[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
OVERSEEING THE FINTECH REVOLUTION:
DOMESTIC AND INTERNATIONAL
PERSPECTIVES ON FINTECH REGULATIONS
=======================================================================
HEARING
BEFORE THE
TASK FORCE ON FINANCIAL TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
JUNE 25, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-36
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
39-497 PDF WASHINGTON : 2020
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California PETER T. KING, New York
GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri SEAN P. DUFFY, Wisconsin
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANN WAGNER, Missouri
BILL FOSTER, Illinois ANDY BARR, Kentucky
JOYCE BEATTY, Ohio SCOTT TIPTON, Colorado
DENNY HECK, Washington ROGER WILLIAMS, Texas
JUAN VARGAS, California FRENCH HILL, Arkansas
JOSH GOTTHEIMER, New Jersey TOM EMMER, Minnesota
VICENTE GONZALEZ, Texas LEE M. ZELDIN, New York
AL LAWSON, Florida BARRY LOUDERMILK, Georgia
MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia
RASHIDA TLAIB, Michigan WARREN DAVIDSON, Ohio
KATIE PORTER, California TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
BEN McADAMS, Utah JOHN ROSE, Tennessee
ALEXANDRIA OCASIO-CORTEZ, New York BRYAN STEIL, Wisconsin
JENNIFER WEXTON, Virginia LANCE GOODEN, Texas
STEPHEN F. LYNCH, Massachusetts DENVER RIGGLEMAN, Virginia
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
TASK FORCE ON FINANCIAL TECHNOLOGY
STEPHEN F. LYNCH, Massachusetts, Chairman
DAVID SCOTT, Georgia FRENCH HILL, Arkansas, Ranking
JOSH GOTTHEIMER, New Jersey Member
AL LAWSON, Florida BLAINE LUETKEMEYER, Missouri
CINDY AXNE, Iowa TOM EMMER, Minnesota,
BEN McADAMS, Utah WARREN DAVIDSON, Ohio
JENNIFER WEXTON, Virginia BRYAN STEIL, Wisconsin
C O N T E N T S
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Page
Hearing held on:
June 25, 2019................................................ 1
Appendix:
June 25, 2019................................................ 35
WITNESSES
Tuesday, June 25, 2019
Clark, Charles, Director, Department of Financial Institutions,
State of Washington, on behalf of the Conference of State Bank
Supervisors (CSBS)............................................. 9
Knickerbocker, Beth, Chief Innovation Officer, Office of the
Comptroller of the Currency (OCC).............................. 6
Szczepanik, Valerie A., Senior Advisor for Digital Assets and
Innovation, and Associate Director, Division of Corporation
Finance, U.S. Securities and Exchange Commission (SEC)......... 7
Watkins, Paul, Assistant Director, Office of Innovation, Consumer
Financial Protection Bureau (CFPB)............................. 5
Woolard, Christopher, Executive Director, Strategy and
Competition, UK Financial Conduct Authority (FCA).............. 10
APPENDIX
Prepared statements:
Clark, Charles............................................... 36
Knickerbocker, Beth.......................................... 54
Szczepanik, Valerie A........................................ 70
Watkins, Paul................................................ 77
Woolard, Christopher......................................... 81
Additional Material Submitted for the Record
Lynch, Hon. Stephen F.:
Written statement of the National Association of Federally-
Insured Credit Unions...................................... 95
Written statment of the FDIC................................. 97
OVERSEEING THE FINTECH REVOLUTION:
DOMESTIC AND INTERNATIONAL
PERSPECTIVES ON FINTECH REGULATIONS
----------
Tuesday, June 25, 2019
U.S. House of Representatives,
Task Force on Financial Technology,
Committee on Financial Services,
Washington, D.C.
The task force met, pursuant to notice, at 2:54 p.m., in
room 2128, Rayburn House Office Building, Hon. Stephen F. Lynch
[chairman of the task force] presiding.
Members present: Representatives Lynch, Scott, Gottheimer,
Lawson, Axne, McAdams; Hill, Luetkemeyer, Emmer, Davidson, and
Steil.
Ex officio present: Representative McHenry.
Also present: Representatives Himes, Porter, and
Hollingsworth.
Chairman Lynch. The Task Force on Financial Technology will
come to order.
Without objection, the Chair is authorized to declare a
recess of the task force at any time.
Also, without objection, members of the full Financial
Services Committee who are not members of this task force are
authorized to participate in today's hearing, consistent with
the committee's practice.
Today's hearing is entitled, ``Overseeing the Fintech
Revolution: Domestic and International Perspectives on Fintech
Regulations.
I now recognize myself for 4 minutes to give an opening
statement, and I expect the Full Committee Chair to join us
shortly.
This afternoon, we begin the work of the Financial
Technology Task Force, the first body to examine in depth how
advancements in financial technology are transforming the
relationship between the financial services industry and the
consumer. A change in financial services is usually driven by a
crisis, like we saw in 2008, and during the Depression.
However, this change is not driven by crisis, but by consumer
preference. It is driven by changes in technology, available to
nearly every consumer.
However, the velocity of this change is immense and
unprecedented, and we need to encourage responsible innovation.
Today, we will receive testimony on how regulators are seeking
to harness the potential benefits and mitigate the potential
risks of the fintech revolution. Most Members of Congress grew
up in a traditional financial world that required us to use a
local brick-and-mortar branch and build a relationship with a
local banker. That, unfortunately, is no longer the case.
Today, someone who wants to open a bank account, apply for a
loan, or send money to friends can do all of those things
without leaving home.
Many of the innovations can improve consumer well-being.
Digital lending can expand the availability of credit to
underserved populations and lower the cost of lending for
consumers. Advancements in payments technology can increase the
speed and convenience of payments for both people and
institutions. Open banking can give consumers better control
over their own financial situation.
However, these technological advancements come with risks.
Without proper oversight, algorithmic qualifiers can turn
alternative data into alternative forms of discrimination, and
eliminating the human element in all digital applications can
lead to confusion about the actual costs of a product.
Fintech covers many activities, but each new advancement
relies on an ever-increasing amount of personal data to be
collected, stored, and analyzed. Companies are vacuuming up
personal information with questionable levels of consumer
consent or data protection. Consumers are being asked to agree
to unintelligible privacy policies by companies with little or
no track record for securing that sensitive financial
information. Consumers often are not told, or are deliberately
misled about how their data is collected, used, shared, or
sold. Financial services regulators are the tip of the sphere
in the fight to protect Americans from bad actors in financial
services.
Our consumers' faith in the financial system invariably
relies on the ability of our regulators to effectively monitor
and guide the entities in their jurisdiction. However, recent
crises have badly shaken that faith, and report after report
has emerged of banks exploiting the personal information of
their own customers and abusing the trust that underpins the
success of our U.S. financial system.
With this in mind, I look forward to hearing about how we
might address the new landscape of financial services, the
benefits and risks that you see, and what Congress should be
focused on as we move forward.
With that, I would like to recognize my friend and
colleague, the ranking member of the task force, Mr. Hill of
Arkansas, for 5 minutes for an opening statement.
Mr. Hill. Thank you, Mr. Chairman, I appreciate you
convening this hearing today. I want to begin by thanking
Chairwoman Waters and Ranking Member McHenry for their
collaboration in creating this important task force. I want to
thank our regulatory friends for being here for this important
first panel. I look forward to working with my colleagues on
both sides of the aisle, as well as the regulatory agencies to
find a way to promote and foster innovation for both disruptive
innovators and incumbent financial services players, large and
small, over the next few months.
In my view, our Fintech Task Force can enhance the
understanding of this rapidly developing use of big data and
data analytics. This task force should be focused on the
American consumer as the ultimate beneficiary. Along the way,
we will explore ways and means of customer acquisition and
better service, and enhancing financial services to the
underbanked, all while making compliance less costly and more
effective. When Congress passed the Dodd-Frank Act in response
to the 2008 financial crisis, it included thoughtful, necessary
provisions for the American consumer, but it also had
unintended penalties as a consequence of shifting critical,
traditional banking services and functions to nonbanking
players.
Bank credit availability has suffered since the crisis, and
many nonbank financial institutions like private equity firms,
SBICs, BDCs, and fintech companies have grown, and their market
share has expanded. Fintech companies, in particular, have seen
significant evolvement over the past few years. These companies
have appeared to be at odds with financial institutions'
incumbents as both are fighting for market share and business.
However, in recent years, both have realized the value each
brings to the other and have started developing mutually
beneficial partnerships. Today, we hear much more about
collaboration, rather than disruption. I want to encourage the
regulators to promote these partnerships in innovation, while
finding ways to reduce the cost of regulatory compliance.
Specifically, I am interested in ways that the third-party
vendor due diligence process is handled. As a former community
bank executive, I understand the regulatory burdens associated
with onboarding a new vendor and I hope that the agencies can
work together to enhance this process.
That being said, I understand the importance of banks
maintaining a robust level of safety and soundness. With
technology constantly changing, banks must ensure that they are
protecting their customers' privacy against both cyber hacks
and other threats. I am interested in hearing your thoughts as
it relates to the use of application programming interfaces
(APIs), and other ways that banks are using technology to
enhance this safety.
A year ago, the U.S. Treasury issued their very informative
fintech report that frequently commends the use of APIs to
provide a more secure method of data exchange. I would
recommend to the members of this committee that they read this
financial innovation report as a foundation for their work on
the task force. It provides a great overview of the many topics
that we will be discussing in the task force related to
regulatory sandboxes, necessary harmonization, open banking,
and bank charters, just to name a few.
This hearing will not only serve as a way for the task
force members to learn about the ways and means that the
regulatory agencies are promoting innovation, but also a way
for you to learn the best practices from each other.
In my district, we house two accelerator programs at our
Venture Center. The two programs are: Fidelity Information
Systems, a Fortune 500 company founded 50 years ago, that
serves as a community bank core processor; and last year, the
Independent Community Bankers of America (ICBA) selected Little
Rock's Venture Center to host its program, which focuses on
developing fintech opportunities for community bank
partnerships.
During the ICBA program, representatives from the
prudential regulators traveled to Little Rock to discuss ways
they could learn from this innovation center. This is a great
example of how best to collaborate by having all of the players
in the same room. We need to ensure these dialogues continue,
which will ultimately allow for better compliance efficiencies,
benefits to bank consumers, and help services reach the
underserved community.
And, with that, I yield the balance of my time to the
ranking member of the full Financial Services Committee, Mr.
McHenry, for an opening statement.
Mr. McHenry. Thank you, Mr. Hill, and I thank you for your
leadership on this important issue of financial innovation. I
want to also thank Chairwoman Waters for creating this task
force and the AI Task Force.
This is an area where she and I have legislated in the past
and hope to legislate in the future. We need to build a broader
consensus on this committee and across jurisdictions about how
we lean into this new era of technology: the computing power,
the quantum computing revolution; and the great opportunities
that are happening with the innovation economy more broadly.
And I am encouraged that we can actually have, not a
nonideological discussion, but a discussion where ideology is
secondary to the nature of the reforms and the technology that
is coming onboard. So, I think we can build great consensus
through committees like this and the AI Task Force, and that
can help drive good bipartisan legislation through the process.
And so I thank you, Mr. Hill, for yielding, and I thank
you, Chairman Lynch, for your leadership, especially in such a
hotbed of innovation as you represent in the great State of
Massachusetts. I yield back.
Chairman Lynch. The gentleman yields back.
Today, we first welcome the testimony of Paul Watkins, who
is the Director of the Office of Innovation at the Consumer
Financial Protection Bureau. Second, Beth Knickerbocker, who is
the Chief Innovation Officer at the Office of the Comptroller
of the Currency.
Third, Valerie Szczepanik--is that correct?
Ms. Szczepanik. ``Szczepanik.''
Chairman Lynch. What is it?
Ms. Szczepanik. ``Szczepanik.''
Chairman Lynch. ``Szczepanik.'' A lot of points in
Scrabble, I will tell you that. She is the Associate Director
of the Division of Corporation Finance and Senior Adviser for
Digital Assets and Innovation for the Securities and Exchange
Commission.
Fourth, Charles Clark, who is the Director of the
Department of Financial Institutions for the State of
Washington.
And finally, making the trip all the way from London, we
are joined by Christopher Woolard, the Director of Strategy and
Competition for the United Kingdom's Financial Conduct
Authority (FCA).
The witnesses are reminded that your oral testimony will be
limited to 5 minutes.
And without objection, your written statements will be made
a part of the record.
Mr. Watkins, you are now recognized for 5 minutes.
STATEMENT OF PAUL WATKINS, ASSISTANT DIRECTOR, OFFICE OF
INNOVATION, CONSUMER FINANCIAL PROTECTION BUREAU (CFPB)
Mr. Watkins. Thank you so much, Mr. Chairman, and good
afternoon, Chairman Lynch, Ranking Member Hill, and task force
members. I am Paul Watkins, the Assistant Director for the
Bureau's Office of Innovation. Previously, I was the chief
counsel of the Civil Litigation Division in the Arizona Office
of the Attorney General. There, I managed the State's
litigation in areas such as consumer fraud and civil rights. I
also designed the State's fintech sandbox.
Today, I am pleased to share what the Bureau is doing in
this area. The Bureau created the Office of Innovation in July
2018 to facilitate consumer beneficial innovation. We believe
innovation can contribute to the Bureau's statutory purposes by
increasing fairness, transparency, competition, and consumer
access within financial services. We are working to carry this
out through updating the Bureau's innovation policies and
creating regulatory sandboxes designed to address regulatory
uncertainty that may impede innovation, collaborating with
other Federal, State, and global regulators and engaging with
stakeholders on innovation issues.
We proposed revisions to the Bureau's existing trial
disclosure program in September 2018 and no-action letter
program in December of 2018. Those proposed revisions aim to
increase the policy's utilization. They generally would
streamline the application and review process, focusing on
potential risks to consumers. The revisions would also provide
increased clarity for recipients.
Also, in December 2018, the Bureau proposed the product
sandbox policy. This policy would require participants to share
data with the Bureau concerning the products offered, including
potential risks to consumers. Similar to the Bureau's current
trial disclosure policy, participants would receive safe-harbor
protection from liability for certain aspects of the product
being tested. Each proposed policy contains provisions designed
to deter harm to consumers. We have put the 3 proposals out for
public comment and have received about 60 written responses.
Each of our proposed policies states that the Bureau will
look to coordinate with other regulators. Internationally, the
Bureau, in August 2018, joined the Global Financial Innovation
Network (GFIN), an organization of regulatory agencies working
to support financial innovation and regulatory best practices.
In January 2019, the Bureau became a coordinating member of
GFIN.
Since the Office of Innovation was established, I and other
members of the office have participated in over a hundred
innovation-related meetings and events and have interacted with
fintechs, financial institutions, consumer advocacy groups, and
Federal, State, and international regulators. Other members of
the Bureau have, likewise, participated in such events and
meetings, including Bureau leadership, senior officials, and
staff. Through these engagements, the Bureau is building a
significant knowledge base about innovation in the markets for
financial services. Thank you for this opportunity to testify,
and I look forward to your questions.
[The prepared statement of Mr. Watkins can be found on page
77 of the appendix.]
Chairman Lynch. Thank you.
Ms. Knickerbocker, you are now recognized for 5 minutes.
STATEMENT OF BETH KNICKERBOCKER, CHIEF INNOVATION OFFICER,
OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)
Ms. Knickerbocker. Chairman Lynch, Ranking Member Hill, and
members of the Task Force on Financial Technology, I am pleased
to appear before you to discuss the initiatives at the OCC to
support responsible innovation. Responsible innovation enables
a vibrant banking system to meet the evolving needs of
consumers, businesses, and communities. It promotes economic
opportunity and job creation. When done responsibly, innovation
increases consumer choice, improves the delivery of products
and services, enhances bank operations, and enables financial
institutions, including small and rural banks, to more
effectively meet the needs of their customers and communities.
Moreover, responsible innovation expands services to
unbanked and underbanked consumers and promotes financial
inclusion. Innovation has significantly changed how consumers
engage with their financial service providers. How banks
innovate is also evolving, particularly in the area of bank and
fintech partnerships. The OCC supports partnerships between
banks and fintech companies that are safe and sound and meet
the evolving needs of consumers, businesses, and communities.
The OCC created the Office of Innovation to implement our
responsible innovation framework. As Chief Innovation Officer,
I head the Office's work to regularly conduct outreach and
provide technical assistance to banks, fintechs, and other
stakeholders through a variety of channels. These include
office hours, listening sessions, and participation in hundreds
of meetings, calls, conferences, and events. My office also
works to advance awareness and training for OCC staff on
emerging trends to foster a culture that is receptive to
responsible innovation and to develop staff competencies.
In addition, we conduct research to assess the financial
services landscape to inform OCC policy and supervisory
actions.
Finally, we put great emphasis on maintaining open channels
of communication and information-sharing, with other domestic
and international regulators. The OCC's most recent innovation
initiative was announced in April when we proposed a voluntary
innovation pilot program to support bank testing of activities
that could significantly benefit consumers, businesses, and
communities, including those that promote financial inclusion.
The program is designed to assist banks in those situations
where regulatory or supervisory uncertainty may be a barrier to
deploying a new product, service, or process, and where early
regulatory involvement may promote a clearer understanding of
risks and related issues.
The pilot program will also allow the OCC to further our
understanding of innovative products and services and to assist
in identifying supervisory approaches that might
unintentionally or unnecessarily inhibit responsible
innovation. The OCC invited public comment on its pilot program
and is in the process of evaluating the comments we received.
Many fintech companies such as marketplace lenders, payment
processors, and custody service providers offer products and
services that historically have been offered by banks. Since
the early stages of our work, the companies have consistently
asked the agency about options to conduct their businesses on a
national scale and promote--and potential to become a national
bank. The OCC strongly supports the dual banking system and
believes that fintech companies engaged in the business of
banking should have the option to conduct their businesses
through a national bank charter when it makes sense for their
business model. The OCC has options available for firms that
can meet our rigorous standards.
Fintech companies may choose to consider a full-service
national bank charter to engage in a full array of authorized
national bank activities including accepting deposits or to
apply for a variety of other limited-purpose charters, if they
are engaged in a limited range of banking activities.
Regardless of the particular path that a fintech company
chooses, all national banks face rigorous examination and high
standards that include capital, liquidity, compliance,
financial inclusion, and consumer-protection standards.
My written statement also includes some principles for the
task force's consideration that we believe are important, for
example, facilitating appropriate levels of consumer
protection, including by ensuring transparency and informed
consent. In addition, laws or changes to laws should be
technology-neutral, so that products and services can evolve
regardless of changes in technology that enable them.
The OCC is looking forward to working with the task force
and continuing to be a resource as members explore important
policy considerations related to financial technology. Thank
you again for the opportunity to testify today. I am happy to
answer questions.
[The prepared statement of Ms. Knickerbocker can be found
on page 54 of the appendix.]
Chairman Lynch. Thank you very much.
Ms. Szczepanik, you are now recognized for 5 minutes.
STATEMENT OF VALERIE SZCZEPANIK, ASSOCIATE DIRECTOR OF THE
DIVISION OF CORPORATION FINANCE AND SENIOR ADVISOR FOR DIGITAL
ASSETS AND INNOVATION, U.S. SECURITIES AND EXCHANGE COMMISSION
(SEC)
Ms. Szczepanik. Thank you, Chairman Lynch, Ranking Member
Hill, and members of the task force. Thank you for the
opportunity to testify before you today alongside
representatives from some of the SEC's key regulatory partners
on the important topic of technological innovation in our
financial markets.
In October 2018, the SEC launched FinHub, a strong
innovation initiative to centralize efforts and leverage
expertise across the Commission and focus on key areas in
financial innovation. I am the head of FinHub, and I am happy
to be here to tell you about its activities and some of its
plans. FinHub has tried to innovate the way we regulate. With
FinHub, we have built both a platform and a portal. As a
platform, it is a repository of resources for the public.
FinHub broadcasts in one place all of the activities and views
of the Commission in various areas in financial innovation.
It is also a portal. It is a place for engagement with the
public, academia, other regulators and each other, and we
engage in a number of ways. First, through FinHub's webpage,
entrepreneurs, developers, and their advisers routinely request
meetings with the staff, and we have dozens of such meetings in
Washington, D.C. Recognizing that not everyone can travel to
D.C., we also travel around the country to meet with these
people hosting local, peer-to-peer meetups in cities like San
Francisco, Denver, New York, and Philadelphia. Later this week,
I will travel to Chicago. In these office hour-type events, we
meet with innovators developing new technologies, entrepreneurs
looking to bring new business to market, advisers and
advocates, universities and academics, SEC registrants and
those seeking to register, and others. While we can't give
legal advice, we can give guidance. We can tell people how we
interpret our laws, and we can point out particular issues with
potential projects.
Second, we host public events. On May 31, 2019, we held a
public fintech forum dedicated to distributed ledger technology
and digital assets. This event brought together academics and
industry participants to discuss issues before an audience of
the public, SEC staff, and staff from other agencies.
Approximately 2,000 people attended or viewed our webcast, and
it is still available for viewing.
Third, we publish guidance and seek input on specific
issues. On April 3, 2019, FinHub staff published a framework to
aid market participants in analyzing whether a digital asset is
an investment contract and, therefore, a security. On the same
day, the Division of Corporation Finance issued a no-action
letter to a market participant seeking to issue a digital
asset. SEC staff has issued letters welcoming public input on
various topics such as legal and investor protection issues
concerning digital assets.
Finally, we collaborate internally and externally on
initiatives. For example, FinHub staff partners with the SEC's
Office of Investor Education and Advocacy to devise creative
ways to reach investors. Recently, we launched a mock-up of a
fraudulent ICO called the HoweyCoin, where potential investors
were redirected to a web page with educational information.
We collaborate regularly with our sibling domestic and
international partners. Our level of coordination in this
regard is extensive. We are continually exploring ways to
improve our efforts, such as by seeking to hire digital asset
experts through our visiting scholars program and regularly
participating in industry conferences and academic events.
I am scheduled to take part in two upcoming tech sprints,
one of them hosted by the FCA. We are committed to
understanding the technologies that impact our markets, and we
are taking proactive steps to ensure that we have hands-on
opportunities to work with these technologies.
Those who engage with the SEC's FinHub will play a critical
role in shaping the future of fintech and assuring that the
U.S. capital markets continue to adhere to the high standards
that have made them so deep, liquid, fair, and attractive for
decades. We are eager to see new beneficial technologies
succeed. The long-term promise of these technologies will be
achieved if those implementing them comply with the laws,
rules, and regulations Congress and the SEC has put in place to
further the agency's core mission: protecting investors;
maintaining fair, orderly, and efficient markets; and
facilitating capital formation.
We encourage market participants to use the materials on
FinHub's website as a resource, to consider consulting with
securities counsel, and to request further guidance from the
staff if questions remain. Regrettably, while some market
participants have engaged with us constructively, others have
not. The SEC's Division of Enforcement has been and will
continue to recommend enforcement actions for alleged
violations of the Federal securities laws in order to protect
investors in the market.
Thank you for the opportunity to testify before you today
about the work of SEC's FinHub and for your support of fintech
innovation. I look forward to answering any questions you may
have.
[The prepared statement of Ms. Szczepanik can be found on
page 70 of the appendix.]
Chairman Lynch. Thank you.
Mr. Clark, you are now recognized for 5 minutes.
STATEMENT OF CHARLES CLARK, DIRECTOR, DEPARTMENT OF FINANCIAL
INSTITUTIONS, STATE OF WASHINGTON, ON BEHALF OF THE CONFERENCE
OF STATE BANK SUPERVISORS (CSBS)
Mr. Clark. Good afternoon, Chairman Lynch, Ranking Member
Hill, and members of the task force. Thank you for holding this
hearing. My name is Charlie Clark. I am the director of the
Washington State Department of Financial Institutions. It is my
pleasure to testify today on behalf of the Conference of State
Bank Supervisors. I serve as the Chair of the CSBS
nondepository supervisory committee, which provides a forum for
State regulators to drive initiatives aimed at ensuring that
State supervision of nonbank companies, including fintechs, is
effective and efficient. My Department oversees more than
17,000 State-licensed nondepository entities.
I have been at the agency as fintechs have emerged, even
before they were called fintechs. Our agency has made sure we
have stayed a step ahead of these new business models and
ensure that consumers are protected. As a primary regulator,
State regulators have expertise, data, and real-time insight
into how these companies are interacting with consumers and
functioning in the marketplace. I welcome the opportunity to
discuss State regulators' approach to regulating fintech and
our perspective on the impact of technology on our regulated
institutions.
State regulation is activities-based. Whether you go to a
storefront or use an app, money transmission is money
transmission. Similarly, lending is lending. We don't regulate
a company differently, just because it calls itself fintech. We
look beyond the labels and marketing to understand the
underlying activity and how it fits within our State laws. In
many instances, we find that a fintech company's activities fit
squarely within existing State financial laws and regulations.
The Nationwide Multistate Licensing System (NMLS) is one of the
State's regtech solutions. Through solutions for licensing,
regulating fintech firms, and through NMLS, we have seen the
ongoing impact of fintech across the marketplace. NMLS is
tracking in real time the evolution of the marketplace from
brick-and-mortar to online.
We recognize that the current intersection between
financial services and technology has accelerated change in the
industry and the State system. With industry participation, we
are leveraging technology and data to create a more networked
system of State regulation that functions more efficiently,
with strong consumer protections.
State regulators have broadened the scope of how we work
together, especially as we recognize that technology is
enabling fintech companies to scale rapidly. That is why State
regulators are committed to advancing Vision 2020, a set of
initiatives designed to harmonize and strengthen State
supervision. Current Vision 2020 initiatives include a
transformative exam platform called the State Examination
System, and a sweeping cybersecurity training program that will
train 1,000 examiners by the end of the year. As part of Vision
2020, State regulators have gathered industry input from
fintech firms on how to streamline regulation nationwide, while
maintaining strong consumer protections and local
accountability. Some of the resulting initiatives are a model
State law for money transmitters and new tools and resources to
help industry and others navigate the State system. Washington
State is leading a streamlined, multistate, MSB, licensing
initiative. To date, we have 23 States that have signed on to
this effort, which is intended to curb duplications in the
licensing process and cut redundant work among State
regulators.
Through NMLS, fintechs can submit most license application
materials only once, reducing the need to go State to State. As
noted in greater detail in my written testimony, the States are
committed to implementing regtech solutions and collaborating
on new ways to improve oversight and enhance consumer
protections while reducing regulatory burden. Thank you for the
opportunity to testify today. I look forward to answering your
questions.
[The prepared statement of Mr. Clark can be found on page
36 of the appendix.]
Chairman Lynch. Thank you.
Mr. Woolard, first of all, let me publicly thank you for
making the effort to be here. The committee was extremely keen
on getting your perspective. You are now recognized for 5
minutes.
STATEMENT OF CHRISTOPHER WOOLARD, EXECUTIVE DIRECTOR FOR
STRATEGY AND COMPETITION, UK FINANCIAL CONDUCT AUTHORITY (FCA)
Mr. Woolard. Chairman Lynch, thank you very much. Ranking
Member Hill, members of the task force, thank you for inviting
me to give evidence today. As you said, Chairman Lynch, I am a
member of the board and an executive director of the Financial
Conduct Authority. I also lead our innovation work. I am also
chairman of the IOSCO fintech network, which brings together 92
regulators and other members from around the world.
I have submitted written testimony to the committee, but in
the interest of time, I just wanted to highlight three points
from that: first, to highlight the FCA's approach to innovation
policy; second, the importance that we attach to outcomes; and
third, the importance of international cooperation in this
sphere. And of course, I would be very happy to answer any
questions, as well.
Our approach at the FCA rests upon our competition duty.
Put very simply, as well as seeking to prevent risks to the
system, which all financial regulators do, we also consider the
dangers of potentially beneficial innovations not happening or
coming to market. Our journey around innovation started in
October 2014, when I established something called Project
Innovate within the FCA. We had the objective of fostering
innovation in the financial services sector in the interest of
consumers. We wanted to make it easier for innovators to get
their ideas to market and also encourage larger firms to break
the mold. For the most part, that has been about connecting
those with innovative business models with our existing rule
book. We got a huge response to this, including seeing some
ideas that were really cutting-edge. In order to manage these,
we established something called the FCA sandbox as a place
where firms could trial innovative products, services, and
business models in a live market environment, normally for a 6-
month test, while ensuring that safeguards were in place.
And the thing I should stress is, certainly from our
perspective, we believe that sandbox firms have to work in the
real world from day one. So, our full suite of rules apply to
them. They are fully regulated, and, indeed, sandbox firms are
probably our most heavily supervised.
The second point I just wanted to make is that we believe
is real importance in terms of outcomes. As you know, there is
a lot of hype around fintech. Our work needs to make a real
difference in terms of new entrants to the market, consumer
offerings, and our own approach to regulation. Now, we think it
is making a difference. Demand from firms have been strong. We
have had over 1,500 requests for help. Our sandbox cohorts are
oversubscribed around 3 times over. We have given 149
regulatory steers since we started this program, and more than
a hundred new firms have come to market or have had variations
of permission.
The sandbox is in his fifth cohort. We have had over 110
tests, and around 80 percent of the firms that enter the
sandbox go on to operate fully in the market. We have also been
able to reduce the time it takes us to take innovative firms
into full authorization by around 40 percent, which equates
around 3 months' reduction in time. We have seen new services
in almost all of the sectors that we regulate for, and we
believe that millions of consumers have had access to new
products geared around better value or greater convenience.
There are examples in the documents that I have submitted to
the committee, and obviously, I am very happy to talk about
them.
We also use those activities to make sure they inform our
own policymaking and how we think about using technology
ourselves as a regulator, for example, to deal with questions
like anti-money-laundering or transformations like digital
reporting.
Third, and finally, international cooperation in this
sphere is vital. Many of the firms that we see have business
models that are geared around international expansion, rather
than traditional, domestic business models. We believe that
there is work that we can do through both IOSCO and through the
new Global Financial Innovation Network that can allow us to
tackle cross-border issues in a really meaningful way.
There is already significant cooperation between
regulators, as Val already mentioned in her evidence, and we
believe that this needs to continue. Now, I recognize that is a
very whistle-stop tour of the issues. I hope it gives you a
sense of the scale and value that we see in this space. Thank
you, once again, for inviting me here today.
[The prepared statement of Mr. Woolard can be found on page
81 of the appendix.]
Chairman Lynch. Thank you very much. I will now yield
myself 5 minutes for questioning, unless Chairwoman Waters is
here. No? Okay.
Ms. Knickerbocker, we had the opportunity to speak with Mr.
Otting, who came before the Full Committee a couple of weeks
ago, and we discussed the OCC's special purpose charter of
fintech companies. It is my understanding that as of now, we
have no completed applicants. Is that correct?
Ms. Knickerbocker. That is correct.
Chairman Lynch. Okay. It was recently reported in the
press, however, that Google and perhaps some other larger tech
companies had reached out to the OCC about the charter. Is
there any truth to that?
Ms. Knickerbocker. Not that I am aware of, Mr. Chairman.
Chairman Lynch. All right. And, of course, we have just
received notice that Facebook announced their plans to launch
Libra and Calibra, a cryptocurrency and digital wallet. So, we
have this merging of--or potential merging to create some
conflicts of interest between the heretofore traditional
banking world and the tech space. Does the OCC have any
concerns about the blending of these two disciplines where
there is a fairly fixed and conservative regulatory framework
around banking, and that is not at all sort of the culture
within the tech community? Any concerns about that marriage?
Ms. Knickerbocker. Well, a couple of things on that. First
of all, one of the things that the Office of Innovation does is
we spend a lot of time with companies that are not used to the
regulated environment, to explain to them if they want to
operate in the regulated environment, what that means. And we
provide technical assistance to them and spend a lot of time
discussing those expectations.
For those companies that have reached out to us around the
special-purpose charter, we have further discussions with them
about expectations around capital, liquidity, risk management,
governance, and those expectations. But I do think it is
important to note that there are a lot of activities that have
historically been in the banking industry that are now in a
wide variety of different places, and they intersect with the
banking industry and the regulated environment. We need to be
aware of those.
And with the case of Facebook, I will just point out that
at least right now with Facebook Libra, there are no banks that
are involved. So, the OCC is just monitoring that activity, but
if a national bank was involved with Facebook Libra, we would
ensure that its activity would be in compliance with the law.
Chairman Lynch. Okay. Thank you.
Mr. Clark, the CSBS has sued Ms. Knickerbocker's
organization, the OCC, over this issue. What are the concerns
that have been--I don't want you to talk about the litigation,
but just sort of, from the 100,000-foot level, what are the
concerns that the State supervisors have raised?
Mr. Clark. State regulators oppose the special-purpose
charter because it lacks statutory authority. It is up to this
body, Congress, to decide whether the OCC should regulate these
nonbank entities. I think the example you raise creates a
perfect example of how such a charter would pick winners and
losers. In a State system, currently a small company can enter
the system, scale up, and be competitive with an innovative
idea. But with very large companies that would essentially get
a preference, that creates an unlevel playing field.
Chairman Lynch. Let me ask you, Ms. Knickerbocker, you have
talked about sort of harmonizing--well, at the end of your
testimony, you talked about Congress sort of trying to
introduce some of this new technology in a way that is not
disruptive or damaging to some of the smaller firms. I think
you called it technology-neutral legislation. And I struggle
with that because you have huge firms with huge resources and
great capacity from a technological side. And then I have
community banks, so I have to balance that. It sounds good in
theory, but I just struggle with it. What do you mean by that?
How do we do that up here?
Ms. Knickerbocker. When I referred to technology-neutral,
what I was speaking about was there are a lot of different
technologies, whether it is cloud-based technology, or
different types of distributed ledger technology, so we
shouldn't be choosing what type of technology a bank wants to
use.
Chairman Lynch. Okay. It was a different context.
Ms. Knickerbocker. Right.
Chairman Lynch. I have gone over my time; I apologize for
that.
And I now yield to Ranking Member Hill for 5 minutes.
Mr. Hill. Thank you, my friend. Again, thank you to the
panel. I thought your testimony was really well-delivered and
well-prepared. Thank you for that.
Mr. Watkins, when I looked at the Treasury report issued
last summer that I referenced, there were a couple of major
congressional issues that were suggested that Congress needs to
deal with. One is regarding the Madden v. Midland Funding case,
a topic that affects people extending credit out there called
valid-as-made doctrine. Is that something you think that
Congress should deal with legislatively, or do you think that
is something that the regulators could collaborate on and
clarify?
Mr. Watkins. Thank you for that question, Ranking Member
Hill. I do recall that portion of the Treasury report. It is
certainly an important issue. To give you a full answer to
that, I would probably need to confer with some of my
colleagues at the Bureau, as well as these other agencies to
determine what aspects are implicated by our existing
jurisdiction and rulemaking and what aspects would require
legislative action.
Mr. Hill. What, in the Treasury report, is the CFPB's top-
of-mind item to work on?
Mr. Watkins. We have been implementing several of the items
in that report, starting with regulatory sandboxes, which I
mentioned briefly in my opening statement. We have revised two
existing policies. We have proposed a third. Another area that
the report mentioned that is relevant to the Office of
Innovation is collaboration, international collaboration
through our membership in the Global Financial Innovation
Network (GFIN), and also in each of our policies, we have
indicated our intent to collaborate with both State and Federal
regulators.
Mr. Hill. I think that is important. I think all of our
prudential regulators having a similar approach to sandboxes,
with similar rules of the road, would make it a lot easier on
private market participants, so I encourage you to pursue that.
Mr. Clark, your testimony was very interesting about the
national registry system and how that has expanded since Dodd-
Frank and your efforts in the State of Washington to lead on
uniform laws. The Treasury report suggests that Congress
provide guidance on State uniform laws when it comes to lending
and money-transmission services, but it also is very clear that
the States ought to have 3 years in which to perfect that
effort. Can you give me a feel for--I know you have 23 States
working. Can you expand on that and talk a little bit about
Treasury's report and what the States are doing beyond that one
in your testimony?
Mr. Clark. Sure, absolutely. We were asked to make
substantial progress in streamlining and harmonizing licensing
and supervision, and we are absolutely doing that collectively
as States. We have the CSBS Vision 2020, which has modernized
and is working to modernize the NMLS. We are creating a special
State examination system to coordinate supervision for national
companies. We are creating a national scheduling effort to
better coordinate scheduling of MSBs, and I can tell you, in
the licensing area, not only is this MSB licensing agreement
streamlining the effort where States are sharing work, there is
less duplication, but we are also working on a model MSB law,
so that we can better collaborate and create harmony among the
State laws.
Mr. Hill. Thank you. I look forward to studying your
results.
Mr. Woolard, thanks for crossing the pond and being here
with us. I am interested in what--after open banking has been
in place now for just over a year, what is the key benefit you
have noted from a regulator's point of view, and what is the
key shortfall? And is it true that, in your standardized
approach, APIs are used universally for the transmission of
customers' private data?
Mr. Woolard. Thank you, Mr. Hill.
We have, with open banking, the rules finally came in sort
of full effect in January. So, it is a bit less than a year.
But I think there are a number of things we can observe
already. First, we have many of the large banks, which I think
had some quite serious concerns about this when it was first
proposed, are now actively making offerings to their customers
around open banking, to consolidate their relationships with
one particular bank. So, this isn't purely a sort of fintech
versus traditional established banks. This is something that is
happening across the market. If I look at it objectively, I
think there is something about the limited range of products
that are currently covered by open banking in terms of sort of
current account, checking accounts, payment accounts. And there
is a question there about should that be more banking there
that is available? And, yes, to your point, APIs are the
principal route by which these interfaces are working in a
standardized way across the market, in contrast to perhaps
other parts of Europe.
Mr. Hill. Thank you, Mr. Woolard.
I yield back, Mr. Chairman.
Chairman Lynch. Thank you. The Chair now recognizes the
gentleman from Georgia, Mr. Scott, for 5 minutes.
Mr. Scott. Thank you very much, Chairman Lynch.
Congratulations to you--
Chairman Lynch. Thank you.
Mr. Scott. --as the chairman of our Fintech Task Force, and
thanks for holding this hearing, and thank you all for coming
here and doing such a wonderful job with your testimonies.
Ms. Knickerbocker, I want to kind of--you seemed to really
hit the nail on the head with your opening statement when you
said, ``When done responsibly, innovation can increase
consumers' choice, improve the delivery of products and
services, and enable financial institutions to more effectively
meet the needs of consumers, including those who are unbanked
and underbanked businesses and communities.'' I think you hit
it right on the head there, because this is one of the reasons
I have been involved in fintech.
I am chairman of the bipartisan Fintech Caucus. And we have
a bill that we are working on, along with the Chair of the full
Financial Services Committee, Chairwoman Maxine Waters, and it
is called the FINTECH Act. And it is to get us into some
guardrail situations. Paramount of what we are trying to do is
to make sure, because as you know, you are the chief regulator,
you are the OCC, you have this special order going out for the
fintech's regulation, so it is very important that with all of
the different financial regulators, to a degree, to feel they
have a piece of fintechs here, it is important for us to get
out front a bill that will give harmonization if there are
regulatory agencies that may feel each one has a piece of the
action. And, hopefully, as we work through this, a point of
entry to come into the regulatory system. And so I wanted to
say, if you felt that our bill, the FINTECH Act, again, which
would establish harmonization among Federal regulators to
eliminate duplication and conflicting regulations impacting
fintech companies--bipartisan as I said, with my good friend,
Barry Loudermilk, and Mr. Luetkemeyer on that side. We have my
good friends, Mr. Gottheimer and Mr. Lawson on this side, and
of course, we are working with Chairwoman Waters on this bill.
So, I would like for you to comment on that. Did you see, do
you agree with us, for regulatory harmonization of fintech
companies, to allow for certainty and stability as in our
FINTECH Act?
Ms. Knickerbocker. Much of the work that the Office of
Innovation does, in fact, the majority of the work that we do
is working with banks and fintechs to talk about what the
expectations are in operating in a regulated environment and
trying to understand where there are uncertainties. And
oftentimes, those uncertainties are perceived. And I think it
is important that, in order for us to reach those goals that we
all believe are important around fintech and the evolution of
banking, to be able to break down those perceptions, so that we
can operate in a more efficient and effective manner.
Harmonization is also important. It is a little challenging
sometimes when you have multiple regulators that have different
mandates, but we all are working, I believe, as effectively as
we can, to look at opportunities for harmonization. An example
of that is the Treasury report had talked about third-party
risk management and having the regulators try to find places
where we could be more in harmony, if you will. And we have, in
fact, done that. There have been a number of discussions about
that, and we are continuing to meet, to focus on that, because
it is one of the biggest issues, where banks and fintechs
partner.
Mr. Scott. And so, if you could, very quickly, how would
you look at the efforts that are already under way among the
Federal banking regulators within fintech? What would be the
landscape right now?
Ms. Knickerbocker. I would say that the landscape right now
is that we are working very cooperatively. All of us on this
panel talk on a regular basis. The Office of Innovation and
those groups of the agencies that are focused on innovation
work on a regular basis to talk about how we can improve our
programs. We share a lot of information.
In addition, now what we are doing, particularly with
fintechs or banks that have particular questions that are for
another regulator, is we will do introductions through the
Office of Innovation, to either Paul's group or Valerie's
group, and that has been very effective in reducing some of
that uncertainty.
Mr. Scott. Thank you very much.
Chairman Lynch. Thank you. The Chair now recognizes the
gentleman from Missouri, Mr. Luetkemeyer, for 5 minutes.
Mr. Luetkemeyer. Thank you, Mr. Chairman. We have a great
panel today, and a great topic. Thank you all so much for being
here.
Mr. Woolard, I'm always curious as to how other countries
look at these issues and their approach and what they find
whenever they do things. From the regulatory standpoint, how is
your country looking regulatorily at trying to either control
or not control, to be able to allow, not allow, in this
particular environment innovators and the people to be able to
access this technology, as well as how do you protect the
information that they are out there with, if you don't mind?
Mr. Woolard. Thank you very much. I think probably the
easiest analogy to think of about our approach is it is rather
like a pharmaceutical trial. So, you want to get the benefits
here. You want to get the innovation into the market that you
think might make things better for consumers. At the same time,
we are taking an approach where, particularly through the
sandbox, if it is something that is very, very new, we want to
make sure that it is actually tested properly on a smaller
controlled group before that innovation then works its way into
the wider environment. That has been our broad approach.
In all of this, what we are trying to do is, as I said,
keep--how do we secure innovation in the interest of consumers?
We do occasionally see ideas that are incredibly clever,
incredibly innovative, but unfortunately, would not have a good
impact on the market. And so, it is about making sure that we
try and encourage the vast majority of those players that are
really trying to bring something new and add value.
Mr. Luetkemeyer. How do you control security for customers?
Are you looking at that as an issue as well when you are going
through this, with your sandbox?
Mr. Woolard. Yes. All of our standards apply from day one.
So, the same standards that we would expect any other regulated
entity in the market to have around things like cybersecurity,
around the systems and controls to protect consumer data, for
example, we would expect those new firms to have also from day
one.
Mr. Luetkemeyer. Okay. You have had a number of sandboxes
in place, according to your testimony, for quite some time, and
I was curious, have you had any results from that? Have you
found things that did work and things that didn't work? Would
you share those, please?
Mr. Woolard. Yes, of course. We have published an
evaluation of our work around sandboxes, which I have tabled as
part of my written testimony. But in broad terms, we have seen
ideas that have worked across the range of areas that we--
Mr. Luetkemeyer. Can you give us an example of one?
Mr. Woolard. Yes, of course. So, for example, if you take
the insurance market, there is a very small firm called CUVVA,
C-U-V-V-A, seven guys originally based up in Scotland, who
started a very short-term insurance app. You can get your car
covered for a few hours or a few days or whatever it might be.
When that launched into the market with some new technology
that we obviously had to get very close to and understand, we
saw the two largest incumbent firms launch a very similar
product within months. And this was something that was
significantly cheaper for consumers. It was a significantly
better product. But it took the entry of a challenger to
effectively prompt other players to come forward with those
kinds of innovations.
Mr. Luetkemeyer. Okay. And did you look at--does England
have charters for their banks and savings and loans and credit
unions and those other financial institutions and--
Mr. Woolard. The way we operate is, as part of our founding
legislation, there is something called a regulated activities
order, which says, if you engage in a certain kind of activity,
then you are regulated.
Mr. Luetkemeyer. Okay. Are you regulating these fintech
innovators then, too?
Mr. Woolard. Yes, absolutely. In the particular case of the
firm I just mentioned, they are operating as an insurer, so we
regulate them as if they are an insurer.
Mr. Luetkemeyer. Okay. Ms. Knickerbocker, you are with the
OCC, and Comptroller Otting has been very aggressive in trying
to be out front in saying he wants to put charters out there,
but by doing it, he wants to make sure those entities are
regulated like banks as well as anything else. I know that
there are some concerns there whenever you do that with regards
to limiting the ability of those entities to be able to provide
services to community banks, credit unions, the smaller
entities, because they can't afford to go out and purchase a
fintech company, like Bank of America can, for instance. How do
you view their relationship, and how progressive can it be?
Ms. Knickerbocker. The relationship between--
Mr. Luetkemeyer. Yes, the fintechs and the community banks.
Where do you see your place in that?
Ms. Knickerbocker. We see a lot of opportunity for
community banks to partner with fintechs. Because you are
right, they have challenges in terms of building or buying, and
they can have a lot of success in reaching their customers
through fintech relationships. A large amount of my time is
spent talking to community banks about how to do that in a safe
and sound manner, things to think about with respect to their
strategy. And there are a number of successes out there that we
have seen with community banks.
Mr. Luetkemeyer. Okay. My time is up. Thank you, Mr.
Chairman.
Chairman Lynch. Thank you. The Chair now recognizes the
gentleman from New Jersey, Mr. Gottheimer, for 5 minutes.
Mr. Gottheimer. Thank you very much, Mr. Chairman.
And thank you to all of the witnesses for being here today.
As the U.S. and global financial systems continue to evolve at
a break-neck pace, this hearing could not come, in my opinion,
at a more appropriate time. I want to start with something I
have been working on recently, expanding the sources of data
included in credit scores, so we can help those who are thin-
filed or credit-invisible, get the access to credit they
deserve.
Recent advances in digital technology have allowed fintech
lending to emerge as a potentially promising solution to reduce
the cost of credit and increase financial inclusion. According
to an IMF study, one of the best ways fintech has the potential
to enhance financial inclusion and outperform traditional
credit scoring is by looking at nontraditional data sources to
improve the assessment of the borrower's track record. If I can
ask everyone this question--we will start over here, Mr.
Watkins, if you don't mind--yes or no, would you agree that
credit-scoring models have a responsibility in today's
financial services world to consider alternative data sources
like rent and monthly telecom payments? If I could start with
you, sir?
Mr. Watkins. Thank you for that question, and I know you
asked for a yes or no answer, and I don't want to disappoint
you right off the bat, but the uses of alternative data
certainly pose some of the benefits that you have identified
and, I agree, is an essential component of fintech
development--
Mr. Gottheimer. Thank you, sir.
Mr. Watkins. --and is something that we are working on.
Thank you.
Mr. Gottheimer. Ma'am?
Ms. Knickerbocker. Banks have been using alternative data
to supplement credit scores, like utility and rent payments,
for quite some time. So, with respect to alternative data, to
supplement if there is a credit nexus--
Mr. Gottheimer. So you agree?
Ms. Knickerbocker. I would agree.
Mr. Gottheimer. Okay. Thank you. Ma'am?
Ms. Szczepanik. It is not directly within our regulatory
remit, but it sounds reasonable to me.
Mr. Gottheimer. It is a good idea. Sir?
Mr. Clark. Yes, provided that the model doesn't violate the
law, including the fair lending law.
Mr. Gottheimer. Thank you. Sir?
Mr. Woolard. As part of our innovation work, we have
actually authorized the first new credit reference firm in the
U.K. for many years that does use alternative sources of data.
We also have the Treasury in the U.K. undertaking a trial at
the moment of whether you can bring, on a more consistent
basis, things like rent payments into a wider credit score.
Mr. Gottheimer. Thank you very much, sir. I have also
personally heard from several companies as we have talked about
today, in trying to provide regulatory clarity for emerging
fintech firms, many have been instructed to set up shop in
countries like Singapore, Switzerland, Bermuda, and beyond, to
avoid the lack of regulatory certainty we have here in the
United States when it comes to digital assets. That is why I
partnered with Representative Davidson on legislation that
would help provide this much needed clarity.
Ms. Szczepanik, do you believe that the current regulatory
authority over digital assets is harming the United States'
global standing when it comes to this technology?
Ms. Szczepanik. Thank you for that. We believe that we have
been quite clear in how we are viewing things. We have put out
guidance, at least on ICOs beginning in 2017, about how we
apply the law to the issuance of digital assets. We have put
out a number of statements since then, and we believe that the
guidance is clear. To the extent folks still have questions, we
have been welcoming folks to come talk to us. We have dozens of
meetings to talk to people about particular projects and how we
would apply our laws.
Mr. Gottheimer. Have you heard also that there is some
uncertainty? A lot of people visit us and say, they are not
really sure who the regulator is or which rules to follow, and
yet we should be the premier destination for blockchain and
cryptocurrencies and other digital instruments, and a lot of
people raise this as an issue. You have definitely heard there
is some fuzziness here, right?
Ms. Szczepanik. Sure. And we look at it, each digital asset
is its own animal. It has to be examined on its facts and
circumstances to determine what, in fact, it is. It could be a
security. It could be a commodity, it could be something else.
We stand ready to provide guidance to folks if they want to
come talk to us. We encourage them to come talk to us before
they do anything so they can get the benefit of our guidance.
To the extent that folks move offshore, for example, if they
are still conducting business within the United States, we
believe our laws would still apply to the conduct that occurs
in the United States.
Mr. Gottheimer. Okay. Thank you very much.
I yield back. Thank you.
Chairman Lynch. Thank you. The Chair now recognizes the
gentleman from Ohio, Mr. Davidson, for 5 minutes.
Mr. Davidson. Thank you, Mr. Chairman, and I want to
congratulate you and the entire committee on the establishment
and first hearing of the Fintech Task Force. It is a bit of an
achievement for, really, our committee. I think it is progress
for this body and Congress, to tackle an incredibly important
sector for America's economy and, indeed, the global economy.
As some of you know, almost a year and a half ago, I set out to
find a bipartisan solution to properly and effectively regulate
digital assets. As Mr. Gottheimer, who is a cosponsor of a bill
I created, the Token Taxonomy Act, highlighted, many firms come
to us and say that they don't have the regulatory certainty in
the United States, and consequently American firms, American
innovators aren't leaving the United States to avoid U.S.
regulations. They are leaving overwhelmingly to find regulatory
certainty that they cannot find in United States markets. It is
not a coincidence that Facebook launched outside the United
States. Switzerland has some of the most clearly established
regulatory framework. They all say that they are looking for
this certainty, and they are effectively attracting much more
capital than the United States is, Singapore and Switzerland,
in particular.
Mr. Woolard, on March 15, 2019, the FCA updated their
policy on defining crypto assets to distinguish three types of
tokens, as well as recommendations regarding mitigation of
illicit activities and cyber threats. Many legal experts have
said that FCA's policy is very similar to Switzerland. Would
you agree with that?
Mr. Woolard. I think our policy actually is still a bit
distinct from the Swiss one. They have, I think, gone further
in terms of how they have tried to define a jurisdiction around
crypto assets. What we are trying to do is actually, I think, 9
million miles away from the approach the SEC outlined, in many
ways. So, we see there are three different, distinct kinds of
uses and activities. And we regulate according to what is the
underlying business that someone is trying to conduct around
crypto assets. But there is more work that we are doing in this
space and certainly more thinking that we need to do.
Mr. Davidson. Thank you. Some of my colleagues have asked
me why I feel such an urgency on putting a legislative text out
here, and the reality is that we do differentiate. In the main
bill, the base piece is: What is a security, and what is not? A
clear definition that is in line with the Howey test, that has
long been established in the U.S. but provides a four-point
criteria that gives certainty so that not every company is
forced to say: Gee, I can go cut my own deal, and it is company
by company. This is a third-world developing economy kind of
approach to, hey, if you want to launch a company, you go and
negotiate with the government, and maybe you can get your deal,
and maybe your deal is different than this other person's deal.
We need the certainty that if you do these things, you will be
deemed an asset, and that has been one of the drawbacks of
regulatory guidance. It is guidance, and it is often the case
that it is not found to be binding. Then, you wind up with a
patchwork of court decisions that try to discern things after
the fact. And, frankly, it scares off capital.
I think we are--personally, I feel passionately that we are
well beyond the sandbox stage in the United States, and we need
a minimal touch, one of the things that the United States did
brilliantly with the Telecommunications Act in the 1990s that
allowed technology and innovation to flourish in the United
States of America. And thankfully, many of my colleagues agree.
We have eight cosponsors, and we continue to grow. It is
clearly not an ideological bill. It spans from people on the
furthest left of our political spectrum to towards the right
end of our political spectrum. And so, I hope that we can move
forward and begin to debate this text. As we would potentially
say in Ohio, the field has been plowed; we are ready to plant.
So, we have a framework. And as talk about international
perspectives on fintech regulation and digital economy, we need
to talk about a range of things. And I guess, Ms. Szczepanik,
you have highlighted some of the work that the SEC has done. Do
you feel the sense of urgency, would it add something to have
this clarity?
Ms. Szczepanik. Thank you. I think it is good to remember
that distributed ledger technology is nascent, and it is fast
evolving. Our laws that we have currently are flexible and
principles-based and very broad, and they have assisted us over
the years in taking in all kinds of new technologies as they
occur. This isn't the first time we have had a new technology
come to bear. I think we regulate around activity and conduct.
Mr. Davidson. Thank you. And I agree, you have to look at
the conduct, but look, it has been 5 or 6 years. It is not
nascent. It has been around for a while. And I think some
minimal law is out there, and we have a wide range of issues
that would need to be dealt with, including how to deal with
exchanges, all the anti-money-laundering BSL, know-your-
customer provisions, and so this is just the tip of the
iceberg. Thankfully, we have this task force on board ready to
tackle this and a number of issues in the space. My time has
expired, and I yield back.
Chairman Lynch. Thank you. The Chair now recognizes the
gentleman from Utah, Mr. McAdams, for 5 minutes.
Mr. McAdams. Thank you, Mr. Chairman, and thank you all for
being here today. My State of Utah is home to a thriving
technology and financial services industry, largely centered on
what we call the silicon slopes. We have lending companies and
payment processing and development of artificial intelligence
systems, the use of Big Data, and much, much more. This growing
fintech industry has been a boon for our local economy, and
ultimately, I think a boon for consumers who will benefit from
these advances in technology, many of which are already some
household names.
I want to encourage innovation and the next generation of
technologies here at home, but I also recognize that government
does play a role in setting boundaries to make sure consumers
are properly protected. It is often a matter of fine-tuning,
and fine-tuning that dial between appropriately protecting
consumers and unleashing innovation. And so, I want to focus on
how we get the dial setting correct in that regard.
I guess my first question would be for Mr. Clark. One of
the beauties and challenges of our Federal system is that we
have 50 different States sometimes pursuing policy in 50
different ways. And this can lead to some frustration for
companies operating nationwide who must comply with a myriad of
different requirements. But it does also allow for innovation
and experimentation at the State and local level to see what
works best. The CSBS represents State regulators who regulate
both banks and nonbanks alike. Are there any particular
approaches to fintech and innovation that States have
pioneered, that work particularly well, that we should look to
replicate at the Federal level?
Mr. Clark. I can tell you that, when Congress has looked at
the role that State banking regulators play and their important
role in regulation, and looked at the benefits, we have come up
with some great solutions. In the mortgage area, you passed the
SAFE Act, which provided some uniformity, but it relied on the
States to continue to examine and make sure that they are a
gatekeeper for bad actors.
Another tool that I think would really help with helping
State regulators encourage a partnership between fintechs and
banks is if Congress passes H.R. 241, the Bank Service Company
Examination Coordination Act. That way, State regulators could
be able to more easily share information with Federal
counterparts.
Mr. McAdams. And I guess a question for any of the
panelists, but--maybe a two-part question--do nonbank or
fintech companies present any unique challenges in supervision,
and is data security and privacy a particular concern? And
share with me your thoughts on data privacy in the Congress.
Ms. Knickerbocker, you seem to be--yes, go ahead?
Ms. Knickerbocker. Data security and data privacy are
really key, particularly as we move into an environment that is
almost exclusively digital. The OCC focuses a great amount of
time with respect to cybersecurity and understanding the
importance of privacy with respect to consumers, and it really
needs to be a part of the work of the task force.
Mr. McAdams. I started my comments talking about the fine-
tuning of this dial between appropriately protecting
consumers--and that can be everything from predatory lending
practices to the privacy and data privacy of consumers--but
also making sure that we don't have such a heavy regulatory
hand that we squelch innovation, that we allow some of this
innovation to continue to move forward. And I think that is the
quandary between that, of that tuning of that dial is ever
present in the area of data security and data privacy. What
should we be looking at? You see various States stepping
forward with data privacy regulations and protections and some
innovations in that regard, but also that is an area where a
national framework may be interesting. What should we be
thinking about as it relates to data privacy and regulation or
freedom of data?
Mr. Clark. I can tell you that the States are closely
watching the FTC's rulemaking with the Federal Safeguards Rule.
My understanding is they pulled some provisions from DFI's--or
New York's cyber law. And so I think it is important to be
looking at what is already there, but when looking at a Federal
solution, it is very important that State regulators have
enforcement authority to make sure that financial institutions
are complying with those requirements.
Mr. McAdams. Thank you.
Mr. Chairman, I see I am out of time. I yield back. Thank
you.
Chairman Lynch. Thank you.
The Chair now recognizes the gentleman from Wisconsin, Mr.
Steil, for 5 minutes.
Mr. Steil. Thank you.
I want to start by thanking Chairwoman Waters and Ranking
Member McHenry for starting the Fintech Task Force. I also want
to commend Chairman Lynch and Ranking Member Hill for leading
us as we look for ways that fintech is changing the way we do
business, invest in retirement, and conduct our financial
lives.
The fintech revolution is a great opportunity for all
Americans. Lenders are using sophisticated data analysis to
help more families and entrepreneurs responsibly access their
services. Insurers are using new technology and artificial
intelligence to improve underwriting accuracy. Payment
companies are facilitating transactions quickly and securely
for consumers and businesses around the world.
While we need to stay vigilant and protect consumers from
abuse, we should make sure that we don't fall into a typical
Washington mindset that sometimes views innovation as a threat.
With every major innovation, pessimists often decry the
hypothetical consumer harm and job losses that haven't
historically always materialized. I often think back to the
risk of ATMs to the jobs of bank tellers as an example of that
hypothetical risk that did not materialize. I think we need to
continue to look at ways to create environments that are
conducive to continued fintech innovation. And today's
discussion, I think, has been a great start to the task force's
important work ahead.
I have a couple of questions I would like to ask. I would
like to start with you, Mr. Woolard. One of the concerns I
often hear about fintech is that some new entrants may seek to
operate in a manner similar to a depository institution but
without the associated regulatory burden, in effect, regulatory
arbitrage. Can you elaborate on the FCA's experience in
deterring regulatory arbitrage?
Mr. Woolard. Thank you very much, Mr. Steil. From an FCA
point of view, the U.K. set-up is very much around regulated
activities. Technically, we don't regulate banks. We actually
regulate the act of deposit-taking and so on and so forth. And
so, frankly, we haven't seen this kind of issue really in the
U.K; we have the ability to look through the technology, to
look through, if you like, the service that is being offered to
what is the underlying activity, and we regulate it on the same
basis as if it was a fintech or if it was a more traditional
player in the market.
Mr. Steil. Thank you. I want to jump and ask Ms.
Knickerbocker and Mr. Watkins to comment here. Countries around
the world, including the U.K., are experimenting with different
fintech regulatory structures, and we should learn from the
experience of foreign financial regulators as we seek to
modernize our rules so the U.S. can remain competitive in
fintech. Can you comment on lessons you have learned from
policy experiments in other countries and how those are
impacting policy proposals in the United States? I'll start
with you, Ms. Knickerbocker.
Ms. Knickerbocker. We spend a lot of time speaking to
regulators around the world so that we can learn about their
experiences and how we can apply that best in the United
States. We also have regular conversations with the Financial
Conduct Authority. What we have learned from those
conversations, as well as conversations from around the globe,
is that it is very important to be able to have a new way of
engaging with regulated entities, and that is why we proposed
our pilot program back in April, so that there is an
opportunity with these complex innovations, to get involved
early, to see what are the potential risks and what are the
potential possible issues that could come up, and it benefits
greatly the institutions that are working on these novel
entities ideas as well as those that have regulatory
uncertainty, and that has helped us quite a bit.
Mr. Steil. Thank you.
Mr. Watkins?
Mr. Watkins. Thank you for highlighting this important
issue of tracking what is happening internationally. We have
also learned from the FCA and other regulators in developing
some of our policies, including our sandbox policies. We are
also in communication and monitoring developments around open
banking, which is another important issue touching on this
area.
Mr. Steil. Thank you. With my limited time left, I want to
come back to you, Mr. Woolard. Can you comment about consumer
impacts in fintech in the U.K.? Have customers gained access to
the services in instances where they were previously out of
reach?
Mr. Woolard. Thank you. Yes, we have certainly seen a
number of areas where access might be opened up. So, for
example, for low-income families around basic contents
insurance on their goods that they have in their house, we have
seen experiments there, between fintechs and established
players. We have also seen some degree of innovation in the
basic savings market, where you get very small sums being saved
by low-income families. But banks serving that market, again,
because technology makes it cheaper to do so.
Mr. Steil. Thank you very much.
And seeing I am out of time, I yield back. Thank you.
Chairman Lynch. The gentleman yields back.
The Chair now recognizes the gentleman from Florida, Mr.
Lawson, for 5 minutes.
Mr. Lawson. Thank you, Mr. Chairman, and witnesses, welcome
to the task force. And this question can be for anyone. Can you
discuss the issues around privacy and consumer protection in
regard to regulating fintechs especially when it comes down to
peer-to-peer lending, rural advertising, insurance technology,
and digital banking?
Mr. Clark. I can speak to that on behalf of State
regulators, that we license money transmitters and consumer
lenders, and in those areas--and peer-to-peer lenders would be
covered--they are subject to the Gramm-Leach-Bliley Act. So, as
far as information security, we examine for that. When we
license a company, we make sure that they have an information
security program in place before they even start operating, and
as I mentioned earlier, CSBS is training up our examiners
around the country, so that they are very skilled in
cybersecurity.
Mr. Lawson. Did anyone else want to respond? Mr. Watkins,
did you want to respond to that?
Mr. Watkins. Absolutely. So, of the examples that you
mentioned, peer-to-peer and digital banking most closely
intersect with our jurisdiction. The privacy provisions under
Gramm-Leach-Bliley 501b are delegated to the FTC, but we do
supervise pursuant to our UDAP (Unfair or Deceptive Acts or
Practices) authority for privacy-related issues on some nonbank
entities. With respect to peer-to-peer lending, a key element
that we have looked at is transparency and deception, making
sure that consumers understand the terms that are being
disclosed.
Mr. Lawson. Okay. What about robo advertising?
Ms. Szczepanik. I can speak to that. So, to the extent
someone is giving investment advice, they would likely be
subject to our regulations that are around investment advisers.
And we have rules in place that apply to registrants, like
investment advisers and broker dealers, that require them to
have policies and procedures and controls around customer data,
customer identity and information, and so we have an
examination staff who goes out and examines our registrants for
compliance with those rules, and we have brought enforcement
actions where those rules have been violated in appropriate
circumstances.
Mr. Lawson. All right. Can you tell me, how, in your
opinion, will fintechs change people's careers? Can anyone
respond to that? And that might be the wrong question to ask,
but I think it will.
Ms. Szczepanik. I think it certainly changed the careers of
the folks at this table because we focus on that, and we make a
huge effort to do outreach, both to the industry and to the
public, to encourage them to come to talk to us about what they
are seeing and to help us be better regulators in that regard.
And on the flip side, I think there is a great deal of
opportunity out there for folks who want to innovate in the
financial industry, and we are here to help them do it in a
compliant way.
Mr. Lawson. Okay. Mr. Woolard, you mentioned in your
testimony--and I don't have much time--about how this will
affect a lot of minorities and how to get that information to
them. What is on the horizon with that?
Mr. Woolard. I think one of the questions here is, how does
fintech reach into different communities? And, in particular, I
think with many of these questions we have been debating, the
technology itself, you could always regard as neutral. It is
how it is used and it is how it is deployed by the people
running the companies that makes it used for either good or for
ill. And I think, in particular, one of the things we are
seeing is the ability of some of these financial technology
solutions to actually provide very cheap, low-cost, efficient
alternatives to maybe some of the higher-cost lending that we
have seen in the market. We certainly have about three players
in the sandbox at the moment who are looking at those kind of
alternative provisions. That is often about serving communities
that are perhaps harder to reach or excluded from more
mainstream financial services products.
Mr. Lawson. Okay.
Thank you, Mr. Chairman. I yield back.
Chairman Lynch. The gentleman yields back.
The Chair now recognizes the gentlelady from California,
Ms. Porter, for 5 minutes.
Ms. Porter. Thank you, sir.
Mr. Watkins, 5 months after you were appointed to your
position, the Consumer Financial Protection Bureau proposed
policies that give the Office of Innovation authority to exempt
certain fintech companies from having to comply with laws like
the Equal Credit Opportunity Act, and they did this for the
purpose of promoting innovation. Specifically, the Bureau
revised its no-action letter and its product sandbox policies
to give fintech policies a safe harbor from liability so that
the qualifying companies would be immune from enforcement
actions by Federal or State authorities.
As the head of the Office of Innovation, once these
policies go into effect, you are going to wield enormous
influence over which anti-discrimination laws companies have to
follow. Would you be able to wield that influence in an
unbiassed capacity?
Mr. Watkins. Thank you for that question, Congresswoman.
Yes, I would.
Ms. Porter. You mentioned in your testimony that you
consulted with a broad spectrum of stakeholders in designing
the proposals, the no-action proposals and the sandbox
proposals that you have spoken about, including meeting with
civil rights groups. Can you name a few of those groups,
please?
Mr. Watkins. I most recently met with Chicanos Por La
Causa. The meetings that we have had--the prior meetings that I
am thinking of, regarding civil rights groups, were part of
larger groups, and I would be glad to get you that information
but I would need to provide that to you at a later time.
Ms. Porter. Did you meet with the Human Rights Campaign?
Mr. Watkins. I don't recall if they were at a meeting or
not.
Ms. Porter. Did you meet with Equality California?
Mr. Watkins. I don't recall if they were at a meeting or
not.
Ms. Porter. Did you meet with any LGBTQ rights groups?
Mr. Watkins. I would have to look at the meeting
participants to be able to answer that question.
Ms. Porter. Discrimination in lending against LGBTQ
borrowers is rampant. One recent study found, in surveying 25
years of mortgage data, that gay couples were 73 percent more
likely to be denied a mortgage than heterosexual couples with
the same financial worthiness. Mr. Watkins, I studied your--as
is my habit, I studied your CV before I came here today. I
would like to ask you about this gap in your CV. This is from
LinkedIn. What were you doing from 2012 to 2015?
Mr. Watkins. Thank you for providing me the opportunity to
respond to that allegation.
Ms. Porter. Oh, it is my pleasure.
Mr. Watkins. There is no gap on the resume that I submitted
to the Bureau. The resume that I submitted to the Bureau--
Ms. Porter. No, I am not--excuse me. I am not--reclaiming
my time, I am not accusing you of any resume impropriety. I am
asking--let me just ask you directly, is it true that, during
that period, you worked for the Alliance Defending Freedom?
Mr. Watkins. That period that you mentioned was a period
when I had left my law firm, when I was disillusioned with the
practice of law--
Ms. Porter. Mr. Watkins, I am not--respectfully reclaiming
my time. I am not interested in your life history. I just
really want to ask about--have you ever worked for the Alliance
Defending Freedom?
Mr. Watkins. Yes, and I did during that time.
Ms. Porter. Were you senior legal counsel there?
Mr. Watkins. I was, and I would be happy to explain what
those duties were.
Ms. Porter. Did you know that the Alliance Defending
Freedom has been designated a hate group by the Southern
Poverty Law Center?
Mr. Watkins. I don't recall if that occurred when I was
there or afterwards, but I do know that that has happened as I
sit here now.
Ms. Porter. In describing the Alliance Defending Freedom,
the Southern Poverty Law Center said that the group, ``supports
the recriminalization of homosexuality and defends state-
sanctioned sterilization of trans people.'' Mr. Sears, the
founder, co-founder, and CEO of the Alliance Defending Freedom,
has described the homosexual agenda as evil and has written
that homosexual behavior and pedophilia are often intrinsically
linked. Do you agree with those views?
Mr. Watkins. Congresswoman, I do not even believe that the
organization holds those views. They would have to speak for
themselves. What you have described is clearly
unconstitutional, and the practices that you mentioned are
clearly unconstitutional, and have no place in the United
States.
Ms. Porter. More than one-third of my staff in D.C., and in
Orange County, are gay. Do you have a message to them to assure
them how you will champion antidiscrimination at the Consumer
Financial Protection Bureau after your advocacy with a gay hate
group?
Mr. Watkins. I did not engage in advocacy; I did not engage
in litigation (my job was, as part of a component of that group
that advises law students.); I did not represent parties in
court; I did not advocate for policies in the legislature. The
information that I believe you are basing these questions on is
mistaken in many respects. I am committed to upholding the
Bureau's policies, both for my internal management of my
office, as well as upholding the constitutional and statutory
framework as interpreted by the Bureau in my external-facing
activities.
Ms. Porter. Thank you, Mr. Watkins.
My time has expired.
Chairman Lynch. The Chair now recognizes the gentleman from
Minnesota, Mr. Emmer, for 5 minutes.
Mr. Emmer. Thank you.
First, I would like to thank all of you for the work you
are doing to encourage financial technology innovation. This
Administration has shown at each and every agency that they are
open to new innovations that may not necessarily fit within our
current regulatory structure. In addition to the SEC, the OCC,
and the CFPB, we have--it is the alphabet soup of letters in
this town--seen some great work by Chairman Giancarlo, Daniel
Gorfine at the CFTC, and Jelena McWilliams at the FDIC, FINRA,
and the amount of agencies on the list could, maybe
unfortunately, go on and on. This committee will consider
reauthorization, as I understand it, of the Export-Import Bank
tomorrow. Many of these financial innovations could be directly
applied to the work done there, improving international
finance, reducing transaction costs, and minimizing delays.
Despite the recent negative remarks of some lawmakers, the
use and support of cryptocurrencies by the U.S. Government
could go a long way to improve our efficiency, as well as
provide for anti-money-laundering oversight. I want to ask
Valerie--I understand you go by Val--a nonsecurity commodity
token that runs on an unowned, decentralized network can have
its origin in a securities offering. My question is about how
that happens. Do securities transform or transmute into
commodities? Or does a commodity simply result from a
securities offering with the initial investment contract and
the commodity token being two separate independent things?
Ms. Szczepanik. That is a great question, and thank you for
that. The way that the staff looks at it at the SEC--and I
think this is reflected in the remarks of Director Hinman last
year--is that it is critical to look at the manner of offer and
sale of a digital asset or any instrument. And at one point in
time, an instrument can be offered and sold as a security
whereas, at a different point in time, it can be offered and
sold as something that isn't a security.
One good example is the Division of Corporation Finance
issued a no-action letter to a company that wanted to issue a
token for jet services. When that company came to us with the
no-action letter, it had a completely functional system, it
wasn't raising money, it had an operational blockchain. And in
that case, the Division issued a no-action letter. Had that
company come to us 5 years previously when hypothetically the
company didn't have operational technology, didn't have jets,
didn't have the ability to provide goods and services in
exchange for a token, and instead was issuing that token in
order to raise the funds needed to build that ecosystem, had
come to issue it at that point in time, the same as--the sale
of the same digital token was likely a sale of a security.
Mr. Emmer. As a follow-up, is the token not a security the
moment it is handed to investors? Or do you look at the
delivered token separately from the investment contract and
analyze whether it is a security? And I know you are talking
about point in time, and maybe I am just confusing the
mechanics and I am asking you the same question again. Clarify
for me, if you will?
Ms. Szczepanik. I believe what you may be referring to is
the use of a purchase agreement to sell a security or token
that perhaps is delivered in the future. Is that correct?
Mr. Emmer. Right. Yes. Sorry.
Ms. Szczepanik. So, typically, we would look at that
purchase agreement as a security, depending on the facts and
circumstances, and that is not normally that hard of a
question. A different question is whether the underlying token
is a security, and that depends on the facts and circumstances.
Mr. Emmer. Again, that is the timing, right?
Ms. Szczepanik. It could be the timing, but it also--you
have to look at the facts and circumstances, for example, when
it is purchased and then when it is delivered, and have those
changed. It is an analysis that is done really at the point of
offer and sale.
Mr. Emmer. Okay. In a talk at South by Southwest earlier
this year, you said that some stable coins might be securities.
If a stable coin is backed by a reserve of assets, the mix of
which is actively managed by the issuer to achieve value
stability, does it matter that the purchaser does not have an
expectation of profits, or can such a stable coin qualify as a
security merely by the purchaser relying on the managerial
efforts of the issuer to keep the value stable?
Ms. Szczepanik. Again, I think that hypothetical would need
to be fleshed out a little bit in terms of the facts and
circumstances of the particular case. Just because something is
called a stable coin does not mean that there aren't the
efforts of others involved. And so we would look behind the
facts and circumstances and also the economic realities to see
whether is there a central party, for example, acting to keep a
price stabilization. Is the formula that they are using likely
to provide a profit over time? Those would be all important
factors that we would look at, among others.
Mr. Emmer. I appreciate it. I see my time has expired. Mr.
Chairman, thank you for the flexibility. Obviously, this is
something that we would love to follow up with more because we
need more clarity in this area. Thank you very much.
Ms. Szczepanik. Thank you.
Chairman Lynch. Absolutely. Thank you.
The Chair now recognizes the gentlewoman from Iowa, Mrs.
Axne, for 5 minutes.
Mrs. Axne. Thank you, Mr. Chairman. And congratulations on
the task force, and thank you to our witnesses for being here
today.
I am happy to be here at the first of the Fintech Task
Force hearings, and I am excited to help shape the role of the
Fintech Task Force and how it plays in our financial system
and, of course, with our economy.
Obviously, fintech is a very broad term. My husband and I
do own a digital design firm, so we dabble somewhat with some
of our customers related to this. I get it to some degree, but
it is a broad term and, of course, this is new to a lot of
folks. And so it is a burgeoning opportunity for this country
that, obviously, those of us here feel very compelled to make
sure is going to work appropriately.
My question is more specifically for Mr. Clark and Mr.
Watkins. Can you explain just a little bit more about how you
differentiate between entirely new services and something that
is, in fact, really an old service, but delivered in a new way?
And then if the team, the group here itself or either one
of you would like to explain further how you would deal with
those differentiators differently as regulators?
Mr. Clark. Sure. It starts with communication. And I can
tell you, speaking for the State of Washington and bank
regulators generally, we want to learn from companies, learn
what is going on with new services.
CSBS wanted to learn more from fintechs in general and
understand the industry. So, they created a Fintech Industry
Advisory Panel, where they had representatives from 33
companies come in and talk about their products.
Our staff have come up-to-speed on much of the technology
that is out there so we can keep pace as a new company comes in
and describes what they are doing. But the key factor that we
try and do is decide, given their business model, are they
engaged in money transmission, which we regulate, are they
engaged in consumer lending, which we regulate, or mortgage or
loan servicing? And we work with them to come to that
conclusion.
CSBS is working on a licensing wizard to help companies and
their counsel learn some of that on their own. So, we are
making progress and we are using regtech to do that. And once
we determine whether we have jurisdiction, we either help them
through licensure--and by the way, we communicate this with
other State regulators. So it is not just Washington making
those decisions. We share the information through NMLS. And if
we don't have jurisdiction, we do not regulate them, we let
them go forward.
Mrs. Axne. And then my question that comes up as a result
of that is, will we have access to--could we see what the
licensing wizard is about? It might be helpful.
Mr. Clark. Sure. We would be happy to give you some
information. It is in development right now, but it is very
promising.
Mrs. Axne. Okay, thank you.
Mr. Watkins, did you have anything to add to that?
Mr. Watkins. Only that you have touched on one of the
toughest questions in this whole area, which is, how do you
define innovation? I think we try to approach that because of
our jurisdiction and our focus on the consumer.
So one way to look at this question is, what is in it for
the consumer? What is new? What is the benefit here? Is it ease
of experience? Is it better pricing? Is it some sort of
functionality that makes this product more attractive for the
consumer? That is what we try to understand as an initial
matter.
Mrs. Axne. Thank you.
Do any other witnesses have any other comments?
Mr. Woolard. I could offer one, if you like. We have dealt
in the U.K. with around 1,500 individual firms through our
projects. I would say the vast, vast majority of those,
probably all but two, are offering at the end of the day
traditional financial services products ultimately when you
strip it all away, when you analyze back to sort of really what
is the core of what is being done here.
However, the thing we are looking for is, are they being
delivered in a particularly innovative way? Is there a
particular consumer benefit from the way in which the firm is
operating? And, also, does that drive a particular efficiency
or a change in the market that could be beneficial for
consumers? But I think the underlying core product, it is quite
hard to distinguish between things that are somehow completely
new and ultimately financial services products that probably
have been around for hundreds of years but delivered in very
different forms.
Mrs. Axne. Thank you very much.
Chairman Lynch. The gentlelady yields back.
What I would like to do is, I would like to give the
ranking member of the task force an opportunity. He has
recently returned from the Floor and was unable to join us for
the last portion of this, but I certainly welcome him. The
Chair recognizes Mr. Hill for 5 minutes.
Mr. Hill. I thank my friend from Massachusetts.
Ms. Knickerbocker, I had asked Mr. Watkins earlier about
valid-as-made. I wonder if you have any comments on that?
Ms. Knickerbocker. With respect to valid-as-made, the OCC
joined a Solicitor General opinion where we believe that the
decision in Madden was incorrect. And I believe that Mr. Otting
has told the committee that we are looking into all of the
options around that.
Mr. Hill. If you have a legislative proposal, I would hope
you would invite its consideration by the committee.
And in a similar vein, the issue of the concept of a true
lender, which is a similar issue in our fintech world on
extending credit, where the bank remains the true lender under
a fintech depository institution partnership, is that something
you believe that the regulatory agencies, the prudential
regulators could clarify that definition of true lender?
Ms. Knickerbocker. Just like with valid-when-made, we will
be looking at that issue. I would point out that the true
lender litigation right now is with State banks and not
national banks, but it is something that we would be willing to
look at.
Mr. Hill. Good. Thank you for that.
Mr. Woolard, I noticed that, in some of the work I read
about your testimony in preparation for the hearing, that loan
volume declined by 11 percent in the United Kingdom after the
introduction of a national consumer rate cap, and that that
was, I think, the expectation. But the actual decline was it
dropped 56 percent, 5 times what the regulatory authorities
estimated within 18 months, and that the number of borrowers
dropped by 53 percent versus an initial estimate of only 21
percent.
Given the regulators' forecast, thinking about the optimal
outcome as it relates to payday borrowing, can you speculate
how those impacts are all from that interest rate cap and what
lessons has the FCA taken from that?
Mr. Woolard. Thank you very much.
That obviously applies, as you said, to the payday lending
market, where we are under duty to institute a cap.
What we have seen there is some significant benefits to
consumers in terms of costs that have been avoided, so several
hundred millions of pounds of charges a year. We have also seen
when we surveyed, actually, consumers have adjusted their
behaviors. So, looking either to effectively cope with a lack
of access to potential credit in some cases or to look for
alternatives to that market that actually might be cheaper. So,
on the whole, I think we have seen in the area of our
evaluation work actually positive benefits that have come from
that cap.
It is worth saying across the high-cost credit market,
where we have a much wider program that includes a whole range
of different products, there is only one other space where we
have taken a parallel kind of intervention, which is around the
rent-to-own lending market, which is about how people buy
household goods at very high rates of interest.
In the remaining areas, we have tended not to use caps. We
only use those, really, as a last resort. And it is really
about trying to find interventions that constrain the harms
that we see in that high-cost end of the market versus the
wider access that there might be for the public to credit.
Mr. Hill. Thank you for that response.
Ms. Szczepanik, let me ask you a question in regard to the
SEC and this issue of data privacy. I mentioned earlier about
Application APIs for use on protecting consumers' data. Do you
believe that is a best practice for people who are trying to do
data aggregation in the wealth management or full financial
picture mode?
Ms. Szczepanik. Sure. As we mentioned, or as I mentioned
earlier, we do have rules around keeping policies, procedures,
and systems in place to protect the data privacy of customers,
for example, investment adviser customers or broker-dealer
customers and others. And we typically don't prescribe the
means that they do. We want the firms to look at what makes
sense for their business, what is state of the art, what is the
best practice. That could evolve over time.
So we expect that they are constantly reevaluating the
systems they have in place to make sure that they are
sufficient, adequate, and state of the art to meet their
obligations under those rules to protect data privacy.
Mr. Hill. Thank you. I appreciate that.
Mr. Chairman. I yield back.
Chairman Lynch. The gentleman yields back.
I now recognize myself for 5 minutes.
Ms. Knickerbocker, I expressed at the beginning in my
opening statement the dichotomy sort of, the different cultures
in the tech world and the traditional banking world. In
traditional banking, we in many cases apply a fiduciary
standard, which is very exacting, and the obligations to the
customer, to the client are quite clear, a bright line.
On the other hand, in the tech world, we have adhesion
contracts. We have, you know, you click, I agree to 73 pages of
obligations, and you are basically giving away your privacy
rights. The privacy agreement is an agreement to give away your
privacy; it is not to keep it.
How do we reconcile those two worlds, and who wins? Is the
fintech merger more like the banking world in that respect, or
is it more like the tech world, where you have big companies
like Facebook and Google vacuuming up personal data, this
behavioral surplus, as Shoshana Zuboff has described in her
book. They are sucking up all this data.
And I am told that I think it is Facebook, on their regular
users, has like 5,000 data points on every one of their regular
users. And now we are going to allow them to link up with a
banking firm, and they will have all that information to
exploit.
How do we reconcile that?
Ms. Knickerbocker. One of the things that the OCC did with
respect to a special purpose charter was look at some of those
particular issues, where you have companies that are engaged in
traditional banking activities but are not subject to bank-like
regulation and examination.
And so one of the things that we looked at with respect to
the charter was the fact that if they were engaged in these
activities--and, again, it is a choice in the United States.
But if they wanted to become a national bank, which we had a
lot of folks that were interested in that, they should be
subject to regulation. We believe that regulation is strong. It
can promote innovation that is done responsibly. And that is
one of the reasons why we propose the special purpose charter.
Chairman Lynch. Okay. I just want to make sure we get that
part of this right. There is a lot of risk in sort of that
dimension of things.
Ms. Knickerbocker. I would--I'm sorry.
Chairman Lynch. No, go ahead.
Ms. Knickerbocker. I would agree with that. I think that
data protection, as the task force is looking at these issues,
should be a key issue that you should look at, particularly
with how fast things are moving now.
Chairman Lynch. Right. Google and Facebook, they don't like
friction. And so all of these requirements--Mr. Woolard, you
have the General Data Protection Regulation (GDPR) in the U.K.
What kind of friction do you see in terms of the fintech firms
operating in that space under that regulation?
Mr. Woolard. Thank you. I think there is a range of
friction, if you want to use that label, that comes not just
from GDPR. It also comes from the Payment Services Directive,
where the underlying assumption is that data belongs
essentially to the consumer. And you think about how that is
being protected and how that is appropriately deployed and
used.
The reality is we can see models emerging where large
amounts of data are being used by firms, artificial
intelligence is being deployed on an increasing basis by firms
in the financial services markets and, indeed, elsewhere.
Again, as I also said earlier, I think a lot of these
technologies have, if you like, a neutral purpose. It is how
they are used and deployed is whether we think they would raise
a regulatory concern or whether, actually, they could provide a
benefit to consumers.
So I think we would all be in favor of better, more
tailored services, which that data could provide. But if that
information is then used to price gouge people, if it is used
to work out whether they are less tolerant to price increases,
for example, then it obviously becomes a concern.
Chairman Lynch. All right. Thank you.
I do appreciate all of the testimony. The task force
appreciates that. I think you have suffered enough. Some
regulators were more prepared to come today than others. We
regret that the Federal Reserve and the FDIC were not able to
participate. One was a last-minute scheduling problem that I
understand.
But, without objection, the statements of the two agencies
provided to the task force for this hearing are hereby entered
into the record: the statement for the record of the staff of
the Board of Governors for the Federal Reserve System submitted
to the task force on June 25, 2019; and the statement of the
Federal Deposit Insurance Corporation, similarly dated.
We also have letters and testimony from the Credit Union
National Association, the National Association of Federally-
Insured Credit Unions, and the Financial Data and Technology
Association, which are all hereby entered into the record.
Without objection, it is so ordered.
I would like to thank our witnesses for their testimony
today.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And this hearing is now adjourned.
[Whereupon, at 4:45 p.m., the hearing was adjourned.]
A P P E N D I X
June 25, 2019
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