After 18 months of anticipation, the Treasury Department released on Tuesday a seminal report examining the barriers to financial technology and innovation in the United States and proposing a sweeping set of recommendations designed to cut red tape and foster continued experimentation.
While the report only mentions cryptocurrency and blockchain technologies in passing, many of the current problems it highlights and recommendations it proposes are highly germane to the crypto industry and nonbank financial entities of all stripes.
These include calls for the streamlining of complex and convoluted financial regulation frameworks for activities such as money transmission and payments, and for further implementation of fintech regulatory sandboxes, such as those that have been successfully deployed in places like the United Kingdom, Singapore and Hong Kong internationally, as well as Arizona in the U.S. - which will officially launch on August 1.
“Financial regulation should be modernized to more appropriately address the evolving characteristics of financial services of today and in the future,” the report states, emphasizing:
“It is important that state regulators strive to achieve greater harmonization, including considering drafting of model laws that could be uniformly adopted for financial services companies currently challenged by varying licensing requirements of each state.”
It goes on to specifically recommend that “the states work to harmonize money transmitter requirements for licensing and supervisory examinations.”
Money transmission licensing rules have been a perpetual thorn in the side of cryptocurrency companies operating in the U.S., as the activity is regulated on a state-by-state basis and no license passporting structure exists as it does in places like the European Union.
Treasury also noted that blockchain, distributed ledger technologies and digital assets are being separately examined in interagency fashion by the Financial Stability Oversight Council, a group which was established after the 2008 Financial Crisis as a forum for convening federal financial regulators around issues of systemic importance.
The report was commissioned via executive order by President Donald Trump shortly after he took office in February 2017 with the purpose of constructing a series of recommendations for making the U.S. financial system more nimble, competitive and capable of embracing and incubating new technologies.
Concerns Being Heard
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 provide that push when necessary within the regulatory ranks
“Support of innovation is critical across the regulatory system — both at the federal and state levels,” the report states. “Treasury supports encouraging the launch of new business models … to pursue innovative technologies to lower costs, improve customer outcomes, and improve access to credit and other services.”
It introspectively reckons that many current financial regulation structures are outdated given the changing pace of technology, and that this dynamic could squeeze out innovation that could potentially benefit consumers and businesses:
“The financial regulatory framework is not always optimally suited to address new business models and products that continue to evolve in financial services … Financial regulation should be modernized to more appropriately address the evolving characteristics of financial services of today and in the future.”
Sandbox Solutions
Another carrying theme from the report is that of fostering “agile governance,” or an approach to regulation “that can evolve with innovation.” One battle-tested way of doing this internationally has been through the use of regulatory sandboxes that provide a safe space for companies to experiment with new products and allow regulators and entrepreneurs to learn side-by-side with one another.
“Treasury recommends that federal and state financial regulators establish a unified solution that coordinates and expedites regulatory relief under applicable laws and regulations to permit meaningful experimentation for innovative products, services, and processes,” the report states.
“Such efforts would form, in essence, a ‘regulatory sandbox’ that can enhance and promote innovation,” it continues, urging Congress to step in with a legislative solution if financial regulators and individual states are unable to achieve such an objective.
These types of laboratories will be critical for bringing the U.S. financial technology scene back to par with other countries that have been quicker out of the gate and have less inertia embedded in their regulatory schemes.
“Innovation has played a factor in making the U.S. capital markets the largest, deepest, and most vibrant in the world and has been of critical importance in supporting the U.S. economy,” the report finds, concluding:
“But the United States cannot take its leading position in innovation for granted. As the rest of the world takes measures to improve its ability to create, develop, and deploy innovative new products and services in the financial sector, the United States risks losing out by failing to provide appropriate regulatory clarity and assurances, and remove unnecessary barriers to innovation.”
