As we've discussed, FinTech is a broad and really quite difficult to define industry. It covers banking, credit cards, securities, cryptocurrencies, lending, investment advising, and much more. In regulating new technologies associated even with these existing industries, often requires thinking about a new framework for regulation and also who should bear the responsibility for supervising and intervening in these particular markets. Another issue besides the breath with which regulators have to think about a regulatory framework, involves the fact that inherently we are thinking about regulation in an industry and in a space that is evolving incredibly rapidly. Alfred Kahn the Nobel laureate said this with respect to regulation generally. That it almost was an inevitable game of Whac-A-Mole, what is Whac-A-Mole? Well, for those of you who don't know, it is a fantastic arcade game where a bunch of holes come out of a wall. And in essence you, the player, has a mallet and when one of a mole comes out of one of these holes, you hit the mole with the mallet as fast as you can. And then another mole comes out of another hole and kind of the objective of this particular game is to hit as many moles as you can in a certain period of time. Why is this a good analogy for the regulatory space? Well, you worry that when you restrict one particular kind of practice of a financial institution or a financial technology provider. Then inevitably, another sort of very similar practice is going to emerge and the regulator is kind of going to always be playing catch up with respect industry. And that's especially true with respect to FinTech, where the entire nature of this industry involves leveraging new technologies in innovative ways successfully. And so it's kind of inevitable that regulators will be one step behind the innovators and have difficulty figuring out how best to supervise in this setting. Alfred Kahn, of course, didn't think that this was a reason not to regulate. He had a very clever analogy for what he thinks of the role of a regulator that can help enlighten us with respect to financial technologies. More broadly, his view for regulation was that just as a sort of as industry is clever and there will inevitably be holes in the dike, dike is like a container for water let's say. The role of the regulator is to, as there will always be holes that emerge in the dike, there will always be new fingers that sprout for the regulator to sort of try and restrict water from flowing out. And so the point is, that regulator have to and the industry will always evolve and financial technology in particular will always reform itself. And adjust to sort of work around regulatory frameworks in ways that our profit maximizing for institutions. But what regulators must do is they must be clever and thoughtful and adept and quick in responding to new risks as they emerge in these markets. Another issue with respect to financial regulation broadly and financial technology regulation specifically, is that we are struck by the fact that these markets are actually inherently global. And if there's no sort of global coordination around regulatory framework, this becomes quite difficult even for countries which decide that it's important to pay attention to risks as they build up in these new sectors. So for example, if there is very strict regulation of new financial technology service providers in the United States, which tends to be on one side of the spectrum in these discussions. Then there's concern that first innovation will gravitate outside of the United States. But second, the risks that build up in other countries with respect to financial technologies that the US doesn't have jurisdiction over may still harm consumers in the US market. And so how do we deal with the fact that risks are really global rather than national in financial markets. Here in the United States with respect to financial regulation, a few points seem quite relevant. First as we've discussed, financial regulation encompasses a broad swath of different industries. These industries are currently regulated by distinct regulatory agencies with different mandates and different standards for what they deem acceptable and promoting of financial stability. I happened to work at the White House in the aftermath of the crisis and as we were conceiving of the new post crisis financial regulatory framework. What was hoped for and conceived of as a massive innovation was to create a structure where one particular regulator was kind of in charge of overseeing the entire financial services industry. In reality, individual regulators still maintain significant power over regulating their particular domains. And in many industries, participants are required to meet the standards of a swath of different financial regulators. For example, the SEC deals with investment advising, the Federal Reserve deals with retail banking, and the consumer protection bureau is the consumer facing arm of the regulatory framework. This means that sort of large financial institutions are beholden into the Federal Reserve but also must meet the mandates of the Bureau of Consumer Financial Protection. This creates a real question over who is best suited to regulate financial technology service providers. Perhaps most naturally the answer to this question depends on the nature of the financial technology that we're thinking about. For example, if it's Bank of America's new mobile app that allows you to deposit checks on your phone. Well, perhaps the Federal Reserve is already regulating Bank of America and so it's natural for them to also supervise this new kind of technological development. Or maybe it's the Consumer Financial Protection Bureau, because the concerns that we would have with these new financial innovations are primarily that they will be abused or misused or deceptively advertised to consumers who are customers of these financial institutions. But there are real concerns with having such a fragmented regulated system. Two concerns that we had at the White House with respect to the financial regulatory framework were first that having such different authorities be responsible for different aspects of the financial sector meant that information would get stuck with one regulator and not find its way to the other. Even though together these two different agencies set of impact information might hint at risks building up in a particular sector of the economy. And so there was a concern about the lack of ability of information to flow very freely between regulators. There's also a concern that from the perspective of industry if you could be regulated through a state banking charter or you could be regulated through a federal banking charter your incentives are a structure to try and find the regulator who's going to be easiest on you. There's empirical evidence that is exactly what financial firms do. So it seems quite important to create a regulatory structure that allows for information to flow freely, and discourages the short of regulation shopping, that we know is commonplace among sophisticated financial players.
