If fintech wasn't already a top priority for financial regulators under the Biden administration, it surely is after last week.
Fintech companies were already expecting more enforcement action under the Biden administration, and the WallStreetBets GameStop episode could add to that. Scrutiny of the manipulation of public markets could even lead to a tighter grip on new financial products wholly unrelated to stock trading.
"If you're a fintech company, you will be subject to whatever regulation comes out of this [GameStop] process," said Preston Byrne, partner at Anderson Kill. "But it's too soon to draw conclusions on what will come. The government is still in crisis response mode. The situation is still not over."
In the meantime, fintech companies had been hoping for more openness to new technologies under the Biden administration that could enable them to grow — or barring that, at least more clarity on regulations and rule-making. Last week is unlikely to change the fact that the approach of the new administration is still expected to be very different from the regime under President Trump.
"If nothing else, in the Trump world, whether by lack of competence or ideology that government shouldn't be involved in most things, there just wasn't that much activity on fintech or a lot of areas of technology," said Bradley Tusk, CEO at Tusk Ventures.
So companies have been reading the tea leaves on appointments and potential changes at many federal agencies to predict how things could play out down the line. Top of mind for the government, according to industry insiders and experts Protocol spoke with, will be how underrepresented groups can access financial services, how consumers can access and move their financial data between companies and how consumers can access and manage crypto.
In the consumer interest
The new administration is expected to foreground policies that support protections and policies for unbanked and underrepresented groups, said Andrew Klungness, partner at Fenwick & West. "The administration's going to be extremely receptive to innovation that can be seen as helping consumers who have been underemployed or underbanked, who have lacked access to the financial system," he said.
Under the Trump administration, enforcement at the Consumer Financial Protection Bureau was minimal and the agency cut back on payday loan protections. That's expected to change, Klungness said.
The Robinhood drama could add to regulators' interest in pumping the brakes on anything that hurts consumers. But the SEC and other regulators are playing catch-up to figure out how to address the speed of internet mobs, Byrne said.
"The SEC will likely be faced with an enormous challenge in regulating or determining which trading activity in this stock was bona fide and which was not," Byrne said. "Regulators are going to have to increase the tempo of regulatory intervention to stop these processes before they spiral out of control. There's value to developing circuit-breakers to do that but it's not clear how they will do it."
Regulatory focus on fintech will likely increase across the board, including on crypto, and, for example, bank charters may get harder to get, said Chris Dean, CEO at startup Treasury Prime. "Scrutiny is going to become higher," Dean said. "It'll raise the level of compliance for most fintech companies."
The nomination of former CFPB official Rohit Chopra to head the CFPB is expected to bring more focus on protecting consumers. "The expectation is a stronger focus on consumer protection and a stronger focus on using the authority that CFPB has to the fullest extent in order to protect consumers," said John Pitts, policy lead at Plaid and former CFPB deputy assistant director for intergovernmental affairs.
Any companies seen as predatory regarding consumers will be particularly targeted as enforcement increases, Tusk said. "Anything that smells like payday lending — that's so politically resonant — will get the lion's share of attention," he said.
To support innovation even as scrutiny increases, Klungness hopes for more policies such as regulatory sandboxes or other exceptions to rules for fintech or startup betas, pilots and rollouts. The CFPB in 2019 released a Compliance Assistance Sandbox to give companies safe harbor and clarity on new products or features. Under this program it has issued approvals for PayActiv, Synchrony Bank and others. The U.K. has moved faster here: its Financial Conduct Authority has had six regulatory sandbox cohorts, and set up a sandbox for companies tackling problems associated with the coronavirus alongside The City of London Corporation.
75 words to change fintech
One key area is rule-making around an obscure area of the Dodd-Frank Act's Section 1033 that could have a major impact on fintech.
At issue are just 75 words in the law, which say that consumers have the right to access their financial data, but don't provide details of what data that encompasses, how consumers can do it or what protections they have. Because this section of Dodd-Frank is not currently well-defined, a bank is currently within its rights to deny, say, a request by a consumer to access their bank data through the Mint app. That's problematic for fintech companies, as they need the ability to send and use data to provide existing and new products.
But in October 2020, the CFPB announced plans to make new rules and requested public comment on Section 1033, which will determine consumers' access to and control of their financial data. The CFPB is interested in how data is produced from financial services, how consumers can access it and how they can authorize third parties to access it. The deadline to submit comments is Feb. 4, after which the CFPB will determine if it'll issue new rules.
Changes to Section 1033 could affect what financial data a consumer could send to apply for a loan, or clarify what protections consumers have when using this data. "If something goes wrong, what happens and what protections do people have?" Pitts said.
Changes could also benefit minorities and underrepresented groups — a Biden administration priority — Pitts said.
For example, some fintech apps analyze consumers' cash flow in their checking accounts, rather than a credit score, to underwrite loans. (Companies such as Plaid help facilitate this.) This helps minorities and underrepresented groups that haven't been able to build up a traditional credit file. But for this to happen, banks need to allow consumers to share this data, which a new Section 1033 rule could do. "With 1033 consumer access, consumers can instantly and electronically share their own cash flow history with their lender of choice in order to qualify for a loan," Pitts said.
Consumers can access and share certain financial data now, but some of that access could be removed depending on the rule-making, Pitts said: "Some banks say no, some banks say yes. Consumer rights shouldn't change based on where you bank."
Without such access, consumers would have to print out years of checking account data to send to a lender, which greatly reduces the chance of these loans happening. "The onramp for a credit file is steeper and harder to climb for historically disenfranchised groups than the rest of the population," Pitts said. "With cash flow, if you have a bank account, it's a different source of information that fintechs especially have found are very reliable for underwriting loans. It's not based on historic credit files and whatever discrimination is baked into the system."
Clarity for crypto
While some parts of the Trump administration were seen as crypto-friendly, the crypto industry hopes for more regulatory clarity in the new administration.
"No one wants the sector regulated out of existence," Tusk said. "But no regulation is almost as big of a problem. It's an industry with a lot of bad actors, so industry relies on government to tell you who's legitimate and who isn't. If government isn't, it becomes hard for anything to have legitimacy."
Coinbase, a cryptocurrency exchange company, is looking for three things from the new administration: clarity in terms of regulation, constructive dialogue on using crypto for things like distributing stimulus funding or other money for people who are underbanked and progress toward a "fed-backed digital dollar," said Paul Grewal, the company's chief legal officer. Grewal said he was "encouraged" by the nomination of Gary Gensler as SEC Chair and Michael Barr as comptroller of the currency.
Gensler, a former Commodity Futures Trading Commission chair who helped write the Sarbanes-Oxley Act and more recently taught a course on blockchain at MIT, could help provide clarity for the crypto industry on which tokens are securities and which aren't, Klungness said. "The SEC is trying to get closer to this answer of when is a digital asset a security and when it's not," he said. "It's been a specter over crypto for a long time."
The nomination of Barr, a former board member at crypto company Ripple, also seems to bode well for the crypto industry, Klungness said. The office of the comptroller of the currency has already been in "subtle ways extremely crypto-friendly," Klungness said, citing a recent order allowing banks to custody digital assets. "The mainstreaming of crypto was in a lot of ways spurred by OCC."
"While we expect we will not always agree with these important regulators, we respect their experience with crypto and hope that will lead to even more productive discussions about the best way to expand access to the crypto-economy," Grewal said.
Elsewhere, for the CFTC, which oversees derivatives markets, Georgetown Law professor Chris Brummer is reportedly in line to be nominated head of the commission. He's been involved with crypto for years and has a fintech podcast. "That's fantastic for crypto," said Jesse Spiro, global head of policy at Chainalysis. "He has a deep working knowledge of virtual assets."
"Some political appointees named so far have very good working knowledge of crypto and domain expertise that I don't think we saw in the previous administration," Spiro said.
It's still early to know how crypto regulation will go, but Grewal said that the written responses given by Treasury Secretary Janet Yellen at her confirmation hearing "suggest a longer-term coordinated effort among all financial regulators."
Yellen will likely focus on repairing the overall economy first. She could also take less of a hands-on approach to crypto than Steven Mnuchin did, giving more authority to agency heads and the under secretary for terrorism and financial intelligence, Spiro said.
Still, Yellen has made anti-crypto statements, Klungness said. And in addition, FinCEN, a Treasury agency, issued a rule-making in December that many in the crypto industry saw as overly harsh and difficult to implement.
"It'll be interesting to see how her role intersects with others in the administration who are more pro-crypto," Klungness said.