Are regulators laying the groundwork for 21st century regulation?
Our recent Center for Financial Markets whitepaper, “FinTech: Building a 21st-Century Regulator’s Toolkit,” argued that policymakers should explore alternative regulatory tools, processes and approaches to facilitate responsible FinTech development. As if on cue, federal and state regulators recently announced that they are exploring such approaches in regulating FinTech and are rethinking regulatory rules and frameworks created many decades ago. A properly tailored approach to regulating FinTech can fulfill the objectives of ensuring consumer and investor protection without overly burdening innovative financial platforms and services.
For instance, state and federal regulators are seeking to implement a more right-sized regulatory environment based on the size and sophistication of virtual currency businesses instead of implementing a one-size-fits-all approach. Recent comments by New York State Superintendent Benjamin Lawsky attest to this. After New York became the first state to propose virtual currency regulations in July, Lawsky has since recognized the need for a scaled regulatory framework that aims to reduce the compliance burden on new and fledgling virtual currency enterprises.
In addition, the New York regulator has also stated its willingness to designate staff members to engage with and guide virtual currency startups in applying for licenses. This arrangement will also help educate regulators about the “the unique challenges smaller companies and startups face,” allowing the New York Department of Financial Services “to better tailor our regulatory requirements to the firms' particular situations.”
On the Federal level, Commodity Futures Trading Commissioner Mark Wetjen urged regulators last week to educate themselves on virtual currencies with the “ultimate goal” of creating a “flexible and rational regulatory framework” that can appropriately respond to incidents such as Mt. Gox – and thereby foster the consumer confidence necessary for virtual currencies to obtain legitimacy while remaining supportive of innovation.
Beyond regulation, the Consumer Financial Protection Bureau (CFPB) has created a program called Project Catalyst to support innovators offering consumer-friendly products and services. Launched in November 2012, Project Catalyst currently invites fledgling startups – BillGuard, Plastyc, and Simple, for instance – to pitch pilots or run trials with the CFPB staff to identify ways to improve the disclosure process and the regulation of innovative financial products or services without removing important consumer protections.
Again seeking to promote competition, the CFPB recently released a Notice of No-Action Letter Policy to help provide regulatory certainty to early-stage firms so they can continue to develop their product or service without the fear of potential CFPB enforcement. As stated in the proposal, the CFPB “has recognized that, in certain circumstances, some may perceive that the current regulatory framework may hinder the development of innovative financial products that promise substantial consumer benefit because, for example, existing laws and rules did not contemplate such products.”
Not all U.S. financial regulatory bodies are moving at the same speed, however. Getting the disparate elements of the federal and state financial regulatory structure to come together to facilitate FinTech innovation and development will not be an easy task. And while FinTech investment in the U.S. continues to outpace other nations (the U.S. received 83 percent of global FinTech investment in 2013), U.S. policymakers may want to look across the pond to the UK, where various government officials have publicly stated their support for the domestic FinTech industry, and the UK Financial Conduct Authority is actively developing a regulatory structure conducive to innovative financial products and services. If the U.S. wishes to remain the number one destination for FinTech investment and innovation, financial regulators will need to work across regulatory silos to develop a harmonized financial regulatory system built for the digital age.