Taming the shrewd

Like many long-married couples who can no longer stand each other, China and the United States seldom agree on anything major. When they do, you know it is something extremely serious.

What the two superpowers decided, in tacit agreement, is the need to take action against the global fintech industry – an unruly offspring of both China and the US.

Born, or at least having taken its current shape, in the first decade of the 21st century, the fintech industry is today an adolescent. And like many teenage kids, it has started disobeying its parents and doing things without their permission.

Peer-to-peer lending, cross-border digital payments, cryptocurrency, crypto mining, decentralized finance – the list goes on and on, and every additional innovation in financial transactions weakens the control of national governments over their own financial industries.

Most governments, and every last member of the G20, consider the control of their financial industries their sovereign right. While reality is sadly different – US monetary policy often overrides those of other national governments – power had stayed, until the last decade-and-a-half, within G-to-G, or government-to-government, circles.

Today, governmental control of finance has been seriously weakened by new financial channels created by the tech giants – Facebook, Amazon, Google and Apple in the US; and Alibaba and Tencent in China, alongside a host of secondary players.

Hordes of users from hundreds of countries are using these tech channels to move their money, making it nearly impossible for governments to control the transactions or even regulate money supply.

Not surprisingly, both the US and China are taking what they see as drastic action against the tech firms in their countries. In the US, there are multiple congressional hearings where politicians go through the motions of questioning and taming the likes of Facebook and its cohort.  In China, the sledgehammer has fallen on Alibaba’s Ant Financial; Didi, the ride-hailing giant; and others.

Whether the charges are so-called due process or harsh regulation, the end result will likely be futile. To see why, it is useful to recall the words of a fintech pioneer who went through the gristmill of working with financial regulators.

Renaud Laplanche, the French-American entrepreneur who founded LendingClub, the world’s first peer-to-peer lending platform, in 2007 once said:

“When you innovate in a regulated industry, you are faced with a set of regulations that weren’t meant to apply to what you are doing. They were meant to apply to things that were entirely different, because what you’re doing didn’t exist previously. So it is a lot of trying to put a square peg into a round hole.”

To regulate something, you’d have to understand it and have the tools to work with it. Regulators and politicians, on the whole, do not understand fintech, and no one has yet developed a tool to regulate, say, cryptocurrency transactions. They are using yesterday’s tools to try to control an industry where the underlying set of technologies is not only changing fast, but accelerating.  As it is not a trait of regulators to admit their own shortcomings, such a start-and-stop way of handling the global fintech industry is likely to drag on for a long time.