The UK has been bending over backwards to make it easy and quick for innovative startups and entrepreneurs to comply with appropriate consumer protection regulations and safely enter the market.
One year ago, we noted the UK government’s announced its intention to “create a world-leading environment for the development of innovative payments and financial technology,” and over the past year it has lived up to that vision. And it’s not just with talk, but with action. The UK’s Financial Conduct Authority, through its Project Innovate initiative, has been bending over backwards to make it easy and quick for innovative startups and entrepreneurs to comply with appropriate consumer protection regulations and safely enter the market. Among other things, participants in the FCA’s Innovation Hub receive from the regulator:
That’s pretty impressive from a government agency! And this approach, which seeks to welcome and help innovators comply and set up shop, has begun to bear fruit. Yesterday Circle Internet Financial announced that it is the first digital currency company to receive an electronic money license from the UK government, which allows it to establish a banking relationship with Barclays, a top UK bank. This is what a government looking to lead the world in FinTech looks like.
As the UK’s Chancellor, George Osborne has said, the plan is to make London “the global center for fintech” and he has acknowledged that globally “the race is on, but we’re determined to win it.”
If encouraging fintech and digital currency innovation is a race, then the U.S. may be losing its lead. Since New York issued its BitLicense regulations in June 2015, only one license has been issued, and at least 27 companies are waiting in queue. Meanwhile, other states are pursuing disparate and inconsistent regulatory approaches, and some efforts to provide clarity, such as California’s, have stalled. The Uniform Law Commission is admirably developing a uniform model state law, but its efforts likely won’t come to fruition for years.
At the federal level, the Office of the Comptroller of the Currency has issued a new whitepaper on “responsible innovation in the federal banking system” and has begun a process of soliciting comment from the public. This is an incredibly welcome development–especially its focus on addressing the culture at the OCC, which the whitepaper identified as fostering “low risk tolerance for innovative products and services” and “a deliberate and extended vetting process that can discourage innovation inadvertently.” Yet this is a process that, on its present path, will also likely take years. It is a step in the right direction, but still miles away from the welcoming, full-service approach the UK is pursuing.
So what’s to be done if the U.S. is to retain its competitive edge? There are no easy answers, but there are a few low-hanging fruit that might be worth picking. The first would be serious action by the OCC and other regulators to make it clear to banks that it is perfectly fine, and even encouraged, to establish relationships with innovative fintech and digital currency firms. Indeed, ending mindless “derisking” may not just encourage innovation, it may also help fight crime and terrorism. Second, while I’m loathe to suggest new federal regulation, it may be time for Congress to begin to consider federal preemption of parochial state licensing laws that make no sense in a globally connected Internet age. Politically, these options are uphill battles, but if we don’t think big, someone else will.