Although there are many things about the Chinese financial system not to like, its regulatory approach to fintech and BigTech shows that U.S. financial regulation is even more antediluvian than you think.  Earlier this week, the Chinese government announced that like-kind lending and payment services will come under like-kind capital regulation.  At about the same time, Square opened its new bank and, while the insured depository comes under regulatory-capital standards, the parent’s ability to back it along with its own capacity to handle its far-flung payment operations is to be wondered at.  Any firm which derives at least half its income from bitcoin trading may reasonably be said to have volatile earnings with significant vulnerability that warrant buffers at the parent level, not just at the bank in its high-flying bosom.  In a recent issues brief, FedFin said what we think the U.S. is likely to do this year about tech-finance regulation.  Here, I turn to what it should do.

When I spoke earlier this week at the Cato Institute about my new book, George Selgin asked me a great question on precisely this point.  He noted that the Bank of England has opened U.K. banking to start-up fintechs to force both innovation and competition, asking why the U.S. should not quickly do the same.  The answer, I think, is that the Bank of England shares the powers granted to the People’s Bank of China: authority to regulate nonbank financial companies, fintechs included.  Indeed, after a couple of years of laissez-faire fintech rules, the U.K. Financial Conduct Authority has thought better of it, instituting a series of new safety-and-soundness, consumer-protection, and capital rules across the fintech spectrum.

The Fed has no such power nor does any other federal financial regulator.  As a result, U.S. financial-innovation policy is a Wild West of opportunistic regulatory actions such as many recent ones by the OCC and equally ambitious state efforts.  Many of these are aimed at capturing the laurels of the nation’s most innovative regulator.  In the states, these accolades also come from the often illusory tax revenue and employment said to come with new state charters.  Few of these get-there-first wagon trains have their eye on the issues most critical to sustainable innovation: stability over the business cycle and consumer safeguards suitable for the broad base of American households and businesses.

Although there are important battles across the entire fintech and BigTech financial frontier, the most important of these will determine the future of the U.S. payment system.  Nothing is as critical to both true financial inclusion and systemic stability as a payment system that speeds funds from payors to payees with efficiency, transparency, certainty, and finality.  Still, the U.S. has opted for the worst possible approach to payment-system innovation: deferring decisions to a central bank which is even less able to innovate than its regulated charges.

The Fed has long assumed it could take its sweet time because no private entity other than, perhaps, The Clearing House, could challenge its omnipotence.  In essence, the Fed has counted on control over payments-system plumbing as the bulwark of U.S. stability instead of demanding the powers needed to govern a more diverse, innovative, inclusive, and effective system comprised of both banks and symmetrically-regulated nonbanks.

The reason this won’t work is straightforward and evident in almost every other critical part of the U.S. economy: technology facilitates decentralization and technology is wielded with awesome power by giant tech-platform companies.  As we have noted before, these have set their sights firmly on payments because every part of their money machine depends at its base on the payment system.  The more they control the payment system, the less they pay banks, the more profitable they are, and the more power they have – that’s the tech-platform positive feedback loop and it’s clearly humming.

A recent op-ed from ABA’s Rob Nichols well lays out the risks not just to his members, but also to the financial system posed by unregulated companies with far more power than any fintech has yet been able to muster.  In China, the solution to huge tech-platform companies is simple: nationalize them still further.  In the U.K. and EU, it’s less simple, but still straightforward: bring tech-platform companies also under stringent competition regulation, a solution also advocated by the head of the Bank for International Settlements.

However, in the U.S., competition regulation is a complex sword wielded generally only when mergers or acquisitions are contemplated, not when concentrated companies expand their reach.  And, even if Congress gives these antitrust regulators more power, none of this will reach to the critical question: how to ensure payment-system transparency, speed, certainty, finality, and inclusiveness.

For this, we need panoptic rules that govern major companies if they pose systemic risks to the U.S. financial infrastructure and govern activities and practices in symmetric ways no matter the provider.  Janet Yellen favors this approach.  Let’s see if her already over-full systemic-designation plate can turn to the payment system.  There’s little more important than that.