There has been much talk about how new avenues in the financial world, such as crypto and fintech, might soon be impacted by more rigorous regulations. For example, the OCC’s Acting Comptroller recently explained in a speech that the organization is interested in regulating crypto: “Regulating stablecoin issuers as banks could also enable more innovation in crypto and make those innovations more durable.” While there may be some operational downsides to increased regulation, it is also important to understand that regulations can also help these new domains sustainably grow in the long term.

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A look at the history of traditional money and banking reveals how vital regulations can be and why fintech and crypto businesses should welcome regulations. Regulations concern crypto producers and investors., As one expert explains, “Bitcoin and crypto has responded negatively when the government is posturing in a way that is creating some kind of ban or higher level of effort for miners.”

How Regulations Built the Financial System

While creativity flourishes in unpredictable situations, solid foundations, particularly when it comes to money and trust, are also necessary to succeed. Before the Civil War, the United States money system was based on a patchwork of pieces of paper issued by several banks at various periods, all purported to represent the same United States dollar. These notes were valuable because they could be redeemed at the issuing bank for gold or silver. Naturally, not all banks were able to match such redemptions evenly, and as a result, various notes traded at various discounts to par. This opened the door to frauds — the stories of wildcat banks and unscrupulous bank note traders are extensively documented in historical literature. The report Wildcat Banking, Banking Panics, and Free Banking in the United States (pdf link) by Gerald. P. Dwyer Jr. gives a good outlook on the issues people faced before banking was regulated.

A look at the history of traditional money and banking reveals how vital regulations can be and why fintech and crypto businesses should welcome regulations. Click To Tweet

Merchants and consumers spent a tremendous amount of time researching the discount rates of various banknotes to do business and determine the worth of their dollar holdings. Bank runs and bank collapses were common occurrences. Congress approved the issuance of Demand Notes and United States Notes, most popularly referred to as greenbacks, in 1861 and 1862. Congress approved the National Currency Act the following year, creating the Office of the Comptroller of the Currency to supervise national banks’ greenback issuance and to maintain their safety and soundness.

The National Currency Act established the OCC, which was charged with the job of creating and managing a system of nationally chartered banks and a single national currency. The act was significantly amended in June 1864 and became known as the National Bank Act. Observe OCC

Building the Financial Network of the Future

In crypto-speak, these early 1860s congressional acts helped establish “layer 1” of the US economy by creating a completely interoperable and trustworthy currency. While it constrained inventors’ ability to innovate about banknotes, it permitted them to redirect their efforts elsewhere, to the actual economy – “layer 2.” The basic lesson appears to be applicable: vigorous, focused government regulation of money and banking may contribute to the establishment of a sound economic foundation conducive to healthy innovation and growth.

Similar regulations will help users focus on the said layer 2, instead of focusing purely on layer 1 factors that are so common in the world of fintech and cryptocurrencies.

Businesses in the fintech and crypto sphere shouldn’t be afraid of regulations – they should be preparing for said regulations. There are numerous publications and news releases by regulatory authorities which outline their thinking. The latest news releases show how the OCC is allowing banks to work in the crypto domain in a limited capacity, as well as the thoughts of regulators on the future of the crypto and fintech market.

Fintech and Crypto Businesses Need to Invest in Compliance

Fintech and crypto businesses need to start preparing to be regulated if they want to succeed when the regulations are announced and implemented. The easiest way to do so is to focus on developing an internal compliance framework that can be adapted to upcoming regulations. Regulatory compliance is a complicated domain and can seem daunting for many fintech and crypto experts with a technology background instead of a finance background. That is where compliance technology can bridge the gap between new financial models and traditional financial models.

Businesses in the crypto and fintech spheres are experts when it comes to technology due to the foundational role technology plays in both domains. Compliance management technology demystifies compliance by showing all the rules and limitations in effect. Instead of going through hundreds of documents trying to understand different regulations, the tech experts can let the compliance experts focus on compliance while the tech experts use the compliance platform for their activities.

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Businesses that already have a functioning compliance framework will be easily able to adapt to future regulations. Interested in seeing how your organization can enhance its regulatory compliance capabilities throughout the organization? Get in touch with our experts for a demonstration of what Predict360 can do for fintech operations.