Tech Entrepreneurs to Face More Regulatory Scrutiny in 2020

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Tech Entrepreneurs to Face More Regulatory Scrutiny in 2020
Image credit: metamorworks | Getty Images
Guest Writer
Founder and CEO of A Life With Health
6 min read
Opinions expressed by Entrepreneur contributors are their own.

When Facebook CEO Mark Zuckerberg testified before Congress last month, he claimed that Libra as a global currency would solve major problems including banking the unbanked, lowering the costs of international payments and speeding up transactions. However, most politicians in the U.S. and abroad are resisting Facebook’s proposed payment system, calling it a threat to national sovereignty, among other grievances.

Only 17 percent of Americans trust the government in Washington, according to Pew Research Center. So who, in turn, do politicians (and their powerful lobbies) mistrust or oppose? Despite the benefits of their technology, the answer is disruptors and innovators. But the good news for compliance-minded entrepreneurs is that the Trump Administration has significantly deregulated the federal government, issuing 35-40 percent fewer new rules than its predecessors while eliminating decades-old regulations across industries. However, red tape still gets in the way of business owners and technologists.

The challenge for regulators is to consistently set rules whose benefits exceed the costs, especially since small businesses create the majority of of new jobs in America. Here are a few dynamics of today’s regulatory environment.

Related: An Entrepreneur's Guide to Compliance

Unclear and Contradictory Regulations

Complying with federal, state or local statutes isn’t always clearcut. An example is the $6 trillion food industry, for which federal, state and local agencies often set contradictory rules and code violations that are seemingly impossible to resolve. One real-world example that’ll leave you scratching your head: While the Food and Drug Administration (FDA) requires the doors of food establishments to swing inside, the Department of Agriculture requires those same doors to swing outside. One government, two rules. Each agency requires code violations to be fixed within 30 days, lest entrepreneurs face thousands of dollars in fines.

Bad rules put small businesses at a disadvantage because they don’t typically have the army of lawyers that Fortune 500 companies possess. “That 100 hours that I work per week, I estimate that I spend 36 [hours] on compliance issues alone,” says Joseph Semprevivo, president of Joseph’s Lite Cookies, in a PragerU video. “This keeps me away from activities that would help me grow my business.”

Since taking office, President Trump has ordered federal agencies to roll back two rules before issuing one new regulation. However, as the above example shows, legacy rules can still pose problems for businesses that want to be compliant.

Lowering Compliance Costs

The global regulation technology (RegTech) market is expected to grow to $12.3 billion by 2023, representing an annual growth rate of 23.5 percent, according to ResearchandMarkets.com. RegTech eases the burdens and costs of compliance in areas like money laundering, know-your-customer and data privacy.

Federal regulations cost Americans nearly $2 trillion annually, according to Competitive Enterprise Institute. When it comes to payments and transactions, tech ventures are working to lower compliance costs via smart-contracts technology, coding compliance directly into the technologies they build. Boston-based Algorand has provided technology that makes a number of financial exchanges more efficient and low cost while also providing features and partnerships that solve for compliance and regulation. This technology allows fintech and blockchain entrepreneurs to follow compliance requirements such as whitelists, geofencing, quarantine and force-transfers of assets by directly hard coding these elements into their projects. It's never been more critical to respect and respond to international regulation. And now, by leveraging this new technology, it's finally cheaper and easier. 

Adjusting to New Guidance

Facebook’s Libra is hardly alone. Governments around the world have been critical in response to the rise of digital currencies. Cryptocurrencies, digital exchanges and their ecosystems are viewed by most lawmakers as the lawless Wild West of finance. 

Where you’ll find growing regulatory certainty is in fiat-backed stablecoins, which are usually pegged 1:1 with the U.S. dollar and, in the unique case of San Francisco-based TrustToken, also British pounds, Hong Kong dollars, Canadian dollars and Australian dollars. To be able to offer these digital currencies compliantly in over 120 countries, TrustToken spent more than $1 million during the course of a year with a team of regulatory experts from the public and private sector alike, including Coinbase, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Though it was a huge investment, it’s par for the course among today’s fintech companies. According to the TrustToken team, companies aiming to build a similarly rigorous compliance regime today should expect to spend between $900,000-$2.75 million over a period of six-18 months.

It’s a high price to pay to print digital money -- or is it? Fintech entrepreneurs’s new focus on compliance is a direct response to regulatory scrutiny that has put blockchain projects in the same bucket as banks. Despite their innovations, neither technology nor distance is proving to be a good defense against the long arm of the law. Financial Crimes Enforcement Network (FinCEN) has imposed penalties ranging from $700,000 in fees on Ripple Labs to more than $100 million and jail time against BTC-e operator Alexander Vinnik.

Related: The Feds and States Are Embracing Privacy Law -- What That Means for Your Business

Creating Certainty in the Regulatory Environment

Like choosing the direction of swinging doors, finance regulators will need to pass appropriate measures that encourage innovation and make it easy for the ecosystem to comply with regulatory and reporting requirements. Here’s one good place to start: the classification of cryptocurrencies for tax purposes. The IRS classifies cryptos as property for tax purposes, which means owners must account for capital gains or losses on each and every transaction. The CFTC, however, views cryptos as commodities. 

Other agencies disagree. The SEC looks at cryptos as securities, while FinCen treats them as currencies. The Federal Reserve has issued statements that cryptocurrencies have negative consequences for the monetary system.

Companies will need to be smart and agile when navigating through a complex regulatory environment. RegTech is providing solutions that reduce the burden and costs of being compliant, but politicians and regulators will need to demonstrate common sense so their rules add up.

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