5 states blazing new trails in financial services policy

By Jon Prior, Jordan Stutts, Polo Rocha, Allissa Kline

May 18, 2022 9:00 PM

The old adage that states are the laboratories of democracy seems particularly apt right now in financial services policy.

As Congress remains stalled on a wide range of issues, from cannabis banking to overdraft fees, some of the action has shifted to the states, where legislative dominance by one political party often makes it easier to enact change.

In some red states, elected officials have been embracing cryptocurrency-friendly policies, though those stances may be tested if crypto prices continue to decline sharply.

Meanwhile in certain blue states, lawmakers and regulators are addressing climate risk in the banking sector and trying to improve the industry’s diversity.

What follows is a look at five states that are trying new approaches to financial services regulation.

Bridget Bennett/Bloomberg

Florida

Last week, Florida’s Republican governor, Ron DeSantis (pictured above), signed a bill clarifying regulations for cryptocurrency exchanges. The law specifies that while intermediaries must register for money transmitter licenses, the two parties selling and buying cryptocurrencies do not need a license.

The bill was a reaction to a 2019 state appeals court ruling, which deemed that state money transmitter laws required people selling bitcoin to be licensed.

Russell Weigel, commissioner of Florida’s Office of Financial Regulation, told Miami Today the bill means Florida will “officially regulate and step into the virtual currency world.”

“If I go and buy groceries at your food store, that’s a two-party transaction. Do I need a license for that? It seems absurd,” Weigel told the New York Times.

Florida’s crypto industry has a hub in Miami, where the mayor is taking his salary in bitcoin and officials have unveiled a 3,000-pound bull statue with blue laser eyes that rivals Wall Street’s Charging Bull.

The recent plunge in cryptocurrency prices may have changed some minds, but at least last month, more than 25,000 people flooded Miami for its Bitcoin 2022 conference.

Randall Runtsch/Randy Runtsch - stock.adobe.com

Wyoming

Wyoming was an early mover in passing cryptocurrency-friendly laws, but one recent measure went too far for the state’s Republican governor.

Back in 2018, Wyoming started passing a series of laws to establish a framework for oversight of digital assets in the state. The state established so-called Special Purpose Depository Institution charters that could allow crypto companies, such as exchanges, to provide some banking services, like custody for digital assets.

It’s still unclear if those firms will be granted the Federal Reserve master accounts that would allow them to clear certain transactions more easily than by using intermediary companies.

A more recent example of the state’s aggressiveness in the crypto sector was a proposal for Wyoming to create and sell its own virtual currency known as “stable tokens,” which were to be backed by the state’s assets. But Gov. Mark Gordon vetoed the bill in March.

Wyoming Treasurer Curt Meier told the Cowboy State Daily that the bill was a bad idea in an “unstable market” and at a time when his office’s chief investment officer had other priorities.

Wyoming officials have drawn a distinction between stablecoins that are regulated in Wyoming and algorithmic ones, which rely on traders' activity to keep their $1 value. One large stablecoin in the latter category, TerraUSD, has recently collapsed from its $1 peg.

Daniel Acker/Bloomberg

Illinois

Illinois has been a leader in diversifying corporate boardrooms, but the state may be hitting the limits of laws that lack an enforcement mechanism.

A 2020 state law mandates annual diversity reports from publicly traded companies that are based in Illinois. Since the law took effect, gender, racial and ethnic representation on bank boards has increased, but it still lacks parity with the state’s demographics, according to a study from researchers at the University of Illinois.

Illinois has also made equity, diversity and inclusion policies in the financial services sector a priority in other ways.

In 2017, the state treasurer required all financial services firms with business related to the state treasurer to complete an annual equity, diversity and inclusion assessment. And last March, Democratic Governor J.B. Pritzker (pictured above) signed a bill establishing community reinvestment standards for state-chartered financial institutions.

New York

Last year’s leadership change at the New York State Department of Financial Services doesn’t appear to have slowed the agency down.

Since August, when Democratic Gov. Kathy Hochul nominated Adrienne Harris as superintendent, the Department of Financial Services has created a first-of-its-kind climate division and expanded the state’s anti-redlining law to cover nonbank mortgage lenders.

That’s not all. Late last month, the department released new guidance for state-regulated virtual currency companies, saying they should use blockchain analytic tools to prevent and manage financial risk and suspicious activities. New York was one of the first states to begin regulating and licensing cryptocurrency companies with its so-called BitLicense.

Earlier this month, Hochul directed the Department of Financial Services to conduct a study of New York’s underbanked communities and households, and to make recommendations about how to improve access to financial services.

Harris, who was confirmed as superintendent in January, has said that she intends to focus the agency’s enforcement work more on “kitchen table issues” than her predecessors did. She’s also said that she wants to address racial and economic disparities that have been exacerbated by the pandemic.

Utah

Utah this year became one of the first states to approve rules that will force nonbank commercial lenders to make certain disclosures to borrowers. Those disclosures include the total amount of funding to the business and information about any prepayment costs.

Democratic-controlled states like California and New York have previously passed laws requiring annual percentage rate disclosures in commercial lending, but Utah is taking an approach that some nonbank commercial lenders consider less onerous.

The state, a GOP stronghold that has long been seen as friendly to the financial industry, also has a new top banking regulator after the retirement of G. Edward Leary, who served as commissioner of the state’s Department of Financial Institutions for 30 years.

Darryle Rude was tapped as interim commissioner in March. The change came at a time when some of Utah’s policies were facing scrutiny from consumer advocates and Democratic officials in Washington, D.C.

For example, Utah has taken a welcoming stance toward banks that partner with nonbank lenders in an apparent effort to evade other states’ interest rate caps, but that posture could draw pushback from the Democratic-controlled board of the Federal Deposit Insurance Corp.

California state lawmakers and consumer advocacy groups have asked the FDIC to step in and stop those lending partnerships, which may feature annual percentage rates above 225%.