Today marks the 90^th anniversary of the Bank for International Settlements, and in celebration of it, the BIS is formally launching its new book, Promoting Global Monetary and Financial Stability, The Bank for International Settlements after Bretton Woods, 1973-2020..  The collection of essays are designed to highlight the significant role in the momentous changes the international monetary and financial system has undergone over the past half century.  It was a pleasure to contribute.  Authors include Agustín Carstens, Claudio Borio, Stijn Claessens, Piet Clement, Robert N. McCauley, Hyun Song Shin, Harold James, Catherine R. Schenk, Chris Brummer, Andrew Baker, Barry Eichengreen, William C. Dudley.

Problems have appeared already in several government assistance programs. The Washington Post, for example, reported Friday that several million people who filed their taxes via H&R Block, TurboTax and other services were unable to get payments because the IRS did not have their direct deposit information on file, according to the Treasury, companies and experts.

Meanwhile, the IRS launched a “Get My Payment” tool Wednesday for people to trackthe status of their payment and enter direct deposit information, but which has failed to provide any information for millions of Americans who have logged on. The reason? The IRS uses software first developed in 1962, and Congress’ economic stimulus has required multiple coding changes to the software. But ultimately, the Post reports, the agency has at least 16 other databases with taxpayer information, none of which easily can communicate with the other, said a person familiar with the matter.

Similar challenges have riddled efforts to assist small businesses. The new Paycheck Protection Program (PPP), designed to effectively offer grants to companies to keep their workforce, was slow to get out the gate. Bureaucratic challenges played a major part, but the underlying challenges of the Small Business Administration program’s technology also had a role.

The SBA’s application portal E-Tran, for example, can only support 3,000 applications per hour. But in today’s environment, there are 7,000 per hour. As Brayden McCarthy, a strategist for Stripe, observed in the Town Hall last week, there is no ability to support programmatic submission of applications to the SBA. The agency’s systems are instead dependent on people manually overseeing operations like cleaning up error messages. Consequently, the system is not designed to support over a matter of days what the SBA traditionally would have to support over 15 years — and the SBA’s ETran has been overwhelmed by demand for loan approvals.

Big banks unready (or unwilling?) for their new role Complicating things even further is that the SBA’s PPP program initially depended on big banks that are themselves surprisingly underdeveloped when it comes to key processes and capabilities necessary to execute successful policy responses.

The PPP is based on the SBA’s existing 7(a) loan program where the SBA doesn’t make loans; instead, SBA-approved banks do. But given the demand and need, there have not been enough banks to get the job done. Not only is the demand immense, but many SBA-approved banks haven’t exactly been in the mood to take on new customers. Big banks, in particular, have long been reputed to concern themselves most with servicing and keeping their largest customers, not getting new ones. And, as a result, they reportedly haven’t invested in systems designed to onboard new customers or make efficient or automate the kinds of compliance that accompanies it, like antimoney laundering and sanctions programs. So taking on new customers in bulk would require a relaxing of internal processes that could potentially open them up to government charges and penalties.

Thus not surprisingly, when the PPP was launched, many SBA lenders were only willing to offer loans to existing customers that had taken out loans with them in the past. As a result, small businesses with no existing relationships had difficulties getting financing assistance under the program.

Reviewing the problem, the government clarified its guidance for lenders and gradually opened up the program to fintech firms that had the infrastructure in place to process new customers and quickly get loans out. But days after the first fintechs received approval to participate in the program, the funding for the PPP program — all $349 billion of it — had been exhausted. And with the program working on a first come, first served basis, the initial iteration had the appearance of assisting those firms with the best connections and relationships.

The myriad technological issues aren’t going away soon, and just don’t look great for the United States. America is certainly not, when it comes to our infrastructure, number one. Or even average. Indeed, even middle-income countries now largely enjoy more advanced tools and technical infrastructure to financially assist and access their populations than the United States. From our government IT to our largest, most sophisticated institutions underinvesting in everyday people, we’re behind.

The stakes of such shortcomings have grown as quickly as the pandemic. No longer isthe country’s technological underdevelopment just embarrassing. It is now, in  very real sense, a national emergency in itself. Like many, I shudder to think what would be the consequences if an even deadlier virus was to emerge, and endanger the country’s public health. Upgrading not only our bureaucratic and political responses, but also the base layer infrastructure enabling public policy, will be a necessary component of effective reform.

More information can be found at https://www.usajobs.gov/GetJob/ViewDetails/562791300.

So a popular ranking came out, collating data from over 5 million finch related posts, identifying the Top 100 “influencers” in fintech. While I would love even more to be able to “influence” my students as to their homework completion, I’ll gladly settle for landing on this very interesting list.

Last Friday, Britain said good-bye to the EU, embarking on a new life as a fully independent country no longer tethered to the mast of regional integration.  But there are plenty of questions to come—like how will it leverage its independence to its economic (and financial) benefit.

One theory holds that Brexit, especially a Hard Brexit, will be catastrophic for fintech—immediately.  London’s status as a global financial center derives from its status as a gateway to Continental Europe.  Traditionally a firm coming from the US, Japan o r China, could establish itself in London, and then sell its financial services or products throughout Europe.  But if a hard Brexit occurs, and all economic ties are severed, the UK will loose its ability to offer firms a ‘passport’ to EU member states. Overnight, the valuation of all UK-based financial firms could fall if they haven’t set up affiliates in a EU-member state and gained from European regulators the appropriate licenses for their operations.  And for fintech firms have borrowed in dollars (or euros), which not infrequently the case for start-ups, the cost of borrowing—and servicing outstanding loans—could spike as the value of the GBP sinks.

Another more optimistic take holds that this won’t necessarily be a dramatic event. Fintechs, despite the impasse—and despite at time bellicose language coming from Brussels and London—are still raising money, and at a brisk clip to boot.  Accenture recently reported that in the last two quarters, investment flowing into UK fintechs nearly doubled, to approximately US$2.6 billion. The volume was also impressive, with the number of deals involving fintech firms jumping 25%, to 263. Of particular interest has been, according to Accenture, young technologically sophisticated banks and payments companies like Monzo, Starling Bank, TransferWise, and WorldRemit.

Finally, a third theory suggests a long, protracted decline.  Whatever the UK’s particular problems for traditional financial firms, the interest in fintech is high.  Some of the potential solutions—from AI-driven investment strategies and advice to distributed ledger payment infrastructures—have an international interest.  And with the talent in London, investment dollars have flown to the capital and nearby areas to drive forward the scaling up of new players in the sector as well as novel collaborative partnerships between fintechs and banks.

However, as the investment cycle matures, and investors begin to scrutinize the returns on their investments, as well as their sustainability, Brexit will start to compromise the industry. Not only will new (and in some instances permanent) compliance costs be built into UK firms providing services for activities based in the EU, but also the human capital serving as the basis of the city’s comparative advantage will gradually atrophy.  According to some estimates, up to twenty percent of people working in the fintech sector come from the EU.  However, Brexit could end up cutting off the spout for such foreign workers. EU nationals looking to work in the sector and migrate to London would have to apply for a work permit—which in a post-Brexit UK may be difficult to come by, and in any event departs dramatically from today’s open borders policy for EU nationals.  Just as important, talent may not want to come to Europe due to a sense that they may be disadvantaged, discriminated against, or restricted in terms of their employment and career goals.  Instead of going to London, they might choose  to move elsewhere, like Toronto or Singapore.  Or they might just stay in their home countries scattered across the EU.

If I had to choose a theory, the third sounds most likely, but the results could depend on what subsector of the fintech industry you’re talking about.  Peer to peer lending could be very differently impacted than, say, cybersecurity or blockchain-backed financial industry.  But I do think it’s safe to say that if the UK’s economy contracts because of Brexit, which is what one would expect, fintechs will have fewer potential clients—and suitors like banks seeking to purchase them from entrepreneurs and investors.  Thus though money for fintech projects and ventures may be plentiful now, there will be more pressure for innovative and young to show positive business results sooner.

The article has now appeared in the Journal of International Economic Law, published by Oxford University Press.

It’s a fascinating observation, which begs the question why.  For sure, different sectors in any economy may source vendor and other relationships with different countries.  But often, we tend to think about vendor relationships, even providers of technology solutions, as at least in part, extensions of trade relationships.  A country may have dominant relationships with the US, Germany or Japan, and the assumption is that such dominance is, well just that, and bleeds across sectors.  And one certainly wouldn’t expect too many differences between sectors if the technology or service in question concerns an overlapping domain of two industries.

Still, regulations can certainly play a role in creating very different choices between sectors.  Even where companies may be trying to deliver similar services—think banks and social media firms trying to offer bank-like services—they may not be subject to the same oversight, or the same sensitivity to it.  As a result, the regulatory framework within which any particular services provider is operating, whether in Africa or the United States, could very well impact the decision-making as to where third-party inputs and services are sourced.

Banks, for their part, are usually among the most stringently regulated institutions in the world.  Regulators from Nairobi to New Jersey want to make sure that what a banks does is safe and sound—and will not generate financial instability or take down a national economy if it fails.  And there’s a reason—they take on-demand deposits from individuals and lend it for the long term, which makes their balance sheets inherently fragile.

Telcom rules, by extension, focus on the degree to which a major firm exhibits monopoly power.  Creating a telcom requires considerable outlays of capital and infrastructure, as well as reliance on government owned or regulated resources.  As a result, governments watch companies carefully to ensure they are serving public goals alongside their profit-making activities.

As a result, it’s not hard to imagine that banks in Africa may be a lot more sensitive to questions about how regulators respond to technology sourcing than telecoms, assuming of course there are no national security considerations at play.  Regulators view banks (along with a set of other actors like stock exchanges, public companies, etc.) as central financial gatekeepers.  If these gatekeepers offload key functions to third parties, there will be an interest in ensuring that the third-party vendors and suppliers pose minimal operational and prudential risks.

Telcoms aren’t used to taking these kinds of concerns into consideration.  So if African telecoms see interesting (or cheap) tech coming from China, there’s the possibility that they might have fewer reservations about experimenting with it, or even relying on it.  Meanwhile banks, used to (and perhaps concerned with), regulators constantly looking over their shoulder, might be less willing to jump into the great technological unknown with firms coming from jurisdictions with shorter histories and less reputable oversight. When faced with the choice between China and the United States or Europe, the decision may seem comparatively easier, especially if operating in a risk averse supervisory ecosystem.

I want to stress that other, perhaps simpler explanations could be at play. But I offer this theory, more than anything, to illustrate a simple point–namely that focusing regulatory attention on entities, instead of activities, enables a number of potentially unexpected repercussions throughout the financial system. Not only do opportunities for arbitrage arise, but also entire industries may adopt highly different national sources of technology solutions. And even where regulation is functional in orientation, it still might not anticipate the kinds of legacy cultural attitudes that can lend to very stark differences in industry behavior.  What this means, is anyone’s guess, but as boundaries are blurred in the provision of financial services, we’re bound to find out.

I know from what many folks my age, securities regulation has a couple of core concepts. The canonical approach embraces more or less the following:

• Materiality
• Initial Public Offerings
• Private Offerings
• Insider Trading

But I think it’s time, with all the developments for a revamp, especially with fintech preoccupying the minds of regulators and market participants. (And not just because I wrote a book on them). But it’s hard to imagine nowadays a serious course not also covering:

• Crowdfunding
• Decentralized Finance and Cryptocurencies
• Roboadvisors

My hunch is that we’ll see these and similar changes elsewhere leading to an earlier introduction for students to not only financial products, but also to more  issues concerning market infrastructure and participants. Which could revolutionize the course—making it more difficult, and interesting, all in one.

Securities Regulation 2020 (4th edition)

Securities Regulation Syllabus 2020 (5th edition)