As fintech innovation moves at an accelerated pace after a year of pandemic-driven lockdowns, regulators are, per usual, catching up.
A lot has happened since President Joe Biden’s administration was ushered into the White House nearly two months ago: Social media and online trading apps fueled the GameStop frenzy, Bitcoin prices reached all-time highs and the entrance of new robo-advisers is making some advisory firms sweat.
Regulation of these expanding areas in fintech will determine a lot about the future of wealth management and advisers, a panel of experts said during an InvestmentNews webinar last Thursday.
“Every time there’s a new technology, regulators have to come up with a new regulation on how to regulate that technology,” said Lilya Tessler, partner at Sidley Austin. “By the time the regulation gets proposed, goes through a comment period and is adopted by firms, it’s stale and the technology's moved on to another iteration."
This current cycle is not going to be productive for new innovation going forward. “The overall takeaway: Don't regulate technology, regulate the activity and try to give firms flexibility to implement the regulation in different ways, depending on the technology,” Tessler said.
With Bitcoin prices surging beyond $56,000, fintech apps providing access for even more retail trading, and institutional adoption increasing, regulating Bitcoin and other digital assets is on the docket for regulators.
The Securities and Exchange Commission has been very careful to ensure that allowing Bitcoin to come into the marketplace as a security will not disrupt the markets or the consumer confidence that is essential to make capitalism work. There's hope that President Biden’s pick to lead the SEC, Gary Gensler, could provide more regulatory clarity around digital assets.
Once Gensler takes the helm, his knowledge about digital assets is likely to provide the industry with more clarity on what type of blockchain activities fall under securities laws and can be undertaken by financial institutions, Tessler said.
“What part of the technology is simply technology that can be implemented in every other industry that we're seeing that is not financial service or product that doesn’t need to be regulated by the SEC?” Tessler said.
“So hopefully, we'll have a clear line from other industries outside of the financial services industry concerned with implementing the technology in new and innovative ways,” she said.
Beyond blockchain, Gensler also has written papers on artificial intelligence and machine learning, Tessler said. “I anticipate that also being a focus of some of the regulations that we'll see coming out of the SEC that are separate and apart from digital assets.”
Online brokerages sparked outrage from lawmakers after issuing restrictions on GameStop, AMC and other shorted stocks that surged to unprecedented highs in January. Lawmakers like Rep. Alexandria Ocasio-Cortez, D-N.Y., and Sen. Ted Cruz, R-Texas, expressed deep concern.
“When this initially happened, instead of going right to regulation or legislation, education is what regulators and policymakers needed to do first to understand these issues,” said Aaron Cutler, partner in the government relations and public affairs practice at global law firm Hogan Lovells.
One policy change that seems to have the most bipartisan support is shortening the trade cycle from transaction date plus two days to transaction date plus one day, Cutler said.
Payment for order flow and gamification of trading apps is another area policymakers will focus and study, Cutler said. “When I was on the Hill, the big '60 Minutes' story about high-frequency trading came up, and everybody wanted to rush to regulate high-frequency trading,” he said. “In these situations, you need to take a breath and analyze it from all different angles, hear from experts and then decide what to do. You can't rush into these things.”
This year has already seen change in the robo-adviser space. Goldman Sachs finally introduced Marcus Invest, Stash rolled out Smart Portfolio, marking its entrance into robo-advice, Betterment acquired Wealthsimple’s U.S. accounts, and M1 Finance aims to double its size after fresh funding rounds.
“Our advisers are struggling to compete with some of these robos and do-it-yourself online platforms,” said Andrea McGrew, USA Financial’s chief compliance and chief legal officer. “The [robos] are all regulated, but not all regulation is created equal, and there are certain business processes that happen at a robo-adviser that we can’t do because we dive a little deeper.”
To that end, more regulatory eyes could be on the robo-advice space and do-it-yourself business models that these fintechs have adopted in light of events like the GameStop surge and gamification, McGrew said.
“It’ll be interesting to see whether there are any investor protection regulations that are put into [robos] because [users] don’t have to do a whole lot to open an account with a robo — and we’ve seen people get into really bad spots doing that,” she said.
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