The past decade of innovation in fintech has been interesting, watching the struggles of regulators trying to keep up. Fundamentally, failing to keep pace has led to many challenges down the line. They allowed a lot of things to happen which they’re now trying to address.
Let’s look at a few examples. First, peer-to-peer (P2P) lending.
P2P lending rose rapidly after the first entrant, Zopa, launched in 2005. I’ve always called Zopa the first fintech, as its concept was an eBay for loans. It worked in the UK, but when it tried to expand into other markets, such as Italy and the US, it didn’t — the regulators didn’t like the idea.
However, the major market that did like the idea was China. The regulators sat back and watched as the P2P lending market took off, but took no action.
By 2018, when the Chinese regulators decided to act, there were thousands of P2P lending firms — more than 3000, by my estimate. The regulators began to impose increasingly strict regulations, which included the appointment of a custodian bank, full disclosure on the use of investments, and caps on the maximum lending amounts that could be extended — either Rmb1m ($149,000) to individuals or Rmb5m to companies.
That catalysed an implosion in the P2P lending market. The sudden collapse of thousands of unregulated firms led to thousands of people losing their life savings.
Greater intervention
And it’s not just in China where the regulators are starting to intervene. P2P lending firms around the world have seen crackdowns on their business models after the proverbial horse has bolted.
It’s not just in China where the regulators are starting to intervene. P2P lending firms around the world have seen crackdowns on their business models after the proverbial horse has bolted
Now we’re seeing the same with the buy now, pay later (BNPL) market. Sweden’s Klarna emerged in the 2000s with the innovative idea to layover payments for goods purchased online into a few monthly instalments. While it’s a great idea, it has also been screaming to be regulated.
The question is why Klarna and its brethren didn’t go to the regulators first and ask to be regulated? Instead, there’s been lots of uncertainty until last year, when many governments woke up and started to look at this market, and are now introducing regulations.
What has been the result of the new regulations coming in? The valuations of BNPL firms like Klarna have dived. Klarna, valued at $45bn in 2021, is now valued at just $6.5bn in its latest funding round this year.
Clearly, if regulators sit on the sidelines too long before taking action, then those actions can decimate markets they’ve allowed to mature. Those who invested in those markets — whether they be citizens (P2P lending) or investors (BNPL) — tend to lose massively.
What next for crypto?
Cryptocurrencies are the elephant in the room. Bitcoin was launched more than a dozen years ago and has been joined by over 10,000 other cryptocurrencies, yet the regulators have sat and watched. They’ve constantly decried bitcoin, but can’t seem to do anything about it. They’ve whinged and moaned about how these currencies undermine banking, finance and government, but no one cared. They’ve started trying to create their own alternatives – central bank digital currencies – and most in the crypto community have laughed in their faces.
Yet, there is good reason for wanting crypto regulations. In 2014 Mt Gox collapsed, which was painful for some. In 2018 there was the sudden death of Quadriga’s CEO Gerald Cotten, who was the only person with the password to the crypto exchange. In the current crypto meltdown, there are exchanges introducing arbitrary policies to stop people cashing out; even worse, many are accusing these services and currencies of being Ponzi schemes.
Nevertheless, there will be a global digital currency one day and the key factor will be a money with governance. The challenge is to ask: what is the right governance? Is it the Federal Reserve, European Central Bank and People’s Bank of China saying you can trust this, or is it the network?
As the EU creates new rules based on the Markets in Crypto Assets regulatory proposal, a new mandate agreed in June, will it work? Can it work? And if so, how? These are the big questions being asked of supervisory authorities, who are always in catch-up mode and rarely have any vision of what’s next. Instead they should be thinking ahead and protecting consumers from losing their life savings, or getting sucked into debt or Ponzi schemes.
We need regulators who understand network change, technology and digitalisation, and are able to clamp down early on malpractices, scams and schemes that open citizens and investors to abuse. The fact that most of them have waited years to draft a response seems shocking.
