President Joe Biden’s young administration is poised to deliver heightened – and perhaps unprecedented – regulatory scrutiny of the exploding Fintech industry. The groundwork for a more active regulatory regime has been set over the course of the past decade. Prior administrations harnessed existing enforcement mechanisms to regulate the Fintech industry. They also made policy statements and issued guidance regarding the participation of Fintech and the use of cryptocurrency assets in banking and financial markets.
Circumstances now are ripe for a new and more active regulatory regime. For example, cryptocurrencies have proliferated to the point of mainstream entry into the marketplace. President Biden’s financial regulators are also uniquely positioned to bring increased attention to Fintech. We expect a forceful dynamic between Treasury Secretary Janet Yellen, who has expressed public skepticism towards cryptocurrencies, and President Biden’s other chief financial regulators, who have deep expertise and understanding of Fintech.
As this article sets out, companies across the financial spectrum should be paying close attention to regulatory developments regarding Fintech. Those that choose to do so will be able to take advantage of new opportunities and remain compliant in a shifting regulatory landscape.
The Enforcement Landscape Ahead
U.S. Treasury Department
As the principal government agency responsible for managing federal finances, supervising national banks, and enforcing federal finance and tax law, the U.S. Department of the Treasury has a major role in implementing and enforcing laws relevant to the Fintech industry and the use of cryptocurrencies.
Notably, Secretary Yellen is on the record as a cryptocurrency skeptic. She has warned about the “explosion of risk” associated with digital markets and the concern surrounding the use of cryptocurrencies for “terrorists, financing money laundering and the like.”1 However, Yellen has also stated that she “sees the promise of these new technologies” and that she “believe[s] fully” in “responsible” and “equitable” innovation.2 In this regard, Yellen has prioritized combatting financial inequality and expanding access to financial markets.
Under the Anti-Money Laundering Act (AMLA), passed by Congress over President Trump’s veto in January 2021, the Bank Secrecy Act (BSA) was extended to cryptocurrency businesses by amending the definition of “financial institutions” and “money transmitting businesses” to include businesses engaged in the exchange or transmission of “value that substitutes for currency.”3 Accordingly, cryptocurrency businesses will be required to comply with the Anti-Money Laundering program and reporting requirements set forth in the BSA. The AMLA also increases staffing at the Financial Crimes Enforcement Network (FinCEN), an agency under the Secretary of the Treasury, and the U.S. Department of Justice to combat money laundering and terrorist financing.
Given Yellen’s concerns regarding the use of cryptocurrencies for illicit purposes and the Treasury Department’s expanded enforcement authority under the AMLA, cryptocurrency businesses face a growing risk of enforcement actions if they fail to comply with anti-money laundering requirements. At the same time, expansive policies towards financial equity and market access may make cryptocurrencies more widely available and lead to business opportunities for Fintech companies. Of course, new areas for innovation combined with heightened regulatory enforcement could present a difficult terrain for companies to navigate. For this reason, companies seeking to succeed in the Fintech industry should proceed carefully and with full awareness of their compliance obligations.
Securities and Exchange Commission
The SEC is responsible for regulating securities markets in the United States. To date, the Commission has taken a position that some cryptocurrencies, such as Bitcoin and Ethereum, are not securities, while others, such as Ripple’s XRP, must be registered as securities. The SEC’s different determinations are based in part upon how the respective cryptocurrencies are developed and treated. More specifically, Bitcoin and Ethereum coins are created through a gradual, ongoing “mining” process.4 XRP, on the other hand, was created in a single event for Ripple Labs.5 A certain portion of XRP is held in a reserve fund by Ripple Labs to be sold in scheduled allotments. A pending suit by the SEC alleges that Ripple failed to register its ongoing offer and sale of billions of XRP to retail investors, which deprived potential purchasers of adequate disclosures about XRP and Ripple’s business.6 The outcome of this case will be a bellwether in deciding the treatment of cryptocurrencies as securities.7
The SEC also has made efforts to declare initial coin offerings (ICOs)8 as securities. Among repeated public statements made by SEC officials to that effect, in 2017 Chairman Jay Clayton said that the structures of ICOs “involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws.” Clayton emphasized that “these laws provide that investors deserve to know what they are investing in and the relevant risks involved.”9
President Biden’s nominee for Chairman of the SEC, Gary Gensler, is a professor specializing in Fintech at MIT’s Sloan School of Management. By all accounts, he is intimately familiar with blockchain technology and digital currencies. Based on statements made during his nomination hearing, Gensler will likely focus on investor protection and a need to ensure that cryptocurrency does not become a mechanism for circumventing regulatory frameworks. During his nomination hearing before the Senate Committee on Banking, Gensler stated, “Markets—and technology—are always changing. Our rules have to change along with them. . . . I believe financial technology can be a powerful force for good—but only if we continue to harness the core values of the SEC in service of investors, issuers, and the public.”10
As chairman of the Commodities Futures Trading Commission (CFTC), Gensler fought to bring order to an unstable derivatives industry and played a key role in drafting the Dodd-Frank Act, which was created in response to the financial crisis of 2008. The Act enhanced the CFTC’s regulatory authority to oversee the swaps market and established a number of new government agencies to oversee compliance with the Act, such as the Financial Stability Oversight Council (to monitor the financial stability of financial firms), and the Consumer Financial Protection Bureau (to prevent predatory mortgage lending). The Act also established the Volcker Rule, which restricts the ways banks can invest by limiting speculative trading and eliminating propriety trading.11
Considering Gensler’s contribution to the Dodd-Frank Act and his familiarity with Fintech, it is likely that in his role as the Chairman of the SEC, he similarly will strive to organize and construct a stable regulatory scheme for the Fintech industry. Fintech companies should expect Gensler to focus on laws targeting investor protection. For example, experts anticipate that the SEC will advance retail Bitcoin exchange-traded funds (ETF) in order to provide a safe method for offering digital assets to American investors.12 Further, Gensler’s SEC likely will seek more actively to regulate cryptocurrencies as securities, which would result in heightened regulation and oversight.13
Commodities Future Trading Commission
The CFTC is responsible for regulating the U.S. derivatives market. In the last few years, the CFTC has taken a number of steps to promote risk-management guidance with respect to virtual currencies. For example, in 2017 it issued a “primer” on virtual currencies and, since then, it has issued advisories concerning the holding of virtual currencies. The CFTC also has established a Fintech incubator, “LabCFTC,” which reports directly to the chairperson of the commission, to find and promote innovation in the Fintech sector.
The agency now appears poised to take a more active role in regulating cryptocurrency asset trading. In March 2021, the CFTC brought its first enforcement action involving the manipulation of digital assets, when it charged John McAfee and an employee of his with engaging in a deceptive “pump and dump” scheme. The CFTC specifically alleged that the two individuals accumulated positions in digital assets, promoted the digital assets through social media as valuable long-term investments, and then sold the assets when their prices spiked following their deceptive endorsements.
Moreover, the likely nominee for Chair of the CFTC, Chris Brummer, is a Fintech expert. Brummer is a Professor at Georgetown University’s Institute of International Economic Law and has focused his research efforts on regulation of the financial industry, specifically Fintech. He has spoken about his concerns that “changes in what money is [by way of Fintech]—will have ripple effects throughout national security strategy . . . [a]nd governments will have to keep up.”14 Brummer has focused extensive research on how international economic law is devised and how it impacts the global financial system. In an interview, Brummer has stated, “As cryptocurrency assets are inherently cross-border financial products, operating on digital platforms, the mitigation of the risks entailed in their increasing circulation and use requires international coordination.”15 Should Brummer be confirmed as Chair of the CFTC, we can expect him to focus on the global impact of Fintech regulation to encourage the U.S. to take a leadership position in the Fintech industry.
Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency (OCC) is an independent bureau within the Department of the Treasury, responsible for chartering, regulating, and supervising all national banks and thrift institutions. In the waning days of President Trump’s administration, then-acting Comptroller of the Currency, Brian Brooks, issued a number of interpretive letters and guidance documents targeting the Fintech industry and how banks can utilize cryptocurrencies. Most significantly, under Brooks, the OCC renewed efforts to issue a special purpose Fintech charter, an idea first raised under President Obama’s administration, to allow Fintech companies to engage in some activities that constitute the “business of banking” (i.e., taking deposits, facilitating payments, and making loans). Also under Brooks, the OCC issued Interpretive Letter 1174, which explained that banks could use “stablecoins” to facilitate payment transactions for customers. Stablecoins are cryptocurrencies designed to provide price stability, as they are backed by a reserve asset. Among other things, OCC’s Interpretive Letter allowed banks to issue stablecoins and exchange stablecoins for fiat currency.
Michael Barr was, at least until recently, in the mix of candidates to serve as head of the OCC. But, his close connections to Fintech – Barr is currently a professor of public policy and served as an advisor to Ripple – appears to have taken him out of the running for the job.16 Now, Mehrsa Baradaran is reported to be the frontrunner to head the OCC.
Baradaran has focused extensively on publishing books and articles about racial injustice in the U.S. banking system. Her appointment has brought some concern to the Fintech world, as she has voiced skepticism about the industry in the past, particularly with respect to financial inclusion and equity. For example, she testified before the Senate Banking Committee in 2019, that “Fintech has only served the population who is already banked and blockchain use is limited to the technically savvy.”17 Whoever ultimately is selected to lead the OCC, we can expect close attention towards the role of Fintech in banking.
U.S. Department of Justice Framework for Enforcing Cryptocurrency Crimes
In October 2020, the Department of Justice issued a Cryptocurrency Enforcement Framework, indicating that it would rely on existing enforcement statutes to ensure that cryptocurrency transactions are not used for illicit purposes. The Framework explained that most illicit uses of cryptocurrency fall into three categories:
- financial transactions associated with the commission of crimes;
- money laundering and the shielding of legitimate activity from tax, reporting, or other legal requirements; and
- crimes, such as theft, directly implicating the cryptocurrency marketplace itself.
The Framework further emphasized that cryptocurrencies that qualify as investment contracts (and thus as securities) must comply with SEC rules.18 In this regard, the DOJ signaled the importance of cross-agency collaboration in enforcing against cryptocurrency crimes.19
President Biden’s incoming chief financial regulators’ interest and unprecedented expertise in Fintech and cryptocurrencies herald a new and more active regulatory regime. In this environment, Fintech companies aiming to pursue innovation and business opportunities in a legally compliant manner should closely track the statements, guidance, and regulations issued by the relevant government agencies. Enterprises that manage to do so will be well-positioned to help advance the U.S. business economy in pushing through the Fintech frontier.