Financial Innovation: Reducing Fintech Regulatory Uncertainty
link to page 1 
April 25, 2019
Financial Innovation: Reducing Fintech Regulatory Uncertainty
Many companies are developing innovative financial
industry, increasing their uncertainty as to how financial
technology—or fintech. Broadly, fintech aspires to provide
regulation may or may not apply to their product.
financial products using technological advances. Given that
most of the federal financial regulatory framework was
Regulators. Absent a track record of performance,
created prior to these technologies, fintech companies often
regulators may lack a complete understanding of what
face uncertainty over how—or whether—existing federal
outcomes a new technology or product may generate, the
laws and regulations may apply to them or their products.
risks it presents, and the appropriate regulatory treatment.
Thus, policymakers may consider ways to reduce regulatory
Consequently, they may (at least initially) apply regulation
uncertainty and integrate fintech into the regulatory
in an ineffective or inefficient way to a technology with
framework. This often involves balancing efforts to
which they are unfamiliar.
encourage innovation while protecting consumers and the
financial system from excessive risk. This In Focus
Consumers. When accessing an unfamiliar financial
examines regulatory uncertainty related to fintech and
product, consumers may lack a complete understanding of
analyzes possible policy approaches and recent regulatory
the product’s terms or the risks they face. This could be
initiatives that may reduce it.
especially problematic if it is not clear what consumer
protections apply to that product.
Fintech and Regulatory Uncertainty
Fintech is an inclusive term that can encompass many
Potential Regulatory Approaches
technologies providing an array of financial services or
Many still-evolving terms are used to describe different
products (see Table 1 for examples). The existing
programs regulators have implemented or proposed to
regulatory structure, however, may not always have clear
address fintech uncertainty, including “sandbox,”
rules for new types of fintech. In addition, companies and
“greenhouse,” and “single point of entry.” Generally, such
regulators may have difficulty determining the risks a new
programs use at least one of the following approaches.
technology may create before it is launched. This regulatory
uncertainty can negatively affect many different
Increased Regulator Outreach. Communication between
stakeholders.
fintech firms and regulators can help these firms better
understand how regulators view a developing technology
Table 1. Examples of “Fintech”
and potential regulatory concerns. Communication also
helps make regulators aware of new fintech innovations
Financial Product or
when developing new or interpreting existing regulations.
Innovation
Service Affected
As discussed below, certain regulators have established
Online Marketplace Lending
Commercial lending
offices within their organizations to conduct outreach to
fintechs—including maintaining outreach websites,
Crowdfunding
Equity issuance
participating in fintech conferences, and organizing office
hours with fintech firms.
Blockchain Ledgers
Payment and settlement
Robo-Advising
Wealth management
Regulator Information Gathering and Study. Some
regulators have announced research collaborations with
Algorithmic High-Speed Trading
Securities trading
fintech firms to improve their understanding of new
“RegTech”
Regulatory compliance
products and technologies. Such initiatives could include
jointly designing a research trial or fintech firms sharing
“Big Data”
Credit bureau agencies
data about their product performance with regulators.
Source: CRS. Note: This is a non-exhaustive, il ustrative list.
Tailored Regulation or Limiting Enforcement Actions.
Companies and Investors. Companies must attract
If policymakers determine that particular regulations are
investment in order to develop and introduce innovative
unnecessarily burdensome or otherwise ill-suited to a
technologies. Investors generally consider whether a
particular technology, they might exempt companies or
technology will comply with applicable regulations in
products that meet certain criteria from such regulations.
determining the profitability of these investments. Yet,
Similarly, a regulator could issue a No Action letter—an
there may be no clear precedents for which regulations
official communication stating a regulator does not expect
apply to a new financial technology. In addition, certain
to take enforcement actions in certain situations. Regulators
fintech firm principals’ and investors’ expertise may lie in
will often only provide such special regulatory treatment to
technological fields—e.g., software engineering or
companies that first demonstrate that consumers will not be
computer programming—rather than in the financial
https://crsreports.congress.gov
Financial Innovation: Reducing Fintech Regulatory Uncertainty
exposed to undue harm or meet other conditions, like
in the future. The CFPB also has the statutory authority to
agreeing to share data with regulators for research purposes.
waive consumer disclosure requirements for companies that
apply to test and improve consumer disclosures. Lastly, the
Offer-Specific Regulatory Regime. Regulatory
office coordinates with other consumer regulators abroad.
uncertainty can be resolved if regulators offer or require
certain fintech firms to enter a regulatory regime with well-
SEC FinHub and LabCFTC. Securities and commodities
defined permissions, restrictions, and responsibilities. For
regulators have also established outreach programs. The
example, a regulator could offer or require a specific charter
Securities and Exchange Commission (SEC) created
or license for certain firms.
FinHub and the Commodity Futures Trading Commission
(CFTC) established LabCFTC. These portals are the
The regulatory approaches described above could be
agencies’ efforts to engage with the fintech industry,
supported or opposed by various stakeholders depending on
consolidate and clarify communications, and inform policy.
how they are designed and implemented and which firms or
Since their inception in 2018 and 2017, respectively, neither
products are affected. For example, while fintech firms may
FinHub nor LabCFTC have announced new fintech rules.
want to reduce regulatory uncertainty and operate under one
set of rules nationally (rather than different rules in each
OCC Fintech Charter. In 2018, the Office of the
state), they may also oppose new or additional data
Comptroller of the Currency (OCC) announced that it
reporting requirements. Incumbent financial institutions
would consider “applications for special purpose bank
may argue that regulatory tailoring for fintech firms would
charters from [fintech] companies that are engaged in the
put incumbents at a competitive disadvantage. State
business of banking but do not take deposits.” Companies
regulators and consumer advocates may oppose any federal
with this charter would be explicitly subject to all laws,
charter that would preempt state consumer-protection laws.
regulations, and federal preemptions applicable to national
banks. To date, no such charter has been granted.
Implementation Considerations
Regulators may consider the following when determining
State-level Programs. A number of states have passed
their particular regulatory approach:
laws or created new licenses to tailor regulation for certain
types of fintech firms. For example, Arizona passed a law
Institution- or Product-Based Application. Policymakers
that exempted firms meeting certain requirements from
choosing to tailor regulation for fintechs could apply a
having to obtain licenses they otherwise would need for the
different regulatory treatment either to companies or to
first two to three years of operation. Similarly, Wyoming
products. If the goal is to provide new, inexperienced firms
enacted a law that allows regulators to exempt innovative
an opportunity to learn how they and their products would
financial products from certain regulations for two to three
be regulated, institution-based regulation for firms meeting
years provided the products meet certain conditions. New
criteria associated with start-up companies may be the
York now requires that cryptocurrency exchanges and
better option. But if the goal is to integrate a new
certain other cryptocurrency-related businesses obtain a
technology regardless of the size or sophistication of the
special license to operate in the state or serve New York
firm offering it, the differentiated regulatory treatment
residents or businesses.
could apply to the product rather than the firm.
Selected Legislation: 116th Congress
Rule-based or Regulator Discretion. Policymakers could
The FINTECH Act of 2019 (H.R. 1491) aims to create a
also choose to tailor regulation for fintechs meeting certain
regulatory “single point of entry” for fintech start-up firms.
objective criteria. Alternatively, regulators could use
The bill would establish a FinTech Council within the
discretion in determining which fintech companies or
Department of the Treasury. The council would designate a
products would qualify for such tailoring, potentially based
regulator with authority to bring enforcement actions
on authorities or directions enacted in legislation.
against each fintech firm that meets certain criteria.
Qualifying firms would have safe harbor from enforcement
Duration. Policymakers may also consider how long to
actions by nondesignated regulators. In addition, the act
apply a particular regulatory treatment to a fintech company
would create an Office of Financial Innovation within each
or product. For example, a specific charter could last
federal financial regulatory agency that would serve as a
indefinitely, while an exemption or No Action letter might
point of contact for fintech firms.
last only a finite period.
The U.S. Virtual Currency Market and Regulatory
U.S. Examples and Proposals
Competitiveness Act of 2019 (H.R. 923) would require the
CFPB Office of Innovation. Originally launched in 2012
CFTC and other relevant regulators to provide
as “Project Catalyst,” this office within the Consumer
recommendations for creating an alternative regulatory
Financial Protection Bureau (CFPB) was revamped and
structure for virtual currency exchanges.
renamed in 2018. The office’s mission is to promote
innovation, competition, and consumer access within
David W. Perkins, Analyst in Macroeconomic Policy
financial services through regulatory relief, engagement
Cheryl R. Cooper, Analyst in Financial Economics
with the fintech community, and collaboration with other
Eva Su, Analyst in Financial Economics
regulators. The office allows fintech firms to apply for
research pilot projects, issues No Action letters, and has
IF11195
proposed granting regulatory safe harbors and exemptions
https://crsreports.congress.gov
Financial Innovation: Reducing Fintech Regulatory Uncertainty
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11195 · VERSION 1 · NEW
April 25, 2019
Financial Innovation: Reducing Fintech Regulatory Uncertainty
Many companies are developing innovative financial
industry, increasing their uncertainty as to how financial
technology—or fintech. Broadly, fintech aspires to provide
regulation may or may not apply to their product.
financial products using technological advances. Given that
most of the federal financial regulatory framework was
Regulators. Absent a track record of performance,
created prior to these technologies, fintech companies often
regulators may lack a complete understanding of what
face uncertainty over how—or whether—existing federal
outcomes a new technology or product may generate, the
laws and regulations may apply to them or their products.
risks it presents, and the appropriate regulatory treatment.
Thus, policymakers may consider ways to reduce regulatory
Consequently, they may (at least initially) apply regulation
uncertainty and integrate fintech into the regulatory
in an ineffective or inefficient way to a technology with
framework. This often involves balancing efforts to
which they are unfamiliar.
encourage innovation while protecting consumers and the
financial system from excessive risk. This In Focus
Consumers. When accessing an unfamiliar financial
examines regulatory uncertainty related to fintech and
product, consumers may lack a complete understanding of
analyzes possible policy approaches and recent regulatory
the product’s terms or the risks they face. This could be
initiatives that may reduce it.
especially problematic if it is not clear what consumer
protections apply to that product.
Fintech and Regulatory Uncertainty
Fintech is an inclusive term that can encompass many
Potential Regulatory Approaches
technologies providing an array of financial services or
Many still-evolving terms are used to describe different
products (see Table 1 for examples). The existing
programs regulators have implemented or proposed to
regulatory structure, however, may not always have clear
address fintech uncertainty, including “sandbox,”
rules for new types of fintech. In addition, companies and
“greenhouse,” and “single point of entry.” Generally, such
regulators may have difficulty determining the risks a new
programs use at least one of the following approaches.
technology may create before it is launched. This regulatory
uncertainty can negatively affect many different
Increased Regulator Outreach. Communication between
stakeholders.
fintech firms and regulators can help these firms better
understand how regulators view a developing technology
Table 1. Examples of “Fintech”
and potential regulatory concerns. Communication also
helps make regulators aware of new fintech innovations
Financial Product or
when developing new or interpreting existing regulations.
Innovation
Service Affected
As discussed below, certain regulators have established
Online Marketplace Lending
Commercial lending
offices within their organizations to conduct outreach to
fintechs—including maintaining outreach websites,
Crowdfunding
Equity issuance
participating in fintech conferences, and organizing office
hours with fintech firms.
Blockchain Ledgers
Payment and settlement
Robo-Advising
Wealth management
Regulator Information Gathering and Study. Some
regulators have announced research collaborations with
Algorithmic High-Speed Trading
Securities trading
fintech firms to improve their understanding of new
“RegTech”
Regulatory compliance
products and technologies. Such initiatives could include
jointly designing a research trial or fintech firms sharing
“Big Data”
Credit bureau agencies
data about their product performance with regulators.
Source: CRS. Note: This is a non-exhaustive, il ustrative list.
Tailored Regulation or Limiting Enforcement Actions.
Companies and Investors. Companies must attract
If policymakers determine that particular regulations are
investment in order to develop and introduce innovative
unnecessarily burdensome or otherwise ill-suited to a
technologies. Investors generally consider whether a
particular technology, they might exempt companies or
technology will comply with applicable regulations in
products that meet certain criteria from such regulations.
determining the profitability of these investments. Yet,
Similarly, a regulator could issue a No Action letter—an
there may be no clear precedents for which regulations
official communication stating a regulator does not expect
apply to a new financial technology. In addition, certain
to take enforcement actions in certain situations. Regulators
fintech firm principals’ and investors’ expertise may lie in
will often only provide such special regulatory treatment to
technological fields—e.g., software engineering or
companies that first demonstrate that consumers will not be
computer programming—rather than in the financial
https://crsreports.congress.gov
Financial Innovation: Reducing Fintech Regulatory Uncertainty
exposed to undue harm or meet other conditions, like
in the future. The CFPB also has the statutory authority to
agreeing to share data with regulators for research purposes.
waive consumer disclosure requirements for companies that
apply to test and improve consumer disclosures. Lastly, the
Offer-Specific Regulatory Regime. Regulatory
office coordinates with other consumer regulators abroad.
uncertainty can be resolved if regulators offer or require
certain fintech firms to enter a regulatory regime with well-
SEC FinHub and LabCFTC. Securities and commodities
defined permissions, restrictions, and responsibilities. For
regulators have also established outreach programs. The
example, a regulator could offer or require a specific charter
Securities and Exchange Commission (SEC) created
or license for certain firms.
FinHub and the Commodity Futures Trading Commission
(CFTC) established LabCFTC. These portals are the
The regulatory approaches described above could be
agencies’ efforts to engage with the fintech industry,
supported or opposed by various stakeholders depending on
consolidate and clarify communications, and inform policy.
how they are designed and implemented and which firms or
Since their inception in 2018 and 2017, respectively, neither
products are affected. For example, while fintech firms may
FinHub nor LabCFTC have announced new fintech rules.
want to reduce regulatory uncertainty and operate under one
set of rules nationally (rather than different rules in each
OCC Fintech Charter. In 2018, the Office of the
state), they may also oppose new or additional data
Comptroller of the Currency (OCC) announced that it
reporting requirements. Incumbent financial institutions
would consider “applications for special purpose bank
may argue that regulatory tailoring for fintech firms would
charters from [fintech] companies that are engaged in the
put incumbents at a competitive disadvantage. State
business of banking but do not take deposits.” Companies
regulators and consumer advocates may oppose any federal
with this charter would be explicitly subject to all laws,
charter that would preempt state consumer-protection laws.
regulations, and federal preemptions applicable to national
banks. To date, no such charter has been granted.
Implementation Considerations
Regulators may consider the following when determining
State-level Programs. A number of states have passed
their particular regulatory approach:
laws or created new licenses to tailor regulation for certain
types of fintech firms. For example, Arizona passed a law
Institution- or Product-Based Application. Policymakers
that exempted firms meeting certain requirements from
choosing to tailor regulation for fintechs could apply a
having to obtain licenses they otherwise would need for the
different regulatory treatment either to companies or to
first two to three years of operation. Similarly, Wyoming
products. If the goal is to provide new, inexperienced firms
enacted a law that allows regulators to exempt innovative
an opportunity to learn how they and their products would
financial products from certain regulations for two to three
be regulated, institution-based regulation for firms meeting
years provided the products meet certain conditions. New
criteria associated with start-up companies may be the
York now requires that cryptocurrency exchanges and
better option. But if the goal is to integrate a new
certain other cryptocurrency-related businesses obtain a
technology regardless of the size or sophistication of the
special license to operate in the state or serve New York
firm offering it, the differentiated regulatory treatment
residents or businesses.
could apply to the product rather than the firm.
Selected Legislation: 116th Congress
Rule-based or Regulator Discretion. Policymakers could
The FINTECH Act of 2019 (H.R. 1491) aims to create a
also choose to tailor regulation for fintechs meeting certain
regulatory “single point of entry” for fintech start-up firms.
objective criteria. Alternatively, regulators could use
The bill would establish a FinTech Council within the
discretion in determining which fintech companies or
Department of the Treasury. The council would designate a
products would qualify for such tailoring, potentially based
regulator with authority to bring enforcement actions
on authorities or directions enacted in legislation.
against each fintech firm that meets certain criteria.
Qualifying firms would have safe harbor from enforcement
Duration. Policymakers may also consider how long to
actions by nondesignated regulators. In addition, the act
apply a particular regulatory treatment to a fintech company
would create an Office of Financial Innovation within each
or product. For example, a specific charter could last
federal financial regulatory agency that would serve as a
indefinitely, while an exemption or No Action letter might
point of contact for fintech firms.
last only a finite period.
The U.S. Virtual Currency Market and Regulatory
U.S. Examples and Proposals
Competitiveness Act of 2019 (H.R. 923) would require the
CFPB Office of Innovation. Originally launched in 2012
CFTC and other relevant regulators to provide
as “Project Catalyst,” this office within the Consumer
recommendations for creating an alternative regulatory
Financial Protection Bureau (CFPB) was revamped and
structure for virtual currency exchanges.
renamed in 2018. The office’s mission is to promote
innovation, competition, and consumer access within
David W. Perkins, Analyst in Macroeconomic Policy
financial services through regulatory relief, engagement
Cheryl R. Cooper, Analyst in Financial Economics
with the fintech community, and collaboration with other
Eva Su, Analyst in Financial Economics
regulators. The office allows fintech firms to apply for
research pilot projects, issues No Action letters, and has
IF11195
proposed granting regulatory safe harbors and exemptions
https://crsreports.congress.gov
Financial Innovation: Reducing Fintech Regulatory Uncertainty
Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
congressional committees and Members of Congress. It operates solely at the behest of and under the direction of Congress.
Information in a CRS Report should not be relied upon for purposes other than public understanding of information that has
been provided by CRS to Members of Congress in connection with CRS’s institutional role. CRS Reports, as a work of the
United States Government, are not subject to copyright protection in the United States. Any CRS Report may be
reproduced and distributed in its entirety without permission from CRS. However, as a CRS Report may include
copyrighted images or material from a third party, you may need to obtain the permission of the copyright holder if you
wish to copy or otherwise use copyrighted material.
https://crsreports.congress.gov | IF11195 · VERSION 1 · NEW