2018 Will Bring More Enforcement to the FinTech Frontier

For the most part, the FinTech frontier has been unbridled by traditional financial institutions. But much to the dismay of blockchain and FinTech developers, that will probably change in 2018. As we saw in 2017, governments, banks, and other organizations are starting to take notice of the current state of FinTech. And for better or for worse, they want to bring some order to it.

Impossible to Ignore

2018 will likely bring more attempts to enforce and regulate certain sectors of FinTech, like robot financial advisors, blockchain, and cryptocurrencies. Looking back on 2017, this comes as no surprise. Some countries, like China, chose to outright ban Bitcoin, while others, like Russia, announced plans for cryptocurrencies of their own. Considering that Bitcoin’s surging price constantly garnered news headlines, we can expect more governing bodies to take polar stances on the subject.

Many attornies agree. Jeffrey Neuburger, attorney at Proskauer Rose, says that these regulators are “very focused on the FinTech area, and it is likely we will see more regulation in 2018 in this area.” While sharing a similar sentiment, Anthony Tu-Sekine, attorney at Seward & Kissel told ThinkAdvisor his slightly differing opinion: “The blockchain and cryptocurrency area is one where we expect a number of new developments, though it is very likely that such developments will take the form of enforcement-type actions rather than new regulations.”

Applying Old Rules to a New Game

Tu-Sekine goes on to hint that regulators may be perplexed on how exactly to enforce order in these fields: “Because this area is still fairly new, regulators are wrestling with applying the existing regulatory scheme to these new types of assets.” For prime examples of this, look no further than the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC).

According to Tu-Sekine, the SEC has been using “existing interpretations and regulations to determine whether any cryptoassets, such as cryptocurrency or cryptotokens, are securities.” Likewise, the CFTC has claimed that particular uses of cryptocurrencies in contracts are their jurisdiction. This logic is predicated upon the fact that the CFTC “declared years ago that all ‘virtual currencies’ are commodities.”

Besides the price surges, cryptocurrencies have also caught the eye of the law because of their ability to evade it.  As Neuberger puts it, “Cryptocurrencies are clearly being used to commit fraud, circumvent sanctions, and other financial crimes… there is a concern that the unknowing investor could be hurt in this area, and we expect to see stepped up enforcement to prevent that from happening.”

James Fanto, a Brooklyn Law School professor, says that advisors developed with AI are also being subjected to current regulatory practices. But blockchain’s versatility in applications necessitates a different approach: “Blockchain as a platform independent of the cryptocurrency applications will be subject to evolving legal developments as well, but more from the perspective of how do we adopt blockchain into current business operations.”

Too Soon to Start?

Denver G. Edwards, attorney at Bressler, Amery & Ross, shares his dissenting opinion that it’s still too early for regulations to start rolling in: “FinTech is in the nascent stages of evolution and regulators are focused on gathering information to get comfortable with a FinTech’s proposed products and the controls and risks associated with them.”

Instead, Edwards believes that regulators will address particular problems with these disruptive technologies rather than enforce general rules. “They will render narrow decisions to resolve specific issues — particularly around anti-fraud and anti-manipulation — but will avoid making sweeping pronouncements.”

Edwards believes these technologies require a more nuanced approach to protect the potential innovations they bring. Howard Yu, a professor at IMD, agrees and even argues that possible regulations could actually result in more corruption: “It is desirable, and in fact more effective, some might argue, to rely on self-regulation to prevent monopolistic behaviors among industry players.

These types of decisions are extremely important and extend well beyond FinTech firms and developers in New York City or San Francisco. With many believing that these technologies are the future of finance, the effects of regulation could trickle down to your own wallet sooner than you think. What do you think should be done about regulating FinTech? Let us know in the comments!