Introduction
As financial technology continues to evolve, the need for a regulatory landscape that encourages and fosters innovation becomes an imperative. Big banks such as JPMorganChase have started piloting deposit tokens for institutional payments, demonstrating the growing prominence of digital assets in mainstream finance. However, for smaller fintechs, the existing regulatory structure can often act as a barrier rather than a bridge.
The Challenge for Small Fintechs
While large banks have the resources and existing relationships to navigate regulatory demands, smaller fintechs often find themselves struggling with slow processes, fragmented licensing, opaque approval criteria, and identical compliance reviews regardless of their size or risk profile. These issues can often lead to capital being drained before a product even hits the market, pushing potential innovation out of the system.
The Need for a Flexible Regulatory Framework
The current regulatory playbook, designed primarily for systemic banks, does not sufficiently accommodate the unique needs of experimental fintechs. This has resulted in a situation where rules that are meant to apply equally to all players in the industry often hit smaller fintechs harder. For instance, access to core payment and settlement rails is usually reserved for deposit-taking banks, leaving others dependent on intermediaries, and compliance obligations can consume a significant portion of a startup’s operating budget.
Fintechs Moving Overseas
Given these challenges, it is hardly surprising that fintechs are looking to jurisdictions like the U.K., Singapore, or Abu Dhabi, where structured sandboxes and tiered licensing regimes exist. These jurisdictions have been able to strike a balance, creating a regulatory environment that promotes stability without stifling progress and innovation.
What Can Regulators Do?
To avoid the migration of fintech innovation overseas, regulators need to adopt smarter tools. One such tool could be a national, coordinated fintech sandbox or pilot-license regime, similar to the U.K.’s Financial Conduct Authority’s model. Data from the FCA shows that companies in its sandbox have raised more capital and reached the market faster, demonstrating the potential benefits of this approach.
Adopting a Risk-Tiered Supervision
Another smart tool that regulators could use is adopting a risk-tiered supervision approach. This would involve scaling compliance requirements not to the size of the company, but to the level of risk it presents. Both Singapore’s Monetary Authority and Abu Dhabi’s ADGM have implemented similar models, showing that speed and safety can coexist when oversight is proportional.
Modernizing Collaboration
The final step for regulators is to modernize how banks and fintechs work together through a “regulatory API” — open-data standards, shared reporting formats, and pre-approved partnership templates. This would allow institutions to exchange data safely and collaborate more effectively.
Conclusion
Regulatory rules should not be a barrier to innovation. Policymakers need to act swiftly to build a coordinated sandbox and pilot-license regime, apply risk-tiered supervision, and establish a “regulatory API”. By doing so, they can ensure that both big banks and small fintechs have the space to innovate and grow, without compromising on stability or safety.
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