Amid all the excitement about the financial spin-off from the benefits of the so-called digital economy, regulators are struggling to keep up with the changing shape of the markets.
Even if you have no understanding of the mechanisms or compliance issues behind financial technology (fintech), crypto currencies, blockchain, peer-to-peer lending, digital wallets, robo-advisers, equity crowd funding and payment systems leveraging off messaging services available from Facebook, Google and Apple, you would most likely be aware of the relentless changes in the market that digital innovation is fuelling.
Examples in the past month include online mortgage providers who can approve a loan application in less than 24 hours without the lender speaking with a banker or mortgage broker. Then there’s Facebook which plans to launch peer-to-peer (P2P) payments within its Messenger service next year if it gets the necessary regulatory approval. And according to one investor and developer I spoke with this month, consumers will be able use a new online platform to purchase gold using micro-payments, all in time for Christmas.
The pressure will not ease in the New Year. New technologies such as machine learning, predictive behavioural analytics and data-driven marketing, will take the guess work out of financial decisions. Improved data analytics will help institutional clients further refine their investment decisions and open new opportunities for financial innovation.
In a significant development, the Federal Government has plans for ‘open banking’ that will allow customers to authorise third parties to access banking data. Not only will that move give a boost to fintech start-ups but it will create a more complex marketplace that will require new approaches to regulation.
Last year the Australian Competition and Consumer Commission (ACCC) established its data analytics unit. The unit will have a key role to play in ensuring that innovative digital businesses do not lessen competition. Already the ACCC says it is considering cases where anti-competitive algorithms and online platforms might be contravening Australian competition law.
However, there is a sense that regulators are playing catch up when it comes to financial innovations. Much will depend on the resources available to them so that it is not a time to be complacent. Recently the Australian Securities and Investments Commission (ASIC) warned that because initial coin offerings (ICOs) are conducted anonymously, they are riskier than conventional investments.
Unless you transact regularly in crypto currencies such as bitcoin, understanding the machinations of an ICO can appear daunting. In simple terms an ICO is a fundraising tool – often used in crowdfunding – that trades future crypto coins in exchange for crypto currencies of liquid value. From a regulator point of view the main risk elements are that an ICO ‘coin’, which is essentially a digital coupon or token, does not confer ownership, can be conducted anonymously (as ASIC noted) and is unregulated. Promoters can get around the regulatory issues by referring to ICOs as donations, for example. Industry news site CoinDesk reported more than $US1.7 billion was raised by start-ups using ICOs in the first nine months of 2017.
The Federal Government has indicated that it wants Australia to be a fintech hub, but our region is very competitive in this area. Singapore is viewed as having regulations and tax laws that are more accommodating for crypto-currencies. Recently at a briefing ASIC said that it will be focusing more on building its market surveillance and enforcement capabilities in new technology areas such as the dark web and cybercrime.
Meanwhile a Reserve Bank of Australia submission to the House of Representatives Standing Committee on Tax and Revenue in October noted that crypto currencies might have some implications for tax authorities and they raise more significant issues for authorities tasked with crime prevention and detection. “The distributed and cross-border nature of digital currencies like bitcoin means that regulation of the core protocols of these systems is unlikely to be effective.”
In a comment that seems to put emphasis more on hope than experience, the same submission noted that “digital currencies do not currently appear to raise any pressing regulatory issues.”
While the longer-term impact of the digital economy on consumer protection areas is unclear, one thing is certain: Regulators must have the resources to adapt, not only in response to inappropriate and criminal behaviour but where practical, to anticipate it.