RDP’s Industry Agenda series will explore how different industries seek to influence executive personnel decisions.
Fintech, short for financial technology, refers to apps and other software that provide various forms of consumer-facing financial services, including lending, investing, payments, and banking. Cryptocurrencies, such as bitcoin, are digital assets that utilize stored ledger technologies. Cryptocurrencies are not typically considered “fintech” since they are a medium of exchange and type of investment, rather than a means of facilitating investments, but the two industries are closely interrelated, both harnessing technology to create financial products.
Fintech remains quite young — the Obama administration’s financial regulatory agencies conducted several “incubator” programs to help kick off the then-nascent industry, which has developed over the Trump years and is now poised to enter the mainstream of American financial life. Some better-known fintech companies include the payments apps Stripe, Venmo (PayPal), and Zelle; the stock-trading apps Robinhood and SoFi Invest; consumer lender Affirm; and crypto exchange facilitators Coinbase and Ripple.
However, these new companies bring with them new potential harms to financial consumers, as well as new systemic risks the financial regulatory apparatus has not seen before. Just last month, amateur investors used Robinhood to drive up the price of GameStop stock to spite a few hedge funds betting against the video game retailer. But in many cases, the amateur investors lost significant wealth while enriching other hedge funds who exploited the rally. This led to increased scrutiny of Robinhood, increasing public awareness that the firm sells user trading data back to Wall Street firms and allows them to complete transactions based on that information before Robinhood users, despite its faux-populist marketing about “democratizing finance.”
Since fintech apps provide a wide range of financial services, there are many potential harms to leaving the industry largely under-regulated — especially since many fintech and cryptocurrency firms design their products to narrowly evade existing laws that define certain types of financial products, and thus, the regulations to which they are subject. Fintech lending firms could abuse data driven insights to profile and target consumers with unfavorable offers. Additionally, the reliance on data allows lenders to predict and preempt consumers behavior in unclear and manipulative ways. Robinhood, for instance, sells users’ trade data to large Wall Street firms, allowing big players to stake positions off of this knowledge and effectively overcharge Robinhood users, lured by promises of co-commission trades, to facilitate certain transactions. As the Robinhood scandal showed, the commodification (tracking and sale) of users’ financial data is key to fintech firms’ business practices, raising both moral and regulatory questions, especially since most of the lending occurs in the dark.
As more and more financial and commercial activity occurs online, and fintech and crypto firms develop “innovations” and products designed to meet the public’s needs in this new space, it’s also worth asking how many of these new products are really privatizing what should be public functions. For example, rather than relying on carbon-intensive and inherently valueless bitcoin for non-traceable online currency, why not create a government-issued digital equivalent of cash? Congress or other executive branch actors could create such a form of “digital cash,” but the fintech and crypto industries have strong incentives to oppose such a development.
As fintech and cryptocurrency become more popular and sophisticated, they will inevitably become more entangled in the politics of regulation and executive-branch activity. Here is what you need to know about fintech and crypto’s agendas for the Biden administration.
What are the executive branch issues Fintech cares about?
Special Purpose Fintech Charter: The Comptroller of the Currency, an independent official housed in the Treasury Department, can grant federal bank charters to firms as they choose. First introduced by Obama’s Comptroller of the Currency Thomas Curry in December 2016, the special purpose charter frees fintech firms to operate nationally as non deposit-taking banks. This national validation would allow firms to ignore state specific licensing requirements that protect consumers and empower them to partner up with Too Big To Fail institutions to further consolidate financial services. Both of Donald Trump’s appointees to the Office of the Comptroller of the Currency attempted to go forward with the charter despite opposition, including lawsuits from state regulators across the country. Management of this issue is likely to be a key priority for the next Comptroller of the Currency as fintech firms continue to seek favorable policies.
Product Classification and Regulation: Different financial products are subject to different executive-branch regulators depending on how they are legally classified. Securities, for instance, are the bread-and-butter of the Securities and Exchange Commission, while futures derivatives are overseen by the Commodity Futures Trading Commission. The amorphous nature of fintech and associated products, especially cryptocurrencies, continues to create a product classification problem. Some of these companies deliberately try to build products that don’t meet the legal definitions of any existing financial product, meaning they can avoid almost all regulation under current regimes. Ripple, for example, currently faces a multi-billion dollar lawsuit filed by the SEC for failing to register its cryptocurrency, XRP, as a security. The SEC argues that XRP currently serves no purpose besides funneling cash to Ripple, while Ripple contends that XRP is not a security. The outcome of this lawsuit may set precedent for the classification and regulation of crypto under U.S. law. Additionally, fintech firms provide financial services to consumers, granting the Consumer Financial Protection Bureau the rights to enforce necessary consumer protection laws. The CFTC also classifies some virtual currencies such as Bitcoin as commodities and is responsible for regulating all products on the derivatives market.
Privacy: Personal data collection and commodification is a major aspect of fintech firms’ business practices. Firms collect data to develop lending profiles and, as the Robinhood saga has shown us, sell data to inform Wall Street players of market movements. Fintech firms and trade groups are actively pushing for more invasive forms of surveillance technology such as biometric data to replace traditional requirements. While the United States currently lacks nationwide digital privacy laws or standards, the Federal Trade Commission has served as a limited, de facto privacy regulator under its powers to prevent “unfair, deceptive, or abusive acts or practices,” or UDAAP. The FTC and CFPB, moreover, have significant experience enforcing UDAAP law against traditional brick-and-mortar lenders. At least some of this experience would likely be relevant to protecting privacy and policing consumer abuse in the fintech space. Balancing the legitimate need for consumer financial privacy with effective anti-money laundering enforcement, especially for non-traceable, non-traditional currencies like bitcoin, will be another unique problem for the Biden administration.
What agencies is the fintech industry seeking to influence?
Through typical processes such as lobbying and other pressure tactics, the young fintech industry is seeking to influence Biden’s administration personnel, as well as policy decisions that will shape their outlook for the next years. These agencies are of particular interest to fintech firms:
- Office of the Comptroller of the Currency: With its ability to issue special purpose charters, the OCC is a significant chokepoint for any fintech firm hoping to lend across state lines, take deposits, or access the Federal Reserve payments system. The OCC also has the power to determine how banks interact with cryptocurrencies, as they can grant banks permission to use, issue, and exchange stablecoins for fiat currency.
- Commodity Futures Trading Commission: The CFTC classified virtual currencies such as Bitcoin as commodities in 2015 and is responsible for overseeing the US derivatives market, including instruments exchanged on fintech platforms.
- Consumer Financial Protection Bureau: Earlier this year, a CFPB task force recommended that the Bureau assume the responsibility of regulating fintech firms and issuing federal charters. If Congress authorizes such a change, the CFPB will gain a huge amount of power over the industry. The CFPB is also responsible for ensuring the industry complies with consumer financial laws, supervising fintech firms’ practices and taking enforcement actions when necessary.
- Securities and Exchange Commission: The SEC has jurisdiction over securities and securities-related products. Hence, any fintech products classified as securities fall under its regulatory authority. As the current lawsuit against Ripple shows, the SEC also has the power to determine whether products such as business-issued cryptocurrencies are securities and apply relevant regulatory scrutiny.
- Federal Trade Commission: The FTC is the United States’ current de facto privacy regulator, and its experience enforcing UDAAP law against traditional lenders gives it jurisdiction and some relevant background for consumer protection against fintech product abuses.
- Financial Crimes Enforcement Network: FinCEN, a bureau in the Treasury Department, is the administrator and primary regulator of the Bank Secrecy Act — the U.S. anti-money laundering statute. Hence, FinCEN has supervisory and enforcement authority over all parties in the US financial system. The bureau will play a key role monitoring potentially illicit use of fintech and crypto products.
What previous work experience should raise serious questions for Biden’s nominees and appointees?
Beyond simply registered lobbying, there are a number professional and personal activities that should raise concerns or disqualify individuals from serving in an administration committed to effectively regulating fintech. These include:
- Working directly for a fintech/crypto firm or trade association after previously working in a senior executive-branch position, especially a political appointment.
- Lobbying on behalf of a fintech/crypto firm or trade association, either under their direct employ or as a client at a lobbying firm.
- Working for a law firm frequently or currently hired by a fintech/crypto firm, especially to defend the fintech/crypto firm on antitrust, privacy, consumer, or other politically relevant concerns.
- Either significantly investing personally in the fintech/crypto sector, or advising those who do.
- Working for a think tank, philanthropy, or advocacy non-profit funded significantly by a fintech/crypto firm or trade association to work on fintech/crypto-relevant issues.
- Conducting academic research funded by a fintech/crypto firm, especially research on topics relevant to that firm’s interests and which is flattering to the firm overall.
- Conducting professional fundraising by targeting and receiving funds from executives and firms in the fintech/crypto sector.
What questions should nominees with recent connections to the fintech/crypto industry be required to answer?
In order to ensure all potential conflicts of interest are disclosed, Senators should ask the following questions of Biden’s nominees during and after confirmation hearings:
- Have you ever been employed by any fintech/crypto firm, or had a fintech/crypto firm as a client for lobbying, consulting, legal, or other services? If so, name the firms.
- Have you ever had an equity stake in any fintech/crypto firm, especially those which you have advised or been employed by? If so, name the firms.
- Do you believe it is likely that any fintech/crypto companies that compensated you marketed their association with you to prospective investors?
- Have you ever provided policy, regulatory, or strategic advice to a fintech/crypto firm? If so, how were you compensated, and how much were you compensated? Which clients have you advised, and what was the content of your assistance?
- Have you ever invested personally in a fintech/crypto firm, or professionally advised investors in a fintech/crypto firm? If so, for how long did you have this financial or advisory relationship, and are the activities of the firms in which you or your associates invested relevant to the position for which you are now nominated?
- Have you ever advised or been employed by a non-profit organization substantially funded by a fintech/crypto firm, such as a think tank or advocacy organization? If so, were you compensated? Has this non-profit organization produced work relevant to the position for which you are now nominated? When did your employment by this organization end, and when did the organization stop marketing their association with you?
- Have you ever conducted research funded by a fintech/crypto firm or investors in fintech/crypto firms? If so, was such research relevant to the position for which you are now nominated? Were you compensated by the firm(s) or investor(s)?
- If you have ever served in a professional fundraising role, have you raised funds from a fintech/crypto firm or its major executives and/or financial backers?
- If you have answered “Yes” to any of the above questions, in what ways do you expect to govern or regulate on issues relevant to the firms with which you have a past association? Do you predict that these firms will materially benefit from your governance decisions?
- Will you commit now to not pursue nor accept employment, compensation, or other professional benefit from fintech/crypto firms after you leave this role? Regardless of your answer to the previous question, what do you predict you shall pursue professionally after your time in government service?
- Do you think an association with a former regulator or political actor helps a firm convince investors or clients that it is legitimate, law-abiding, and effective at lobbying?
Who are the FinTech allies seeking administration jobs?
The following individuals with connections to the FinTech sector have been floated for top jobs in the administration.
- Michael Barr: Michael Barr was Obama’s Assistant Secretary for Financial Institutions from 2009-2010. He ran the HAMP program which helped transfer risk and liability from the banks to homeowners, despite promising to do the opposite. Since then, he has advised the controversial fintech startups Lending Club and Ripple and is currently an advisor to a fintech-focused venture capital fund whose investors all come out of established Wall Street and Silicon Valley giants. Barr is involved with many non-profits which are highly optimistic about fintech, some of which are funded by the industry. He is a major advisor to the Alliance for Innovative Regulation, which seeks to overhaul the American financial regulatory system to reduce public input and increase reliance on artificial intelligence, machine learning, and other “black box” technology systems, all the while reducing regulations which affect fintech. Barr is a frontrunner to lead Biden’s Office of the Comptroller of the Currency, though progressive groups have raised substantial concerns over his appointment.
- Amy Friend: Amy Friend previously served as Chief Counsel of the Office of Comptroller of the Currency. In this role, she developed what would become Special Purpose National Bank Charters, which give fintech companies unprecedented exemptions from state and federal banking laws. After her government service, Friend revolved into the private sector, joining the board of Varo Bank in order to help it win the first fintech bank charter issued by the OCC. Friend also works for a fintech lobbying firm, FS Vector, in their regulatory arm, helping fintech companies skirt OCC regulations. Additionally, Friend sits on the board of a nonprofit funded by a fintech-focused venture capital firm to produce arguments for deregulating the financial system. Friend is currently in contention for a high level regulatory post at the OCC.
- Chris Brummer: Chris Brummer is a “fintech evangelist” who founded Fintech Week, hosts the Fintech Beat podcast, and wrote the 2019 book Fintech Law in a Nutshell. He serves on the advisory board of the Alliance for Innovative Regulation, which seeks to overhaul the American financial regulatory system to reduce public input and increase reliance on artificial intelligence, machine learning, and other “black box” technology systems, all the while reducing regulations which affect fintech. Brummer is a top contender to serve as chair of the Commodity Futures Trading Commission (CFTC).
- Charles Yi: After serving as general counsel at the Federal Deposit Insurance Corporation (FDIC) from 2015 to 2019, Charles Yi became a partner at BigLaw firm Arnold & Porter Kaye Scholer LLP. At Arnold & Porter, Yi has attracted corporate clients with his insider knowledge of financial regulators and government bailouts. Arnold & Porter’s financial services team has advised multiple banks on investments in and acquisitions of FinTech companies. Prior to his public sector experience, Yi practiced banking, corporate, and securities law at WilmerHale and Wachtell, Lipton, Rosen & Katz. WilmerHale’s financial services group has advocated on behalf of firms in enforcement actions and litigation, including FinTech startups. Yi served on Biden’s Treasury Agency Review Team and may be in the running for a high level position at Treasury or SEC.
- Manuel Alvarez: Manuel Alvarez is the commissioner at the California Department of Financial Protection and Innovation, which he joined in 2019 after working as Chief Compliance Officer/Corporate Secretary/General Counsel for Affirm from 2014 to 2019. Affirm is a high-interest microlender fintech company founded by PayPal co-Founder Max Levchin and Palantir co-Founder Nathan Gettings. Levchin joined the advisory board of the CFPB in 2015, a year after Alvarez left his post as enforcement attorney for the CFPB to work for Affirm. The company has been criticized for encouraging consumers to take out high-interest loans that they cannot afford. Since revolving back into government, Alvarez has been an advocate for fintech, leading an office dedicated to incorporating the fintech industry’s input on California regulatory activity. Alvarez served on Biden’s CFPB Agency Review Team, and may be in the running to head the OCC.
- Ron Moultrie: Ron Moultrie has held senior positions in the National Security Agency, the Central Intelligence Agency, and the Department of the Navy. He founded Oceanus Security Strategies in 2015 to engage in shadow lobbying on behalf of corporate clients, capitalizing on his experience in cybersecurity. He also serves on the Cyber Security Advisory Board of Resolute Consulting, a management consultancy, and the Advisory Board of Pallas Advisors, a shadow lobbying firm founded by former Trump officials. Since 2020, he has served as a Board Member of iCapital Network, a fintech startup that offers a platform for investing in alternative assets. He served on Microsoft’s Advisory Board from 2018 to 2019. He also sits on the boards of national security tech companies Altamira Technologies Corporation and Sequoia Holdings. Moultrie served on Biden’s Intelligence Community Agency Review Team.
- Christopher Fonzone: Christopher Fonzone is a partner at Sidley Austin LLP, a BigLaw firm, where he is a member of the firm’s Privacy and Cybersecurity practice. He joined the firm after serving as National Security Council legal advisor and counsel to the President from 2013 to 2017. From 2000-2004, he served as Principal and Engagement Manager of Novantas, a leading provider of fintech to large banking institutions. Fonzone served on Biden’s National Security Council Agency Review Team.
- Arthur Plews: Arthur Plews is the head of User Strategy and Operations at Stripe, a fintech company that provides payment processing software for e-commerce and mobile applications. Stripe is a member of the lobbying group “Financial Innovation Now” that includes Apple, Google, Amazon, Intuit, and Paypal. The group advocates for policies amenable to Big Tech companies and fintech startups. He joined the company in 2017 after serving in the U.S. Small Business Administration under President Obama. Prior to this, he worked as an Associate at McKinsey & Co. Plews served on Biden’s Small Business Administration Agency Review Team.
This list will be continuously updated. Any additions made after initial publishing will indicate the date added.
PHOTO: “Fintech, money, finance” by Tech In Asia is licensed under CC BY 2.0.