Fintech businesses struggling to stay inbounds of government rules may soon receive a dose of much-needed guidance via the Consumer Financial Protection Bureau (CFPB). Through its newly-created Office of Innovation, agency leadership intends to develop a regulatory framework designed to open the spigot in terms of the development of new products and services for those companies involved in cryptocurrencies, blockchain technologies and microlending, and also loans by individuals. Paul Watkins, the architect of Arizona’s fintech regulatory sandbox that launches in August, was named to spearhead the federal effort.
“It’s a good first step,” Washington D.C.-based finance and regulatory attorney Laurel Loomis Rimon told Bitcoin Magazine.
Rimon, senior counsel with the global law firm O’Melveny and former lawyer with various government agencies — including a stint as CFPB assistant deputy enforcement director — said entrepreneurs and startup companies in the fintech space “operate with a lot of uncertainty.”
For these financial innovators, ensuring universal compliance within the vast span of regulatory agencies “all come with a pretty heavy investment.” Combined with the hefty outlay of cash involved, especially in the early stages of startups, the lack of regulatory guidance “leaves them really unsure of how to spend their money.”
Theoretically, then, the construction of a CFPB sandbox could alleviate some of the regulatory uncertainty fintech companies face and would provide at least some guidance to innovative fintech operations.
Still, the creation of the Office of Innovation and its planned sandbox isn’t the first attempt by the agency to step into the fintech world. In a previous iteration, agency officials promised to support fintech innovations through the use of no-action letters, among other things, for approved companies.
But this program, something not seen as particularly effective, resulted in the issuance of only a single letter issued to an online lender utilizing unconventional underwriting methods. From the entrepreneur’s perspective, regulatory efforts of this ilk “only give you so much comfort.”
Ideally, said Rimon, the CFPB sandbox will facilitate regulator/company match-ups to create a collaborative relationship between government officials and business leaders. In this scenario, officials create limits of liability and work “more in the vein of coordinated sandbox for companies.”
Nonetheless, Rimon points out that no single clear definition exists for what exactly a sandbox is, and established rules for how sandboxes operate don’t exist. For U.S. regulators, sandboxes tend toward a philosophical nature without establishing formal operating procedures.
“It’s a continuum,” said Rimon.
But even from a philosophical point of view, the regulator track record is less than stellar. For instance, the Office of the Comptroller of the Currency (OCC) announced the agency’s consideration of a plan to allow some fintech companies special-purpose national bank charters. Since then, OCC officials have remained on the fence, though agency leadership is expected to make an announcement on the issue sometime this summer.
Where the CFPB is concerned, the Arizona sandbox rules will likely serve as a template for federal regulations. Some of the key aspects for companies approved to play in Arizona’s regulatory sandbox include a two-year window to test innovative financial products and services with the possibility of a one-year extension with the approval of the state attorney general’s office. Sandbox rules also puts limits on the number of consumers allowed to participate with sandbox players and also caps loan amounts that companies in the space can issue. Fintech companies operating within the state’s regulatory sandbox can serve only Arizona residents.
While plenty of question marks remain in terms of the kind of framework in which the CFPB operates its sandbox, Rimon remains optimistic that real progress lies ahead. When she crosses paths with CFPB officials, she says she sees a genuine “excitement and interest in this new technology.”
However, even with these best of intentions, “CFPB has a lot of thinking to do,” she says.