Dealing with Disruption: Emerging Approaches to Fintech Regulation

“Fintech” refers to a variety of digital assets, technologies, and infrastructure that deal with the operation of today’s financial markets. The regulation of this presents both legal and regulatory challenges. This article examines the regulatory responses to fintech disruption; specifically, the “experimentation” approach, the “incorporation” approach, and the “accommodation” approach. These approaches provide a baseline for further discussion and policy analysis in response to “Fintech.

Dealing with Disruption: Emerging Approaches to Fintech Regulation

“Fintech” refers to a variety of digital assets, technologies, and infrastructure that deal with the operation of today’s financial markets. The regulation of this presents both legal and regulatory challenges. This article examines the regulatory responses to fintech disruption; specifically, the “experimentation” approach, the “incorporation” approach, and the “accommodation” approach. These approaches provide a baseline for further discussion and policy analysis in response to “Fintech.

Ethical Finance as a Systemic Challenge: Risk, Culture, and Structure

This Article analyzes the principal themes in the newly reinvigorated public debate on the role of ethical norms and cultural factors in financial markets and identifies its key conceptual and normative limitations. It argues that the principal flaw in that debate is that it tends to ignore the critical role of systemic, structural factors in shaping individual firms\u27 internal cultural norms and attitudes toward legitimate business conduct. Reversing the causality assumption underlying the current academic and policy discourse on institutional culture, the Article discusses how broader reform measures seeking to alter the fundamental structure and dynamics of the financial market-on a macro- rather than micro- level-would profoundly, and far more effectively, alter individuals\u27 and firms\u27 normative choices and attitudes. The key to making finance ethically sound, therefore, is to make it structurally sound - and to do so on a systemic level

Wall Street as Community of Fate: Toward Financial Industry Self-Regulation

This Article proposes an approach to regulatory design that aims to create structural incentives for the emergence of a new model of embedded self-regulation in the financial industry. Without a doubt, the ideas laid out in this Article are more of a thought experiment than a polished set of fully developed regulatory proposals. These ideas and suggestions need a great deal of additional thought and a deeper, more granular and rigorous analysis of their potential consequences, benefits, and costs. Moreover, this Article explores only how to create conditions conducive to the emergence of comprehensive industry self-regulation that is embedded in the broader public interest and regulatory goals. It does not directly address what the ideal new model of financial industry self-regulation should look like or what mechanisms are needed to assure its effectiveness, legitimacy, and accountability. These critically important and highly complicated issues will require further research and analysis. The purpose of this Article is far more modest: to expand the boundaries of the debate on the future of global financial regulation and to start a serious discussion of all potential paths to reform, including the largely neglected and underexamined self-regulatory path

The Merchants of Wall Street: Banking, Commerce, and Commodities

This Article explores the legal, regulatory, policy, and theoretical aspects of an ongoing transformation of large U.S. banking organizations into global merchants of physical commodities and energy. In the absence of detailed and reliable information, it is difficult to draw definitive conclusions as to the social efficiency and desirability of allowing this transformation to continue. What we can already ascertain about U.S. financial institutions\u27 physical commodity assets and activities, however, raises potentially serious public policy concerns that must be addressed through a fully-informed public deliberation. Even if big U.S. FHCs were, in fact, to scale down their physical commodity operations either in response to current regulatory developments or as a temporary market adjustment, it would not obviate the need for such deliberation. Addressing these policy concerns in a timely, open, and publicly minded manner remains a task of the utmost importance, both as an economic matter and as a matter of democratic governance

The Quiet Metamorphosis: How Derivatives Changed the Business of Banking

In the wake of an unprecedented global financial crisis, one of the fundamental questions preoccupying policymakers and students of financial regulation worldwide is How did we get here? This Article uncovers and analyzes an important part of our recent regulatory history, which provides a key to understanding some of the deeper, hidden causes of the crisis but whose significance legal scholars have so far failed to appreciate. The Article examines interpretive letters issued by the Office of the Comptroller of the Currency (OCC), the primary regulator of federally chartered U.S. banks, interpreting the National Bank Act of 1863 to allow banks to trade and deal in derivatives, potentially complex and risky financial instruments once famously characterized by Warren Buffet as financial weapons of mass destruction. The Article argues that, between the mid-1980s and the end of 2008, the OCC utilized three principal tools of interpreting the statutory language to authorize bank derivatives activities: the look-through, the \u27functional equivalency, and, finally, the most radically expansive elastic definition approach. In these interpretive letters, the OCC articulated an excessively broad definition of the statutory concept of the business of banking to mean all types of financial intermediation and dealing in all forms of financial risk. The Article further argues that the OCC\u27s highly expansive interpretation of the business of banking in the context of bank derivatives activities served to undermine the integrity and efficacy of the U.S. system of bank regulation. Through the seemingly routine and often nontransparent administrative actions, the OCC effectively enabled large U.S. commercial banks to transform themselves from the traditionally conservative deposit-taking and lending institutions, whose safety and soundness were guarded through statutory and regulatory restrictions on potentially risky activities, into a new breed of financial superintermediaries, or wholesale dealers in pure financial risk. By indirectly removing most of the restrictions on activities of commercial banks, the OCC\u27s interpretive efforts had an ironic effect of prolonging the life of an obsolete statute and potentially impeding legislative reforms necessary to bring the regulatory framework in line with the changing business and risk profile of modern financial institutions

Ethical Finance as a Systemic Challenge: Risk, Culture, and Structure

This Article analyzes the principal themes in the newly reinvigorated public debate on the role of ethical norms and cultural factors in financial markets and identifies its key conceptual and normative limitations. It argues that the principal flaw in that debate is that it tends to ignore the critical role of systemic, structural factors in shaping individual firms\u27 internal cultural norms and attitudes toward legitimate business conduct. Reversing the causality assumption underlying the current academic and policy discourse on institutional culture, the Article discusses how broader reform measures seeking to alter the fundamental structure and dynamics of the financial market-on a macro- rather than micro- level-would profoundly, and far more effectively, alter individuals\u27 and firms\u27 normative choices and attitudes. The key to making finance ethically sound, therefore, is to make it structurally sound - and to do so on a systemic level

The Quiet Metamorphosis: How Derivatives Changed the Business of Banking

In the wake of an unprecedented global financial crisis, one of the fundamental questions preoccupying policymakers and students of financial regulation worldwide is How did we get here? This Article uncovers and analyzes an important part of our recent regulatory history, which provides a key to understanding some of the deeper, hidden causes of the crisis but whose significance legal scholars have so far failed to appreciate. The Article examines interpretive letters issued by the Office of the Comptroller of the Currency (OCC), the primary regulator of federally chartered U.S. banks, interpreting the National Bank Act of 1863 to allow banks to trade and deal in derivatives, potentially complex and risky financial instruments once famously characterized by Warren Buffet as financial weapons of mass destruction. The Article argues that, between the mid-1980s and the end of 2008, the OCC utilized three principal tools of interpreting the statutory language to authorize bank derivatives activities: the look-through, the \u27functional equivalency, and, finally, the most radically expansive elastic definition approach. In these interpretive letters, the OCC articulated an excessively broad definition of the statutory concept of the business of banking to mean all types of financial intermediation and dealing in all forms of financial risk. The Article further argues that the OCC\u27s highly expansive interpretation of the business of banking in the context of bank derivatives activities served to undermine the integrity and efficacy of the U.S. system of bank regulation. Through the seemingly routine and often nontransparent administrative actions, the OCC effectively enabled large U.S. commercial banks to transform themselves from the traditionally conservative deposit-taking and lending institutions, whose safety and soundness were guarded through statutory and regulatory restrictions on potentially risky activities, into a new breed of financial superintermediaries, or wholesale dealers in pure financial risk. By indirectly removing most of the restrictions on activities of commercial banks, the OCC\u27s interpretive efforts had an ironic effect of prolonging the life of an obsolete statute and potentially impeding legislative reforms necessary to bring the regulatory framework in line with the changing business and risk profile of modern financial institutions