge about emerging trends. Second, it would provide a forum for joint policy work and regulatory trials: an opportunity to source solutions to common challenges—such as cross-border payments, anti-money laundering (AML), or cross-border identity verification—and identify areas of regulatory divergence, which often act as barriers to cross-market innovation. Lastly, the GFIN could facilitate testing across multiple jurisdictions of new innovations, both business-to-business and business-to-consumer.
The consultation document invited feedback from industry stakeholders. The response, according to FCA, “was overwhelmingly positive”. Since then, the GFIN opened applications for a pilot phase of cross-border testing, which closed in February 2018. The GFIN has also continued to grow its membership, from the founding 12 members to 35 organizations currently.
The GFIN may be a global network, but it doesn’t have the authority to override national legislation. Participants in the GFIN’s pilot project were still required to meet the application requirements of the jurisdictions in which they planned to test.
GFIN takes next steps in cross-border testing pilot
The GFIN received 44 applications to participate in its pilot program. After an initial screening, GFIN members will continue to move forward with 8 firms, including the Vancouver-based Coinvestion, an international investment and exchange platform for real estate shares. The only Canadian-based firm moving ahead, Coinvestion proposes to test a “platform that uses blockchain to allow users to invest in shares backed by real estate investments”.
The next steps is for the chosen 8 firms to develop testing plans with their regulators and prepare for a cross-border trial, which may involve live transactions. These trials will allow the participating firms to test their ideas in different markets. Regulatory approval has not been guaranteed however. Participating firms must undertake further work with the regulators involved.
“Firms that develop a testing plan satisfactory to each jurisdiction’s criteria will take part in the pilot testing phase,” the GFIN announcement reads. “An announcement of the firms formally selected for the cross-border testing pilot will be made in late Q2.”
The GFIN also noted that a high number of applications were from firms with RegTech and cryptoasset related business models. In the future, the announcement continued “it is also our hope and ambition to receive applications from other areas of financial services.”
A better way forward for fintech
Regulatory mechanisms are generally directed domestically, while technological innovation seeks to expand into new markets. This creates tension between regulators and firms, as does the need for tech companies to follow Zuckerberg’s famous imperative to “Move fast and break things”. Regulators may be tempted to enact regulation in order to avoid being caught flat-footed. Their mandate is to protect the public interest, after all, and considerable uncertainty surrounds the resiliency and security of cryptocurrency, distributed ledger technology, and artificial intelligence in financial products and services.
“While the adoption of technological innovations has reduced costs and increased efficiencies, it has concurrently provided greater risks for data to be lost, stolen, corrupted or accessed by unauthorised users.“ –“Cross-Industry Guidance in Respect of Information Technology and Cyber Security Risks“, published by the Central Bank of Ireland.
The GFIN may offer a better way forward: a step towards balancing the potential of innovation in financial technology with the need for robust security and protection of public interest. From the regulator’s perspective, the GFIN could permit observation of emerging innovations in order to inform smart policy development from the outset. From the innovator’s perspective, the GFIN could provide a more efficient way to navigate the various regulatory regimes— reducing the time and cost required to bring new products and services to international markets.
For fintech to thrive, it will need to be more than convenient—it will need to be trustworthy and demonstrably safe. The GFIN initiative could help regulators and fintech businesses work towards this goal.