Japan wants to rollback regulations for financial technology startups - here's why it could be bad for the US

Screen Shot 2017 09 20 at 12.09.56 PMFrank ChaparroShinzō Abe (R), prime minister of Japan, and Tom Farley (L), the president of the NYSE.

NEW YORK — Japan’s push to attract innovative financial technology startups to the country could spell trouble for the US.

On Wednesday, Japan’s prime minister, Shinzō Abe, said the government is moving forward with a plan to rollback regulations on some fintech startups to help spur the development of emerging technology and drive growth in the country.

“When one wants to conduct a world-first trial, such as with new financial services made possible through fintech, it is impossible to predict the sort of regulations with which the trial will come into conflict,” Abe said at the New York Stock Exchange.

As such, Abe is pushing for a regulatory sandbox program that will allow fintechs, startups looking to automate or digitize aspects of financial services, to operate and scale without having to conform to existing regulations.

“We will make a sandbox in which it is possible for certain participants to conduct trial and error freely on new business for a certain period of time, without conforming to existing regulations,” Abe said.

Inaki Berengeur, the CEO of CoverWallet, a New York-based fintech company, told Business Insider that the proposed sandbox in Japan will help foster an entrepreneurial environment akin to the one found in Silicon Valley, in which innovators are free to try new things without fear of reprisal. This environment, however, is lacking in the US where companies are often required to subscribe to the same regulations as their much larger peers, according to Berengeur.

In most cases, Berengeur said, you need to start paying lawyers on day one. As such, entrepreneurs have to put off investing in the actual product and team. This creates a sort of catch-22 for some startups. Venture capital backers won’t give entrepreneurs money to build their product, but they can’t create a product because they don’t have the money to pay lawyers so they can get started. According to Berengeur, this has made financial technology a harder space to break into relative to the overall tech industry.

“This suppresses innovation,” he said.

Singapore, U.K. sandbox

Some companies, he said, are seeking greener pastures in Singapore and the UK, where a sandbox program has existed for some time.

“With them goes their ideas and the potential jobs and wealth those ideas could bring to fruition,” Berengeur said.

“The addition of Japan gives fintech companies another option,” Federuc Nze, founder and CEO of Oakam, a UK-based startup lender, told Business Insider.

Japan’s sandbox program could add further pressure to the US fintech industry. According to Mark Brnovich, Arizona’s attorney general and long-time advocate for regulatory reform in the financial services space, US fintech firms only received 33% of fintech venture capital spending. In total, the US captured 56% of total VC spending, however.

“This underperformance may have many causes, but our global competitors are certainly exploiting their regulatory advantage to get ahead in fintech,” Brnovich wrote.

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