Recent movements in crypto valuations, new business launches, and the rise of fintech investments have led regulators to “come along-side” the emerging trends in this space and seek, where appropriate, regulatory frameworks that will help “protect customers”. Most of these initial overtures are pertaining to tax-related inquiries from the IRS; however, some regulatory “issues” pertain to securitization, identity management, and anonymity.
At first blush, this seems fairly reasonable. The IRS collects taxes from Americans; many Americans are investing in crypto or new FinTech companies through ICOs. To collect taxes, the IRS needs to know who these customers are. That would appear that these are reasonable constructs to pursue. But dig a little deeper, and the cognitive dissonance starts to show its ugly head.
What the regulators don’t understand about the rise of fintech is one simple point--their inability to properly regulate finance is what drove the fintech revolution in the first place, and what continues to drive them today. The “tech mentality” is one of user-centered design, not just of products or experiences, but of business models and technology stacks. Innovators from all over the world took a look at the financial services category and found it wanting, thus spinning out several value propositions of note. Those include non-fiat based currencies (crypto-currencies), distributed trust systems and non-hierarchical models (blockchain), or confidentiality (anonymity-based hashing). These are features that grew out of a well-earned distrust for financial institutions coming out of a 2008 financial crisis where the regulators failed the community they serve.
As the New York Times points out, the IRS wants to make sure that the average American is paying their taxes on their crypto successes; we’ve seen nothing to indicate that they care about ensuring that the millionaires and billionaires pay their taxes. The IRS intends to track down consumers in America who use crypto programs, whether those programs and businesses are based in the the states or not; we’ve seen nothing to indicate that the regulators are going to enforce taxes on wealthy individuals who place their funds in overseas accounts or tax shelters. So if you are at the top of the financial food chain, you are protected through legal loopholes that the average American cannot afford; if you are an average american using an offshored app, you are a target.
It is within this framework that consumers are migrating, en masse, to new financial products that serve them. Regulators who continually try to punish the average user, while letting the rich slide, will find that the innovation community will stay ahead of them by continually trying to ‘digitize loopholes”. Tech companies move faster than regulators; in order to partner with the new fintech companies on a framework that will be effective here, regulators should set their intentions on the following values:
1. Consistency: legislators and regulators need to enforce their principles on taxation, regulation, and enforcement universally. Two sets of rules (one for the privileged few and one for everyone else) are no longer acceptable.
2. Transparency: regulators and especially legislators need to demonstrate the same level of operational and procedural transparency that they expect from the firm they intend to regulate. The government is an institution which, by design, serves the citizens and the voters. Their operations, and the operations of traditional financial services organizations, need to become more transparent before they can expect the same transparency from Fintech companies.
3. Competition: Regulations, by and large, are now drafted by lobbyists or corporate lawyers to entrench the advantage of traditional firms. Fintech companies don’t need another leg up; we area already faster, better, and more customer centric than the likes of Goldman or JPMorgan Chase. What we do need is a level playing field, and the regulators need to set the rules accordingly.
If regulators don’t learn the lessons of the great recession and fintech revolution, technology companies will continue to engineer their businesses around loopholes in regulatory frameworks that benefit their users. On a long-enough timeline, this will likely result in more “offshoring” of these businesses in more friendly havens where regulatory frameworks are more egalitarian and fair. There is a serious risk of a vicious cycle ensuing that hurts the country as a whole.
The only way to avoid this is for the regulatory bodies to serve ALL their citizens, not the privileged few.