The United States Treasury Department, in a recent report, is recommending that state and federal regulators loosen their grip on FinTech and financial services firms to allow them to innovate.
In the report released earlier this week, the Treasury urged state and federal regulators to revamp outdated statutes and support innovative financial technologies, including artificial intelligence, machine learning, and blockchain, in order to create economic opportunities.
The Trump administration first commissioned the report 18 months ago under Executive Order 13772 “On Core Principles for Regulating the United States Financial System.” The goal of the report was to explore how innovative FinTech practices could produce economic opportunities for the United States. The report emphasized non-bank financial services providers, including credit lending companies, servicing organizations, and payment networks, as well as FinTech companies.
The report was written by Steven T. Mnuchin, Secretary of the Treasury, and Craig S. Phillips, Counselor to the Secretary, in partnership with staff at the Department of the Treasury.
The report identified three important FinTech trends, including:
- Rapid advances in technology
- Increased efficiencies from the rapid digitization of the economy
- An abundance of capital available to push innovation
The report cites encouraging stats from the FinTech field, including the fact that more than 3,330 new technology-based FinTech companies were founded between 2010 and 2017, and that there’s been a thirteen-fold increase in the financing of digital financial services firms, rising to $22 billion globally in 2017.
The report’s authors were also encouraged by the rise of non-bank lending activity. A growing number of lenders are choosing to get loans from institutions that aren’t banks, including “high-tech, non-bank firms,”, which now make up more than 36% of all personal loans in the United States. In 2010, these firms made up less than 1% of all US personal loans.
Does The Current US Regulatory Structure Make Innovation Difficult?
Is the United States a difficult place for FinTech firms to work? Is there a reason so many FinTech firms are based in Hong Kong, Singapore, Switzerland, and other regions perceived to be more FinTech-friendly?
Computer World, in their writeup on the Treasury Department report, cited a financial services regulatory attorney who claimed there’s a “perception” that US regulatory structure makes innovation difficult.
One of the biggest hurdles faced by FinTech firms in the United States is that businesses that wish to launch a product nationwide need to analyze risk and exposure at a state level:
“If they are subject to state laws, they must also set up their compliance management systems to track and stay updated on state legislative and regulatory changes. Treasury advocates more streamlined approaches for several areas of law and regulation,” that lawyer explained to Computer World in an email.
In other words, America is made up of 50 different states with 50 different regulatory requirements, making it difficult for FinTech companies to innovate across America.
Meanwhile, when the Treasury tries to make laws that encourage FinTech innovation, they’ve been accused of overstepping federal government boundaries and infringing on the authority of individual states to regulate local business.
Regulatory Uncertainty Is One Reason Why Blockchain Adoption Has Been Slow Across The United States
The report also cites regulatory uncertainty as one reason why American firms have been slow to adopt blockchain and other distributed ledger technologies.
The 222-page report doesn’t dive into deep detail about blockchain technology and cryptocurrencies. However, the report seems to favor an overall clarification on regulations, particularly in regard to bank partnerships with non-bank financial firms and startups that encourage innovation.
The report also expresses concern about how blockchain startups can accommodate different state-by-state regulations.
What Should America Do To Encourage FinTech Innovation?
To sum up their report, the Treasury ultimately recommended implementing four key changes in the United States, including:
- Adapting regulatory approaches to changes in the aggregation, sharing, and use of consumer financial data, and to support the development of key competitive technologies
- Aligning the regulatory framework in order to avoid unnecessary regulatory fragmentation while also accounting for new business models enabled by financial technologies
- Updating activity-specific regulations across a range of products and services offered by non bank financial institutions, including products and services that have become outdated in comparison to recent technological advances
- Advocating an approach to regulation that enables responsible experimentation in the financial sector while improving regulatory agility and advancing American interests worldwide
Ultimately, America is home to some of the world’s wealthiest tech companies, but its banking sector remains surprisingly outdated compared to financial services worldwide. The 222-page report from the Department of the Treasury outlines some of the ways to change that. By clarifying regulations and unifying standards across states, the Treasury believes we can encourage FinTech regulation across the country.