WASHINGTON — The Office of the Comptroller of the Currency has received inquiries from fintech companies, including one virtual currency firm, about applying for a banking charter, Chief Counsel Amy Friend said.
The inquiries raise fundamental questions for regulators about the nature of banking in the digital era. "Are these activities that a bank could ever engage in?" Friend asked.
When asked about these firms' motivations during a panel discussion Thursday at George Washington University Law School's first FinTech Forum, Friend said they might be seeking the "regulatory umbrella" of federal preemption of state rules. A consistent challenge for fintech companies seeking to scale is the patchwork of state licenses needed to operate as a nonbank lender or money transmitter.
"Regulation is a big barrier to entry" in the U.S., Philippe Gelis, the CEO and a co-founder of the London-based foreign-exchange startup Kantox, noted during an earlier panel. He added his company had paused plans to expand here because of this regulatory environment.
With technologies such as distributed ledgers, cryptocurrencies, and marketplace lending in their infancy, regulators are still scratching the surface when it comes to understanding how to handle them, several speakers said.
"Until you really have the technologists in the room … with the regulators, the conversations are necessarily abstract," said Jacob Farber, the general counsel at R3 CEV, a consortium that is developing distributed ledgers for banks. Regulators should be involved in discussing the technology as it is being built to understand how best to oversee it, he added. "It's all in the details, whether or not something works."
The OCC is gathering data from fintech companies and banks — large and small — for a forthcoming white paper on financial innovation, Friend said.
"We thought … we could really start looking at this a little more deeply," she said. The OCC's goal, she added, is to make sure the banking industry remains a "stable and sound resource for the communities" while ensuring that it doesn't "become so risk-averse that it has become calcified."
Many startups in the digital currency field have complained in recent years that they cannot get or keep bank accounts, even if they invest heavily in compliance, because financial institutions deem them regulatory pariahs. The OCC recently announced it was collecting data on the global phenomenon of banks severing ties with various industries and geographic areas deemed high-risk, and that it may issue guidelines on the matter.
During the panel discussion, Friend said the OCC is not interested in pushing banks to de-risk by cutting off their dealings with startups in areas like digital currency.
"We have said many times that it's not the agency's policy to direct banks who to do business with," she said.
But innovative startups, she added, are not above the consumer financial protection and other rules banks have to deal with.
"Just because it's marketplace lending doesn't mean that those are suspended," Friend said. "A bank can't pawn off its responsibilities on another entity."
All the more reason for upstart companies to have their compliance ducks in a row as they expand.
"There are companies that scale too quickly," said Jeanine Wright, general counsel at the online lender ZestFinance. But when it comes to compliance with consumer finance protection standards, "Everybody should know that you should be doing what you think the CFPB wants you to do at all times, anyway." (The Consumer Financial Protection Bureau announced March 7 that it would accept complaints from consumers about online and marketplace lenders for its public database, a move widely viewed as a prelude to regulating the sector.)
"It's a war," Wright added. "You have to make sure you have your house well-guarded and your troops ready to go."
It is in the best interest of fintech companies to seek out clarity on the regulations they operate under, said Kevin Petrasic, a partner at the law firm White & Case, which co-sponsored the conference. For an industry that relies on "trust," he said, it is "necessary from a competitive standpoint."