In a recent “Conversations with Tyler” episode, guest Matt Levine was asked if American financial regulation was too “federalistic and too fragmented or not?” Mr. Levine’s answer was:
“In my experience, the existence of state financial regulation was only a weird footnote. But I think, in general, it is almost certainly too federalistic and fragmented. The example that was not core to my experience as a person in finance is insurance regulation.”
“It’s very clearly too state-based and fragmented and gameable, and I think that there are probably some securities cases that are similar. But insurance regulation is kind of the big one.”
“Then you could argue that corporate law should be federalized. I don’t think that there’s a huge case for that, just because in practice, corporate law is a creature of Delaware. It’s essentially there’s only one corporate law anyway.”
Mr. Levine is correct. Financial regulation is too fragmented and too ‘federalistic.’ While he didn’t mention the regulation of many non-bank fintech firms, he could have. Non-bank lenders and money transmitters face a state-by-state regulatory environment that is inefficient and unfair compared to their bank competitors. Fortunately, there are things that can be done to rectify this, and not all of them require removing the states from the picture.
As Mr. Levine points out, corporate law is largely a product of state law but is also largely uniform. This is because states recognize each other’s corporate law in a way they generally don’t for other laws. States recognizing each other’s lending and money transmission law could help make fintech regulation work. Furthermore, the federal government could treat fintechs similar state-chartered FDIC insured banks and grant export rights as a matter of federal law.
There are multiple, non-exclusive solutions to the question of how to rationalize fintech regulation. Hopefully, policymakers will pursue some combination of them.