There is a fundamental shift taking place in the financial services industry as technology is enabling startups and incumbents alike to lower the cost of banking and investing, provide more widespread access to financial services, and increase the efficiency of our capital markets. However, with this innovation comes disruption, as well as friction with existing regulatory frameworks. On September 12th, the Center for Monetary and Financial Alternatives hosted a group of innovators, investors, policy wonks, and regulators in San Francisco for “Fintech Unbound: The Cato Summit on Financial Regulation.” The event featured two keynote speeches and three panel discussions on the positive role that policy change can play in reaping the benefits from the ongoing fintech revolution in banking, capital markets, payments, and the emerging crypto economy. Below is a synopsis of the Summit with links to video coverage.
SEC Commissioner Peirce kicked things off with a speech likening a regulator’s role to that of a parent. This metaphor was particularly appropriate in light of her social media nickname “Crypto Mom” – a title she earned after her critical dissent in the SEC’s decision to the deny the Winklevoss twins’ application for a Bitcoin ETF.
Peirce said regulators should strive to be “free-range” rather than “helicopter” parents; in other words, they should allow for risk-taking, which according to Peirce, is a key purpose of financial markets. Like a parent who hovers over a child to protect them from unknown dangers, regulators too often take the default position of shielding investors from potential losses. This results in chilled innovation and gives prospective investors the false idea that they need not conduct their own due diligence.
Peirce concluded her remarks by highlighting the importance of humility: “I do not know which technologies will succeed and fail. It is not my job to assess the relative merits of different products and services.” Regulators need an attitude of humility to ensure “the U.S. [is] a comfortable home for the next generation of innovators.”
The first panel of the day was moderated by CMFA’s own Diego Zuluaga, who framed the discussion around the promises of technology to facilitate financial inclusion. Joining him were two regulators – Paul Watkins of the Bureau of Consumer Financial Protection’s (BCFP’s) new Office of Innovation and Barry Wides, Deputy Comptroller of Community Affairs at the Office of the Comptroller of the Currency – and two industry practitioners – Jay Reinemann of Propel Venture Partners and Louis Caditz-Peck of LendingClub. The mix of perspectives allowed for an informative back-and-forth.
The conversation started with Caditz-Peck describing three ways he sees technology aiding financial inclusion: (1) it lowers transaction costs, (2) it improves decision-making through new data and insights, and (3) it’s naturally inclined to focus on unserved populations because that is where the biggest market opportunity exists. Later, Wides praised Caditz-Peck’s summary and pointed out that the Treasury Department’s recent fintech report echoed many of the same points. He also spoke about the OCC’s new “Fintech Charter,” which allows financial institutions involved in lending or payments to apply for a special purpose national bank charter that is less onerous than charters for deposit-taking institutions.
Reinemann, whose venture fund invests in companies disrupting the financial services space, talked about how startups have a comparative advantage in using technology and their ability to recruit the right talent to improve everything from back office operations to customer service. He also offered his views on the challenges of the procurement process within big banks and what that means for consumers.
Watkins shared the goals of the BCFP’s new Office of Innovation and explained how the tendency for regulators to think that innovation is at odds with “consumer protection” (i.e. fraud-prevention) is misguided. The ability for the consumer to choose new, more-innovative products is as strong a (if not stronger) form of consumer protection than an agency like the BCFP bringing a fraud action. Watkins’ also described how this philosophy informed his own experience with regulatory sandboxes when he served in the Arizona attorney general’s office prior to joining the BCFP.
The second panel of the day, moderated by CMFA managing director Lydia Mashburn, focused on how fintech is expanding opportunity for capital formation and retail investment. On stage with Mashburn were J.W. Verret, associate professor at George Mason University’s Antonin Scalia Law School; Haimera Workie, Senior Director and Head of Emerging Regulatory Issues at FINRA; Spencer Bogart, partner at Blockchain Capital; and Hardeep Walia, founder and CEO of Motif, a tech-driven thematic investing application. The panel featured a fascinating conversation about rules vs. principles-based regulation.
Verret kicked things off by describing the regulatory challenges and opportunities at the intersection of fintech and capital formation. He criticized the SEC and Congress for not creating an environment in which new, more accessible funding models can flourish, citing, for example, how New Zealand has a larger market capitalization than the United States when it comes to crowdfunding.
Workie, the panel’s regulator, followed up by talking about the critical “balancing act” between regulation and innovation that is required to create an ideal marketplace—ensuring investor protection and market integrity on the one hand without stifling promising new ideas on the other. He also discussed FINRA’s Special Notice process, which actively seeks input from market participants to improve its own performance as a regulator.
Walia shared his hands-on experience with bringing his fintech company, Motif, to market—including the regulatory hurdles they have faced and some amusing anecdotes about the disconnect between start-ups and regulators. When FINRA placed Motif on a “new and novel” list he thought that was an accomplishment—until his compliance officer told him that, in this industry, it is better to be “old and boring.”
Bogart built on Walia’s thoughts about the challenges of building innovative companies in the finance space, especially when it comes to crypto. With the advent of what he calls the “parallel world of crypto finance,” finance can operate in an entirely “crypto-native” environment—without touching US dollars or other official currencies, and thus entirely avoiding any established (and regulated) financial systems. He noted how his portfolio companies are often drawn to offshore or crypto finance environments because they are friendlier to innovation.
The third and final panel was moderated by Matthew Feeney, director of Cato’s new Project on Emerging Technologies. Joining him were John Collins of the fintech advisory firm FS Vector; Andrea O’Sullivan, co-author of Bitcoin: A Primer and feature writer for The Bridge; Gerry Tsai, director of applications and fintech at the San Francisco Federal Reserve; and Ryan Zagone, director of regulatory relations at Ripple. The conversation centered around the two main changes taking place in the payments space: improvements to user experience in the current system and how distributed ledger technology is creating a whole new system.
Zagone talked about Ripple’s experience interacting with regulators while building a payments company and the international regulatory competition between countries that are hoping to become a “global capital of finance” in a future where crypto and fintech have matured.
Tsai commented that developing countries might have an advantage in the adoption of new technologies due to the lack of legacy electronic payment systems that need to be replaced. He also filled the crowd in on the existing efforts at the Fed to study and adapt to blockchain technology and other tech-driven improvements to the US payments system.
O’Sullivan touched on the debate within the Bitcoin community since its inception about scaling the technology to deal with slow transaction speeds. She also noted how ordinary consumers, particularly those in countries with volatile monetary conditions like Venezuela, benefit from payment system options.
Collins mentioned the Lightning Network as a second layer solution to facilitate quicker transactions. In addition, he chimed in on the privacy concerns with cryptocurrencies, especially if issued by central banks in the future, which yielded an interesting discussion about industry efforts to work with law enforcement.
The panel concluded with the speakers sharing what they’ve learned over the last 10 years of financial technology development and how it informs what should be done as the market continues to innovate.
The closing keynote was delivered by Balaji Srinivasan, former CEO of Earn.com and current Chief Technology Officer of Coinbase. His speech focused on “blockchain as a transnational, algorithmic regulator of a more open financial system.”
Srinivasan predicted that the adoption curve of blockchain technologies will mirror that of the internet and that, within 20 years, most people will have at least 50% of their net worth in blockchain-based or blockchain-inspired assets. Then he explained some of the “technological 10x’s” blockchain enables, such as: faster payments, easier crowdfunding, and setting up a business (through smart-contracts) or bank accounts (without the bank).
These improvements, combined with the global and “transnational” nature of blockchain, make it impossible for any one country to stop. Thus, per Srinivasan, blockchain-based systems can displace national regulators, whose role should become one that helps usher in this new era in a safe, minimally frictional manner.
Watch the Summit in full or pick and choose a panel or keynote to view here.