[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 -------------------------------------------------------------------------------------- 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 ---------- 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 [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]