Do we really need financial technology 'sandboxes'?
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At a recent financial technology conference, a member of the audience posed a question to a panel about whether the U.S. needed a more pro-innovation regulatory approach, perhaps one that included “regulatory sandboxes,” a phrase currently in vogue.

Regulatory “sandboxes” can mean different things to different people, as well as to different sectors of the financial services industry. But generally, it refers to a confined regulatory environment with a lighter touch where new products and services can be offered, typically by new market entrants.

The response by a panelist, who is a chief executive of a financial technology firm, to the question was interesting: Jurisdictions other than the U.S. have proposed “regulatory sandboxes” only out of necessity to compete against the U.S. for financial technology, or “fintech,” firms and talent. In other words, the U.S. already is in a position of strength when it comes to innovation in the financial technology space.

There are many reasons why this might be the case, but one of them is that the U.S. has a mature and tested financial-regulatory structure that, among other things, promotes capital investment and gives investors the confidence to entrust their money with someone else. There are exceptions, but generally that regulatory framework was designed to be technology neutral. As a result, it is by and large accommodating of new technologies.

That’s not to suggest that the U.S. system cannot be improved. It certainly can. But the policy goals reflected in the U.S. regulatory framework for financial markets have stood the test of time. Goals such as transparency for investors, sound and robust risk management—from both a systemic and firm-level perspective—and disincentivizing market manipulation have been refined and updated over the years, including after the passage of Dodd-Frank Wall Street Reform Act.

While Congress has considered and provided additional authority to regulators over time, overarching policy goals have rarely been changed or eliminated. On balance, this approach has brought tremendous benefits to the U.S. economy. It has positioned the U.S. well in a competitive global environment.

As it relates to financial technology in particular, U.S. regulators have been exploring and proposing improvements to the U.S. policy framework to make it more accepting of innovation and new technologies. The Securities and Exchange Commission recently hosted a financial technology forum, the Office of the Comptroller of the Currency has established an office of innovation, the Commodity Futures Trading Commission formed an interdivisional working group on financial technology, and the Federal Reserve released a thoughtful piece on the use of distributed ledger technology in the payments, clearing and settlement space.

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These efforts make a lot of sense, especially when viewed with an eye toward preserving the beachfront the U.S. currently maintains. Careful regulatory review and analysis, especially when done in collaboration with market participants, will lead to helpful insights that could then lead to necessary rule refinements in support of existing policy goals.

What would not make sense is to suspend critical regulations that promote the most important policy goals for the U.S. financial market simply to encourage new innovation and technologies. That risky approach could needlessly erode the very confidence that investors and consumers have had in U.S. markets for decades.

And without such an approach, financial technology firms have proliferated. According to a report by McKinsey & Company, the level of venture capital investment in financial technology has accelerated in recent years—and none more so than in our country. As the report noted, “Fintech companies are undoubtedly having a moment.”

As an organization that develops and uses technology to enable financial markets to operate safely and efficiently, the Depository Trust & Clearing Corporation has collaborated with many of these innovative providers, including Digital Asset and Axoni, two pioneering firms in distributed ledger technology.

Regardless of whether this technology will deliver the greatest business benefit and commercial advantage, the technology can be leveraged responsibly within the existing regulatory framework, meeting important policy goals all the while.

To be sure, the U.S. may own the beachfront for financial technology providers for now, but that’s not a reason to avoid efforts to review and revise regulations appropriately. In so doing, policymakers should continue the proven approach taken thus far: Preserve the underlying policy objectives that have served the U.S. market so well, and only entertain regulatory changes that advance those objectives.

Mark Wetjen is a managing director and head of global public policy at the Depository Trust & Clearing Corporation. He was a member of the U.S. Commodity Futures Trading Commission under President Obama.


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