Slow and Steady Wins the Race, Right?

FinTech Regulation in the US

Co-Written by Mick Emmett

Will regulation slow down FinTech?

Answer: It’s complicated.

A quick Google search of “fintech” and “regulation” brings up some bleak adjectives in the result headlines: “threatens,” “challenge,” “uncertain,” “complex,” etc. Given that the whole point of FinTech is to innovate, to do old things in a new and better way, to disrupt, and other such things that rile up regulators, it’s no wonder there’s tension. Lots of tension. And lots of money at stake as well: globally there was $17.4 billion in venture capital alone in 2016. So should you cash in your FinTech stocks, buy lots of Amazon stock (seeing as we’re just going to get all our goods and services through them anyway), and call it a day?

No. Well, at least not yet. Here’s why:

Though eyeing each other warily, FinTech companies and regulators in the US, Europe and Asia are engaging each other and even working together in some instances. This includes FinTech applications and platforms like blockchain and cryptocurrencies, robo-advisory services, cybersecurity, and others. There’s even a new FinTech offshoot called “RegTech” to categorize the new applications focused on regulations. Finally — something new for compliance professionals that’s not an indecipherable prospectus!

Depending on where in the world you look, the FinTech/regulation dance is either a fast-moving tango (Asia), an imperfect-but-hard-working-waltz (Europe), or an awkward two-step shuffle that is still figuring itself out (US).

We’ll tackle Europe and Asia in a separate article. As for the US…

Good Times…

Regulators aren’t always issuing regulations and filing lawsuits, it just seems that way. In many cases they’re actually trying to prevent problems and conflicts before they happen. Hell, one of them even stole the trendy tech term “labs” for a new venture. Yes — A regulatory agency.

One recent example of this trend is the US Commodity Futures Trading Commission (CFTC) announcing an innovation lab called LabCFTC specifically for regulatory collaboration with FinTech companies. Similar to financial regulation “sandboxes” that have sprung up in Europe, the LabCFTC is a genuine effort on the part of a regulatory body to engage with small companies and new tech — including blockchain. They are even pledging to modernize their own tech infrastructure to keep pace. Once more — a regulatory agency!

And then there’s the Office of the Comptroller of the Currency (OCC), part of the US Treasury Department. According to its mission, “The OCC charters, regulates, and supervises all national banks and federal savings associations as well as federal branches and agencies of foreign banks.” This is a huge piece to the FinTech/regulatory puzzle as bank charters have been a particularly thorny — and expensive — issue for FinTech companies. Banks, and especially the “big” banks, are sort of like members of an exclusive club with astronomical membership fees. Just getting a bank charter can cost into the millions of dollars when all is said and done. And you can probably imagine the intricate web of federal and state laws that govern financial institutions.

In the spirit of working with the FinTech industry and changing along with it and technology, the OCC proposed a new type of bank license, called a “special purpose national bank fintech charter (SPNB).” These licenses would basically allow FinTech companies to provide some of the services that traditional banks do, but without the onerous charter requirements. It could be a game-changer, though in the US recent developments have cast doubt as to whether the next Comptroller will support it or kill it. But worldwide the outlook is brighter, and FinTech is well on its way to being an unstoppable train no matter what the hurdles.

Beyond these two examples, there has also been real FinTech collaboration progress with the Financial Industry Regulatory Authority (FINRA) taking a hard look at the implications of blockchain (or “Distributed Ledger Technology,” as they call it), and even the SEC and Federal Reserve are making inquiries and getting educated.

Bad Times…

So, while there is some actual progress with FinTech and regulatory bodies, there is also a lot of confusion. The new administration has given mixed messages on a range of regulatory issues — not just confined to FinTech — and many of the initiatives started in the previous administration have stalled while the president and Congress try to put through their agenda. There’s also been a lot of talk about dropping or renegotiating trade agreements, which doesn’t exactly signal smooth economic sailing.

Then there are the big banks and financial services firms. They are not known for embracing change, especially the kind that doesn’t originate with them. And they really don’t like uncertainty. They also have a lot of lobbying power in Washington, DC and key states like New York and California. Sure — some of them, like JP Morgan Chase, are working on big FinTech projects and incorporating new tech into their operations and offerings, but they want to do it on their terms. So there’s that.

What’s ironic here is that the home of most of the FinTech companies and applications is no longer the recipient of most of the venture funding. China was #1 in 2016, with $7.7 billion of that $17.4 billion figure mentioned earlier (the US was at $6.2 billion). Uncertainty and confusion will do that to your country when their are billions on the line.

Taking the Long Way

The thinking here at Realm Labs is that the FinTech innovation wave is going to continue its sweep across the financial world. While much of that innovation will continue to come from the US, the biggest beneficiaries will be Asia (especially China) and to a lesser extent, Europe. The US will continue to have FinTech successes like robo-advising, but things will move slowly in fits and starts despite well-meaning and open-minded regulatory agencies like the CFTC. Many of the innovations will get bogged down at the federal level for months, or, more likely, years.

So yeah, it’s complicated. Stay tuned…