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Engaging Regulators on Fintech Innovation

Engaging Regulators on Fintech Innovation

November 28, 2018

This article is co-authored by Duane Pozza and Megan Brown.

The future of tech regulation continues to be in flux, and lawmakers and regulators alike are asking for input from industry stakeholders on how it should evolve. On Tuesday, the U.S. Chamber of Commerce brought together leading voices from Congress, the Treasury Department, and regulatory agencies to discuss the regulatory landscape of financial technology. It was a wide-ranging and nuanced discussion that went far beyond fintech to explore how to broadly encourage beneficial technological innovation, from blockchain to data-driven markets to digital identity solutions.

Tech innovators face a complicated web of regulators with overlapping jurisdictions and interests. Monday’s event featured a number of government representatives, including Brent McIntosh, the General Counsel of the U.S. Department of the Treasury, Commissioner Hester Peirce from the Securities and Exchange Commission, Daniel Gorfine, the Director of LabCFTC and the Chief Innovation Officer at the Commodity Futures Trading Commission, and Paul Watkins, the Director of the Office of Innovation at the Bureau of Consumer Financial Protection. All emphasized the need to hear more from stakeholders about challenges to beneficial tech innovation. Here are just a few key themes from an extensive discussion: 

  • Enlist regulators to help deal with regulatory fragmentation. Tech innovators face potential compliance challenges at both the federal and state level – and a technology like blockchain can fall under different regulatory frameworks depending on the way it’s deployed. The Treasury Department’s recent report on fintech and innovation calls for greater coordination between federal and state financial regulators to harmonize regulatory requirements as much as possible, a view shared by other agencies. The BCFP also has proposed trial disclosure rules that could potentially allow more flexibility for innovators who participate in certain state-level regulatory sandbox programs. Agencies need to hear about the points of friction to coordinate effectively.

  • Make sure regulators understand technological trends and innovations before enforcement issues crop up. Just yesterday the CFTC released a primer on smart contracts using blockchain. It’s a timely example of an agency gathering information about a fast-developing application of technology, and using what it learns to educate stakeholders about potential benefits while also spotting potential issues. This kind of dialogue can help innovators understand what kind of regulatory or other legal risks are on the horizon – and avoid them. 

  • Understand that existing laws apply even when novel technology is involved – but alert regulators when regulations aren’t tech-neutral and are inhibiting innovation.  Plenty of existing laws – some more clear than others – govern consumer and investor protections when fintech and other technologies are introduced. But as Commissioner Peirce noted, analogizing to parenting, regulators should avoid “helicopter regulating.” And one key takeaway from the Treasury report is that regulation should be designed to avoid inhibiting consumer-friendly technological innovation. Regulators should be well-attuned to arguments that some outdated laws and regulations might single out and stifle responsible innovation.

And of course, Congress is ready and willing to weigh in too. Congressional Blockchain Caucus co-chairs Rep. Tom Emmer (R-MN) and Rep. Bill Foster (D-IL) emphasized that they were looking at blockchain-related issues in a bipartisan manner and both noted that blockchain has enormous potential even outside of financial transactions. They also invited stakeholders – including entrepreneurs – to educate members about technological trends and regulatory pressure points. 

Stay tuned to hear how regulatory priorities develop in the next year – including whether consensus emerges around regulatory simplification or sandboxes.  We expect continued government interest in innovators’ approaches, and companies should be mindful of future government scrutiny, whether of privacy and security practices or other potential impacts of new technology.

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