The Future of Fintech Regulation

Fintech companies received some good news at the end of July, when the US Department of the Treasury’s Office of the Comptroller of Currency (OCC) announced it would accept applications for special bank charters that, if approved, would allow fintech businesses to operate nationally.

This was great news on the surface, but fintech’s regulatory climate has never been straightforward – news welcomed by the companies themselves was met with strong opposition from states and inter-state organizations.

The OCC is responsible for ensuring the safety of the national banking system, for fostering competition by allowing banks to offer new products, and for efficiently overseeing banks without creating an undue regulatory burden, among other duties. While their mission is straightforward, fintech has presented unique challenges, in part because there is no single type of fintech company.

Cryptocurrency exchanges, for example, are viewed as money service bureaus (MSBs) because they transfer funds; but initial coin offerings (ICOs) are considered securities, and subject to Securities and Exchange Commission (SEC) rules. A digital payments firm is categorized as an MSB under the Banking Security Act, meaning they need to register on a federal level with the Financial Crime Enforcement Network at the Department of the Treasury and receive a state license.

Despite common goals, state and federal regulatory bodies remain in conflict as to who should lead the charge. There have been positive developments, as states have developed initiatives to streamline non-bank financial activity, including CSBS’s ‘Vision 2020,’ which aims to create an integrated state licensing and supervisory system across all 50 states by 2020. Meanwhile, the federal government has expressed a desire for fintech innovation to continue within a more consistent set of regulations – a stance not entirely at odds with the states, though they have been reluctant to cede decision-making control.

While a single regulatory framework has yet to emerge, there is room for hybridization between the two approaches – a unified approach that is ultimately necessary to limit the possibility of financial crimes. Variations in regulation on a state level can create loopholes for money launderers and other criminals, eager to exploit less-demanding requirements if they present themselves. More demanding standardization applied with great consistency will help mitigate overall financial crime risks, creating a safer environment for all.

Until that time arrives, fintech firms will need to continue to manage risks independently. By integrating best practices now – risk assessment, building systems in response to identified risks, and leveraging data in pursuit of both of these goals – fintech companies can ease the future conversations with regulators while setting themselves up for immediate success with their customers.