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ABSTRACT
Prior to the global financial crisis, financial innovation was viewed very positively, resulting in a laissez-faire, deregulatory approach to financial regulation. Since the crisis the regulatory pendulum has swung to the other extreme. Post-crisis regulation, plus rapid technological change, have spurred the development of financial technology (FinTech). FinTech firms and data-driven financial service providers profoundly challenge the current regulatory paradigm. Financial regulators increasingly seek to balance the traditional regulatory objectives of financial stability and consumer protection with promoting growth and innovation. The resulting regulatory innovations include RegTech, regulatory sandboxes, and special charters. This Article analyzes possible new regulatory approaches, ranging from doing nothing (which spans being permissive to highly restrictive, depending on context), cautious permissiveness (on a case-by-case basis, or through special charters), structured experimentalism (such as sandboxes or piloting), and development of specific new regulatory frameworks. Building on this framework, we argue for a new regulatory approach, which incorporates these rebalanced objectives, and which we term 'smart regulation.' Our new automated and proportionate regime builds on shared principles from a range of jurisdictions and supports innovation in financial markets. The fragmentation of market participants and the increased use of technology requires regulators to adopt a sequential reform process, starting with digitization, before building digitally-smart regulation. This Article provides a roadmap for this process.
INTRODUCTION
Technology is transforming finance around the world at an unprecedented rate, generating new opportunities and new risks. Financial regulators must develop new approaches to regulation, including the use of technology, to balance the benefits of innovation and economic development with the need for financial stability and consumer protection.
Prior to the Global Financial Crisis of 2008 (the Crisis), financial innovation was generally viewed very positively. This led to laissez-faire, deregulatory approaches to regulation particularly in global institutional markets. Post-Crisis financial regulatory reforms have seen a reversal of this approach with the regulatory pendulum arguably swinging to the other extreme. 1 Post-Crisis regulatory changes combined with increasingly rapid technological change have spurred the development of financial technology (FinTech). 2 FinTech embraces new startups (FinTechs), established technological and e-commerce companies (which we call TechFins)3 as well as incumbent financial firms. FinTech promises innovation and economic growth through disruption of traditional finance, yet it also poses a major challenge to the...