FinTech_FinReg_vFF

1
FinTech & FinRegs:
Warp Speed to Efficiency & Transparency
by Tudor Jones
Regulations inform the commitments and relationships created by market
participants, undergird the certainty behind financial transactions, and [] serve as
the focal point for technological innovation. Law [alters] the competitive and
cooperative relationships and interactions among market participants and
infrastructure providers in ways that in turn give rules unexpected consequences.1
The finance space is ripe for disruption . . . . That’s why we see [FinTech
companies] making considerable progress seemingly overnight. . . . Wells Fargo
is well over 150 years old . . . . Our opportunity at NerdWallet is to redefine the
personal finance model, with technology and transparency, for the next 150
years.2
Introduction
While the FinTech entrepreneur aims to disrupt the stranglehold that banks3
have on the
economic interests of every person on earth, and while the scope of this disruption ranges from
simply helping banks service existing customers to the revolutionary consequences of
completely eliminating both banks and currencies, yet this entrepreneur must work within a
convoluted and outdated regulatory framework that challenges the minds of even the world’s
most powerful executives.
Or, is this even true? This is just one question worth considering as FinTech takes
banking, warp speed, to heightened efficiency and transparency. Could it be that while the
visionaries in FinTech are busy overhauling and retooling the universe of finance, there could be
a parallel tribe of legal visionaries who do similar things within the regulatory landscape?
To even begin to address the maelstrom of issues presented by trying to adapt financial
regulations to the rapidly evolving world of FinTech requires possession of a basic
understanding of both the regulations governing banking and how FinTech is interpreted by the
banking industry.
1
Brummer, Chris, Disruptive Technology and Securities Regulation, at p. 46 (January 12, 2015).
Fordham Law Review, Forthcoming; available at SSRN: http://ssrn.com/abstract=2546930 or
http://dx.doi.org/10.2139/ssrn.2546930.
2
NerdWallet and the Push for Objectivity & Transparency in Personal Finance, WHARTON
FINTECH, available at www.whartonfintech.org/blog/nerdwallet-and-push-objectivity-
transparency-personal-finance/.
3
Banks include all traditional financial services companies from here forward

2
A Brief History of the United States Banking System & Financial Regulations
In 1863 and 1864, Congress passed the National Banking Acts, creating the United States
National Banking System, through which commercial banks would be chartered, and eventually
regulated, by the federal government. During the 1860s, Congress took several additional steps
to encourage state banks to submit to Federal oversight, including taxing state bank notes, which
led to the unintended result of the ubiquitous adoption of checking accounts. By the 1880s,
commercial banks used the deposits on these accounts as their primary source of revenues.4
Around the same time, due to surging capital requirements for the rapidly growing
industrial sector in the United States, investment banks emerged. While they were not authorized
to issue bank notes or accept deposits, they were highly specialized in bridging the gap between
investors with capital and the industrial firms that needed that capital.5
Until 1933, there was no legal requirement to separate the operations of commercial and
investment banks. This allowed commercial banks to underwrite the business of their investment
bank counterparts with consumer deposits, rather than with investor capital.6
In 1933, however, with the U.S. banking system failing and the country in the grips of the
Great Depression, Congress, guided by the vision of President Roosevelt’s New Deal, took
immediate steps to reform the nation’s banking system. The Glass-Steagall Act of 1933 included
a provision to separate banking entities into their business components, such that investment
banks and commercial banks could not operate as one; the Securities Act of 1933 took steps to
bring the offer and sale of securities under Federal regulation; and the Securities Exchange Act
of 1934 established the Securities and Exchange Commission (SEC), forming the basis and
authority for federal regulation of financial markets and market participants.7
For six decades, the U.S. banking system operated under predictable regulatory
guidelines and, while several small crises threatened stability, the New Deal legislation remained
intact. However, the 1999 repeal of Glass Steagall removed the separation between investment
and commercial banks, and led directly to the severity of the 2008 Financial Crisis.
In response to the Crisis, Congress passed the Dodd-Frank Wall Street Reform and
Consumer Protection Act in 2010. Dodd-Frank’s stated aim is “[t]o promote the financial
stability of the United States by improving accountability and transparency in the financial
system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect
consumers from abusive financial services practices, and for other purposes.”8
Thus, it aims to
4
See History of Banking in the United States, WIKIPEDIA, available at
https://en.wikipedia.org/wiki/History_of_banking_in_the_United_States.
5
See History of Investment Banking in the United States, WIKIPEDIA, available at
https://en.wikipedia.org/wiki/History_of_investment_banking_in_the_United_States.
6
Id.
7
Id.
8
"Dodd–Frank Wall Street Reform and Consumer Protection Act (Enrolled Final Version – HR
4173)"

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completely overhaul all aspects of the financial industry. It has drawn consistent criticism from
banking executives for its “opaqueness and complexity,” such that compliance departments
across all financial institutions are seeing significant growth. The result is that executives claim
they are paralyzed with fear that because they lack understanding of Dodd-Frank, they are risk
averse; and further, because Dodd-Frank is so unclear, it is not a productive piece of legislation.
Dodd-Frank, thus far, might be “bad for the executives and good for the lawyers.” 9
So what do we take from this? The three regulations that dominate the financial services
sector now, the Securities Act, the Securities Exchange Act, and Dodd-Frank, are either very old
or reactionary in nature, or both. As one Wells Fargo compliance manager points out, the
Securities Act of 1933 and the Exchange Act of 1934 were enacted after the stock market crash
of 1929; they took a long time to develop, but have been usefully applied for over 80 years.
Contrast them with Dodd-Frank, which was rushed through Congress in a single month, July
2010, and it is easy to see that the future of financial regulation must be handled with great
care.10
FinTech Defined
FinTech is “an economic industry composed of companies that use technology to make
financial systems more efficient.”11
Traditional financial services companies, such as commercial
and investment banks, and also credit card companies and investment brokerages, have
dominated financial systems for decades, so the emergence of FinTech has caught their attention.
The financial services industry is the largest investor in FinTech, and investments are growing in
FinTech faster than in any other sector of the startup economy.
Why Does FinTech Matter
Social media, consumer confidence, consumer demographics, and consumer wealth all
factor into answering why FinTech matters at all. If the system has been working for centuries,
will disruption actually serve the people?
For centuries, human understanding of the world has been constrained by the limitations
of the biological mind, by the confines of the tangible. It is only in the last 50 years or so that the
power of computers, coupled with the global reach of the Internet and the astonishing
proliferation of mobile technologies, has granted people both access to, and expectations of,
immediate interconnectivity. Banks know this. “Banks . . . are key drivers of [] demand. The[y
are] . . . more focused on technology innovation than at any other point in its history; and [they
have] serious buying power. Banking . . . institutions will spend $486 billion on information
technology overall in 2014. . . . That is more than any other sector.”12
9
Quote by Dan Rauchle, CIO, Ascent Private Capital Management, September 2015.
10
Bill Harvey, Compliance Manager, Wells Fargo & Co., July 20, 2015.
11
What is FinTech?, WHARTON FINTECH, available at www.whartonfintech.org/blog/what-is-
fintech/
12
The Rise of Fintech: New York’s Opportunity for Tech Leadership, ACCENTURE, available at
http://pfnyc.org/wp-content/uploads/2014/06/NY-FinTech-Report-2014.pdf.

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Meanwhile, there is a race among FinTech pioneers to use analytics tools to best filter
and utilize the oceans of data that result from a mobile society that is obsessed with social media.
There is “a new generation of Big Data and analytics tools that can sift through unstructured data
… to improve customer services.”13
The implications of applying Big Data to banking are
numerous and largely untapped, but there is already enough focus on the Data itself to believe
that its value may soon outweigh that of money. Just as leaving the gold standard brought about
massive shifts in finance, just as the introduction of a credit society radically changed banking, it
is not unreasonable to believe that a similar shift toward information as currency might be just as
revolutionary.
Social Media
Social Media, broadly speaking, are computer-driven, virtual communities or networks
that allow people to create, share, or exchange information and ideas.14
They depend on web-
and mobile-based technologies to create interactive platforms through which individuals and
communities co-create content, and they introduce substantial and pervasive changes to
communication between businesses, organizations, communities, and individuals.15
As Social
Media has grown, so has the amount of time that Internet users spend interfacing with one
another through its many portals.
Meanwhile, as Social Media has proliferated over both web- and mobile-based platforms,
with total user time roughly doubling from 2011 to 2012,16
the clear advantages of participating
in Social Media have evolved. Banks have come to recognize that more than simple social
networking, Social Media can and should be exploited to improve brand-building, client
management, marketing, and research.
The implications of introducing finance to Social Media platforms are that young people
will be involved, brands can be aligned, data can be mined, and people of the developing world
can be reached. This last point is especially relevant in terms of mobile access for 3rd
world
peoples who do not have banks; there are 2.5 billion people globally who lack bank accounts,
mostly in Africa, India, and South America.17
13
Id.
14
Kaplan Andreas M., Haenlein Michael (2010). "Users of the world, unite! The challenges and
opportunities of social media". Business Horizons 53 (1). p. 61.
15
H. Kietzmann, Jan; Kristopher Hermkens (2011). "Social media? Get serious! Understanding
the functional building blocks of social media". Business Horizons 54: 241–251.
16
"State of the media: The social media report 2012". Featured Insights, Global, Media +
Entertainment. Nielsen.
17
Slings and Arrows, THE ECONOMIST, available at www.economist.com/news/special-
report/21650290-financial-technology-will-make-banks-more-vulnerable-and-less-profitable-it.

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Consumer Demographics
The other major factor has to do with the demographics of consumer wealth: the vast
majorities of Gen X and Y, millionaires, and high-net-worth individuals use some form of Social
Media, both personally and professionally. According to a 2014 Ernst & Young market survey,
40 percent of customers stated that they were losing trust in the industry.18
PayPal, one of the leading, original FinTech companies, used Social Media to see a 327
percent increase in engagement, alongside a 207 percent improvement to consumer sentiment.
CITI used LinkedIn in 2012 to introduce a social networking community for professional women
– “Connect: Professional Women’s Network” – which, as the fastest growing and most active
group on LinkedIn, has grown to 240,000 members, and not only encourages virtual networking,
but also leads to women organizing offline meetings in which they can discuss new ways to
network and advance their careers.19
Consumer Confidence
As hinted at above, the next generations of relevant banking consumers will be savvy in
technological integration of their daily lives like none before them. In fact, “[i]t’s not surprising
that Millenials are willing to put their financial faith in the crunch of algorithmic investing ….
After all, this is a generation of digital natives … who trust code jockeys to find the cheapest
plane ticket …. They will also be the early adopters of Apple Pay and other new transaction
modes.”20
These are also the same consumers who watched with little investment, but with great
interest, as the wealth of their parents and grandparents was threatened by the greed of market
participants as underscored by the tremendous losses they endured in the Financial Crisis of
2008. These consumers understand that the human element may not serve the general interest of
humanity, but rather favor the interests of a select few in power. As a result, they may be more
trusting in the objectivity of algorithms than people.
Millenials have been deemed the Ben Franklin generation: “they value craft, authenticity,
strong values. Ironically, they are far more prudent and sensible than their predecessors … [who]
fell victim to get-rich-quick bubbles, blandishments, and stock-picking mania.”21
Why is this relevant? Because “[w]hile it is true that most financial behemoths make their
big money from the corporate side, . . . even that world . . . is vulnerable to the upside-down
18
Is Social Media in Financial Services a Friend or Foe?, HUFFINGTON POST, available at
www.huffingtonpost.com/kitty-parry/is-social-media-in-financ_b_6534354.html.
19
Best Use of Social Media for Financial Services, available at
http://industry.shortyawards.com/category/6th_annual/financial_services.
20
The Stunning Evolution of Millenials: They’ve Become the Ben Franklin Generation,
HUFFINGTON POST, available at www.huffingtonpost.com/adam-hanft/the-stunning-evolution-
of_b_6108412.html.
21
Id.

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view of the Ben Franklin generation. Even so, the quirky but intellectually consistent confluence
of Ben Franklin values and Larry Page technology will come to disrupt the embedded
architecture of corporate finance.”22
One FinTech firm that exemplifies this shift is NerdWallet, whose stated mission is “to
provide clarity for all of life’s financial decisions. Personal finance is still an opaque industry
controlled by major financial institutions with billion-dollar marketing budgets that have a vested
interest in selling their own products and services. There’s little transparency for the consumer
and we aim to change that.”23
Thus, as NerdWallet itself asserts, there is value in being “a neutral
source, earn[ing] the consumers’ trust and be[ing] the destination of choice [for people] facing
personal finance concerns and anxieties.”24
Consumer Wealth
Another important reason that banks must embrace Social Media’s potential is that the
people with the money are active participants. According to a study conducted by Oracle, by
2025, 46 percent of wealth will be held by Gen X and Gen Y, 75 percent of whom are already
online.25
Also, 85 percent of millionaires use Social Media personally, and one-third are active
professionally.26
Finally, there are 5 million high-net-worth investors in the US and Canada
actively using Social Media, with 73 percent of those using LinkedIn, 53 percent on topic-
specific discussion boards, and 26 percent using a combination of Facebook and Twitter.27
With so much money at stake, and with the owners of that money so clearly identifiable
as Social Media users, there are abundant opportunities for FinTech companies.28
Revenue Streams
The traditional revenue streams of the banking industry include credit cards, transfers,
fees, overdrafts, and interest charges. Most of these streams are created either through deposits,
payments, lending, or investment management. FinTech companies focus on these areas, but also
aim to disrupt the system as a whole, especially with crowdfunding and cryptocurrencies. The
question that banks face is whether to compete with, invest in, or apply the emerging
technologies to existing businesses.
22
Id.
23
FINTECH, available at http://www.whartonfintech.org/blog/nerdwallet-and-push-objectivity-
24
FINTECH, available at http://www.whartonfintech.org/blog/nerdwallet-and-push-objectivity-
25
See www.oracle.com/us/industries/financial-services/gen-y-survey-report-165297.pdf.
26
See http://blogs.wsj.com/wealth/2011/06/16/one-third-of-millionaires-use-social-media/.
27
See https://business.linkedin.com/content/dam/business/marketing-
solutions/global/en_US/site/pdf/cs/linkedin_hnw_investor_research_us_en_130314.pdf.
28
See http://blog.hootsuite.com/financial-social-media-plunge/.

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Competition or Symbiosis
Commercial banks have been viable because they are relatively risk averse and stable.
Clients can store and access money in a bank that charges low fees and is guaranteed by the
government. Banks built and dominate the credit society, and are the primary lenders in the
mortgage industry.29
The question then, is how and why FinTech firms might want to compete,
or rather, team up with banks? The answer is that FinTech firms will aim at the fee-generating
services that banks are not necessarily well-equipped to handle.30
Because they are small, FinTech companies are more nimble than long-established banks.
Because they utilize emerging technologies that are in many cases proprietary, they threaten the
status quo in areas of the banking industry that rely on technology. Because they are not banks,
they are free from the regulatory oversight that strikes fear in risk-averse banking executives. For
these reasons, FinTech startups appear to have an upper hand when it comes to taking market
share from banks, but they are always at risk of being acquired, or worse, becoming big enough
to join the banks among the ranks of regulated companies.31
Instead of competing with banks, most FinTech startups aim to enhance consumer
experiences in niche areas of the banking industry, or to offer alternatives to traditional banking
offerings in areas such as lending or wealth management. And instead of competing with
FinTech startups, many banks are now aiming to either integrate with existing startups or
incubate their own pseudo-startup FinTech divisions.32
Payments – Mobile Wallets
FinTech applications in the world of payments started with PayPal, which began as an
online money transfer business. It enabled online consumers and merchants to transact business
without the consumer having to disclose sensitive bank information. In this small way, it blazed
a trail for people to start getting used to buying without money, credit, or [the appearance of]
their bank. Modern day payment solutions include more robust applications, such as Apple Pay,
Android Pay, Venmo, Square, and Poynt, all of which carry the same basic promise as the
original, PayPal: You don’t have to have money or your credit card to buy here.
29
Slings and Arrows, THE ECONOMIST, May 9, 2015, available at
www.economist.com/news/special-report/21650290-financial-technology-will-make-banks-
more-vulnerable-and-less-profitable-it.
30
Id.
31
32
The Digital Focus & Importance of Design Thinking at Capital One, WHARTON FINTECH,
December 9, 2014, available at www.whartonfintech.org/blog/design-thinking-capital-one/; and
www2.deloitte.com/content/dam/Deloitte/global/Documents/Financial-Services/gx-fsi-ca-who-
said-bank-cant-be-social-2013-10.pdf.

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The rise of payments systems is in large part due to the rise of mobile technology, as
“[w]ith more consumers willing to make purchases using smartphones, companies are rushing to
take the lead in the market, spurring eBay’s PayPal to heavily market a suite of mobile apps,
while start-ups like Square and Stripe expand their payments processing software to small and
midsize businesses.”33
With large players such as Apple and Google joining the payments niche,
it has not taken long to see further innovation.
Venmo is a P2P payments service that, even if not catering to them, services young
people disproportionately. For a generation that rarely carries cash, Venmo allows people to
instantly transfer money amongst themselves. Apple Pay and Android Pay are attempting to
replace the entire wallet, with products that are falling under the category of “mobile wallet.” It
makes sense, as “mobile payments are growing quickly. Forrester Research predicts they will
balloon to $142 billion by 201934
in the United States, almost tripling from $52 billion in
2014.”35
By providing a mobile wallet for clients, these newcomers to the payments game are
likely aiming to acquire “wallet[s] full of data,”36
to which they will be able to apply big data
analytics and determine consumer spending habits and creditworthiness. By replacing the banks
as the middleman in millions of transactions, these new payments companies will take inventory
of transaction data formerly hoarded by banks.
Banks understand that they are under siege, and have taken steps to partner with new
payments companies. “Apple has partnerships with dozens of American banks, allowing Apple
Pay to work with most major credit cards.”37
And with the new mobile wallet technology,
retailers understand that payments are no longer solely in the online domain. “Google’s new
Android Pay can also be used at brick-and-mortar stores in addition to letting merchants accept
credit card payments from their mobile apps. Consumers who use Android Pay for a purchase
will also automatically add points to loyalty programs run by participating retailers.”38
These
trends serve to further underscore the idea that data are increasingly valuable. “Retailers . . . are .
33
Google and Apple Adjust Strategies on Mobile Payments, NEW YORK TIMES, May 27, 2015,
available at www.nytimes.com/2015/05/28/technology/google-and-apple-adjust-strategies-on-
mobile-payments.html.
34
http://blogs.forrester.com/denee_carrington/14-11-17-
us_mobile_payments_will_reach_142b_by_2019
35
36
37
38
Id.

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. . eager to accept mobile payments products that work with their loyalty programs in order to
gain insight into customer shopping habits.”39
Even PayPal is adapting to the push from the upstart (if you can call Apple and Google
that) payments companies. “While PayPal has long dominated web-based payments, the
company has moved to improve its mobile payments products over the last few years, including
acquiring the mobile start-up Braintree and revamping the PayPal mobile app.”40
P2P Lending
FinTech lending is more commonly known as P2P lending, in which an online platform
connects borrowers directly to lenders, cutting out the bank.41
The application process is
streamlined, and often takes less time than traditional borrowing.42
Because the risks associated
with this form of lending are borne by specific lenders, and not the general public through
insured bank funds, regulators have kept clear to date.43
Recent entrants into the niche include
OnDeck, Lending Club, Prosper, ZestFinance, and Kabbage; some companies, such as Funding
Circle (Small Business Loan; accredited investors),44
Common Bond and SoFi (college loans;
accredited investors),45
and Pave and Upstart (borrowers with sparse credit histories),46
have
further identified pockets within the P2P lending market to focus on.
The rapid growth of P2P lending is one of FinTech’s great success stories, and its success
is understandable in the context of the environment out of which it grew. After the Financial
Crisis of 2008, banks reduced lending drastically, and as a result, a vacuum for consumer
borrowing emerged. P2P, which had come into existence just before the Crisis, filled that void
and gained traction in the lending niche. P2P eliminates banks from the lending process entirely.
With $10 billion per year in lending and the sector doubling every nine months, interested
investors estimate that a mature P2P industry will reduce U.S. bank profits by $11 billion, or
roughly 7 percent.47
39
Id.
40
A Primer on Android Pay and Google Wallet, NEW YORK TIMES, May 28, 2015, available at
http://bits.blogs.nytimes.com/2015/05/28/a-primer-on-android-pay-and-google-wallet/.
41
P2P Lending: Industry Overview, WHARTON FINTECH, October 29, 2014, available at
www.whartonfintech.org/blog/p2p-lending/.
42
Id.
43
44
P2P Lending: Industry Overview, WHARTON FINTECH, October 29, 2014, available at
www.whartonfintech.org/blog/p2p-lending/.
45
Id.
46
Id.
47

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Not only is P2P lending threatening the lending business of big banks, but also the
information gathering business they have long dominated. Because people are borrowing over
non-bank platforms, they are required to provide information to assess their creditworthiness to
non-bank businesses, which in turn reduces the these non-bank businesses’ dependency on banks
for information. The core task of a lending institution is determining which applicants qualify for
credit, and at what rate. New P2P companies still run normal credit checks, but they have added
other ways to determine creditworthiness, and some believe that these tech companies “are far
better at analyzing [data]” than banks.48
Because they are non-traditional, online companies, P2P lenders have built-in
competitive advantages in terms of overhead. “One of Prosper’s key advantages is our
operational structure—unlike banks, we don’t have to pay for branches and tellers. This allows
us to be much more operationally efficient, leading to cost savings that we can then pass on to
borrowers in the form of better rates and to investors in the form of solid returns.”49
Also,
because they understand the value of data, P2P lending companies are now focusing on novel
ways to underwrite and approve borrowers. “Big banks have a wealth of data on their customers,
and we're seeing alternative lenders such as Kabbage start to use non-traditional data such as a
small business's Amazon reviews to help evaluate creditworthiness.”50
Prosper has “a proprietary
data asset that we’ve refined over the past eight years and that’s really the core of our
business.”51
Crowdfunding – P2B Lending or Aggregated Private Investing
Early crowdfunding involved what could be called “an early-stage, donation-based
relationship,”52
whereby a project might be funded by monetary contributions from large
numbers of people, usually over an innovative technology platform.53
It was where small
businesses borrowed if banks turned them down; the application process is less complicated than
at a bank, and borrowers get their money faster.
“The crowdfunding model is based on three types of actors: the project initiator who
proposes the idea and/or project to be funded; individuals or groups who support the idea; and a
48
Id.
49
Prosper, The Importance of Data & Customer Satisfaction in P2P Lending, WHARTON
FINTECH, December 12, 2014, available at www.whartonfintech.org/blog/prosper-importance-
data-customer-satisfaction/.
50
Id.
51
Id.
52
An Interview with Nextvesting, WHARTON FINTECH, June 16, 2015, available at
www.whartonfintech.org/blog/interview-nextvesting/.
53
"Cambridge Judge Business School: Cambridge Centre for Alternative Finance".
Jbs.cam.ac.uk. Retrieved October 25, 2015.

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moderating organization (the "platform") that brings the parties together to launch the idea.”54
In
2013, the crowdfunding market exceeded $5 billion.55
Crowdfunding is important because it is breaking ground in the regulatory landscape,
with the JOBS Act leading the way. FinTech executives have taken notice. One such executive
stated, “The JOBS act permits these new investment structures[,] and the SEC has shown a real
willingness to embrace a more open and efficient private market.”56
As such, FinTech firms
focusing on crowdfunding may lead the way in creating “easy-to-use tech platform[s] which
simplify[y] the regulatory, legal, accounting, and reporting challenges in a simple interface.”57
Distributed Ledgers – Blockchain: The Technology Underlying Bitcoin
“Created in 2009, Bitcoin is a digital blockchain currency that can be mined, stored in
digital wallets, and sent over the internet.”58
This mean it need never reach a bank. For this
reason alone, blockchain technology has been seen as a game-changer. As an innovation, it has
been compared to “limited liability for corporations, or private property rights, or the internet
itself.”59
Blockchain exists as an online ledger that keeps track of ownership that, while
transparent, protects the identity of owners through the use of complicated cryptography.
Owning the currency itself is nothing more than “having a claim on a piece of information sitting
on the blockchain.”60
Because there is no centralized authority governing the blockchain, “the
definitive version of the blockchain is whatever a majority of the participating computers
accepts.”61
The positives to blockchain include the fact that “it is not tied to any country or backed
by a central bank, [indicating] that a legitimate international currency exchange can be
effectively used to transact in a system with entrenched players and minimal information.”62
Also, it allows transaction without middlemen, fees, or names, which means that users can (and
54
"Crowdfunding: Transforming Customers Into Investors Through Innovative Service
Platforms" (PDF). Retrieved October 25, 2015.
55
HSBC contributor (August 5, 2014). "HSBCVoice: Crowdfunding's Untapped Potential In
Emerging Markets". Forbes.
56
An Interview with Nextvesting, WHARTON FINTECH, June 16, 2015, available at
www.whartonfintech.org/blog/interview-nextvesting/.
57
Id.
58
FinTech 101: Learning the Landscape, WHARTON FINTECH, May 11, 2015, available at
www.whartonfintech.org/blog/fintech-101-learning-landscape/.
59
60
Id.
61
Id.
62

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famously have)63
avoided regulation, transacting anonymously and cheaply. Blockchain “is the
commoditization of payment processing and new payment protocols, rendering clearing obsolete
and dramatically lowering the transaction cost for merchants.”64
The negatives to blockchain are that Bitcoins “are volatile and lack the security or
lifespan of traditional government-backed currencies.”65
Also “Bitcoins are stored in digital
wallets that, without the proper level of security, can be deleted or destroyed by viruses. Once
destroyed, the currency will be orphaned into the system forever.”66
Blockchain pundits have increasingly become more enamored of the blockchain
infrastructure than the currencies that now exist on it. Perhaps that is due to Bitcoin price
volatility, which has been described “as a two-pronged problem: merchants don’t want to accept
it when price is so volatile and consumers are less likely to spend it since the value could double
tomorrow.”67
Most agree that the U.S. might not be the best place for the emergence of
blockchain currencies, as most Americans use credit cards that are tied to their banks. Where
“Bitcoin adds most value [is] in markets where only 10% of the population has bank accounts
and 90% have cell phones,” where “micro and cross-border transactions [occur].”68
Most experts believe that “services [such as Apple Pay and Android Pay] are a good . . .
thing for Bitcoin . . . because they get people used to the idea of digitized dollars.”69
They also
believe that “some regulation would actually be a good thing, since it would legitimize Bitcoin
and hopefully make it easier for Bitcoin companies to launch and grow.”70
Data – The Next Frontier of Currency?
Data is the new dollar. The incredible rise of mobile-based platforms for everything from
shopping, to banking, to dating has created public access to data stores once considered private;
and the most amazing part of this new world of data is that it is being transferred willingly and
without much thought by every person with a smart phone. Many firms, Apple being the most
famous for this practice, require clients to “Accept” terms and conditions for every new software
update, and because the updates are now woven inextricably into the fabric of our daily lives, we
never stop to consider the deep ramifications of our decisions to undervalue privacy in order to
63
“We are up to something big”: Silk Road discovers Bitcoin, SALON.COM, May 24, 2015,
available at
www.salon.com/2015/05/24/we_are_up_to_something_big_silk_road_discovers_bitcoin/.
64
65
Id.
66
Id.
67
Highlights from the Future of Money Conference, WHARTON FINTECH, December 8, 2015,
available at www.whartonfintech.org/blog/highlights-future-of-money-conference/.
68
Id.
69
Id.
70
Id.

13
stay connected. This shift in values might be a precursor to a shift in currency at some point in
the not too distant future.
The convergence of several issues has created an opportunity for FinTech companies to
transform the consumer credit industry from one based on big bank hegemony to one based on
data-gathering, predictive algorithms that mine social media and other behavior-telling sources
for information that can be used to assess creditworthiness. As big data firms drive down the cost
of information-gathering, and technological innovation continues to drive FinTech visionaries
into realms of decreasing regulatory oversight, there is the capacity for revolutionary ways of
using data to evaluate loan applicants.
One clear example of FinTech mining and using data like never before has been in the
world of P2P lending, where firms have found new sources of what they describe to be reliable
data pools, outside the realm of the traditional determinants for creditworthiness, credit history
and the resulting FICO scores. P2P lenders tend to overlay these traditional credit checks with
whatever other financial data are available, including employment history, online banking
details, CC history, types of repayment (partial or full), as well as behavioral data, such as how
online applications are filled out, use of capital letters, speed of the movement of the mouse71
;
and also social networking data, which include contacts on Facebook and LinkedIn, the types of
places at which a person eats and socializes, and how many, and what types of, connections a
person might have. For instance, Zest analyzes “thousands of potential credit variables—
everything from financial information to technology usage—to better assess factors like the
potential for fraud and the risk of default.”72
It uses data provided by loan applicants, and then
goes beyond that into other external databases that hold information never before considered in
the banking loan process.
In a recent ranking of the Top 50 FinTech companies, there is a section that describes the
function of each company, labels that include Funds Management, Loans, Transactional
Services, Retail Banking, and Financial Advice. These all sound like separate subverticals that
might exist under the canopy of one of the Too-Big-to-Fail banks. However there is also a
function description called Research / Data / Information / Education. What this implies is that
there are at least a handful of firms in the Top 50 in FinTech that stake their survival on fulfilling
some aspect of this function. These companies stake their future to the value of research, data,
information, and education. What this portends for each individual company is worthy of
separate investigation for anyone interested in this field, but what it indicates on a large scale is
that data, the ability to successfully mine it, analyze it, and monetize it, will be a strong driver of
FinTech applications as the financial markets require increasing efficiency and transparency.
Internet of Value
The Internet of Things is “the network of physical objects or ‘things’ embedded with
electronics, software, sensors, and network connectivity, which enables these objects to collect
71
ZestFinance and My Internship in FinTech, WHARTON FINTECH, May 19, 2015, available at
www.whartonfintech.org/blog/zestfinance-and-my-internship-fintech/.
72
Id.

14
and exchange data,”73
thus “creating opportunities for more direct integration between the
physical world and computer-based systems, and resulting in improved efficiency, accuracy and
economic benefit.”74
The Internet of Value (IoV) “has the potential of ushering in global real-
time payments through existing banks . . . [using the distributed ledger]. The concept behind the
IoV is that, with new technology, value in the future will move like information has been moving
over the last 20 years through the internet.”75
The term, Internet of Value, was coined by the CEO and cofounder of the FinTech firm
Ripple Labs, which is attempting to utilize the distributed ledger system made popular by Bitcoin
and its underlying blockchain infrastructure. Ripple Labs “wants to enable ‘secure, instant and
nearly free global financial transactions’ working with incumbents to draw up a payment
protocol based on decentralized ledgers; not trying to solve the problem of the omnipotence of
banks but the antiquated way that money is transferred among them.”76
The radical implications of an Internet of Value include a network of non-monetary
currencies. The idea that a person might “like” a picture on Facebook can be taken to an extreme
that is barely conceivable in today’s economy, but is soon coming. If algorithms can determine
creditworthiness, it will not be long before they can determine value systems, and the purveyors
of in-demand (or on-demand) services may be able to transfer non-monetary value to one another
by way of customers (users). In any case, FinTech firms are leading the way, whether in terms of
financial data management or lending or cryptocurrencies, but until there is a clear framework
for regulating FinTech, the emergence of such radical innovations as the Internet of Value will be
delayed. Now is the time to consider how FinTech can positively impact financial regulations.
Future of FinRegs in FinTech
There is already a vision for the future of financial regulations. “Recent post-crisis
legislation has emphasized . . . both more regulation in light of financial innovation, and fewer
regulatory costs for raising capital, especially . . . in a world of reduced bank lending.”77
In this
post-Crisis lending atmosphere, the JOBS Act attempts to create liquidity for businesses while
attempting to open private markets to a new segment of the investing public. “[W]hen the SEC . .
73
"Internet of Things Global Standards Initiative". ITU. Retrieved 26 June 2015
74
http://www.internet-of-things-
research.eu/pdf/Converging_Technologies_for_Smart_Environments_and_Integrated_Ecosyste
ms_IERC_Book_Open_Access_2013.pdf
75
“IoV”: Internet of Value, BANKING EXCHANGE, August 27, 2015, available at
www.bankingexchange.com/blogs-3/making-sense-of-it-all/item/5698-iov-internet-of-value
76
77
Brummer, Chris, Disruptive Technology and Securities Regulation, at p. 44 (January 12,
2015). Fordham Law Review, Forthcoming; available at SSRN:
http://ssrn.com/abstract=2546930 or http://dx.doi.org/10.2139/ssrn.2546930.

15
. promulgates the details of equity crowd-funding for non-qualified investors, that will be just the
beginning of . . . an inevitable cascade of change . . . .”78
In March 2015, the SEC released final rules implementing Title IV of the JOBS Act,
“further advanc[ing] one of the core principles and goals of the 2012 law: to create an
environment where emerging enterprises can raise public capital efficiently.”79
This law affects
“Reg A+” companies,80
in the process of making small public offerings by allowing “every
investor, whether accredited or unaccredited, [to] be able to participate in these offerings.”81
A
fundamental aspect of the new law is federal preemption of state review of the offerings, which
has the operative effect of lowering administrative burden (and therefore cost) of registering
offers with the SEC.82
Which brings up one of the main considerations that players in the banking industry
currently face: how to comply with Dodd-Frank and other new laws efficiently. If new laws and
regulations make the cost of doing business prohibitively expensive, then it is a basic principal
that those costs will be passed on to the public, benefitting nobody. It is time to rethink financial
regulations, especially in light of the cost of doing business, and the enormous capacity of
technological innovation to drive costs down. In other words, “it is time for regulators to . . .
assess whether laws and regulations that pre-date the Internet . . . fit within the digital
environment. And if [not], it is their duty to find ways to expand their frameworks to include the
. . . the incredible innovation [technology] enables across the financial services industry.”83
The foremost authority on the future of financial regulations in light of the impact of
technology is Dr. Chris Brummer, a Senior Fellow at the Milken Institute and Professor of Law
at Georgetown University. Dr. Brummer has written, “[o]ne of the primary challenges that
disruptive technology poses is that tech moves quickly, outstripping the capacity of regulators to
understand or respond to change. . . . Regulators can themselves develop algorithmic tools to
help police fraud online.”84
He has “mapped the growth and proliferation of FinTech innovation
78
The Stunning Evolution of Millenials: They’ve Become the Ben Franklin Generation,
HUFFINGTON POST, available at www.huffingtonpost.com/adam-hanft/the-stunning-evolution-
of_b_6108412.html.
79
SEC OKs Equity Crowdfunding, So Anyone Can Invest In Private Companies, TECH CRUNCH,
March 27, 2015, available at http://techcrunch.com/2015/03/27/sec-rule-change-gives-startups-
an-a-for-capital-formation/.
80
Id.
81
Id.
82
Id.
83
Fintech Startups Navigate Legal Gray Areas To Build Billion-Dollar Companies, TECH
CRUNCH, April 19, 2015, available at http://techcrunch.com/2015/04/19/fintech-startups-
navigate-legal-gray-areas-to-build-billion-dollar-companies/.
84

16
and identified four main distinct verticals in the space: Digital and Electronic Currencies, Digital
Payment Systems, Online Finance and Investment Platforms, and Big Data.”85
Dr. Brummer recommends a “move from reactive, prescriptive regulation . . . to more
responsive, adaptive forms of supervisory oversight,”86
and he states that because “old categories
don’t fit the new market ecosystem/entrants,”87
regulators are faced with uncharted, and
therefore difficult, choices. Brummer points out that the JOBS Act, by reducing regulatory
burdens associated with making public offerings, “dislocates and sidelines [non Reg A+] . . .
gatekeepers,”88
which might have the unintended effect of reducing investor protections. As
Brummer puts it “introduction of technology can . . . help provide new kinds of disciplines, say
for exchange brokers, yet at the same time generate new sources of systemic risk.”89
All of this leads to the real question: whether technology disrupts just current laws and
regulations; or, rather, whether technology is so disruptive in the banking industry that the
familiar administrative processes outlined in the Administrative Procedure Act90
need revising.
Under the APA, four basic purposes exist: (1) to require agencies to keep the public informed of
their organization, procedures and rules; (2) to provide for public participation in the rulemaking
process; (3) to establish uniform standards for the conduct of formal rulemaking and
adjudication; and (4) to define the scope of judicial review.91
As Brummer states:
For the SEC to promulgate rules, proposals must usually be shared with the public
through notice and comment processes and run through varying levels of internal
evaluation and not infrequently government-wide coordination. Furthermore, judicial
dictates require ‘hyper-detailed predecisional impact assessments’ in order to establish a
robust capacity to predict and assess the market and nonmarket impacts of any proposed
action . . . . Responding at the administrative level to the responses of regulated entities to
regulatory reforms can in turn become difficult, especially when first order rules require
either legislative compromise or significant administrative resources. Policymakers are
incentivized to cram ‘all that can possibly be thought or dreamed about actions they carry
out, fund, or authorize into single-shot, all-encompassing decision extravaganzas.’ . . .
Regulatory action . . . can often become ossified as new priorities crowd an
administrative or rulemaking agenda. Little effort is made to refine or modify decisions
made, making first order regulatory decisions all the more weighty—and often slow to be
85
Wharton FinTech in DC, WHARTON FINTECH, October 2, 2014, available at
www.whartonfintech.org/blog/milken-institute-washington-dc/.
86
87
Id. at 44.
88
Id.
89
Id. at 45.
90
Administrative Procedure Act (APA), Pub.L. 79–404, 60 Stat. 237.
91
U.S. Department of Justice (1947). "Attorney General's Manual on the Administrative
Procedure Act".

17
made. Law thus tends to be more static, and outdated, than would be warranted in any
context of dynamic change.92
In his article, Brummer discusses “a new paradigm for agile and iterative rulemaking that
leverages the flexibility and speed of industry innovation, experimentation with pilots and trials,
and engagement versus enforcement strategies in order to enhance communication while
mitigating risk-taking and introducing judicial and adjudicatory review processes.”93
Brummer’s
focus on inclusion of industry in the regulatory process attempts to encourage greater
understanding by market participants from the beginning of the process to the end. Such
inclusion could be derided by critics as catering to a potentially corrupt executive class, allowing
it to self-regulate, but because of the complexity of banking products, as well as the proprietary
technological innovations that exist in FinTech, regulators face difficult decisions when it comes
to deciding exactly how to draw clear boundaries for market participants.
Conclusion
President Franklin D. Roosevelt “would argue in his presidential nomination acceptance
speech, to "let[] in the light of day on issues of securities, foreign and domestic, which are
offered.”94
But this is not so simply achieved. As Professor McAniff from UC Berkeley points
out, “[t]he structure of regulation is . . . best understood as a reflection of the interplay between
the nature of banking activities, themes underlying the American culture, and historical
developments.”95
With the ever-increasing complexity of banking products, the rapidly
accelerating connectivity between people and businesses, and the exponential growth of
technology, banking regulation must be carefully considered. And not only the regulation that is
written and presented for comments, but perhaps even how banking regulations are conceived
and pushed through agencies. It may be that the Administrative Procedure Act itself can no
longer be applied to banking regulation. The world of FinTech is bringing about a new world of
financial products and services, and bringing it to a growing audience faster than ever before; the
world of FinReg is wide open for interpretation and new implementation.
92
Brummer, Chris, Disruptive Technology and Securities Regulation, at p. 46-47 (January 12,
93
Wharton FinTech in DC, WHARTON FINTECH, October 2, 2014, available at
www.whartonfintech.org/blog/milken-institute-washington-dc/.
94
Joel Seligman, Transformation of Wall Street: A History of the Securities and Exchange
Commission and Modern Corporate Finance 19 (3d ed. 2003).
95
Banking Law Fundamentals: “How Did We Get Here and Where Have We Gotten” – A
Paradigm For Assessing the Future of Banking, BERKELEY LAW, October 11, 2013, available at
http://thenetwork.berkeleylawblogs.org/2013/10/11/banking-law-fundamentals-how-did-we-get-
here-and-where-have-we-gotten-a-paradigm-for-assessing-the-future-of-banking/.

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