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Regulating New Financial Frontiers Featured Pattern: P1742 February 2022

Author: Guy Garrud (Send us feedback.)

Regulators are increasingly taking interest in microeconomic trends that affect individual consumers' financial activities.

Disruptions—and disruptive technologies in particular—typically see discussion in the context of large macroeconomic trends that affect entire industries; however, these disruptions also extend down to the microeconomic scale of individual user experiences. For example, cryptocurrencies have had disruptive impacts both on large financial institutions and on individual investors. Indeed, cryptocurrency-focused investment scams have become a major problem and cost victims $7.7 billion in cryptocurrency in 2021, according to estimates by blockchain-analytics firm Chainalysis (New York, New York).

Abstracts in this Pattern:

Policy makers are aware of the potential impacts of these microeconomic trends and may take steps in the near term to regulate some emerging microeconomic trends. For example, in December 2021, the US House Committee on Financial Services (Washington, DC) heard testimony from executives of eight major cryptocurrency companies, potentially with an eye toward future regulatory mechanisms. The US Consumer Financial Protection Bureau (Washington, DC) has also issued warnings around an emerging microeconomic trend: the proliferation of buy‑now, pay‑later (BNPL) schemes, which see looser regulation than do credit and various other types of payment options. The US government is not alone in looking at managing some of these emerging BNPL financial products. For example, both the UK Financial Conduct Authority (London, England) and the Australian Finance Industry Association (Sydney, Australia) have already made moves to subject BNPL products to stricter regulation.

Regulatory intervention is also viewable as an indicator that these new financial approaches are beginning to see absorption into the more mainstream world of finance, not only making them more broadly accessible but also reducing their potential as disruptive wild cards. For example, in early 2021, a group of organized retail investors caused significant disruption by investing heavily in shares of struggling retailer GameStop Corp. (Grapevine, Texas), forcing a so‑called short squeeze that affected major investment funds. A new exchange-traded fund (ETF) is now deliberately targeting similar meme stocks—stocks with a combination of high short interest and viral popularity online. This ETF is taking a previously disruptive investing element and seeking to harness it into a single more manageable investment fund.