Can regulators and Fintechs find the right formula to innovate?


A pair of sessions held at the LendIt Fintech USA conference in New York paved the way for innovation.

The attention that fintech, from decentralized finance to cryptocurrency, is receiving from the public these days might only be matched by the scrutiny of regulators who see the need to establish policy for this new frontier. . From startups to incumbent financial institutions taking new approaches to managing and investing money, new layers of regulation are likely inevitable.

A fireside chat with the New York Department of Financial Services and a separate panel with stakeholders on reinventing fintech regulations provided insight into ongoing discussions with regulators. It’s not just that there are new forms of money – there are different dynamics at play in transactions, ownership, chain of custody, liability and how digital assets are valued.

For example, a murky tussle is underway over the stolen Bored Ape NFTs from comedian and actor Seth Green — NFTs he had planned to feature in a new TV show he created. Green sought legal recourse to regain control of NFTs, apparently taken by phishing scammers and then sold to a third party. The problem for Green is that there doesn’t appear to be a clear legal precedent for seeking immediate relief. These are just one type of emerging issues that financial regulators may have to weigh in the digital space.

Michele Alt, partner and co-founder of Klaros Group, moderated a panel that brought together Custodia Bank, the American Fintech Council and Figure Technologies to discuss “Reimagining Fintech Regulation to Foster Innovation”. Alt said regulation and innovation often seem mutually exclusive, especially after the recent cryptocurrency crash prompted calls for regulation, but there may be ways to navigate the needs of each side.

Yana Miles, general counsel and senior vice president, regulatory affairs at the American Fintech Council, said her organization is fine with regulation that doesn’t eliminate the positive aspects of this growing industry. “We want the regulations to be reasonable,” she said. “We believe in respecting the law.” Miles acknowledged the challenges regulators face in catching predatory players seeking to exploit the public interest in fintech. She also saw a need for patience given the pressure regulators received after failing to catch the latest subprime crisis before it went national.

Miles said innovative fintech lending offers a variety of benefits to the public, such as playing a role in sustainable access to credit which can be important in closing the wealth gap and underserved communities – who often don’t have access to brick-and-mortar banking systems. Finding ways to work with regulators, she said, can lead to fine-tuned policies that work with existing business models. “We’re not saying, ‘Don’t have rules,'” Miles said. “We want regulations. We want the bad actors out. We want illegal behavior to be eliminated, but do this in a way that doesn’t inadvertently exclude people. »

“It’s a really turbulent time from a regulatory standpoint,” said Ashley Harris, general counsel at Figure Technologies. “The collapse of Terra and now the fall of the crypto market highlights this.” She said regulators are trying to catch up while banks are trying to lean into this space. The USDF consortium, in which Ashley Harris is involved, is looking for a measured way for banks to get involved in the crypto ecosystem and create an alternative to the stablecoin that is minted by the bank and represents deposits, she said. declared. “In our opinion, this is the safest and most stable way for someone to transact on the blockchain.”

Mercurial changes to the crypto ecosystem have introduced challenges from a regulatory standpoint, Ashley Harris said, as regulators are in learning mode. “Every time something happens with crypto, there’s a pause and there’s a sort of reset,” she said. The fall in crypto markets prompted acting Comptroller of the Currency Michael Hsu to tread carefully, Ashley Harris said.

“At the same time, we have things like Biden’s executive order saying it’s really important for the United States to have a strong, highly regulated crypto market because it’s important for national security and competitiveness,” she said, describing in more detail the competing tensions that fintech stakeholders must navigate. Ashley Harris also described it as an opportunity to educate regulators and fill the knowledge gap.

There are differences between federal and state regulators, said Caitlin Long, CEO and founder of Custodia Bank, in terms of action and goals. Although state regulators tend to include economic development in their respective mission statements, the same may not be true at the national level, she said. “Federal regulators have a vested interest in shutting everything down, and state regulators actually have an incentive to work on new things.”

Adrienne Harris, Superintendent, New York State Department of Financial Services

Credit: Joao-Pierre S. Ruth

Offering her vision for the role the New York State Department of Financial Services could play in fintech innovation, Superintendent Adrienne Harris spoke during a fireside chat with Garry Reeder, CEO of the American Fintech Council.

“Given the changes we’ve seen in the industry, given the changes we’re seeing post-pandemic in a macro context, it gave me a broad perspective to think about,” said Adrienne Harris. “How to build a transparent, resilient and fair financial system through the prism of a future-oriented and data-driven model? »

Reeder asked for some perspective on New York’s history as a virtual currency regulator in light of the volatility seen in the space last month. Adrienne Harris said DFS has established a rigorous framework with anti-money laundering and cybersecurity standards similar to those of banks. For example, DFS requires each stablecoin to include reserve cash equivalents, third-party attestations of reserves, and other metrics. “The standards are incredibly high,” said Adrienne Harris.

Historically speaking, she said it has taken a long time for some new fintech players to be cleared by New York’s approval. “We have done a lot of work to increase the efficiency of the licensing process without sacrificing the regulatory rigor required by the state,” she said.

Adrienne Harris said her department also works closely with and brings experience to federal and international regulators, who are now beginning to look at these spaces.

Reeder asked what role fintech could play in mitigating climate change risk as it intersects with financial services. Adrienne Harris said DFS has already established climate guidelines for insurers and is in the process of doing the same for banks and mortgage lenders. “We really focus on risk communication and governance,” she said. “It’s really about data, security and robustness, consumer protection.”

The role that banks can play in climate change may affect certain demographic groups that may bear the brunt of ecological problems. “We know that low- and middle-income communities and communities of color are disproportionately affected by climate change,” said Adrienne Harris. This can be in addition to being underserved by financial institutions. “We really went to great lengths to say in this guidance that you cannot abdicate your responsibility for fair lending, equal access to credit, and a fair financial system that serves your climate goals. .”

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