After Facebook announced a plan to launch its cryptocurrency, Project Libra, government, consumer advocates, and banking industry officials expressed concern that the tech giant in particular, and crypto markets in general, will not be sufficiently regulated.
Though they foster faster, more efficient transactions, “fintech” companies also create new risks for consumers, either through self-inflicted missteps, cybersecurity vulnerabilities, or speed-of-light scams. These companies do not have the prudential standards of traditional banking and commerce, and they require supervision by regulatory bodies that can more rapidly adapt to them.
Some might think that state banking regulators do not have the tools and resources to do the job, compared to federal regulators. However, I believe state regulators are the best line of defense to protect consumers from risks in the financial marketplace. While homogeneous federal policies create laudable efficiencies, states are ideally suited to regulate fintech and protect consumers, for three primary reasons.
Historically, states have been the primary regulator for fintech, and the majority also provide oversight of non-traditional financial companies such as mortgage lenders, money transmitters, and consumer lending companies. The Pennsylvania Department of Banking & Securities has seen a lot of change in this area in the last 10 years and has been flexible in its response.
Before the financial crisis in 2008, Pennsylvania supervised around 40 money transmitter companies. The department now supervises more than 100, a 250 percent increase, largely due to internet-based companies transmitting funds without brick and mortar locations. To handle the surge without increasing staff and overhead, the department modernized off-site, electronic exams. This change reduced the regulatory burden on companies, as well as the time and expenses affiliated with an exam.
Because of the smaller scope, states are better able to find the balance between consumer protection and efficient markets. A strong, competitive marketplace is a necessary foundation for economic growth. Often, it is industry itself that seeks regulation to provide predictability and continuity.
Just as individuals and companies operating in the fintech space are laboratories of innovation, states as laboratories of democracy. They have direct and personal connections with their citizens, are able to grapple with myriad nuances within the fintech space, and can offer a front line of defense for consumers. In Pennsylvania, Mortgage Servicing Legislation, for example, leveled the playing field for the industry, brought uniformity with other states and the feds, and protected consumers. This is due entirely to our proximity to consumers and our responsiveness to concerns immaterial to federal regulators, but profoundly important to consumers.
The varied approach by states to best practices provides both diversity of thought and political resiliency. Long before “crowdsourcing” entered the lexicon, states have been doing exactly that on issues as varied as community policing, healthcare, education, and consumer financial protection. We listen to our stakeholders, formulate approaches, then compare and share best practices. State agencies collaborate on multi-state examinations, and the Nationwide Multistate Licensing System hosts a tool for regulators to share information with one another. Over time, states adopt policies that are more balanced than a single solution conceived by a lone administration. State policies can endure longer than federal solutions, which can change from term to term.
So, can states really do the necessary job of protecting consumers in the fintech space? In fact, states are already the primary regulator of some of the largest financial services firms in the world, including money-transmitters and mortgage servicers. What’s more, states are not subjective in their oversight but rather apply principle-based regulation that looks at the underlying activity.
The idea that states are static in their regulatory approach is misinformed and maligning. States constantly strive to balance statutory responsibilities, to protect consumers and strengthen the marketplace.
What state regulation lacks in efficiency it more than makes up for in both innovation and resiliency. We do this with the ultimate priority always in mind: consumer protection. The result is a robust and efficient marketplace that is safer for our citizens.