Securities Regulation Daily Regulatory chief innovation officers reimagine innovation during DC Fintech
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Wednesday, October 21, 2020

Regulatory chief innovation officers reimagine innovation during DC Fintech

By Brad Rosen, J.D.

LabCFTC invited technology leaders from the leading U.S. financial regulators to discuss how their agencies are promoting, overseeing, and adopting technological innovation in the time of COVID-19 and beyond.

As part of the CFTC’s Empower Innovation 2020 series, LabCFTC, the Commission’s innovation arm, brought together top officials who are leading technology initiatives at the CFTC, SEC, OCC, and the New York Department of Financial Services in a panel titled Regulation & Innovation Re-Imagined. The agency leaders discussed how regulators view financial innovation, best practices for engaging with regulators, as well as the challenges, opportunities, and emerging trends facing the markets and fintech participants. The panel was held in conjunction with DC Fintech Week and was moderated by LabCFTC’s senior innovation advisor Shivon Kershaw.

No falloff in technology undertakings at the SEC. Valerie Szczepanik, the head of the SEC’s Strategic Hub for Innovation and Financial Technology (FinHub), described 2020 as unprecedented and intense in light of the COVID-19 pandemic. That experience also demonstrated how important technology could be, especially with respect to effectively marshalling distributed work forces at the Commission and among registrants and other market players. As far as trends are concerned, Szczepanik pointed to the growing role of AI and predictive analytics as an essential part of SEC activities.

Szczepanik also stated that an offering involving digital assets was recently deemed effective by the SEC, and that Regulation A was being utilized in connection with an offering involving digital instruments. Additionally, Szczepanik indicated that the SEC’s FinHub office has met with hundreds of fintech innovators in person or by video in connection with potential products or services. She also noted that these meetings have proved invaluable as they provide innovators with an opportunity to educate the SEC about the nuts and bolts of their undertakings, while being educated by SEC staff about the law.

New York regulator underscores the importance of building in compliance. Matthew Homer, an executive deputy superintendent with New York Department of Financial Services (NYDFS), indicated that NYDFS has a FastForward program that provides support to innovators seeking to deliver novel digital solutions that advance New York’s recovery from the COVID-19 crisis. Homer highlighted the importance of building compliance into products and services from the start and said that taking such steps creates a competitive advantage.

Homer also noted that NYDFS recently granted PayPal a conditional license which authorizes it to engage in digital asset activities for a two-year period, with an eye to graduating to a full license thereafter. He also pointed out that the department recently granted Paxos, a New York-based trust company, the authority to custody digital assets. He observed that the public appreciates well-regulated markets.

Innovation a core activity at the CFTC. Melissa Netram, the chief innovation officer and director at LabCFTC, observed that innovation efforts have grown dramatically throughout the regulatory landscape in recent years. "You just wouldn’t see an innovation office at a regulator five years ago," she noted. Netram also observed that technical innovation has become a core activity since she arrived at the CFTC three years ago. Moreover, she indicated that the innovation ethos has been pushed to every division within Commission. Netram also noted that while government typically moves slowly, CFTC staff has acknowledged market realities and has endeavored to respond to an ever-changing environment.

A pickup in activity at the OCC. Beth Knickerbocker, the chief innovation officer at the Office of the Comptroller of the Currency, has also seen a significant increase in digital activity in connection with the COVID-19 pandemic. Bank branches closed, and the use of digital apps increased during the crisis. Knickerbocker also noted that the OCC played a key role in connection with the implementation of the Paycheck Protection Program (PPP) by bringing financial institutions together with fintech partners to facilitate the loan application process. Toward this end, OCC hosted listening sessions which attracted 700 registrants and 400 participants and which were all put together in a scant 30 days.

Consensus and coordination. All of the panel participants agreed that their focus is on solutions to real problems that impact real people. At the same time customer protection and market integrity concerns remain paramount. All of the agencies represented on the panel are also members of the Global Financial Innovation Network (GFIN), a network of international organizations committed to supporting financial innovation in the interests of consumers. As Valerie Szczepanik observed, "There are no borders when it comes to innovation."

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