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One Key Point Goes Overlooked Following Roubini's Contentious Senate Testimony

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In a rancorous U.S. Senate hearing last week on crypto regulation that was akin to the verbal sparring typically found in a press conference preceding a boxing match, noted NYU professor Nouriel Roubini, famous for predicting the 2008-2009 global financial crisis, faced off with Coin Center’s director of research Peter Van Valkenburgh.

Dr. Roubini reveled in his role as the contrarian, where he called crypto the “mother of all scams” and argued that there was nothing truly innovative about the technology. At best, he professed that the technology is inefficient and actually quite centralized, and at worst it is a tool for fraudsters to prey on gullible investors or for criminals to hide financial tracks of their illicit activities.

On the other hand, Mr. Van Valkenburgh used his testimony to calmly plead for time to allow the crypto space to develop. Using past development cycles for technologies such as the internet and email as references, Van Valkenburgh highlighted how no ambitious technology was fully formed at its outset. Furthermore, he correctly pointed out that any worthwhile technology is usually first adopted by criminals looking for an advantage over law enforcement. Crypto and blockchain technology is no different, so it should not be held to an alternate standard.

Much has already been written about the hearing, and a significant amount of vitriol has emanated from Dr. Roubini (and his Twitter account @Nouriel) and been given back to him from a suddenly unified crypto community. It has become easy, and mostly correct, to dismiss Dr. Roubini’s testimony given his clear desire to antagonize and play a role akin to a comic book villain.

The Non-Blockchain FinTech Challenge

That said, this would be a mistake, because he made one very salient observation in his prepared and oral remarks that everyone in the crypto space should pay attention to: the non-crypto Fintech has developed quickly and independently of crypto, and it still has much farther to go. This evolutionary path will culminate in the creation of complete financial platforms akin to the business models utilized by Google, Amazon, Facebook, and Apple that will blur the lines between the financial and consumer technology sectors.

These platforms are now and will continue to demand increased attention from lawmakers in the U.S. and around the world, as the financial regulatory environment becomes increasingly complex. It is critical for blockchain and crypto companies to understand how these key trends will impact their sector and adjust their product development and regulatory strategies accordingly.

Key Fintech Investment Figures

A cursory look at the sector’s investment figures illustrates the magnitude of this development. Between 2014-2017, investment in the space increased at a CAGR of 18.2%, with the total amount invested in 2017 reaching a record high of $38.9bn. By comparison, crypto companies raised $5.6 billion in ICOs and another $2 billion in traditional venture capital funding.

Areas of focus include payments (PayPal, Venmo, Transferwise), Lending (Affirm, Kabbage), Wealth Management (Betterment, Wealthfront), and even digitally-native banks (Starling, Monzo, N26). In his testimony Dr. Roubini also highlighted how technology companies in China such as WeChat and Alipay have hundreds of millions of daily users. This is a level of adoption that the crypto space, where the most accessed Dapps have a couple of thousand daily users, so far can only dream of.

The Fintech Evolutionary Journey

That said, numbers only tell half the story. Fintechs are on a journey of convergence with traditional banks, which will lead to the development of complete financial platforms. Why is this so? Simply put, in recent years banks made two critical observations:

  1. They are unable to innovate at the speed and efficiency of startups
  2. If they do not find a way to innovate they risk losing customer attachments and will become the “dumb pipes” used by technology companies such as Google, Amazon, Facebook, and Apple, who are increasingly looking to enter the financial services space

At the same time, Fintechs came to their own separate realizations:

  1. Scalability is extremely difficult because they cannot borrow or raise money as cheaply as banks, forcing them to recoup losses either by exposing themselves to higher credit risk, increasing fees, or expanding into other lines of business that they are unfamiliar with
  2. They cannot hope to match banks’ regulatory compliance infrastructure

Therefore, it makes sense that these entities are currently engaging in a period of “speed dating” where they try to find complementary partners that bring out the best in each other. They will integrate their projects via APIs, and in some cases banks such as Monzo, Revolut, or Starling are launching their own marketplaces (app stores) where customers get easy access to a curated list third-party applications focused on lending, budgeting, or asset management.

The Regulatory Response

The reaction from governments around the world to these developments has been to learn as quickly as possible about the risks and opportunities presented by these new technologies in an effort to promote innovation without negatively impacting consumer welfare. This has typically been done by formally soliciting comment from individuals and companies in the space and conducting informal gatherings. Once this “learning” phase is complete, governments have three main choices. They can:

  1. Alter regulatory frameworks to encompass new products, practices, and providers (BitLicense)
  2. Issue guidance to explain how new technologies will be treated by existing regulations (FinCEN 2013 crypto guidance)
  3. Temporarily suspend regulatory barriers to encourage innovation (sandboxes, no-action letters)

However, as one would expect, this process is not as simple as it appears, and in the U.S. in particular no matter what area of financial services a company is addressing, it is likely to have at least two regulators: one federal and one at the state level. Consider this: In the U.S. alone the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Consumer Financial Protection Bureau (CFPB), Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC), and Federal Trade Commission (FTC) all have a role in patrolling the financial system, and their jurisdictions are not clearly delineated. On top of that states are the primary regulators for companies such as money transmitters, payday lenders, mortgage companies, etc.

Adding to the challenge is the increased focus that data and data protection regulators will play in this new financial services environment. Data is the most valuable natural resource of the 21st century, and every company is now a data company at some level. Furthermore, individual consumers are awakened to the value of their data and increasingly want to be in control of their personal information. Therefore, financial services companies will now also need to manage the conflicting goals of helping individuals maximize use of their information, particularly as it flows into and outside of their organization, without compromising privacy or security.

Specific regulatory action focused on these goals includes the Second Payment Services Directive (PSD2) in Europe, which requires banks to make available customer data to third parties via APIs or the CFPB Consumer Protection Principles, modeled after Europe’s General Data Protection Regulations, which espouse to put consumers in the driver’s seat regarding which financial firms have access to their data and for what purposes.

Impact on Blockchain

Fortunately, because of blockchain’s distributed nature and privacy-centric DNA, there is an argument to make that applications and services built on top of this technology could meet customer expectations and be tailor-made for the regulatory environment of today and tomorrow. However, given that the space is still much closer to its beginning than its end, much of these benefits will be ephemeral for the time being. In the interim, it will be critical to keep open lines of dialogue with regulators, as pressure on them is only going to heighten as the fintech space develops.