In its July 2018 report on “A Financial System that Creates Economic Opportunities,” the U.S. Treasury Department outlined its proposals to identify improvements to the regulatory landscape to “better support nonbank financial institutions, embrace financial technology, and foster innovation.”
The Treasury Report contains over 80 specific recommendations for “Embracing Digitization, Data and Technology,” “Aligning the Regulatory Framework to Promote Innovation,” “Updating Activity-Specific Regulations” and “Enabling the Policy Environment.”
Under the heading of “Enabling the Policy Environment,” Treasury’s first recommendation is to establish a “regulatory sandbox” to enhance and promote innovation free from undue regulatory and statutory impediments.
This recommendation echoes efforts to promote new financial technology products previously announced by the CFPB and the State of Arizona. In announcing its initiative, the CFPB stated that its newly created Office of Financial Innovation will focus on “creating policies to facilitate innovation, engage with entrepreneurs and regulators, and review outdated or unnecessary regulations”.
The fact that other Federal and state regulators have their own plans for “regulatory sandboxes” highlights one of the challenges facing Treasury’s proposal to create a “unified solution that coordinates and expedites regulatory relief . . . to permit meaningful experimentation for innovative products, services and processes.” The potential rub is that the Treasury’s proposal goes on to provide that if [other] financial regulators are unable to fulfill those objective, Congress should consider preemption of state laws.
One prominent state regulator’s reaction was unequivocal. Maria Vullo, New York’s DFS Superintendent, assailed the Treasury proposal. “Toddlers play in sandboxes. Adults play by the rules,” according to Superintendent Vullo, who went on to say: “ The idea that innovation will flourish only by allowing companies to evade laws that protect consumers . . . and safeguard markets. . . is preposterous.”
Clearly the U.S. must adapt its financial services regulatory framework to compete effectively in the rapidly evolving world of financial services. New financial services breakthroughs will almost certainly be accompanied by new risks. Blockchain technology and artificial intelligence will likely drive unprecedented innovation in the financial services industry—and pose unprecedented risks along the way. 21st Century regulations must be developed to cope with these risks, as well as the current regulatory concerns with safety and soundness, consumer protection and data security.
One can debate the merits of a “unified regulatory sandbox” —but one thing is certain—cooperation, collaboration and innovation on the part of U.S. financial service regulators is essential.