Entries in regulation (4)


A potential new regulator for p2p lending companies

The new House financial reform bill has been described as a positive development for the p2p lending community and welcomed by industry leaders such as Prosper CEO Chris Larsen. The reason is the move of transfer of regulatory authority from the SEC to a new entity, the Consumer Financial Protection Agency (CFPA). Getting out of the clutches of the SEC probably is good news; so many nascent p2p marketplaces that initially seemed so promising, from Yadyap to People Capital  to Zopa, have either stalled or shuttered US operations in face of overwhelming regulatory requirements. Even those that survived – Prosper, Lending Club, and Pertuity Direct — were set back considerably at the time.

Yet, I’m concerned about a new entity receiving such broad sweeping power in the name of consumers and what it means for the p2p community. The Consumer Product Safety Commission, for example, has not looked with particularly friendly eyes upon the “innovation” of direct selling of handmade children’s items (rather than relying on mass production in China) and threatens to significantly curtail the operations of small sellers on Etsy. It is a sad day when the interest of big business overrides the best interests of the consumers in the name of protecting them.

Here’s to hoping that the CFPA, if it is in fact created (still a great uncertainty), will recognize the benefit of alternative credit models to consumers, rather than restricting access in fear of innovation and newness and of course, the lack of a massive lobbying effort to speak for the consumers who can now access loans at reasonable rates and the lenders who can make sound investments.


It's February 10. Not shut down yet...but stay vigilent!

Kid in a handknit hat. This type of product would have been subject to rigorous and expensive testing under the CPSIA.The government has made a wise and practical decision. The Consumer Product and Saftety Commission is granting 1 year stay for CPSIA testing requirements that were supposed to come into effect today. As we've stated, CPSIA is a heavy-handed, poorly conceived and economically disasterous product safety law rushed into passage following the Chinese leaded toy scandal.

Etsy artists and other handmade producers in the p2p e-commerce market are relieved that they are not shut out of business, but they still warn that the law has not been repealed, only delayed. Government fearmongering around toys threatens the vitality of a flourishing on-line p2p community. Stay vigilent. The CPSIA is bad for freedom and bad for the economy.

Flickr credit: Bockstark Knits


Perhaps Intrade isn’t doomed after all…

Barney Frank, Chairman of the House Financial Service Committee, told the Financial Times today that he will introduce a bill to establish a licensing and regulatory framework for online betting operators. Under Frank’s proposal, the Unlawful Internet Gambling Enforcement Act of 2006, the law that forced Tradesports to shut down and currently threatens all online sites where real money is exchanged, would be relaxed.

This is good news for prediction markets. Less regulation means that more prediction markets can operate with the component that market theory says is so important: financial incentive. Tradesports and IEM are so effective now in their predictive power because betters have real money at stake. SimExchange, Hollywood Stock Exchange, and others use a variety of other incentive mechanisms including public leaderboards, faux currency, and bragging rights, but none of these equal the power of cash.

This is also good news for those interested in freedom and commonsense policy. Barney rightly compares the stringent gambling penalties to those encountered during the age of prohibition. And if Maryland is going to grant waivers for slot machines, then doesn’t it make sense to allow betting that actually involves some brainpower and might influence decision making around something of consequence?


Regulation troubles mean slowdown for some markets

Alternative markets are being tra markets and the government is going to treat them as such. The prediction market Tradesports is now permanently shut down due to gambling laws, p2p lending market Prosper will be off-line for months dealing with the SEC, and the viability of craftsmen on Etsy and many other direct seller-consumer markets is threatened by legislation soon coming into effect and more legislation to come. What does this all mean?

Perhaps most importantly, the previous sky-is-the-limit land of innovation in markets is retracting. It took them some time to get started, but government lawyers are hard at work writing cease-and-desist letters and new laws that may spell doom for smaller or newer entrepreneurs in this field. Ventures that survived by operating in gray areas slightly out of reach of the regulators will find that they can hide no longer.

Government involvement in a sphere that was a demonstration of nearly pure capitalism is both regrettable and necessary.  The consensus that regulatory and policy failure contributed towards the current financial crisis and allowed the likes of Bernard Madoff to flourish required the SEC to explore hidden markets and register all sellers of securities. Recent tainted milk and leaded toy scandals in China naturally lead the government to require higher product standards for children’s products and cosmetics. 


Unfortunately for Prosper and other p2p lenders, the SEC’s actions have the most profound and immediate impact upon them, as they need to shut down (Lending Club is still open) while they spend hundreds of thousands of dollars to go through the bureaucratic process of licensing with the SEC (this is a lot of work for an organization whose average loan in 2008 was $6,047).

For small sellers of cosmetics and other homemade items, January may prove to be their last month in business as they are the forced to prove the safety of their items as dictated by the Consumer Product Safety Improvement Act (CPSIA) and the FDA Globalization Act of 2008. Due to immoral practices of Chinese manufacturers, small businesses will now need to spend thousands of dollars a year in paperwork in order to prove that their $2 homemade soaps do not contain high lead concentrations. Paradoxically, the large toy corporations who practice the outsoucing that is so feared by some American consumers will be most able to comply with the new regulations while the small crafters who make items at home using organic wool will be out of luck. The reaction by the Etsy community makes clear that many crafters will simply be forced to close down shop.

It was probably only a matter of time from the beginning for Tradesports. Their entire business model was based upon skirting gambling laws through technical operation out of Ireland, although the majority of their trades knowingly took place in the U.S. It will be interesting to see whether its non-sports affiliated site Intrade (the more innovative and interesting market I would argue) will last.

As many of the best entrepreneurial teams pushed ahead over the past several years with their alternative, and often quite persuasive, ideas, many free market enthusiasts (like myself) found it hard not to get swept up in the excitement and see these as the undenaiable future. Expectations are now revised down from their initial irrational exuberance. These upstarts have a number of hoops yet to pass through, but their promise is still bright.