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Wild East has its advantages

Wild East has its advantages: Over-regulation kills financial innovation

- Joe Zhang chats with Lendit's Dr. Tharon about fintech, P2P and regulation around the globe

Dr. Tharon: Joe, how do you see fintech's growth in the next few years?
Joe Zhang: In the West, fintech in general and P2P in particular face an almost-insurmountable challenge: over-regulation. Since the 2008 subprime crisis, Western regulators are competing to be the toughest cop in the room.

Dr. Tharon: What about China?
Zhang: China's regulatory regime for fintech is simply the best in the world, in my view. I mean it. Call it the "Wild East" if you will but, for the most part, Beijing wants the free market to regulate itself. Coded regulation is often vague and loosely enforced. This makes perfect sense for fintech, a new industry in a developing country. I often say, fly-by-night merchants must be allowed to roam the street. Ridiculous ideas and crazy business models must be allowed to see the light of day. Many citizens have lost money to unscrupulous P2P operators and "wealth managers". But so what? The amount of money they have lost in the stock market is hundreds and even thousands of times bigger. But will that stop them from piling into the next hot stock tip in a fit of stock market mania? Surely not! So let Ponzi schemes flourish. Losing money is the best financial education a person can receive. One learns from one's mistakes. We need it.

Dr Tharon: "Fool me once, shame on you. Fool me twice, shame on me!"
Zhang: Precisely. The governments must treat adult citizens as adults, first and foremost. There are fools in the crowd, but there are many more who are not fools. Many take the plunge into P2P and even Ponzi schemes with their eyes wide open. There are plenty of warnings, red flags, and cautionary tales around. But the minute the people lose money to a scam, they point fingers at the regulators, "it is all your fault!" Is that fair?

Dr Tharon: I hear that hundreds of P2P operators have shut down. How do you see that?
Zhang: Apart from a few, most of these operators have collapsed due to the "gravity" in the market, and without the regulators having to fire a single shot. The operators could not continue to lie. Unfortunately, many honest P2P operators and wealth managers have also failed, either because their business models were inherently flawed, or because they were poorly run. But on the whole, all these operators (including the crooks) have made a valuable contribution to society by fostering competition, and improved consumer welfare. We must thank them all.

Dr Tharon: Will the citizens in China, like those in the West, demand tighter regulation?
Zhang: Sure. But the so-called invisible hand of the market is the best regulator. Tight regulation hinders innovation, and harms competition. Moreover, adults must take responsibility for her own financial behaviour. In the West, the regulators have deprived consenting adults of financial thrills and the ability to take a risk with one's own money.

Dr. Tharon: You mean that the regulators should turn a blind eye on crooks?
Zhang: Absolutely. Crooks are a part of our financial eco-system. Over-regulation leads to many unintended consequences. Think about it: from the regulation of drugs and abortion to minimum wages and food prices, the governments around the world have done far more damage than good, despite decades of wasteful efforts and so much money spent. By the same token, official controls on interest rates and currency values have also proven to be hurtful to the very people they are designed to protect.

Dr. Tharon: You must come to the next Lendit conference to share your views.
Zhang: Delighted.



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