Is red tape holding back the financial tech industry in Canada?

The Bank of Canada is experimenting with "regulatory sandboxes" to promote innovation, but venture capitalist Ray Sharma says that regulation is holding Canada's financial technology industry back.

Bank of Canada says there's a ' role for the official sector to play' in the emerging world of fintech

When it comes to fintech, 'Toronto should be able to come back relatively quickly and be in a position of strength,' says venture capitalist Ray Sharma. (Reuters)

The Bank of Canada is experimenting with "regulatory sandboxes" to promote innovation, says its senior deputy governor Carolyn Wilkins. But venture capitalist Ray Sharma says that regulation is holding Canada's financial technology industry back.

Still, he says, we have the potential to be a major player. 

In 2008, when the financial crisis was spreading from country to country, one of the things that helped protect Canada was our regulatory system.

Bank of Canada senior deputy governor Carolyn Wilkins says Canada is trying to find a middle ground between rigid regulation and a total free for all when it comes to fintech. (Blair Gable/Reuters)

And while that regulation can provide some safety, it can also be restrictive — especially in the case in the high-tech industry, where innovation is a goal in itself.

One proposed idea is a middle ground between a rigid regulation and a total free-for-all: a regulatory sandbox.

"Many central banks and other authorities have put together a regulatory sandbox, which allows financial institutions or innovators to test out their ideas," Wilkins, who oversees the Bank's strategic planning and operations, told CBC's Spark.

Two sides of the FinTech coin

The central bank is currently is running a financial technology, or fintech, experiment called "Project Jasper," which allows banks to pay each other using Blockchain, the distributed-ledger technology that underlies Bitcoin.

"We are clearly on the cusp of a defining moment when it comes to fintech, just because of the scope with which financial innovation is occurring," Wilkins said.

"We think there's a role for the official sector to play in the development of this technology. Not to get in the way of this technology, but to make clear what the kinds of expectations and parameters might be there as these systems become more and more important, so that the innovators can just build them in right from the get-go."

Deputy Governor of the Bank of Canada, Carolyn Wilkins, on regulating the financial technology industry.

One of those innovators is Sharma, one of Canada's most influential venture capitalists. His investments include a fintech startup called Crowd Matrix.

"It's actually regulation that is holding back a lot of this innovation," Sharma said. 

While centres like London, England, have vibrant financial technology industries, Sharma says Canada, and especially Toronto, is well behind what it could be.

"We have, in the Greater Toronto Area, these academic institutions that are unique. We have an unbelievable talent base. We have the Toronto Bay Street community. The combination of all those things means that Toronto should be able to come back relatively quickly and be in a position of strength."

Ray Sharma is a venture capitalist at Extreme Venture Partners. He says Canada's regulation are holding the financial tech industry back. (Nora Young/CBC)

While regulation has helped shield Canada from dangers in the past, Ray says if this country continues to lag behind in fintech, it could affect our economy overall.

"We're in a unique period of time in human history when it comes to innovation. The quid pro quo of being behind in financial services is that I think it will affect our fundamental productivity," he said.

"It's amazing that the financial institutions have allowed the innovation to take this long to really take effect on them."

Venture Capitalist Ray Sharma on the potential of Canada's financial technology industry, and why rigid regulations are holding it back.