Following a tumultuous period for cryptocurrencies, digital assets, and the broader technology industry, investors have become more cautious of ambitious fintech ventures, and regulators have begun to circle. The sector's near-term future is no longer as bright as it was just one year ago.
PS Quarterly regularly features predictions by leading thinkers and uniquely positioned commentators on a topic of global concern. Following the implosion of FTX and many other crypto platforms in 2022, fintech is stirring greater public suspicion and attracting stricter regulatory scrutiny. With an estimated 1.4 billion unbanked people, and with most citizens of advanced economies relying on twentieth-century payment systems, no one doubts that financial services are ripe for technological disruption. But after a period of irrational exuberance, speculative mania, and market mayhem, the near-future for fintech has become shrouded in uncertainty. With this in mind, we asked contributors to respond to the following prompt:
Tightening economic conditions, high-profile scandals, and closer regulatory oversight in key countries will substantially hamper progress in fintech in the coming years. Agree or disagree?
In China, the Ministry of Science and Technology’s official newspaper recently praised Tencent, Alibaba, and Baidu for their contributions to the country’s economy and development. Yet praise does not imply future independence. Over the past two years, the Chinese leadership’s (somewhat delayed) recognition of the platform companies’ significance spurred a fintech “rectification.” What started as a flurry of punitive measures quickly evolved into more systemic control. Earlier this year, Guo Shuqing, the Party Secretary for the People’s Bank of China, announced that rectification of the 14 biggest fintech firms had been “basically completed.”
But while regulators’ splashier moves might be over, the crackdown still casts a shadow over China’s tech sector. Regulatory empowerment and deeper state involvement mean that full emancipation for the private sector is out of reach. On top of permanent regulatory oversight, state entities are taking “golden shares” (which confer special management power) in major tech companies such as Alibaba and Tencent. Perhaps not coincidentally, these two firms’ operations far exceed financial services. Tencent owns the super-app WeChat, while Alibaba’s Ant Group is a multi-pronged digital services and e-commerce giant.
One of the Communist Party of China’s core priorities is economic growth, which these firms are poised to supply. But the party-state’s first priority is to maintain central control, which the government will rush to defend if and when these firms start to appear too powerful. If industry and party goals overlap, fintech firms will have nothing to worry about. But that is a big “if.” Uninterrupted harmony between the two is unlikely.
Progress in fintech will certainly be hampered in 2023, especially when it comes to cryptocurrency and digital assets. Policymakers are weighing the pros and cons of regulating the sector as opposed to simply “letting it burn.” If regulation is on the menu, crypto is poised for a Dodd-Frank moment, with policymakers recreating the sweeping overhaul of banking regulations that were implemented after the 2008 financial crisis.
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Of course, among those proposing new rules, some want crypto to be governed with a relatively light touch – the same way gambling and gaming are. But more serious jurisdictions, such as the European Union, are pushing for a financial-services ecosystem based on the principle of “same services, same risks, same rules, and same supervision.” Such an approach would be technologically neutral: all companies will be subject to rules according to the services they provide, regardless of whether they call themselves “crypto” or something else.
But, far from killing the crypto industry, regulation (following the principle of technological neutrality) could be its salvation. Even conservative central bankers like Jon Cunliffe, the Bank of England’s deputy governor for financial stability, acknowledge that companies that survive this crypto winter may become the Amazons of the future. Many countries will vie for potential survivors’ attention and investments by touting novel fintech regulations. Europe already has a Markets in Crypto-Assets (MiCA) regulatory framework that would do for crypto what its landmark General Data Protection Regulation did for privacy. Now, all eyes are on the US Congress, which could avert a deeper fintech winter by passing legislation like the Stablecoin TRUST Act.
What we are seeing now looks very much like the bursting of the dot-com bubble. The fintech scene will become healthier after years of overvaluation and weak regulation, which allowed for the rise of unreliable ventures such as Wirecard and FTX. Still, it would be foolish to ignore the crucial role that technology will play in the future of finance. The most innovative fintech projects will continue to attract investment, but they will need to demonstrate their robustness and resilience as much as their market viability.
In this environment, I believe that traditional banking and finance players will have an opportunity to catch up by investing in the right areas. Fintech startups have gained ground in recent years by delivering customer-centered services and improving operational efficiency. With a large customer base and risk-management expertise, the big players have what they need to drive the banking-as-a-service model forward, provided that they fully embrace digitalization.
In consumer finance and transaction banking, the development of integrable APIs and new technological building blocks like blockchain may allow for safer and more efficient embedded financial services. But we are not there yet. Whatever the funding or regulatory conditions, innovation will remain on the agenda.
In 2021, abundant liquidity, low interest rates, and a general appetite for technology stocks contributed to an immense surge in the prices of digital assets. But in 2022, high inflation, monetary tightening, and slowing economic growth pricked the bubble, and high-profile scandals like the collapse of FTX highlighted the urgent need for regulation. In the short term, stronger oversight probably will hamper growth and accelerate consolidation within the industry. But in the medium term, as people gradually regain trust, we could move to a safer and more sophisticated plane where digital assets can be opened up to a much broader audience.
Fintech innovation still depends on the same factors as before: access to capital, demand for services, supply chains, and geopolitics. Though history does not repeat itself, the recent digital-assets boom had echoes of the dot-com bubble, with all its “irrational exuberance.” Low interest rates in the late 1990s reduced borrowing costs, which enabled a Cambrian explosion of new internet start-ups. Entrepreneurs could capitalize on high information barriers (because the technology was still relatively new), and venture capitalists were eager to buy into novelty. Sky-high valuations then made it even easier to raise capital.
But many of these business models were never sustainable, and they soon began to falter, especially as more established companies entered the mix. By October 2002, the Nasdaq had shed all the gains amassed during the bubble, tumbling 78% from its peak in March 2000. Yet though many companies failed, the underlying technology survived, and we now use it every day. Digital assets and blockchain-based technologies are likely to follow a similar pattern. As has often been said of the dot-com era: “Nothing important has ever been built without ‘irrational exuberance.’”
New regulatory scrutiny in key countries will not substantially hamper progress in fintech over the medium term, owing to the sophistication and diversified nature of the sector. One sub-sector to watch is climate fintech, where new innovations are well placed to have a positive social impact and help trigger better regulation.
According to CommerzVentures, carbon accounting and climate-risk management attracted the most climate fintech funding ($1 billion) in the first half of 2022. While Europe took the lead in money raised for the year, the Inflation Reduction Act of 2022 could push the United States ahead.
With US and European regulators pushing for more climate-related disclosures, demand for climate-fintech solutions will grow as companies look for better ways to track environmental, social, and governance (ESG) data and avoid accusations of greenwashing. Similarly, with new carbon border taxes taking shape, platforms that track embedded carbon dioxide emissions at various stages of production can provide additional traceability and data to help companies understand their footprint. While carbon-offset platforms for voluntary carbon markets are growing, greater transparency and stronger regulations are needed to ensure that people in developing countries who are adopting these instruments also benefit from them.
Finally, by offering individuals the opportunity to invest in companies focused on combating the climate crisis, fintech can help expand a new class of climate-conscious investors. The challenge is to ensure that enough of this investment is flowing to the developing countries that are hardest hit by the climate crisis. That is why organizations like USAID are working to bridge the climate-financing and fintech gap through initiatives like the new Climate Finance for Development Accelerator.
Various facets of fintech will be affected in different ways by shifts in macroeconomic conditions and regulators’ attitudes. Consumer and business demand for more efficient, cheaper, and easily accessible electronic payments (both domestic and international) remains strong. Innovation in digital payments is therefore likely to continue, despite greater regulatory scrutiny, most of which is meant to limit illicit transactions. Stablecoins, in particular, will probably face stringent regulation to ensure adequate investor protection, and to avoid any spillovers of risk to securities markets.
Financial intermediation activities undertaken by fintech platforms will also come under greater regulatory scrutiny, particularly as tighter macroeconomic conditions and rising interest rates raise default risks for all types of credit. Regulators are becoming highly, and rightly, skeptical about the notion that technology – including the use of big data, machine learning, and artificial intelligence – can by itself (and with minimal regulatory oversight) deliver better, lower-cost intermediation services with lower default risks.
There is likely to be a shakeout in the fintech sector. Firms and platforms that have shaky business models and a weak financial footing face a reckoning when subjected to greater regulatory and economic pressures. This shakeout could ultimately prove beneficial: It would winnow out shadier and riskier firms, while still allowing for innovations that fill the many gaps that persist in the provision of basic financial products and services.
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PS Quarterly regularly features predictions by leading thinkers and uniquely positioned commentators on a topic of global concern. Following the implosion of FTX and many other crypto platforms in 2022, fintech is stirring greater public suspicion and attracting stricter regulatory scrutiny. With an estimated 1.4 billion unbanked people, and with most citizens of advanced economies relying on twentieth-century payment systems, no one doubts that financial services are ripe for technological disruption. But after a period of irrational exuberance, speculative mania, and market mayhem, the near-future for fintech has become shrouded in uncertainty. With this in mind, we asked contributors to respond to the following prompt:
Tightening economic conditions, high-profile scandals, and closer regulatory oversight in key countries will substantially hamper progress in fintech in the coming years. Agree or disagree?
Johanna M. Costigan
In China, the Ministry of Science and Technology’s official newspaper recently praised Tencent, Alibaba, and Baidu for their contributions to the country’s economy and development. Yet praise does not imply future independence. Over the past two years, the Chinese leadership’s (somewhat delayed) recognition of the platform companies’ significance spurred a fintech “rectification.” What started as a flurry of punitive measures quickly evolved into more systemic control. Earlier this year, Guo Shuqing, the Party Secretary for the People’s Bank of China, announced that rectification of the 14 biggest fintech firms had been “basically completed.”
But while regulators’ splashier moves might be over, the crackdown still casts a shadow over China’s tech sector. Regulatory empowerment and deeper state involvement mean that full emancipation for the private sector is out of reach. On top of permanent regulatory oversight, state entities are taking “golden shares” (which confer special management power) in major tech companies such as Alibaba and Tencent. Perhaps not coincidentally, these two firms’ operations far exceed financial services. Tencent owns the super-app WeChat, while Alibaba’s Ant Group is a multi-pronged digital services and e-commerce giant.
One of the Communist Party of China’s core priorities is economic growth, which these firms are poised to supply. But the party-state’s first priority is to maintain central control, which the government will rush to defend if and when these firms start to appear too powerful. If industry and party goals overlap, fintech firms will have nothing to worry about. But that is a big “if.” Uninterrupted harmony between the two is unlikely.
Dante Alighieri Disparte
Progress in fintech will certainly be hampered in 2023, especially when it comes to cryptocurrency and digital assets. Policymakers are weighing the pros and cons of regulating the sector as opposed to simply “letting it burn.” If regulation is on the menu, crypto is poised for a Dodd-Frank moment, with policymakers recreating the sweeping overhaul of banking regulations that were implemented after the 2008 financial crisis.
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Of course, among those proposing new rules, some want crypto to be governed with a relatively light touch – the same way gambling and gaming are. But more serious jurisdictions, such as the European Union, are pushing for a financial-services ecosystem based on the principle of “same services, same risks, same rules, and same supervision.” Such an approach would be technologically neutral: all companies will be subject to rules according to the services they provide, regardless of whether they call themselves “crypto” or something else.
But, far from killing the crypto industry, regulation (following the principle of technological neutrality) could be its salvation. Even conservative central bankers like Jon Cunliffe, the Bank of England’s deputy governor for financial stability, acknowledge that companies that survive this crypto winter may become the Amazons of the future. Many countries will vie for potential survivors’ attention and investments by touting novel fintech regulations. Europe already has a Markets in Crypto-Assets (MiCA) regulatory framework that would do for crypto what its landmark General Data Protection Regulation did for privacy. Now, all eyes are on the US Congress, which could avert a deeper fintech winter by passing legislation like the Stablecoin TRUST Act.
Philippe Heim
What we are seeing now looks very much like the bursting of the dot-com bubble. The fintech scene will become healthier after years of overvaluation and weak regulation, which allowed for the rise of unreliable ventures such as Wirecard and FTX. Still, it would be foolish to ignore the crucial role that technology will play in the future of finance. The most innovative fintech projects will continue to attract investment, but they will need to demonstrate their robustness and resilience as much as their market viability.
In this environment, I believe that traditional banking and finance players will have an opportunity to catch up by investing in the right areas. Fintech startups have gained ground in recent years by delivering customer-centered services and improving operational efficiency. With a large customer base and risk-management expertise, the big players have what they need to drive the banking-as-a-service model forward, provided that they fully embrace digitalization.
In consumer finance and transaction banking, the development of integrable APIs and new technological building blocks like blockchain may allow for safer and more efficient embedded financial services. But we are not there yet. Whatever the funding or regulatory conditions, innovation will remain on the agenda.
Marion Laboure
In 2021, abundant liquidity, low interest rates, and a general appetite for technology stocks contributed to an immense surge in the prices of digital assets. But in 2022, high inflation, monetary tightening, and slowing economic growth pricked the bubble, and high-profile scandals like the collapse of FTX highlighted the urgent need for regulation. In the short term, stronger oversight probably will hamper growth and accelerate consolidation within the industry. But in the medium term, as people gradually regain trust, we could move to a safer and more sophisticated plane where digital assets can be opened up to a much broader audience.
Fintech innovation still depends on the same factors as before: access to capital, demand for services, supply chains, and geopolitics. Though history does not repeat itself, the recent digital-assets boom had echoes of the dot-com bubble, with all its “irrational exuberance.” Low interest rates in the late 1990s reduced borrowing costs, which enabled a Cambrian explosion of new internet start-ups. Entrepreneurs could capitalize on high information barriers (because the technology was still relatively new), and venture capitalists were eager to buy into novelty. Sky-high valuations then made it even easier to raise capital.
But many of these business models were never sustainable, and they soon began to falter, especially as more established companies entered the mix. By October 2002, the Nasdaq had shed all the gains amassed during the bubble, tumbling 78% from its peak in March 2000. Yet though many companies failed, the underlying technology survived, and we now use it every day. Digital assets and blockchain-based technologies are likely to follow a similar pattern. As has often been said of the dot-com era: “Nothing important has ever been built without ‘irrational exuberance.’”
Jacqueline Musiitwa
New regulatory scrutiny in key countries will not substantially hamper progress in fintech over the medium term, owing to the sophistication and diversified nature of the sector. One sub-sector to watch is climate fintech, where new innovations are well placed to have a positive social impact and help trigger better regulation.
According to CommerzVentures, carbon accounting and climate-risk management attracted the most climate fintech funding ($1 billion) in the first half of 2022. While Europe took the lead in money raised for the year, the Inflation Reduction Act of 2022 could push the United States ahead.
With US and European regulators pushing for more climate-related disclosures, demand for climate-fintech solutions will grow as companies look for better ways to track environmental, social, and governance (ESG) data and avoid accusations of greenwashing. Similarly, with new carbon border taxes taking shape, platforms that track embedded carbon dioxide emissions at various stages of production can provide additional traceability and data to help companies understand their footprint. While carbon-offset platforms for voluntary carbon markets are growing, greater transparency and stronger regulations are needed to ensure that people in developing countries who are adopting these instruments also benefit from them.
Finally, by offering individuals the opportunity to invest in companies focused on combating the climate crisis, fintech can help expand a new class of climate-conscious investors. The challenge is to ensure that enough of this investment is flowing to the developing countries that are hardest hit by the climate crisis. That is why organizations like USAID are working to bridge the climate-financing and fintech gap through initiatives like the new Climate Finance for Development Accelerator.
Eswar Prasad
Various facets of fintech will be affected in different ways by shifts in macroeconomic conditions and regulators’ attitudes. Consumer and business demand for more efficient, cheaper, and easily accessible electronic payments (both domestic and international) remains strong. Innovation in digital payments is therefore likely to continue, despite greater regulatory scrutiny, most of which is meant to limit illicit transactions. Stablecoins, in particular, will probably face stringent regulation to ensure adequate investor protection, and to avoid any spillovers of risk to securities markets.
Financial intermediation activities undertaken by fintech platforms will also come under greater regulatory scrutiny, particularly as tighter macroeconomic conditions and rising interest rates raise default risks for all types of credit. Regulators are becoming highly, and rightly, skeptical about the notion that technology – including the use of big data, machine learning, and artificial intelligence – can by itself (and with minimal regulatory oversight) deliver better, lower-cost intermediation services with lower default risks.
There is likely to be a shakeout in the fintech sector. Firms and platforms that have shaky business models and a weak financial footing face a reckoning when subjected to greater regulatory and economic pressures. This shakeout could ultimately prove beneficial: It would winnow out shadier and riskier firms, while still allowing for innovations that fill the many gaps that persist in the provision of basic financial products and services.