FinTech Regulatory Update (4/16)
What regulatory news did you miss this week?
Hey all 👋
Here’s your TL;DR roundup of FinTech regulatory highlights from the past week…
Gensler Confirmed
Gary Gensler has been confirmed as the SEC’s Technoking (ok, fine, just SEC Chair). Key things to know: he’s taught MIT courses on crypto, ran the CFTC after the 2008 crisis, and has a reputation an aggressive “bare-knuckle” regulator.
Expect crypto and climate regs, and an uptick in securities enforcement.
Updated ICO Safe Harbor
Commissioner Peirce1 released v2 of her ICO safe harbor.2 Some key points:
You get three years to make your blockchain sufficiently decentralized.3
You need to make certain disclosures.
You need to file notice and an exit report with the SEC.
ICOs that already happened are eligible to rely on the safe harbor.
Drew Hinkes has a great breakdown if you want more details.
MA Wants to Cancel Robinhood
🙄
Massachusetts regulators want to revoke Vlad’s broker-dealer license.4 Too much confetti, maybe.
RH responded with a blogpost accusing the regulator of being “elitist.” Uhh…probably not what you want to call a state regulator who wants to cancel you?
Sheel Tyle pointed out that MA also tried to prohibit residents from buying Apple IPO stock because it was too risky. Here’s a fun WSJ throwback on that 1980 decision:
This move is interesting, JP Schnapper-Casteras points out, because Massachusetts has one of the biggest lottery systems in the US. Whoops.
Rotman’s Rant
Frank Rotman tweeted an excellent response to Jamie Dimon’s shareholder newsletter. This isn’t really news…but regulation is core to FinTech that your mental framework for handling regulatory risk is crucial.
In his response, Frank noted that good financial innovators don’t minimize regulatory risk, they manage it.
This is spot on. The goal is to cap your regulatory downside; incumbents instead tend to cap their upside.
Here’s a follow-up thread with Frank and others if you want more nuance.
Bank Innovation Hearing
Yesterday, the House Consumer Protection and Financial Institutions committee had a hearing on banking innovation. SO MUCH FINTECH POLICY.
Some highlights:
California Rep. Brad Sherman had some unbiased things to say about cryptocurrency (see above picture).
TIL: only 43 de novo bank charters have been approved since 2010, and the number of FDIC-insured depositories has decreased by almost 2,000 (or 4 per week). We have around half as many as we did in 2000.
One thing everyone agreed on was privacy, privacy, privacy. It matters more than ever post-COVID, when many Americans moved to digital services, making them even more surveillable.
Man, Brian Brooks is good. His written testimony is a phenomenal pro-FinTech framework. Also worthwhile are Kristin Johnson and Raúl Carrillo’s statements.
One uncommon point Brooks made is we should have regs requiring FinTechs to help their communities.5 This is going to become more common.
TIL (from Brooks): Did you know that the (usually derogatory) “rent-a-bank”6 scheme refers to situations where no one was liable for consumer protection failures? That’s the difference between the old rent-a-bank model and FinTech lenders relying on partner banks for interest rates nowadays; the bank is still liable. Skin in the game.
Here are some live tweets of highlights, and you can watch the 2.5 hr hearing here if you’re having trouble sleeping.
And with that, hope everyone has a good weekend.
About
Any views expressed are my own (well, sort of? I mean, they’re laws and regulations, so they’re not really “mine”). Nothing here is legal or financial advice.
I before e, except after p? Everyone spells her name wrong. You’ve been warned.
Security offerings need to be registered with the SEC; a lot of ICOs are securities. But they turn into commodities when they’re sufficiently decentralized, at which point you don’t need to register. Peirce’s framework creates a safe harbor. See the Crypto TL;DR for background.
For the curious, the proposal defines “decentralization” to mean either: (1) not economically or operationally controlled or unilaterally changeable by a single person or affiliated group (networks where one person or affiliated group owns >20% of the tokens fail this), or (2) the network is functional and holders are actually using tokens.
TL;DR: RH ain’t an exchange. It’s a broker-dealer. It executes your orders by sending them to exchanges. As a broker-dealer, it needs licenses.
Banks normally have requirements to make sure they’re serving their community under the Community Reinvestment Act (CRA). They get “ratings” based on how well they do, and regulators use those ratings when deciding whether to approve a bank merger, expansion, etc. Practically, though, most banks easily get good ratings. Generally, FinTechs who don’t have bank charters but offer banking services aren’t subject to this CRA requirement.
See the “Interest Rate Reliance” section of the FinTech Lending TL;DR for background.