Treasury's regulatory easement may benefit fintechs

In response to Executive Order 13772, issued in February 2017, the U.S. Department of the Treasury has been easing restrictions pertaining to key financial services sectors. The department previously published guidelines for the bank and credit union, capital market, and asset management and insurance sectors. The fourth and final report of the series, published July 31, 2018, provides guidance for fintech firms.

U.S. Secretary of the Treasury Steven T. Mnuchin said Treasury staff members who crafted the reports met with numerous stakeholders in consumer financial data aggregation, lending, payments and credit servicing sectors, and he expects ensuing recommendations to drive rapid adoption of competitive technologies, data security and operational efficiencies. The goal is to simplify regulatory standards and create a financial system that supports all stakeholders, including nonbank finance and fintechs, he added.

"American innovation is a cornerstone of a healthy U.S. economy," Mnuchin stated. "Creating a regulatory environment that supports responsible innovation is crucial for economic growth and success, particularly in the financial sector."

Core principles, recommendations

Treasury reports, which include extensive glossaries of commonly used acronyms and abbreviations, are organized under the following core principles:

• Data protection: Recommendations for improving efficiencies and using advanced technologies to protect and secure consumer financial data. These protections include transparent consumer disclosures and national data breach notification standard.

• Update regulatory framework: Streamline the regulatory environment to foster innovation and avoid fragmentation. Outdated regulations fail to address cloud computing and mobile business models, researchers noted.

• Modernize regulations: Update regulations to include emerging technologies across an array of financial products and activities. New rules must account for artificial intelligence, machine learning and big data, which power innovation across the broader economy, spanning the power of Internet search engines, facial-recognition software, and the potential for autonomous cars, researchers noted.

• Promote innovation: Facilitate "regulatory sandboxes" to promote innovation. Creating an environment that encourages experimentation will help the United States maintain its leadership in financial innovation, while engaging in "agile and effective regulation for a 21st century economy," researchers wrote.

Critics remain skeptical

Critics appreciate U.S. government efforts to create a fintech-friendly environment but say more can be done. Forbes contributing writer Sarah Kocianski suggested proof of concept will be achieved when recommendations are implemented.

"There are many obstacles still to be overcome, such as federal and state regulators agreeing to the proposals in the first place, before you even get to a stage where they agree to work together and implement them," she wrote in "We're A Long Way Off from the U.S. Being a Utopia for Fintech," published Aug. 7, 2018. "There is also the fact that some of the recommendations, while being good for businesses, are not so great for consumers."

Kocianski cited the "Payday Rule" as an example, noting it requires lenders to determine a borrower's creditworthiness while failing to protect vulnerable consumers. This would likely "be damaging to both individuals and the economy in the longer run," she noted.

Forbes contributing writer Aaron Stanley expressed disappointment that cryptocurrency and blockchain technologies were only "mentioned in passing" in the Treasury report. "Money transmission licensing rules have been a perpetual thorn in the side of cryptocurrency companies operating in the U.S.," Stanley wrote in a July 31, 2018, article titled "What Does the U.S. Treasury Fintech Report Mean for Crypto?" Activities are regulated on a state-by-state basis, without a unified license passporting structure such as the model being used by the European Union, he added.

On the positive side, Stanley noted the report contains constructive approaches to streamlining regulations."The core theme of the 222-page report is that more governmental support for innovators and entrepreneurs is required across the board, and that Treasury is keen to provide that push when necessary within the regulatory ranks," he wrote.

A full copy of the report is available at: home.treasury.gov/sites/default/files/2018-08/A-Financial-System-that-Creates-Economic-Opportunities---Nonbank-Financials-Fintech-and-Innovation.pdf .

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