Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
House Subcommittee on Digital Commerce and Consumer Protection Holds Hearing to Discuss Consumer Fintech Needs
On June 8, the House Energy and Commerce Committee’s Subcommittee on Digital Commerce and Consumer Protection held a hearing to discuss financial products and services offered by the fintech industry to meet consumer needs. (See previous InfoBytes coverage here.) Committee Chairman Rep. Bob Latta (R-Ohio) opened the hearing asserting, “There are serious opportunities for companies to reach consumers with new products to help them create a rainy-day fund for the first time, pay their mortgage securely, rebuild their credit, budget and manage multiple income streams, and invest their earnings . . . Cybersecurity [specifically] is an ongoing challenge, and one the Energy and Commerce Committee is tackling head on.” The June 8 hearing included testimony and recommendations from the following witnesses:
- Ms. Jeanne Hogarth, Vice President at Center for Financial Services Innovation (CFSI) (statement). Hogarth stated that nearly three out of five American face financial health struggles and spoke about challenges fintech entrepreneurs may face when trying to help consumers, such as (i) “facilitat[ing] interstate and regulatory comity that enables consumers to access and use fintech products and service that promote financial health”; (ii) “support[ing] consumers’ access to their own data”; and (iii) “creat[ing] opportunities for pilot testing of both financial products and services and financial services regulations.” Hogath also detailed CFSI’s Financial Solutions Lab, which identifies financial health challenges faced by consumers and encourages companies to develop ways to address these issues.
- Mr. Javier Saade, Managing Director at Fenway Summer Ventures (statement). Saade—whose venture capital firm backs emerging fintech companies—stressed the importance of understanding and mitigating associated risks as financial innovation continues to expand. Growth is supported and encouraged, he noted, provided entrepreneurs understand that the “’fail fast and often’ approach, typical of tech-driven startups in other sectors, may not be well suited for the financial services industry.” Furthermore, Saade stated that because “nearly 30 million U.S. households either have no access to financial products or obtain products outside of the banking system . . . even modest strides in achieving economic inclusion present the single largest addressable opportunity in fintech.”
- Ms. Christina Tetreault, Staff Attorney at Consumer Union (statement). Tetreault, speaking on behalf of Consumer Union (the policy division of Consumer Reports), stated that while financial technology such as virtual currencies, digital cash, and distributed ledgers have the “potential to increase consumer access to safe financial products and return a measure of control to consumers,” safeguards devised between lawmakers and providers must be implemented with appropriate federal and state financial regulator oversight.
- Mr. Peter Van Valkenburgh, Research Director at Coin Center (statement). Coin Center is a non-profit organization, which focuses on “public policy ramifications of digital currencies and open blockchain networks.” Van Valkenburgh emphasized the need for Congress to (i) create a nationwide federal money transmission license as an alternative to “state by state licensing,” which, in his opinion, emphasizes the needs of individual states rather than addressing the health and risk profile as a whole; and (ii) create a federal safe harbor to “protect Americans developing open blockchain infrastructure.” Van Valkenburgh also encouraged the Office of the Comptroller of the Currency to establish federal “fintech charters” to promote a unified approach to regulating blockchain companies.
On June 13, the Financial Industry Regulatory Authority (FINRA) announced a new outreach initiative to improve its understanding of fintech innovations and how they impact the securities industry. The Innovation Outreach Initiative will consist of the following components:
- the launch of FINRA’s new webpage dedicated to fintech topics such as RegTech (covering compliance monitoring, fraud prevention, data management, and the identification and interpretation of regulations affecting the securities industry), artificial intelligence, and social media sentiment investing; and
- the creation of a cross-departmental team led by the Office of Emerging Regulatory Issues developed to, among other things, foster discussion on fintech developments, develop publications on fintech topics, and increase collaboration with domestic and international regulators.
Additionally, FINRA announced it will host a Blockchain Symposium in New York City on July 13 to create an opportunity for regulators and industry leaders to join together and discuss opportunities and challenges related to the use of Distributed Ledger Technology, also known as blockchain.
On June 8, Vermont Governor Phil Scott signed into law legislation (S. 135), which would, among other things, allow for broader business and legal application of blockchain technology to promote economic development. Additionally, S. 135 requires the Center for Legal Innovation at Vermont Law School, the Commissioner of Financial Regulation, the Secretary of Commerce and Community Development, and the Vermont Attorney General to prepare a joint report for the General Assembly on “findings and recommendations,” as well as policy proposals and “measurable goals and outcomes” concerning “potential opportunities and risks presented by developments in financial technology.” The new law follows the passage of House Bill 868 last June, which defined blockchain as “a mathematically secured, chronological, and decentralized consensus ledger or database,” and formally recognized blockchain-notarized documents as having legal bearing in a court of law.
As previously reported in InfoBytes, Arizona recently enacted a similar law (AZ H.B. 2417) recognizing blockchain signatures and smart contracts under state law.
On June 5, the governor of Nevada signed into law legislation (SB 398) that prohibits local governments from taxing or establishing restrictions on blockchain use—making it the first state to outlaw blockchain taxes. In addition to taxes, the new law prohibits requiring a license, permit, or certificate or any other condition on the use of blockchain. The bill also states that blockchain data can now be submitted in situations where the law requires a record to be in writing.
Washington State Enacts Law Defining Licensing Requirements for Transmitters of Money and Virtual Currency
On April 17, Washington Governor Jay Inslee signed into law a new piece of legislation (SSB 5031), which formally adds virtual currency to its money transmitter law. The legislation—introduced at the request of the Washington Department of Financial Institutions (DFI)—amends the definition of money transmission to include virtual currency, which is defined as “a digital representation of value used as a medium of exchange, a unit of account, or a store of value, but does not have legal tender status as recognized by the United States government.” The definition of virtual currency does not, however, include “the software or protocols governing the transfer of the digital representation of value or other uses of virtual distributed ledger systems to verify ownership or authenticity in a digital capacity when the virtual currency is not used as a medium of exchange.” The new law requires that applicants for a money transmitter license with business models that store virtual currency on behalf of others must provide a third-party security audit of all electronic information and data systems acceptable to DFI. Furthermore, licensees transmitting virtual currencies must now hold “like-kind virtual currencies” of the same volume as that held by the licensee but which is obligated to consumers in lieu of permissible investments. Among other disclosures, virtual currency licensees must disclose to consumers a schedule of fees and charges, whether the product or service is insured, that the transfer is irrevocable, and the licensee's liability for mistakes. Among other provisions, the law:
- outlines new bond requirements for online currency exchange licensees;
- expands supervisory powers allowing DFI to participate in joint or concurrent examinations with other state or federal agencies;
- mandates that licensees report all licensee branch locations and all authorized delegates to the nationwide licensing system within 30 days of the contractual agreement with the licensee to provide money services in the state;
- makes civil penalties $100 per violation per day for each day a violation is outstanding; and
- excludes from its definition of “money transmission” the “provision solely of connection services to the internet, telecommunications services, or network access; units of value that are issued in affinity or rewards programs that cannot be redeemed for either money or virtual currencies; and units of value that are used solely within online gaming platforms that have no market or application outside of the gaming platforms.”
The law goes into effect July 23, 2017.
On April 19, the U.S. Government Accountability Office (GAO) published a study examining four “subsectors” within the fintech industry—marketplace lenders, mobile payments, digital wealth management platforms, and distributed ledger technology (also known as blockchain)—and highlighting the types of products and services offered and how they are regulated. The report, Financial Technology – Information on Subsectors and Regulatory Oversight, is the first in a series of planned reports on fintech, following a request by Congress for a review of issues related to the industry. From July 2016 to April 2017, GAO reviewed agency publications, guidance, final rulemakings, initiatives, and enforcement actions, and also conducted interviews with representatives from the federal prudential regulators, state supervision agencies, and trade associations in order to compile the findings in the report. The report provides an overview of the technologies associated with each subsector, identifies primary users of the products and services, notes potential benefits and risks, and highlights industry trends and current regulations and oversight. Notably, GAO stated it made no recommendations in this report.
Arizona Enacts Laws Providing for Legal Recognition of Certain Electronic Signatures and Other Records
Last month, Arizona Governor Doug Ducey signed into law two pieces of legislation (S.B. 1084 and S.B. 1078), which formally grant legal recognition of electronic records and signatures under state law. Specifically, the new laws—each of which were passed unanimously by both houses of the Arizona legislature—formally acknowledge the legality of certain electronic records and signatures for the purpose of “satisfy[ing] any law that requires a record to be in writing or to be retained or both.” S.B. 1084 further details the requirements that must be satisfied when creating, sending, and accepting electronic signatures or records in order to qualify for legal recognition under the new law. As previously reported in InfoBytes, Arizona also recently enacted H.B. 2417, which recognized blockchain signatures and smart contracts under state law.
On March 29, Arizona Governor Doug Ducey signed H.B. 2417, which recognizes blockchain signatures and smart contracts under state law. H.B. 2417 amends Title 44, Chapter 26, of the Arizona Revised Statutes, and defines “blockchain technology” as “distributed ledger technology . . . protected with cryptography . . . [that] provides an uncensored truth.” The amendment, cleared by the Senate in a 28-1 vote on March 23, addresses signatures and records and states “a signature that is secured through blockchain technology is considered to be in an electronic form and to be an electronic signature.” Furthermore, the amendment also discusses the legality and enforceability of a smart contract, defined by the bill as an “event-driven program, with state, that runs on a distributed, decentralized, shared and replicated ledger . . . that can take custody over and instruct transfer of assets on that ledger.” Smart contracts, therefore, “may exist in commerce . . . and may not be denied legal effect, validity or enforceability,” thus presenting a new option of delivering information via blockchain.
On November 14, the SEC hosted its first Fintech Public Forum at its Washington, DC headquarters to discuss FinTech and to evaluate how the current regulatory environment can most effectively address innovation in the financial services industry. The event was divided into four panels, which covered the following topic areas: (i) the impact of recent innovation in investment advisory services; (ii) the impact of recent innovation on trading, settlement, and clearance activities; (iii) the impact of recent innovation in capital formation; and (iv) investor protection in the FinTech era. The forum was open to the public and is also available on the SEC’s website.
SEC Chair Mary Jo White opened the forum with introductory remarks. After explaining that “Fintech innovations have the potential to transform key parts of the securities industry,” Chair White highlighted several developments that are particularly important to the SEC, including: (i) automated investing advice; (ii) distributed ledger technology; and (iii) online marketplace lenders and crowdfunding portals. In describing the SEC’s role with respect to such innovations, Chair White noted that the Commission “must ensure new developments are not rushed to market or implemented in a way that facilitates a risk of fraud or harm to investors.” Ms. White explained that she had “directed the creation of a Fintech working group at the SEC earlier this year . . . to evaluate the emerging technologies,” and tasked the group to provide “specific, tailored recommendations . . . about what the SEC should do to provide clarity on existing regulatory requirements and help foster responsible innovation.” Chair White also clarified that the SEC was at an early stage in its outreach to investors, innovators and other stakeholders in new technologies, with the forum being an important part of SEC’s outreach.
SEC Commissioner Michael Piwowar, who championed the idea of the Commission hosting a Fintech public forum, also spoke to attendees. “I believe the commission should take the lead regulatory role in the Fintech space,” Piwowar said in prepared remarks. “Many of the firms pursuing Fintech are already SEC registrants, and others are providing services that are squarely within the commission’s oversight, such as investment advice and trading and settlement functionalities.” Piwowar emphasized the need for clarity in the sector, but added that the SEC is “uniquely situated to determine whether and how Fintech currently fits, and ultimately should fit, within a financial regulatory structure.”
Federal Reserve Board Member Recognizes Blockchain Technology's Potential; Warns of Associated Risks
On October 7, at the Institute of International Finance Annual Meeting Panel on Blockchain, Federal Reserve Board member Lael Brainard delivered a speech titled “Distributed Ledger Technology: Implications for Payments, Clearing, and Settlement.” Brainard acknowledged blockchain technology as possibly the “most significant development in many years in payments, clearing, and settlement” and outlined its potential “to transform the way financial market participants transfer, store, and maintain ownership records of digitized assets.” Brainard highlighted payment technology changes as a particular regulatory focus and emphasized the Federal Reserve’s “responsibilities for promoting the safety and efficiency of the payments and settlements systems; supervising financial institutions engaged in payments, clearing and settlement; and safeguarding financial stability.” The following potential benefits of blockchain technology are among those discussed in Brainard’s speech: (i) faster processing and reduced costs in cross-border payments and trade finance; (ii) transparency, reduced costs, and faster settlements within securities markets; and (iii) cryptography as a secure way of transmitting and storing data. Brainard cautioned that, notwithstanding the technology’s promise, certain risks associated with financial technological developments and innovation remain, particularly in the areas of settlement, operations, cybersecurity, money laundering, and terrorist financing. Brainard concluded by highlighting the Federal Reserve’s commitment to industry engagement as blockchain technology evolves, noting that stakeholders “will work together to foster socially beneficial innovation, while insisting that risks are thoroughly understood, managed, and controlled.”
- Daniel A. Bellovin to discuss “Perspectives on proposed private flood insurance” at a CoreLogic webinar
- Jonice Gray Tucker to discuss “How the new administration sets the tone for 2021” at the American Conference Institute Legal, Regulatory and Compliance Forum on Fintech & Emerging Payment Systems
- Sherry-Maria Safchuk to discuss UDAAP at an American Bar Association webinar
- Jeffrey P. Naimon to discuss "What to expect: The new administration and regulatory changes" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Jonice Gray Tucker to discuss “The future of fair lending” at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Steven R. vonBerg to discuss "LO comp challenges" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss "Major litigation" at the Mortgage Bankers Association Legal Issues and Regulatory Compliance Conference
- Michelle L. Rogers to discuss “The False Claims Act today” at the Federal Bar Association Qui Tam Section Roundtable