While Fintech, as per experts, is the future and undoubtedly the roaring present of financial market, there remain numerous factors that may cause it to take a nosedive. The most pertinent factor is the non-complementing regulations. The conventional regulations in place are tailored to post-fintech financial agents and have not been at par with the upsurging financial technology.
These regulations are not only inconsistent with the rise of fintech but expectedly, have also not achieved any global uniformity. As a general practice, all around the world, banking requires a license. FinTechs have vanquished this hurdle and have been providing banking services without a license. This achievement might not all be credited to the FinTech industry, rather some might be a direct consequence of inadequacy of applicable regulations or the deprivation of knowledge of them. In April 2018, an online lender in Massachusetts was fined $ 2 million by the Massachusetts Division of banks for making more than 46, 000 loans in the state without acquiring a state license. This operation was not carried out under FinTech regulations but the small loan laws of Massachusetts.
The incident of Massachusetts is not an isolated one. Prosper, a FinTech which connected borrowers with lenders online, was served by U.S. Securities and Exchange Commission (SEC) with a cease-and-desist order for being an unregistered seller of securities. Prosper’s practice was selling notes to investors whose payment stream depended on the borrower’s making their loan payments on time and in whole. SEC viewed these notes as securities therefore, they must have been registered with SEC. Subsequently Prosper did register itself. These incidents and other similar ones provide that the lack of FinTech regulations is not to be construed as absence of legal implications or consequences. All relevant and applicable laws are to be consulted, screened and complied with depending on the practice of the FinTech.
Payments
It is stating the obvious that one of the primary functions of banks is financial transaction. These transactions are colossally supervised by laws, regulations and governments. Any irregular or unacceptable activity from an account at these financial institutions is barred forthwith. However, the same restraining mechanism is not operative on Fintech transactional services. While this appears to liberate Fintech transactional services from extensive checks, it is likely to bring FinTechs to unintended legal conflict. In 2015 Paypal was made to pay $ 7.7 million to the Office of Foreign Assets Control which is U.S. Department of the Treasury sanctions enforcement arm.The FinTech was guilty of processing 486 illegal transactions of a total sum of $ 44,000, in violation of sanctions on Sudan, Cuba and Iran.
The damages payable in case of violation of law can inflict not only financial but reputational setbacks which can be consequential as FinTechs primarily proliferate on customer trust.
CRYPTO & ICO
Crypto currency emerged as Messiah for quite a population in times where jobs and businesses were not rewarding enough to meet demands. A convenient mean of investment and payment; crypto currency has pierced through the bars and superseded digital wallets and other technological innovations to a great extent. However, once again, one can also fall victim to the competitive advantage of crypto currency. The 2015 case of Derivabit, an online facility and its CEO was charged by Commodity Futures Trading Commission (CFTF) for offering Bitcoin options contracts without complying with the Commodity Exchange Act or CFTF Regulations. Later in February 2018, bitcoin, Bitfunder along with its CEO was charged by SEC for operating an unregistered securities exchange and defrauding users by misappropriating their bitcoins. It further failed to disclose a cyber-attack on its system that resulted in a theft of more than 6,000 bitcoins.
Unfortunate events like these continue to repeat themselves in the FinTech world. Another example from the same year, 2018 is that of Arise Bank, a self-described re-centralized banking platform. It allegedly raised $ 600 million in an Initial Coin Offering by claiming that it had developed an algorithmic trading application that automatically trades in various crypto currencies and falsely stating that it purchases an FDIC Insured bank which enabled it to offer customers the FDIC insured accounts.The assets of Arise Bank were seized by SEC.These events although unfortunate, are not especially attributable to FinTech. Business and financial transactions in all their forms come with an element of risk. The struggle is to eliminate the risk to its best possibility.
The stories from FinTech world apprise that the FinTech companies themselves and their customers, both can fall victim to its market failures. It is in the interest of Fintech companies to protect both from misfortune. To eschew the possible evil of this developing world, the solution is not to abstain from it but to run it through mechanisms such as conduct of business rules, disclosure and conflict of interest.It is climacteric to take measures that shall ensure topmost compliance with law and in the paucity of customized regulations consulting legal minds shall save damage.