Who will regulate crypto and fintech in the US?
As cryptocurrencies have grown in popularity, so have calls to regulate them. Last month, the federal Financial Stability Oversight Council warned that the market needs stronger oversight.
Experts hosted by the MIT Industrial Liaison Program agreed.
“What we’ve seen is that in the absence of regulation, abuses occur,” said Dan Doney, CEO of blockchain infrastructure company Securrency Inc.
Doney was a panelist on “Regulating Disruptive Innovation,” a webinar that explored the nuances of policymaking and how regulation can impact financial technology innovation. He was joined by MIT Sloan professorthe director of the MIT Golub Center for Finance and Policy, andthe centre’s managing director.
It is important to protect consumers from fraud and other risks, the group agreed, but it is equally important to strike the right balance between regulation and innovation. Here are the experts’ thoughts on the biggest questions facing the sector:
Which agencies will regulate crypto in the US?
Regulators say crypto’s growing popularity could pose a risk to the broader financial system if left unregulated. And yet, because there has been confusion about which agency is responsible for what, many entities want a hand in regulation.
“I think all existing regulators will have [a role] consistent with their regulatory mandate,” Lucas said.
For a while, there seemed to be a sense that regulation would fall to the Commodity Futures Trading Commission, which regulates derivatives and markets, rather than the Securities and Exchange Commission, which regulates securities, Lucas said.
“I think we’re seeing both agencies have some interest in regulating crypto, and in fact the SEC has recently clarified its definition of what constitutes a security to bring crypto more into the fold,” Lucas said.
Because there is no agreement on which agency is responsible for what, the United States is at a disadvantage. Companies are going abroad to do business in crypto where the regulations are clearer, Doney said.
“Parties are going elsewhere with this amazing and powerful new technology,” he said. “It’s something we should really seek to align ourselves with as a political goal as a country.”
Will regulation in the US hurt innovation?
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Clarity in U.S. regulations will make it easier — not tougher — for companies not just to do business, but in terms of costs, Doney said, noting that uncertainty often leads companies to proactively hire lawyers and incur legal fees.
“Regulatory uncertainty is becoming a massive barrier to innovation,” Doney said. “We have a responsibility to provide the regulatory certainty if we want to be an innovative leader in financial services technology. If we choose not to lead in innovation in financial technology, we risk losing the advantage we have had from being an innovative society.”
In addition, coordination with international regulations is critical to innovation and to ensure that “things don’t fall through the cracks in very important places,” Lucas said. Crypto regulations vary from country to country, which is why it is important to have global coordination between regulators.
How can developing countries benefit from fintech?
In developing countries where the population needs access to banking services, the demand for fintech is strong. Crypto provides financial inclusion at an affordable price. Unfortunately, if these countries do not have strong regulations, problems can arise.
“Developing countries have been some of the biggest beneficiaries of these technological improvements,” Lucas said. However, “to the extent that developing countries have weaker regulatory frameworks, they are more vulnerable to fraud and other problems that may enter their borders through these new developments.”
Crypto is particularly popular in Venezuela, for example. Foreigners use it to quickly send money back and forth, but it has also been used by the military in drug-trafficking operations and by wealthy citizens looking to circumvent financial sanctions.
“I think there are risks for these countries as well as great potential,” Lucas said.
Will traditional financial institutions bring fintech in-house?
Already, major banks are strengthening their crypto and blockchain capabilities. But will these incumbents continue to onboard fintech and crypto to the point where it is no longer decentralized, What do proponents tout as one of the most important benefits?
“It’s always a question,” Golding said. “There is one possible outcome – that it really does not become decentralized. There is no doubt that there is a lot of interest in bringing many of the technologies into the existing financial structure.”
Lucas said the “hope and dream” for crypto is “to get away from centralized middlemen, to get away from the big banks.”
“But actually, if there’s no one who has a big stake and takes responsibility, it’s also very difficult to have this conversation with regulators where there can be some sort of balance that makes things possible,” Lucas said.
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