Credit: Stephen Sauer
Ideas Made to Matter
5 predictions on the future of financial regulation
More than a decade after the financial crisis, the change continues to roil the regulatory landscape. Lawmakers are rolling back post-crisis regulations and taking a close look at new and emerging digital currencies, some from tech companies, all while keeping a watchful eye out for what might spark the next crisis.
In a recent Q&A session, Washington veterans Gary Gensler, Simon Johnson, and Laura Kodres explored these questions and more to better understand the challenges facing regulators and policymakers today.
Moderator Derek Leist, MBA ’21, quizzed the trio on the challenges we might face in the 2020s during the panel, which was sponsored by Mens et Manus America, an MIT initiative to explore social, political, and economic challenges in the U.S. Here are five takeaways from the session:
Don’t expect the next crisis to look like the last one
In addition to the Dodd-Frank Act of 2010, which overhauled the United States financial system in the wake of the crisis, Kodres said other changes made to stabilize the system include the implementation of the Financial Stability Oversight Council and the Office of Financial Research.
And yet each crisis brings “some new product, some new complexity, some new avenue for taking risk,” she said.
“There’s always a sense in which ‘this time it’s different,’” said Kodres, distinguished senior fellow of the Golub Center for Finance and Policy at MIT Sloan.
While collateralized debt obligations (CDOs) were the troublemaker during the last crisis, there are always new ways of taking leverage that we often don’t recognize, she said.
“There could be new assets that have bubbles — maybe digital currencies,” said Kodres, who previously worked with the International Monetary Fund as a division chief for the Global Financial Stability Division. “You’d be surprised how many people can’t articulate why it is that they’re investing in things or what they think the risks are.”
Banks will look a lot different a decade or two from now
From cryptocurrency to commission-free investing apps like Robinhood, financial technology is revolutionizing traditional banking models at a clipped pace.
“I would be surprised if in 10 or 20 years, banks existed in their current form,” said Johnson, an economics and entrepreneurship professor at MIT Sloan and a former member of the Financial Research Advisory Committee of the U.S. Treasury’s Office of Financial Research. “The names may exist, but I think the structure of bank services will really be quite different because of the way technology is impacting it.”
Being able to open a brokerage account on your mobile phone with “no fuss, no muss, none of all that crazy paperwork” on an app like Robinhood is proof of how fast the sector is changing, said Gensler, an MIT Sloan professor and former chairman of the U.S. Commodity Futures Trading Commission. “I think the 2020s period has a lot of opportunity,” he said.
Regulation is coming (slowly) to cryptocurrencies
Regulators are still sorting through how to classify and monitor bitcoin and other cryptocurrencies and will continue to do so in 2020.
Johnson said blockchain-based technologies have “presented a challenge to conventional systems” and “become a catalyst for change.” He noted that the Intercontinental Exchange recently introduced a one-day bitcoin future contract that is now overseen by the Commodities and Futures Trading Commission (CFTC), a “very interesting” move that shows the CFTC’s increased comfortability with regulation.
“I don’t see [regulators] wanting to block change,” Johnson said. “I see them wanting to get some change they feel will be helpful and not disruptive.”
Big tech has taken the lead over big banks in China
In China, online payment processors WeChat and Alipay have gained so much momentum that regulators are trying to play catchup.
“[Regulators have] not only changed the regulations three times, in six- and 12-month increments, but now the People’s Bank of China is trying to offer its own digital currency/electronic payments,” said Gensler, who also served as a former senior advisor to U.S. Senator Paul Sarbanes in writing the Sarbanes-Oxley Act. “I think it’s in response because the central bank there is saying that we maybe have to get ahead of big tech.”
In contrast, Kodres said, the U.S. has been less inclined to switch up its regulatory structure to account for changes in the tech space. “The U.S. has traditionally been of the approach that we’ll try to fit [fintech] into one of our regulatory boxes,” Kodres said. “I think the message here is there’s no one good model. It depends a little bit on your culture.”
Facebook’s Libra is a bellwether
Facebook’s planned rollout of Libra, its new digital currency, promises to be an “extremely controversial” development that will introduce plenty of complications, Johnson said.
“I'm not saying this is necessarily going to be successful, but it has absolutely gotten the attention of central banks because now we have a big tech company with a global reach with a number of active users about one quarter of humanity,” Johnson said. “They’ve got to start thinking more creatively about alternatives, including digital central banking.”
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