Washington, Fintech, and the Three Bears
A common criticism of Washington is that it moves painfully, sometimes mind-numbingly slowly. Though there are exceptions to the rule, these are almost always a consequence of some high-profile event that forces the government’s hand, such as passage of The Patriot Act in October 2001, just weeks after 9/11, or Congress’ declaration of War against Japan just one day after the attack on Pearl Harbor in December 1941. But even monumental events often fail to propel Washington above its comfortable, bureaucratic speed limit. For example: It wasn’t until 1933, three years after the stock market crash of 1929 in which investors lost $30b over two days (almost half a trillion dollars today adjusting for inflation), that Congress passed the Glass-Steagall Act to mandate a separation between commercial and investment banks.
Defenders of the establishment assert that good public policy is a product of a deliberative, rather than a reactionary, process. After all, good public policy should be devoid of any emotional input and should take into consideration the long-term implications it may have. Critics argue that Washington’s sluggishness can result in lightly or unregulated markets and consumer harm. While the government takes years making the sausage, inaction can significant consequences. But on fintech issues, Washington is pursuing the Goldilocks approach: not too fast but not too slow, the federal government is seeking involvement in the emerging fintech ecosystem that is “just right.”
In Congress, the relevant committees in the House and Senate have held hearings over the last year – including one just this week – to examine the fintech market and determine what statutory changes, if any, the Legislative Branch should consider to help innovative new products reach consumers and small business with the appropriate safeguards and protections. Several bills have been introduced in the Capitol that would make the government more responsive and adaptive to the ever-changing, technology-driven fintech landscape. Rep. Patrick McHenry (R-NC), for example, has introduced legislation that would create regulatory sandboxes at the federal financial agencies, through which firms could essentially beta test products and services in partnership with the applicable regulatory authority to identify the appropriate safeguards needed for that product or service, but in a faster-moving, less bureaucratic environment. The notion of regulatory sandboxes, which Congressman McHenry borrowed from other countries like the United Kingdom and Singapore, seeks to make historically inflexible and complex bureaucratic agencies adaptive and responsive to smaller, innovative firms who may not yet have relationships with the regulators that will one day oversee their activities. Congressman McHenry and Senator Cory Booker (D-NJ) have also introduced legislation that would require the Internal Revenue Service to digitize its income verification service, allowing consumers to verify their income for any number of use cases in seconds rather than days.
Even in the absence of these sandboxes, federal agencies have been increasingly solicitous of fintech’s perspectives. The Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), the Commodity Futures Trading Commission (CFTC), and the Federal Reserve Bank of San Francisco have each created innovation offices within their organizations. These offices within each agency are designed to both house the fintech policy expertise within each regulatory body and also to act as a liaison to the fintech community. At the OCC, the Office of Innovation is actively involved in the agency’s pursuit of a special-purpose fintech charter for technology companies that take deposits, make loans or deposit checks. In exchange for federal preemption from a patchwork of 50 different state laws, the OCC would impose on chartered fintech companies capital, liquidity, risk management, and community investment requirements similar to those imposed on traditional national banks. At the CFPB, Project Catalyst has been actively engaged with stakeholders on issues ranging from data access to marketplace lending. The CFTC has seeking to protect investors from manipulation of virtual currency markets, and the Federal Reserve Bank of San Francisco, given its proximity to Silicon Valley, is leading the Federal Reserve System’s thought leadership regarding the Board’s role in fintech regulation.
Work is similarly underway within the Trump administration. As part of its remit under an Executive Order President Trump signed in February 2017 directing the Department of Treasury to produce recommendations to improve the regulatory framework, Treasury is currently producing on a study that will focus on the fintech and nonbank financial services market. The expectation among policymakers in Washington – echoed repeatedly this week during a House Financial Services subcommittee hearing on fintech issues – is that the fintech policy principles including in the forthcoming Treasury study will serve as a kind of roadmap for regulators and legislators over the next several years. The Treasury Department is expected to release its study sometime in the first half of this year and additional Congressional hearings are sure to follow.
Any policy mandates of any significance, whether law or regulation, are seldom finalized in Washington in the absence of a methodical build up that foreshadows impending action. The Glass-Steagall Act was telegraphed by the Pecora Commission, sanctioned by the Senate more than a year before the Act became law, to study the crash of 1929 and make recommendations that would prevent a repeat. The Dodd-Frank Act, enacted after the financial crisis of 2008, was the subject of intense Congressional debate and public scrutiny during the two years between the crisis and its enactment in 2010. We are now in a similar period for the fintech market: though the final outcome is not entirely clear, Washington’s massive ship has now turned its rudder to begin the slow but steady turn towards heightened activity.