“The advance of technology is based on making it fit in so that you don’t really even notice it, so it’s part of everyday life.” – Bill Gates
Anything seems possible in this digital age, the whole world has drastically changed with the advent of technology in the last few decades, and the same has happened in the financial sector. Nowadays, active netizens from one country are capable of influencing the stock markets in another. National regulations can stifle innovation at the international level, and agile start-ups can take over the traditional financial institutions in this digital world. However, a small shock to the system can have an exponentially great effect on the entire ecosystem in the virtual world, where the connections seem to link forever. Besides risks, there are also numerous possibilities. By democratizing and decentralizing financial institutions, ordinary people will also be able to participate in this global financial ecosystem.
Regulation
The regulatory framework has never been more significant than it is today in a closely connected ecosystem of financial services. Traditional institutions are heavily regulated, that is the reason many non-traditional players experience more freedom and a hands-off approach from regulators. Just the right level of regulatory supervision should be effective where oversight is present but is not stifling innovation. To put it in a more compact and simpler way, structure-based regulation needs to be replaced by pursuit-based regulation.
Unregulated and partially regulated financial institutions pose a great deal of risk to financing systems and investors. It doesn’t necessarily mean that too many or too few regulations impact the finance ecosystem; there should be an adequate proportion of entity and activity-based regulation, moving away from the traditional regulations. There is a need for regulators to understand the degree of variation between digital business models and traditional banking systems.
With the pace of innovation, it is going to become increasingly important to focus on activity-based supervision when it comes to non-traditional players as well as the traditional financial system as a whole. Structure-based regulation has primarily been implemented since the great financial crisis of 2008. Global Systemically Important Banks (GSIB) and Systemically Important Financial Institutions (SIFI) are examples of globally recognized entity-based regulation. If big tech organizations enter the realm of financing, regulations should be drafted which are independent of the entity type. Taking steps to elaborate activity-based oversight so that it incorporates new players will help fill the gaps in regulation we have seen in the past.
Security
In a world with complex digital supply chains, it can make it really difficult to identify vulnerabilities before they turn into full-blown problems. This raises the question of the safety of banks, insurance companies, and fintech companies. A weak link in any of these organizations can cost them their reputation and security. Nowadays, communication between parties does not occur directly, there are third parties and mediators involved. With such a vast network of connections and several layers of connectivity involved, it becomes extremely difficult to keep track of things and hold people accountable in the entire ecosystem. The security of financial institutions gets compromised even more when emerging financing techniques are not regulated properly. Non-traditional financial institutions are winning in the present due to the adoption of decentralized financing. Additionally, digital financing, the accumulation of consumers’ financial data, blockchain technology, and the emergence of cryptocurrency have resulted in the rapid evolution of non-traditional financial institutions. These non-traditional financial entities are so cutting edge and fresh, having such wide scope that we don’t even know their full potential and the risks involved yet. Appropriate regulations are yet to be developed for emerging financial affairs but it is extremely difficult to put centralized regulatory affairs at the front of decentralized financial institutions.
The ultimate goal of the regulatory bodies is to create utmost financial stability, secure transactions, and protection of consumer rights. Although it is really challenging in this unexplored realm that was built to defy the traditional methods of financing, there is a need to somehow find creative solutions to collaborate between central powers and decentralized financial institutions.
Global Incompatibility
The absence of shared classifications and incompatible national perspectives, elevates the risk of cyber-attacks. All countries around the globe have different approaches and perspectives regarding the rules and regulations, such an ecosystem leads to a number of spheres of influence with different geographical locations. Financial regulations differ in a jurisdiction depending upon the market of a particular region and this is going to continue with time. We can not expect to impose a single law in varying regions but we can definitely work toward finding a common ground for all the nations. The goal should be to ensure significant management of the different operations and tasks to eliminate the risks that big financial institutions can pose. We need immediate geographical management approaches to fill out the gaps that have been created over time and had led to several cyber-attacks, cross-nation data issues, and other financial risks in the past.
Social Media Influence
In this tech-savvy world, it has become extremely strenuous to regulate the flow of information and services. There are thousands of platforms that possess the power to influence your thoughts in terms of financing. Generally, these platforms can be classified into the following categories: Social media, web-based forums, online communities, private messaging apps, and financial influencers. Such widespread use of these platforms has enabled non-traditional financing approaches to reach out to consumers that were previously not involved in sophisticated financial marketing. Although the information exchange has helped investors in understanding new ways of financing, on the other hand, these platforms are being used to deliver misleading and wrong information as well. The digital world possesses the power to influence the decisions of millions of people, hence it requires regular checks and balancing. It is burdensome to take care of digital financing through legacy consumer protection mechanisms because a huge amount of information is being shared outside the walls of the traditional financial ecosystem. Today, you create hype about a trend on social media, your purpose is served. Viral social media posts possess the ability to sway the public and encourage stock buying or selling on a huge scale. It is extremely harmful to the investors and disrupts the trust of the public in the entire system.
Conclusion
You see there is a contradiction involved regarding the regulation of decentralized finances, if too many regulations are imposed then the institutions would lose their essence of working with freedom but if the regulatory regime remains absent it could harm the safety and security of the financing sector. There is a need for laws that maintain a perfect balance regarding regulations, geographical incompatibility, social media influence, and financial security.
