In the weeks leading up to Ant Financial’s ill-fated IPO, Jack Ma criticized the system of international banking regulation in remarks at the Bund Summit in Shanghai. The Alibaba co-founder contended that the current framework was a poor match for countries like China that needed to innovate in the creation and delivery of financial services. Describing today’s regulatory system as designed for the “elderly” economies that have long relied on a traditional and compliance-heavy system of banking, Ma explained that emerging or “youth” nations depended on their ability to foster innovation in ways that were less constrained by capital-intensive rulemaking.
Ma’s sentiments appeared prescient. According to reports, Chinese regulators shelved Ant’s $37 billion IPO over concerns that the company had become too entangled with the domestic financial system to be considered a mere tech company outside of banking rules. Rather, its regulatory status (and the compliance obligations that would go with it) deserved closer attention before investors could take a slice of ownership in the firm.
Yet Jack Ma’s statements also highlight some key tensions between international financial regulation (IFR) and fintech. Can IFR realistically adapt its standards to cross-border digital finance? Can these standards be made flexible enough to fit banks as well as firms like Ant, Tencent (owner of WeChat Pay), Apple, or Facebook? And will countries in various stages of economic development be motivated to apply IFR standards at home, increasing compliance costs on fintech firms that deliver essential services to a large and historically underserved consumer base?
In a recent article, Fintech and International Financial Regulation, I explore these questions and argue that IFR confronts serious structural difficulties in developing standards to match digital financial innovation. In earlier work, Fintech and the Innovation Trilemma, Chris Brummer and I observed that regulators face a trilemma when seeking to juggle the goals of fostering financial innovation, preserving market integrity, and crafting clear, straightforward rules. We suggest that, when aiming to achieve all three of these goals, regulators can, at best, realize only two of them. For example, in looking to promote innovation through clear rules (using broad permissions), market integrity is likely to suffer. Alternatively, in prioritizing market integrity and rule clarity (through bans on certain activities), financial innovation becomes harder to achieve. When trying to promote both innovation and market integrity, regulators will likely have to produce a complex rulebook.
We note that the trilemma faces a particularly tough challenge when applied to fintech. Fintech involves complex artificial intelligence (AI), relies on new forms of data, and innovates through non-traditional financial firms like e-commerce companies that sometimes lack the experience and resources of more traditional financial firms like banks. Further, the rise of smaller, less conventional firms in fintech makes it more difficult for regulators to craft rules for both financial and non-financial firms. Compliance can end up being especially costly for smaller firms, start-ups, or those that lack regulatory expertise.
I build on these insights in Fintech and International Financial Regulation to argue that the application of the trilemma is even trickier in the context of cross-border fintech. On the surface, this is surprising. Since 2008, IFR has effectively coordinated national efforts to develop standards, cross-border surveillance mechanisms, and ways to promote local implementation of rulemaking. But fintech creates new challenges. First, international fintech standards must be compatible with a variety of domestic legal systems and administrative processes. Transnational standard-setting thus makes rule clarity especially difficult where new standards must address already complex topics like AI and do so in ways that can be compatible with various local legal systems . As a result, the cost of negotiating workable standards is high.
Second, in countries like China, fintech is addressing real economic needs that have gone unmet by more traditional financial firms. Ant Financial’s digital payments app, Alipay, for example, boasts almost one billion users and handled around $16 trillion in payment transactions in 2019. By contrast, countries like the U.S. with more developed financial systems have experienced a slower shift, perhaps because many local consumers already have access to a range of services.
Achieving consensus on cross-border standards is hard when it means increasing compliance costs for the fintech firms on which many countries rely heavily. Bluntly put, those countries that have the most at stake can have the weakest motivation to act.
Finally, IFR standards must be capable of being implemented into financial systems that are experiencing varying levels of disintermediation and disentanglement from traditional banking and financial firms. Economies dominated by traditional financial firms may find it easier to implement new rules because firms are familiar with the demands of regulatory compliance. By contrast, economies that rely more on fintech firms – which often lack compliance experience and deep pockets – may find it relatively more costly to enforce exacting international standards.
My article offers ideas for navigating the difficulties posed by fintech for IFR. It is essential that IFR rise to the challenge. With digital finance becoming the norm and the financial system expanding to include more varied firms, the future viability of IFR as a framework for global economic governance is at stake.
 Jack Ma Blasts Global Financial Regulators’ Curbs on Innovation, Bloomberg, Oct. 25, 2020, https://www.bloomberg.com/news/articles/2020-10-25/jack-ma-blasts-global-financial-regulators-curbs-on-innovation?sref=2qugYeNO.
 Hudson Lockett and Primrose Riordan, Ant Group IPO Faces At Least 6-month Delay after Beijing Intervention, Financial Times, Nov. 5, 2020, https://www.ft.com/content/35a95455-338a-4ede-bab3-fd0f098ac268.
 Yesha Yadav, Fintech & International Financial Regulation, 53 Vanderbilt Journal of Transnational Law 1109 (2020).
 Chris Brummer & Yesha Yadav, Fintech and the Innovation Trilemma, 107 Georgetown Law Journal 235 (2019).
 Brummer & Yadav, supra note 4.
 Chris Brummer, How International Financial Law Works (and How it Doesn’t), 99 Georgetown Law Journal 257 (2011).
 Queen of the Colony, What Ant Group’s IPO Says about the Future of Finance, Economist, Oct. 10, 2020, https://www.economist.com/briefing/2020/10/10/what-ant-groups-ipo-says-about-the-future-of-finance; CGAP, China: A Digital Payments Revolution, Sept. 2019, https://www.cgap.org/research/publication/china-digital-payments-revolution.
This post comes to us from Yesha Yadav, a professor, Chancellor Faculty Fellow, and associate dean at Vanderbilt Law School. It is based on her recent article, “Fintech and International Financial Regulation,” available here.