Do We Even Need Regulations In A Tech-Driven Financial Sector?

In a world increasingly dominated by technological advances, it's tempting to believe that regulation is an outdated relic, a clunky impediment to the efficiency and freedom technology promises.

Recently, I was challenged by an audience member at an industry conference who voiced this belief, asserting that Indian regulators should simply step back, and not do what he claimed as their over-reach, as technology can address all necessary disintermediation and friction in financial systems.

This view, however, while understandable, is gravely flawed. Friction in financial regulations isn't a drawback; it need not be antagonistic, and it's a safeguard that ensures stability, accountability, and trust in the system.

Importantly, regulation is not about restraining progress or presuming regulators are holier-than-thou. Instead, regulation serves as a framework—one that draws boundaries for what can and cannot be done within a sector. Finance, by its very nature, hinges on trust. If left unregulated, the sector might become a potential minefield for public trust, vulnerable to the whims of miscreants who could wreak havoc on entire economies.

Even today, despite stringent regulations and robust oversight, financial crimes are still around. The very foundation of financial stability rests on the public's confidence in these systems, and regulators are pivotal in upholding this trust.

The notion that 'technology will solve everything' has become something of a modern myth. Yes, technology is a remarkable enabler; the finance industry has long been a leader in its adoption, using it to streamline operations, reduce costs, and expand reach. From faster transactions to accessibility enhancements, technology has truly reshaped the landscape. However, it is no panacea. Technology alone cannot address all systemic issues, nor can it completely replace the need for human judgment and oversight, and to even oversee what and how humans in those sector function.

This misplaced awe for technology obscures the fact that it is not disruption for disruption's sake that we need, but sustainable solutions that uphold societal stability. We are already witnessing the power of Big Tech to influence economies, societies, and even political outcomes. As governments struggle to contain the reach and opacity of social media platforms, we must consider the potential consequences of similarly unchecked forces in financial services. Without regulation, we risk giving way to a society where only the mightiest—often Big Tech players with vast resources—dictate how society functions.

This is not to dismiss the incredible potential of technology in finance. Disruptive innovations and tech-enabled finance have indeed opened doors we could scarcely imagine a decade ago. Yet, the suggestion that technology should operate without any form of oversight is a dangerous one. Allowing unregulated tech to proliferate in our financial systems is a nightmare scenario that we are barely prepared to comprehend. Regulatory oversight is not an adversarial force but a necessary layer of protection against the unpredictability of emerging technologies and potential failures within the systems they create.

Consider this: technology does not replace institutional resilience. In fact, one of the gravest risks we face in the coming years is how technologies like artificial intelligence and quantum computing might infiltrate our existing systems, challenging not just technical structures but the bedrock of societal trust. The social fabric thrives on stable, enduring trust, not volatile shifts between techno-optimism and the disenchantment that can follow when these systems fail. A world built solely on technological swings and disruptions risks eroding the foundational trust that underpins financial and social structures alike.

Some will argue that most individuals and institutions act in good faith, driven by constructive intent. Yet, if that were genuinely the case, we would have little need for regulators, governments, or supervisory bodies. This is an optimistic but utopian view, ignoring that, in reality, individual incentives can diverge from collective needs. Society has long required guardrails—whether in the form of governments, laws, or oversight mechanisms. Believing otherwise, no matter how well-intentioned, flirts with a far-left idealism that disregards human fallibility.

The trust deficit between industry and regulators must be reframed. A productive approach to this issue is to consider the purpose behind each player's existence within the broader financial ecosystem. If a firm's answer is 'to serve consumers', then it must work collaboratively with regulators and other stakeholders. Serving the public requires more than transactional efficiency; it demands trust, resilience, and robust governance. These qualities are precisely what regulatory bodies help uphold. And if a player's purpose is anything other than consumer-centricity, then its presence in the industry merits scrutiny, as it may lack alignment with both societal expectations and the regulatory environment.

When technology drastically reduces or even eliminates intermediaries in various types of value exchange, particularly in financial transactions, the role of the regulator becomes one of ensuring that these tech-driven systems operate with transparency, security, and fairness. Regulators provide oversight to prevent abuse, safeguard consumer rights, and uphold trust, especially as complex technology-driven transactions may introduce new risks and vulnerabilities that could impact the entire financial ecosystem.

It may be surprising, but technology does not always hold the answer. In certain contexts, it even becomes the problem. When technological systems fail or are exploited, they create new issues that are often difficult to anticipate or manage. Who, in these cases, will foresee the coming disruption? Who will act as the brake when technology overreaches?

Certainly, it is fair to expect financial regulators today to have a sophisticated understanding of technology. Critics who claim that Indian regulators display varying levels of tech (il)literacy and supervisory expertise are not entirely mistaken. A disparity exists among regulatory bodies, both in the extent of technology use and depth of understanding. But this is precisely where the Financial Stability and Development Council should play a crucial role in India, and be tasked with standardising technological capabilities across financial regulators and accelerating capacity-building initiatives.

India's financial services sector has immense potential to benefit from technology, but only within a regulatory framework that ensures fairness, transparency, and accountability. Regulatory bodies need to evolve, incorporating the latest technological insights, but they also must remain steadfast in their mission to safeguard the financial system. Far from obstructing progress, a resilient regulatory environment provides the stability needed for technology to truly flourish in a way that serves the greater good.

Technology should enhance our systems, not dominate them. Its role is to support and empower the human values that form the basis of finance—trust, fairness, and integrity. Regulation may not always be glamorous, but it is indispensable in fostering a system where technology serves humanity, rather than the other way around.

Dr. Srinath Sridharan is a policy researcher and corporate advisor.

Disclaimer: The views expressed here are those of the author, and do not necessarily represent the views of NDTV Profit or its editorial team.