Fintech developments continue to unfold, with ongoing workshops and forums, Federal Deposit Insurance Corp. remarks from its chair, another dismissal in the challenge to the Office of the Comptroller of the Currency’s (OCC) proposal to issue fintech charters, and a new bill in the New York Senate that would regulate online lending.
The various actions demonstrate fintech’s impact on the financial services industry as a whole and the jockeying between various regulators for space on the playing field.
What happened
FTC—Mark your calendar: The Federal Trade Commission (FTC) announced it will host a workshop in June to examine scams involving cryptocurrencies. “Decrypting Cryptocurrency Scams” will “explore how scammers are exploiting public interest in cryptocurrencies such as Bitcoin and Litecoin” and will discuss ways to empower and protect consumers. Free and open to the public, the Chicago workshop will include law enforcement, consumer groups, research organizations and representatives from the private sector.
The agency noted that as interest in cryptocurrencies has grown, so has attention from scammers, with enforcement actions by regulators in turn. In March, the FTC filed suit against four individuals who allegedly promoted deceptive moneymaking schemes involving cryptocurrencies, promising consumers that they could earn large returns by paying with cryptocurrency to enroll in the scams.
NASAA Fintech Forum—Seeking its own place at the fintech table, the North American Securities Administrators Association (NASAA) held its own workshop on May 21, just before its annual Capital Formation Roundtable on May 22, a gathering of federal and state securities regulators, practitioners and academics in a closed-door forum on the efficacy of securities regulation and rule making (Manatt was a participant). The NASAA Fintech Forum included a panel discussion of “Who, Why and How Should Cryptocurrencies Be Regulated in a Tech World,” examining multiple potential regulatory frameworks for cryptocurrency and players including the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).
Jurisdiction questions continue. Jurisdiction is a tricky issue in the context of fintechs, and it remains unclear whether federal regulators (like the SEC or CFTC), the states or a third option have the authority to regulate the ecosystem. Although a New York federal court judge agreed with the CFTC that it had jurisdiction to regulate virtual currency markets earlier this year, questions persist in the constantly evolving industry. More broadly, the strong imposition of regulation in the latter half of 2017 and early 2018 has effectively halted the domestic ICO market and moved the lion’s share of deals offshore.
FDIC chimes in. In other fintech news, FDIC Chair Martin J. Gruenberg advocated, with regard to the role of technology in the business of banking, for a balanced approach that appreciates the positive impact tech can have on banking operations while remaining cognizant of the associated risk management challenges.
At the “Forum on the Use of Technology in the Business of Banking,” Gruenberg highlighted the benefits of technology, such as reduced transaction costs, greater operational efficiency, increased credit availability, better customer experiences and broader access to mainstream banking.
“At the same time, innovations bring new challenges for financial institutions and for the FDIC, some of which are difficult to anticipate,” he told attendees. “Cybersecurity, Bank Secrecy Act and anti-money laundering concerns, consumer protection issues, and privacy and data security are risk areas that all financial firms must manage, but these could be amplified as banks and others adopt or expand new technologies.”
To stay on top of these issues, the FDIC established the Emerging Technology Steering Committee, which in turn created two working groups.
“Through these efforts, we are monitoring trends, opportunities and risks in this area, and evaluating impacts on banking, general safety and soundness, deposit insurance, financial reporting, economic inclusion, and consumer protection,” Gruenberg said. “This work informs our supervisory strategy for responding to opportunities and risks presented by the use of emerging technologies to supervised institutions.”
More challenges to OCC fintech charter proposal. In another example of fintech jurisdictional disputes, the second legal challenge to the OCC’s proposal to issue fintech charters went the same way as the first, with a Washington, D.C., federal court tossing out the suit as unripe.
As we earlier reported, both the New York Department of Financial Services (DFS) and the Conference of State Bank Supervisors (CSBS) sued last year, accusing the OCC of going “far beyond” the authority granted to it by Congress.
“[T]he OCC has, through its latest effort, created, without express statutory authorization, a new charter for nonbank companies that would not be engaged in deposit-taking and, thus, would not carry on either the business of banking or any expressly authorized special purpose,” according to the CSBS complaint.
The OCC countered that any harm to state banking regulators was speculative and tenuous. U.S. District Judge Dabney L. Friedrich agreed. CSBS lacked standing to challenge the purported decision to issue charters to fintechs, the court said, as the OCC has not even finalized procedures for accepting applications, much less received an application or granted a charter.
“If the OCC had received 20 to 80 Fintech charter applications, then CSBS would have a much stronger argument for standing,” the court wrote. “But not a single Fintech has ever applied for a charter. Because it is not ‘certainly impending’ that this chain of events will take place and the present situation does not expose CSBS to a ‘substantial risk’ of harm, CSBS fails to establish injury in fact.”
For the same reasons, CSBS’ claims were neither constitutionally nor prudentially ripe, Judge Friedrich said, granting the OCC’s motion to dismiss the case. The irony, of course, is that with the dismissal, the OCC will be more free to consider charter applications, thus possibly defeating the ripeness objection.
New York legislation—Finally, the New York Senate is considering the possibility of additional fintech regulation with a bill that would provide for the chartering and regulating of Internet lending services corporations.
Senate Bill 8340 would task the DFS with issuing limited state charters to online lenders that “engage in the business of making loans over an internet or electronic platform” and then permit chartered entities to approve or deny consumer loan applications submitted through DFS-approved electronic means.
The measure would cap the principal amount to $25,000 for personal loans and $50,000 for commercial and business loans, along with interest rates authorized by law. Chartered online lenders would need to be able to demonstrate fiscal solvency with a minimum capital requirement of not less than $250,000. The bill is currently pending before the Senate Banks Committee. It is noteworthy that previous efforts to tighten licensing requirements in New York have failed in the past two years.
For more details on the FTC’s “Decrypting Cryptocurrency Scams,” click here.
To read the memorandum opinion in Conference of State Bank Supervisors v. Office of the Comptroller of the Currency, click here.
Why it matters
The overarching theme found in the cryptocurrency workshops, the FDIC chair’s remarks, the decision in the challenge to OCC fintech charters and the proposed New York legislation: turf wars. From the FTC and the CSBS to the OCC and New York State, both state and federal entities are trying to stake their claim in the fintech world and will continue to do so while the area remains unsettled.