Regulating FinTech: The perspectives of law, economics, and technology

Abstract

FinTech (financial technology, ‘‘FinTech’’) is a double-edged sword as it brings both benefits and risks. The potential risks, specifically, may merit regulatory attention. This study found that information deficits might arise. This study appraised FinTech’s technological nature that brings changes in complexity in modern financial markets to identify the information deficits and its undesirable outcomes. Financial crimes such as fraud, cheating, and money laundering exemplify them. Besides, as FinTech is still developing, the information regarding, for instance, whether and how to apply regulation to these new products, services or players may be insufficient for both regulators and those regulated. More one-size-fits-all regulation might accordingly be adopted, thereby being unable to distinguish between the safer and riskier FinTech. Through the lens of both law and economics and law and technology, this study further found that the root cause of the aforementioned problems is the pacing issue. Regulation cannot keep pace with technology. To solve this issue, this study suggested AFR (adaptive financial regulation, ‘‘AFR’’) of FinTech. AFR features its dynamic nature, enabling regulatory adjustments and learning through truly experimenting. Exploring and collecting information through experiments and learning from experiments are the core of AFR. FinTech regulatory sandboxes, which have been existing in countries, epitomize AFR. This study chose Taiwan as a case study. This study found that the barriers to adaptive and effective FinTech regulation such as sandboxes tend to happen with respect to the entry into, operation of, and formulation of sandboxes. Unduly emphasizing consumer protection and the innovation entry criterion by improperly imposing limits on the entry into sandboxes, ignoring post-sandbox mechanisms, and relying on detailed, specific and prescriptive rules to formulate sandboxes are examples. In addition, interest groups’ influence and regulators’ attitude were also found to be barriers to adaptive and effective FinTech regulation. To solve these barriers except for the interest groups’ influence and regulators’ attitude, this study proposed several solutions by looking into the experiences in other jurisdictions and analyzing several experimental cases. First, striking a balance between encouraging innovation and ensuring financial stability and consumer protection is indispensable. Several consumer protection measures after entering the sandboxes were recommended instead of the ex-ante limitation on sandboxes’ accessibility. Second, entry to sandboxes should be facilitated by improving the selection criteria. This study suggested that an innovation criterion may not be a necessity. Third, adhering to realizing regulatory adjustment and learning to adapt regulation to technology, this study argued that systematic post sandbox mechanisms should be established. Regulatory adjustments are achievable through such mechanisms. Those regulated could also be incentivized to provide information on the expectation of the subsequent lighter regulations benefiting them. Fourth, this study recommended “more principles-based sandboxes”. Principles rather than rules should be the base on which sandboxes or FinTech regulation are established. Having principles could provide more flexibility, being easier to adjust and adapt, and better at avoiding obsolescence. Interpreting principles that are with a lower degree of specificity may be more costly than interpreting rules. However, the higher interpretation costs should be considered together with the increase or decrease of other types of costs such as the decrease of revising costs in the case of obsolescence and hence the decrease of obsolescence costs.