On December 5, the House Financial Services Committee Subcommittee on Digital Assets, Financial Technology, and Inclusion held a hearing entitled “Fostering Financial Innovation: How Agencies Can Leverage Technology to Shape the Future of Financial Services.” Witnesses in the hearing were:
· Valerie Szczepanik, Director of the FinHub, SEC
· Donna Murphy, Acting Deputy Comptroller for the Office of Financial Technology, OCC
· Mark Mulholland, Deputy Chief Information Officer, FDIC
· Ann Epstein, Assistant Director of the Office of Competition and Innovation, CFPB
· Charles Vice, Director of Financial Technology and Access, NCUA
· Michael Gibson, Director of Division of Supervision and Regulation, Federal Reserve
Below is a summary of the hearing prepared by Delta Strategy Group. It includes several high-level takeaways from both panels, followed by summaries of opening statements and witness testimonies and a summary of the Q&A portion of the hearing.
Key Takeaways
The following is a summary of the main topics explored in today’s hearing. Each is discussed in further detail in the Discussion section below.
- Members in today’s hearing questioned witnesses on a broad range of topics related to digital assets, distributed ledger technology (DLT), and AI. Most questions pressed witnesses to testify on the different ways government agencies are encouraging or discouraging innovation in the financial sector.
- Valerie Szczepanik, from the FinHub sector of the Securities and Exchange Commission (SEC), received many questions from Members regarding her division’s role in cryptocurrency regulation and on the new Predictive Data Analytics rule. She received pushback from Republican members about the SEC’s posture on digital assets and her office’s role in recent rulemakings. Szczepanik said that FinHub’s role is to provide as much information as possible to facilitate sound rulemaking from within the agency.
- Michael Gibson from the Federal Reserve (Fed) received a number of questions about the Fed’s stance on DLT and crypto assets. He said that DLT offers the potential to increase efficiencies, lower costs, and increase access to financial products and services, but both crypto assets and the technology underlying them present risks that must be addressed.
- Gibson mentioned the Novel Activities Supervision Program, which is intended to help the Fed provide relevant feedback to institution within their purview who deal with fintech companies involved in things like DLT and digital assets. A few Members raised issues regarding the clarity of the Fed’s issued guidance on the novel activities supervision program. Gibson said that the Fed has already issued guidance and have allocated appropriate staff to the program.
SUMMARY
Opening Statements and Testimony
Subcommittee Chairman French Hill (R-AR)
- New and emerging technologies like digital assets, DLT, quantum computing, and AI are dominating discussion. While government agencies are not at the forefront of financial technology innovation, they have the potential to stop innovation in its tracks. This is the first time this committee has called these agencies to testify about their work regarding innovation.
Subcommittee Ranking Member Stephen Lynch (D-MA)
- Under the Trump administration, several regulators established offices of innovation to prevent unnecessary regulatory barriers for innovation. In practice, some of these offices became a vehicle for lowering regulatory standards. If we truly value innovation, we should want regulators to police bad actors who are evading laws so we can level the playing field for innovators playing by the law. The current administration has done a good job transitioning these innovation offices to focus on market monitoring. The SEC has done a good job addressing concerns with DLT and AI.
Committee Chairman Patrick McHenry (R-NC)
- Fostering innovation within government agencies is vital and important, but I am increasingly concerned that innovation offices within government agencies are not operating as intended. It is critical that firms, financial institutions of all sizes, and entrepreneurs can go to the market with innovative products sooner, while maintaining important consumer protections. These offices should not be used to smother innovation and technology.
Valerie Szczepanik, Director of the FinHub, SEC
- We are eager to see new beneficial technologies succeed and do not view them as inconsistent with the SEC’s core mission and facilitating capital formation. However, the long-term promise of these technologies will be achieved only if those developing and implementing them comply with the laws, regulations, and rules that Congress and the SEC has put in place to further the agency’s core mission. We are taking proactive steps to ensure the SEC staff has hands-on opportunity to work with new technology.
Donna Murphy, Acting Deputy Comptroller for the Office of Financial Technology, OCC
· The OCC maintains a technologically neutral position toward new and emerging financial technologies, neither requiring, nor prohibiting adoption of any technology or business model. The OCC’s current areas of focus include matters involving bank-fintech partnerships, artificial intelligence, digital assets, and tokenization. Strong third-party risk management is essential to avoid harm to consumers or weakening of bank safety and soundness. The financial industry’s attention in the digital asset space is shifting from crypto assets to the tokenization of real-world assets and liabilities.
Mark Mulholland, Deputy Chief Information Officer, FDIC
· The FDIC relies heavily on technology to maintain stability and public confidence in our nation’s financial system. IT modernization is a top priority at the FDIC as we have invested five hundred million dollars in updating our IT systems. We are engaged with industry stakeholders through a number of channels as we issue periodic requests for information regarding insured financial institutions’ current and potential activities involving digital assets and AI. We will continue to facilitate an agile IT environment that fosters innovation.
Ann Apstein, Assistant Director of the Office of Competition and Innovation, CFPB
· As the role of technology has expanded to the financial sector, the CFPB has expanded our in-house expertise. In October, the CFPB published a proposal for the Personal Financial Data Rights Rule, which will create new standards to facilitate sharing consumer financial data. We believe this proposal will create an environment in which new entrants can thrive while simultaneously allowing consumers greater control and choice. We need transparency in AI processing and data so consumers can understand their rights. We advocate for collaboration among regulatory agencies to promote consistency. We are focused on advancing a more sophisticated approach to competition and innovation in fintech.
Charles Vice, Director of Financial Technology and Access, NCUA
· The NCUA is committed to promoting effective and efficient uses of emerging technology. The agency has implemented several initiatives, including a Virtual Examination Program and a Digital Asset Working Group. The NCUA’s Digital Asset Working Group is an agency team that develops guidance for the credit union industry’s use of distributed ledger technology, digital assets, and cryptocurrency.
Michael Gibson, Director of Division of Supervision and Regulation, Federal Reserve
- DLT offers the potential to increase efficiencies, lower costs, and increase access to financial products and services. Cryptocurrencies leverage the technology and are generally issued on open, public, decentralized networks. Both cryptocurrency and the technology underlying it present risks, including those related to governance and risk management of the network and legal uncertainties around issues such as settlement finality and ownership rights.
- The novel activities supervisory program will allow the Fed to verify that a bank has appropriate risk management systems in place to identify and control potential risks with respect to dollar tokens, including those related to operations, cybersecurity, liquidity, illicit finance, and consumer compliance. Digital assets are supervised under the new the novel activities supervisory program, which will help us provide relevant feedback to the institutions we supervise. The Fed is committed to supporting responsible innovation, but we will continue to research and understand the risks that will come with fintech innovation.
Discussion
Federal Reserve
Hill (R-AR): How do you see the novel activities supervisory program fostering innovation? Do you see this guidance provoking any confusion? Gibson: We have done this to ensure our examiners who are engaging with new technology have the expertise to effectively supervise them. It is possible, as with any guidance, new questions and confusion can happen.
Lynch (D-MA): How are you evaluating the risks of novel activities supervisory program? Gibson: We are seeing some risks materialize as banks make complex arrangements with fintech companies where the fintech company has information that the bank lacks.
Lynch (D-MA): How has illicit activity in the crypto space affected banks? Gibson: Banks themselves are not holding crypto assets, but banks have been dealing with crypto companies. We have seen liquidity risks and unpredictability as issues.
Davidson (R-OH): What is the update on the U.S. development of a CBDC? Gibson: We are in the research and experimentation phase. We are a long way off from thinking about implementation of a CBDC.
Flood (R-NE): Will the Fed release any more guidance related to the novel activities supervisory program? Gibson: We have already issued guidance around the supervisory non-objection process. We have allocated dedicated examiners to the program, and they have specialized training in these activities.
SEC
Lucas (R-OK): What was your office’s role in crafting the SEC’s predicative data analytics rule? Szczepanik: We act a subject matter expert for any particular rulemaking which may be relevant.
Lucas (R-OK): Can you discuss some of the possible consequences if the SEC were hostile to certain technologies? Szczepanik: We cannot have innovation at the expense of investors or market integrity, so we are more focused on finding the balance between innovation and consumer protection.
Casten (D-IL): How is the SEC using AI internally? Szczepanik: We are currently waiting for guidance from the Office of Management and Budget to determine how we can use AI internally. Currently, agency staff uses natural language processing and machine learning to analyze data sets and market data.
Emmer (R-MN): Has FinHub issued any guidance since Chair Gensler as to clarify how the securities laws apply to crypto? Szczepanik: FinHub is in contact with other internal agencies who issue guidance.
Nickel (D-NC): I have concerns about the SEC’s proposal on predictive data analytics as it will raise costs for broker-dealers and is too broad at its core. How involved was your office in making this rule? Szczepanik: Our role is to provide as much information and expertise as we can do the agency.
Waters (D-CA): How are you ensuring criminals within the digital asset space are held accountable? Szczepanik: We are working proactively to analyze trends we see that may present harm in the market.
Waters (D-CA): Are you open to hold special sessions with members of Congress to talk about the problems and the pitfalls that may occur with crypto? Szczepanik: Yes, please reach out to SEC staff.