How digitised rules can accelerate digital transformation
This article is authored by Rhea Subramanya and Pete Furlong from ORF.
Contemporary systems of regulation do not work—for regulators, firms, or consumers—because they are outdated, time-consuming, costly, resource-intensive, and ineffective. Digitising rules can kickstart the modernisation of the rulemaking process and enable countries to create regulations that work. Regulatory technology (RegTech) applies technology to reframe rules as code instead of natural language. A key challenge with this technology is how to navigate increased technological reliance in an increasingly globalised economy. This is where the G20 is important. The G20 has already demonstrated interest in RegTech as recently as in 2020. Now, it can push efforts in its member countries by leveraging its position as a global convening ground to encourage national pilots, international collaboration, and multilateral implementation. Stakeholders across the board stand to gain. Regulators can identify the most egregious cases of non-compliance by learning from other jurisdictions, thus preventing a game of whack-a-mole. Firms can lower the increasingly high compliance costs of doing business and explore new areas of expansion. Consumers benefit from increased competition due to lower entry barriers.
In March 2023, Silicon Valley Bank and Signature Bank collapsed within 48 hours of each other, marking the second- and third-largest bank failures in American history. This raised numerous questions nationally and globally. Chief among them was whether the regulatory safeguards that the United States (US) put in place after the 2008 recession were sufficient. Could we have forecast and prevented these failures?
Rules are set to achieve certain outcomes, like efficiency and equality, and are a bridge between legislation or authority and their target audience. They are pervasive and impact every aspect of our lives, from how we fill prescriptions to the price we pay for produce. However, they have not adapted to our digital-first world. Rules have not kept up with changing technologies. The Tony Blair Institute for Global Change has previously written about the mismatch between 20th century rules and the 21st century firms that they purport to regulate. Global authorities are still battling over whether to regulate cryptocurrencies like bitcoin as security or as currency. This, despite the industry hitting trillion-dollar valuations. Regulators thus spend more time, money, and resources to audit and oversight firms. In the US, regulatory agency outlays grew steadily in the 60 years between 1960-2020 to reach $77.8 billion.
This increase in the cost of compliance has not resulted in a simultaneous increase in compliance itself. Most financial institutions in the US reported rising costs for financial crime compliance in 2022, which were projected to increase 12.8% from the previous year to reach $45.9 billion. That same year, the US also imposed the most penalties for anti-money laundering and other financial crimes globally; $37 billion compared to $11 billion across Europe, the Middle East, and Africa combined.
These regulatory failures have been accentuated by four recent trends: renewed regulatory interest in legacy industries due to market failure or exigent circumstances; the introduction of new technologies such as drones and Artificial Intelligence (AI); expansion into new jurisdictions, including geographic markets, product and demographic segments; and innovative business models like decentralised autonomous organisations and cryptocurrencies. Solving these regulatory failures will benefit regulators, industries, and consumers.
Regulators in fragmented regulatory markets like the US, which has federal- and state-level rules, or in smaller markets that have less leverage with firms can use regulatory technology (RegTech) to facilitate standardisation and collaboration across jurisdictions. Heavily regulated industries like finance and healthcare, or emerging and dynamic industries like AI can apply RegTech to conduct risk management, assess entry into new markets, horizon scan for risks, and reduce compliance costs. Arguably, end-users can benefit the most from successful regulation but have the most to lose when regulation fails. For instance, over a quarter of the $168 million spent to bail out banks in the United Kingdom in 2007-09 came from taxpayer funds.
How can we use rules and the rulemaking process to achieve our regulatory intent? One way forward is to lean into the technologies that we are regulating. Traditionally, rules are written in natural language and are open to interpretation. However, a new field of thought is emerging that attempts to communicate law as code.
The significant technological advancement of the past 50 years has not had an impact on regulation and compliance. Now, new tools bridge the gap between rulemaking and interpretation. They enable regulators to iterate faster and better communicate regulatory intent. Amongst them, RegTech, computational law, and rules-as-code leverage the power of technology to improve how we apply regulations. RegTech is the application of “innovative capabilities and techniques to help financial institutions improve their regulatory governance, reporting, compliance and risk management.” In 2021, $9.9 billion was invested in RegTech globally, roughly three times as much as in 2019.
The paper can be accessed by clicking here.
This article is authored by Rhea Subramanya and Pete Furlong from ORF.
