Creating a Fair and Competitive Financial Environment
June 10, 2022 | 2 min read
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March 11, 2022 | 0 min read
By Lexi Hall, Director of Policy, MX
An executive order from the Biden administration urges regulators to craft rules for open financial networks. These networks support secure, fast data transfers; provide infrastructure for cutting-edge innovation; and put individuals — not institutions — in control of financial decision making.
We’re talking about last summer’s executive order that pressed the CFPB to finalize rulemaking on section 1033 of the Dodd-Frank Act, the legal basis for open banking. But yes, there’s a clear parallel to this week’s cryptocurrency directive from the White House. Both industries offer solutions to the same problem: legacy banking systems that are built on closed, inefficient networks that simply aren’t capable of supporting innovative solutions.
Cryptocurrency and broader decentralized finance (DeFi) solve this by rejecting traditional financial infrastructure, instead relying on distributed networks like smart contracts and blockchain. To bypass inefficiencies, they build new systems from the ground up.
Open banking solves the connectivity challenge through software intermediaries (APIs) that allow different applications from different providers (commonly, banks and fintechs) to communicate efficiently and more securely. They build new systems that bridge the gap.
Imagine you are trying to communicate with someone who speaks a different language. You could use hand gestures or images to try to get your point across, but it doesn’t always work and things get lost in translation. This is what happens when a legacy banking system tries to connect with a fintech application. You could also invent a brand new language to communicate directly with another person, just as a blockchain network exists outside of mainstream financial infrastructure. The third option would be to hire a translator to convert messages from one language to another, which is like an open banking API.
Open banking and DeFi share several similarities that make them appealing alternatives to legacy approaches. Both are:
One more similarity? Open banking and DeFi both lack clear rules of the road from Washington. This impedes innovation, makes America less competitive on the global stage, and robs consumers of affordable solutions. Both executive orders state this plainly. All contributors in the financial industry should support each other in seeking regulatory clarity on the path to a free and open financial system.
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