Unregulatable financial innovation is coming

The SEC is driving Binance, Coinbase, Solana, Polygon,… out of the USA. Revolut is not getting a banking licence in the UK, let alone crypto licences will be given. So the USA and the UK regulators have decided that they don’t want any financial innovations.

What will be the result of this? The short term result will be that fintechs and crypto companies will be starved from VC investments and many will die. Regulators will be able to claim they saved citizens from financial losses. Should Revolut be one of them, then we will see lawsuits against the UK regulators, because one thing is protecting citizens, another is provoking bank runs.

However the midterm effect will be totally different. Revolut not getting a UK and by extension US licence means the banking sector will be artificially shielded from digital competition and due to financial innovation being punished, will not launch many of them. This will mean more years of slow money transfers, expensive loans,…

By not bringing the global traceability of the blockchain into finance, more financial scandals with opaque offshore accounts, often involving politicians, will continue to happen. Most importantly whenever the next financial crisis hits we will see a series of banking failures of too big to fail banks that grew too much due to lack of competition. This will threaten the financial system and will require public money bailouts. Voters have accepted once their tax money was used to save “poor bankers”. They were promised it wouldn’t happen again. Regulators will not survive this happening again because politicians will blame them, and with reason.

Finally we will see the age of unregulatable financial innovation. Regulators who closed the door on financial innovation will signal that they are the problem and as such innovation will be focused on making them irrelevant. Crypto startups spend billions on lawyers and have nothing to show for it. So the next wave of DeFi will just focus on working around any regulators. This next crypto generation will put the customer at the heart of their offering, making it impossible for politicians to shut them down, even if they found a way. Decentralised side-loaded [=not going through app stores] mobile apps that have no central company behind them and cannot be stopped by making them illegal and offer global payments would be an example. Investment is likely going to come from criminals. Drug lords are seeing that physical money is disappearing fast and this is an enormous problem for the survival of their multi-billion business. Dropping some tens of millions on an unstoppable alternative payment system will be their answer. They have seen how Bitcoin accelerated their global wholesale business. Now they will want the same for their retail business. The Dark Web uses the Tor browser. We will see a similar type of Tor-like Wallet. Unfortunately there is no way to stop this, just like we haven't been able to stop the Dark Web or global drug trade. The solution is to offer better alternatives in the open market but that can only happen if regulators allow them.

Conclusion

If regulators want their jobs and citizens to be safe in the next decades then taking a firm stand today and banning any financial innovation will have the opposite effect. Being open to financial innovation will have a positive effect on the economy of the country and its citizens. The opposite is true as well. Some of the biggest companies in the world, e.g. Nokia, Toyota… have fought innovation and are losing or lost. Regulators with paper laws will need to learn that just like what is happening with inflation, their powers aren’t unlimited and when making mistakes can have big negative effects on their countries. Making innovators waste their time and money today, is the best way to be made irrelevant tomorrow. Collaboration with innovators tends to lead to better results for all then banning them...