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New trends in the financial sector - Prospects of growing electronification in the capital markets (fintech, blockchain, electronic platforms…)

Precautionary monitoring as an approach to regulating FinTech

By Von Weizsäcker Jakob - MEP, Committee on Economic and Monetary Affairs, European Parliament

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The latest developments in the ongoing IT revolution, including ever smarter phones, big data and distributed ledger technology, are continuing to transform business models and consumer experiences in most sectors. This is particularly true for the financial sector where FinTech is poised dramatically to reduce transaction costs and new business models are fast emerging. Multi-billion euro industries ranging from payment services to clearing and settlement or even wealth management are being transformed.

Some of these transformational developments could happen very rapidly and could become systemic quickly. Certain FinTech applications could reach significant market penetration within a matter of months, not years. The combination of technical complexity, potentially rapid market penetration and systemic relevance make these developments a particular challenge for regulators.

Heavy handed pre-emptive regulation is not desirable as it could stifle innovation at an early stage. Light touch regulation based on Panglossian assumptions would also tend to be far from optimal as it would allow innovators to externalise risks at the expense of uninformed consumers and also to taxpayers once an innovation has achieved systems relevance.

I propose the creation of a properly funded European task force.

Instead, my draft report on the regulation of distributed ledger technology, the innovation underlying bitcoin, advocates the concept of intensive precautionary monitoring of new applications by public authorities to assure that swift and decisive regulatory action can be taken if and when appropriate. For this to work well in practice, the capacity of regulators in these areas needs to be strengthened further and innovators would have to accept a high degree of transparency.

Concretely, I propose the creation of a properly funded European task force on distributed ledger technology with the task closely to monitor new developments in real time and develop regulatory recommendations before systems are becoming systemic. If this regulatory approach based on intensive precautionary monitoring works well for this particular technology, there might be broader lessons to be learnt for sound FinTech regulation during a period of rapid technological change.