[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]


                   OVERSEEING THE FINTECH REVOLUTION:
                       DOMESTIC AND INTERNATIONAL
                  PERSPECTIVES ON FINTECH REGULATIONS

=======================================================================

                                HEARING

                               BEFORE THE

                   TASK FORCE ON FINANCIAL TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED SIXTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 25, 2019

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 116-36
                           
  [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]  
  
                              __________
                               

                    U.S. GOVERNMENT PUBLISHING OFFICE                    
39-497 PDF                  WASHINGTON : 2020                     
          
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 MAXINE WATERS, California, Chairwoman

CAROLYN B. MALONEY, New York         PATRICK McHENRY, North Carolina, 
NYDIA M. VELAZQUEZ, New York             Ranking Member
BRAD SHERMAN, California             PETER T. KING, New York
GREGORY W. MEEKS, New York           FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri              BILL POSEY, Florida
DAVID SCOTT, Georgia                 BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas                      BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri            SEAN P. DUFFY, Wisconsin
ED PERLMUTTER, Colorado              STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut            ANN WAGNER, Missouri
BILL FOSTER, Illinois                ANDY BARR, Kentucky
JOYCE BEATTY, Ohio                   SCOTT TIPTON, Colorado
DENNY HECK, Washington               ROGER WILLIAMS, Texas
JUAN VARGAS, California              FRENCH HILL, Arkansas
JOSH GOTTHEIMER, New Jersey          TOM EMMER, Minnesota
VICENTE GONZALEZ, Texas              LEE M. ZELDIN, New York
AL LAWSON, Florida                   BARRY LOUDERMILK, Georgia
MICHAEL SAN NICOLAS, Guam            ALEXANDER X. MOONEY, West Virginia
RASHIDA TLAIB, Michigan              WARREN DAVIDSON, Ohio
KATIE PORTER, California             TED BUDD, North Carolina
CINDY AXNE, Iowa                     DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois                TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts       ANTHONY GONZALEZ, Ohio
BEN McADAMS, Utah                    JOHN ROSE, Tennessee
ALEXANDRIA OCASIO-CORTEZ, New York   BRYAN STEIL, Wisconsin
JENNIFER WEXTON, Virginia            LANCE GOODEN, Texas
STEPHEN F. LYNCH, Massachusetts      DENVER RIGGLEMAN, Virginia
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota

                   Charla Ouertatani, Staff Director
                   
                   
                   TASK FORCE ON FINANCIAL TECHNOLOGY

               STEPHEN F. LYNCH, Massachusetts, Chairman

DAVID SCOTT, Georgia                 FRENCH HILL, Arkansas, Ranking 
JOSH GOTTHEIMER, New Jersey              Member
AL LAWSON, Florida                   BLAINE LUETKEMEYER, Missouri
CINDY AXNE, Iowa                     TOM EMMER, Minnesota,
BEN McADAMS, Utah                    WARREN DAVIDSON, Ohio
JENNIFER WEXTON, Virginia            BRYAN STEIL, Wisconsin
                            
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 25, 2019................................................     1
Appendix:
    June 25, 2019................................................    35

                               WITNESSES
                         Tuesday, June 25, 2019

Clark, Charles, Director, Department of Financial Institutions, 
  State of Washington, on behalf of the Conference of State Bank 
  Supervisors (CSBS).............................................     9
Knickerbocker, Beth, Chief Innovation Officer, Office of the 
  Comptroller of the Currency (OCC)..............................     6
Szczepanik, Valerie A., Senior Advisor for Digital Assets and 
  Innovation, and Associate Director, Division of Corporation 
  Finance, U.S. Securities and Exchange Commission (SEC).........     7
Watkins, Paul, Assistant Director, Office of Innovation, Consumer 
  Financial Protection Bureau (CFPB).............................     5
Woolard, Christopher, Executive Director, Strategy and 
  Competition, UK Financial Conduct Authority (FCA)..............    10

                                APPENDIX

Prepared statements:
    Clark, Charles...............................................    36
    Knickerbocker, Beth..........................................    54
    Szczepanik, Valerie A........................................    70
    Watkins, Paul................................................    77
    Woolard, Christopher.........................................    81

              Additional Material Submitted for the Record

Lynch, Hon. Stephen F.:
    Written statement of the National Association of Federally-
      Insured Credit Unions......................................    95
    Written statment of the FDIC.................................    97

 
                   OVERSEEING THE FINTECH REVOLUTION:
                       DOMESTIC AND INTERNATIONAL
                  PERSPECTIVES ON FINTECH REGULATIONS

                              ----------                              


                         Tuesday, June 25, 2019

             U.S. House of Representatives,
                Task Force on Financial Technology,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The task force met, pursuant to notice, at 2:54 p.m., in 
room 2128, Rayburn House Office Building, Hon. Stephen F. Lynch 
[chairman of the task force] presiding.
    Members present: Representatives Lynch, Scott, Gottheimer, 
Lawson, Axne, McAdams; Hill, Luetkemeyer, Emmer, Davidson, and 
Steil.
    Ex officio present: Representative McHenry.
    Also present: Representatives Himes, Porter, and 
Hollingsworth.
    Chairman Lynch. The Task Force on Financial Technology will 
come to order.
    Without objection, the Chair is authorized to declare a 
recess of the task force at any time.
    Also, without objection, members of the full Financial 
Services Committee who are not members of this task force are 
authorized to participate in today's hearing, consistent with 
the committee's practice.
    Today's hearing is entitled, ``Overseeing the Fintech 
Revolution: Domestic and International Perspectives on Fintech 
Regulations.
    I now recognize myself for 4 minutes to give an opening 
statement, and I expect the Full Committee Chair to join us 
shortly.
    This afternoon, we begin the work of the Financial 
Technology Task Force, the first body to examine in depth how 
advancements in financial technology are transforming the 
relationship between the financial services industry and the 
consumer. A change in financial services is usually driven by a 
crisis, like we saw in 2008, and during the Depression. 
However, this change is not driven by crisis, but by consumer 
preference. It is driven by changes in technology, available to 
nearly every consumer.
    However, the velocity of this change is immense and 
unprecedented, and we need to encourage responsible innovation. 
Today, we will receive testimony on how regulators are seeking 
to harness the potential benefits and mitigate the potential 
risks of the fintech revolution. Most Members of Congress grew 
up in a traditional financial world that required us to use a 
local brick-and-mortar branch and build a relationship with a 
local banker. That, unfortunately, is no longer the case. 
Today, someone who wants to open a bank account, apply for a 
loan, or send money to friends can do all of those things 
without leaving home.
    Many of the innovations can improve consumer well-being. 
Digital lending can expand the availability of credit to 
underserved populations and lower the cost of lending for 
consumers. Advancements in payments technology can increase the 
speed and convenience of payments for both people and 
institutions. Open banking can give consumers better control 
over their own financial situation.
    However, these technological advancements come with risks. 
Without proper oversight, algorithmic qualifiers can turn 
alternative data into alternative forms of discrimination, and 
eliminating the human element in all digital applications can 
lead to confusion about the actual costs of a product.
    Fintech covers many activities, but each new advancement 
relies on an ever-increasing amount of personal data to be 
collected, stored, and analyzed. Companies are vacuuming up 
personal information with questionable levels of consumer 
consent or data protection. Consumers are being asked to agree 
to unintelligible privacy policies by companies with little or 
no track record for securing that sensitive financial 
information. Consumers often are not told, or are deliberately 
misled about how their data is collected, used, shared, or 
sold. Financial services regulators are the tip of the sphere 
in the fight to protect Americans from bad actors in financial 
services.
    Our consumers' faith in the financial system invariably 
relies on the ability of our regulators to effectively monitor 
and guide the entities in their jurisdiction. However, recent 
crises have badly shaken that faith, and report after report 
has emerged of banks exploiting the personal information of 
their own customers and abusing the trust that underpins the 
success of our U.S. financial system.
    With this in mind, I look forward to hearing about how we 
might address the new landscape of financial services, the 
benefits and risks that you see, and what Congress should be 
focused on as we move forward.
    With that, I would like to recognize my friend and 
colleague, the ranking member of the task force, Mr. Hill of 
Arkansas, for 5 minutes for an opening statement.
    Mr. Hill. Thank you, Mr. Chairman, I appreciate you 
convening this hearing today. I want to begin by thanking 
Chairwoman Waters and Ranking Member McHenry for their 
collaboration in creating this important task force. I want to 
thank our regulatory friends for being here for this important 
first panel. I look forward to working with my colleagues on 
both sides of the aisle, as well as the regulatory agencies to 
find a way to promote and foster innovation for both disruptive 
innovators and incumbent financial services players, large and 
small, over the next few months.
    In my view, our Fintech Task Force can enhance the 
understanding of this rapidly developing use of big data and 
data analytics. This task force should be focused on the 
American consumer as the ultimate beneficiary. Along the way, 
we will explore ways and means of customer acquisition and 
better service, and enhancing financial services to the 
underbanked, all while making compliance less costly and more 
effective. When Congress passed the Dodd-Frank Act in response 
to the 2008 financial crisis, it included thoughtful, necessary 
provisions for the American consumer, but it also had 
unintended penalties as a consequence of shifting critical, 
traditional banking services and functions to nonbanking 
players.
    Bank credit availability has suffered since the crisis, and 
many nonbank financial institutions like private equity firms, 
SBICs, BDCs, and fintech companies have grown, and their market 
share has expanded. Fintech companies, in particular, have seen 
significant evolvement over the past few years. These companies 
have appeared to be at odds with financial institutions' 
incumbents as both are fighting for market share and business.
    However, in recent years, both have realized the value each 
brings to the other and have started developing mutually 
beneficial partnerships. Today, we hear much more about 
collaboration, rather than disruption. I want to encourage the 
regulators to promote these partnerships in innovation, while 
finding ways to reduce the cost of regulatory compliance. 
Specifically, I am interested in ways that the third-party 
vendor due diligence process is handled. As a former community 
bank executive, I understand the regulatory burdens associated 
with onboarding a new vendor and I hope that the agencies can 
work together to enhance this process.
    That being said, I understand the importance of banks 
maintaining a robust level of safety and soundness. With 
technology constantly changing, banks must ensure that they are 
protecting their customers' privacy against both cyber hacks 
and other threats. I am interested in hearing your thoughts as 
it relates to the use of application programming interfaces 
(APIs), and other ways that banks are using technology to 
enhance this safety.
    A year ago, the U.S. Treasury issued their very informative 
fintech report that frequently commends the use of APIs to 
provide a more secure method of data exchange. I would 
recommend to the members of this committee that they read this 
financial innovation report as a foundation for their work on 
the task force. It provides a great overview of the many topics 
that we will be discussing in the task force related to 
regulatory sandboxes, necessary harmonization, open banking, 
and bank charters, just to name a few.
    This hearing will not only serve as a way for the task 
force members to learn about the ways and means that the 
regulatory agencies are promoting innovation, but also a way 
for you to learn the best practices from each other.
    In my district, we house two accelerator programs at our 
Venture Center. The two programs are: Fidelity Information 
Systems, a Fortune 500 company founded 50 years ago, that 
serves as a community bank core processor; and last year, the 
Independent Community Bankers of America (ICBA) selected Little 
Rock's Venture Center to host its program, which focuses on 
developing fintech opportunities for community bank 
partnerships.
    During the ICBA program, representatives from the 
prudential regulators traveled to Little Rock to discuss ways 
they could learn from this innovation center. This is a great 
example of how best to collaborate by having all of the players 
in the same room. We need to ensure these dialogues continue, 
which will ultimately allow for better compliance efficiencies, 
benefits to bank consumers, and help services reach the 
underserved community.
    And, with that, I yield the balance of my time to the 
ranking member of the full Financial Services Committee, Mr. 
McHenry, for an opening statement.
    Mr. McHenry. Thank you, Mr. Hill, and I thank you for your 
leadership on this important issue of financial innovation. I 
want to also thank Chairwoman Waters for creating this task 
force and the AI Task Force.
    This is an area where she and I have legislated in the past 
and hope to legislate in the future. We need to build a broader 
consensus on this committee and across jurisdictions about how 
we lean into this new era of technology: the computing power, 
the quantum computing revolution; and the great opportunities 
that are happening with the innovation economy more broadly.
    And I am encouraged that we can actually have, not a 
nonideological discussion, but a discussion where ideology is 
secondary to the nature of the reforms and the technology that 
is coming onboard. So, I think we can build great consensus 
through committees like this and the AI Task Force, and that 
can help drive good bipartisan legislation through the process.
    And so I thank you, Mr. Hill, for yielding, and I thank 
you, Chairman Lynch, for your leadership, especially in such a 
hotbed of innovation as you represent in the great State of 
Massachusetts. I yield back.
    Chairman Lynch. The gentleman yields back.
    Today, we first welcome the testimony of Paul Watkins, who 
is the Director of the Office of Innovation at the Consumer 
Financial Protection Bureau. Second, Beth Knickerbocker, who is 
the Chief Innovation Officer at the Office of the Comptroller 
of the Currency.
    Third, Valerie Szczepanik--is that correct?
    Ms. Szczepanik. ``Szczepanik.''
    Chairman Lynch. What is it?
    Ms. Szczepanik. ``Szczepanik.''
    Chairman Lynch. ``Szczepanik.'' A lot of points in 
Scrabble, I will tell you that. She is the Associate Director 
of the Division of Corporation Finance and Senior Adviser for 
Digital Assets and Innovation for the Securities and Exchange 
Commission.
    Fourth, Charles Clark, who is the Director of the 
Department of Financial Institutions for the State of 
Washington.
    And finally, making the trip all the way from London, we 
are joined by Christopher Woolard, the Director of Strategy and 
Competition for the United Kingdom's Financial Conduct 
Authority (FCA).
    The witnesses are reminded that your oral testimony will be 
limited to 5 minutes.
    And without objection, your written statements will be made 
a part of the record.
    Mr. Watkins, you are now recognized for 5 minutes.

   STATEMENT OF PAUL WATKINS, ASSISTANT DIRECTOR, OFFICE OF 
    INNOVATION, CONSUMER FINANCIAL PROTECTION BUREAU (CFPB)

    Mr. Watkins. Thank you so much, Mr. Chairman, and good 
afternoon, Chairman Lynch, Ranking Member Hill, and task force 
members. I am Paul Watkins, the Assistant Director for the 
Bureau's Office of Innovation. Previously, I was the chief 
counsel of the Civil Litigation Division in the Arizona Office 
of the Attorney General. There, I managed the State's 
litigation in areas such as consumer fraud and civil rights. I 
also designed the State's fintech sandbox.
    Today, I am pleased to share what the Bureau is doing in 
this area. The Bureau created the Office of Innovation in July 
2018 to facilitate consumer beneficial innovation. We believe 
innovation can contribute to the Bureau's statutory purposes by 
increasing fairness, transparency, competition, and consumer 
access within financial services. We are working to carry this 
out through updating the Bureau's innovation policies and 
creating regulatory sandboxes designed to address regulatory 
uncertainty that may impede innovation, collaborating with 
other Federal, State, and global regulators and engaging with 
stakeholders on innovation issues.
    We proposed revisions to the Bureau's existing trial 
disclosure program in September 2018 and no-action letter 
program in December of 2018. Those proposed revisions aim to 
increase the policy's utilization. They generally would 
streamline the application and review process, focusing on 
potential risks to consumers. The revisions would also provide 
increased clarity for recipients.
    Also, in December 2018, the Bureau proposed the product 
sandbox policy. This policy would require participants to share 
data with the Bureau concerning the products offered, including 
potential risks to consumers. Similar to the Bureau's current 
trial disclosure policy, participants would receive safe-harbor 
protection from liability for certain aspects of the product 
being tested. Each proposed policy contains provisions designed 
to deter harm to consumers. We have put the 3 proposals out for 
public comment and have received about 60 written responses.
    Each of our proposed policies states that the Bureau will 
look to coordinate with other regulators. Internationally, the 
Bureau, in August 2018, joined the Global Financial Innovation 
Network (GFIN), an organization of regulatory agencies working 
to support financial innovation and regulatory best practices. 
In January 2019, the Bureau became a coordinating member of 
GFIN.
    Since the Office of Innovation was established, I and other 
members of the office have participated in over a hundred 
innovation-related meetings and events and have interacted with 
fintechs, financial institutions, consumer advocacy groups, and 
Federal, State, and international regulators. Other members of 
the Bureau have, likewise, participated in such events and 
meetings, including Bureau leadership, senior officials, and 
staff. Through these engagements, the Bureau is building a 
significant knowledge base about innovation in the markets for 
financial services. Thank you for this opportunity to testify, 
and I look forward to your questions.
    [The prepared statement of Mr. Watkins can be found on page 
77 of the appendix.]
    Chairman Lynch. Thank you.
    Ms. Knickerbocker, you are now recognized for 5 minutes.

  STATEMENT OF BETH KNICKERBOCKER, CHIEF INNOVATION OFFICER, 
        OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)

    Ms. Knickerbocker. Chairman Lynch, Ranking Member Hill, and 
members of the Task Force on Financial Technology, I am pleased 
to appear before you to discuss the initiatives at the OCC to 
support responsible innovation. Responsible innovation enables 
a vibrant banking system to meet the evolving needs of 
consumers, businesses, and communities. It promotes economic 
opportunity and job creation. When done responsibly, innovation 
increases consumer choice, improves the delivery of products 
and services, enhances bank operations, and enables financial 
institutions, including small and rural banks, to more 
effectively meet the needs of their customers and communities.
    Moreover, responsible innovation expands services to 
unbanked and underbanked consumers and promotes financial 
inclusion. Innovation has significantly changed how consumers 
engage with their financial service providers. How banks 
innovate is also evolving, particularly in the area of bank and 
fintech partnerships. The OCC supports partnerships between 
banks and fintech companies that are safe and sound and meet 
the evolving needs of consumers, businesses, and communities.
    The OCC created the Office of Innovation to implement our 
responsible innovation framework. As Chief Innovation Officer, 
I head the Office's work to regularly conduct outreach and 
provide technical assistance to banks, fintechs, and other 
stakeholders through a variety of channels. These include 
office hours, listening sessions, and participation in hundreds 
of meetings, calls, conferences, and events. My office also 
works to advance awareness and training for OCC staff on 
emerging trends to foster a culture that is receptive to 
responsible innovation and to develop staff competencies.
    In addition, we conduct research to assess the financial 
services landscape to inform OCC policy and supervisory 
actions.
    Finally, we put great emphasis on maintaining open channels 
of communication and information-sharing, with other domestic 
and international regulators. The OCC's most recent innovation 
initiative was announced in April when we proposed a voluntary 
innovation pilot program to support bank testing of activities 
that could significantly benefit consumers, businesses, and 
communities, including those that promote financial inclusion.
    The program is designed to assist banks in those situations 
where regulatory or supervisory uncertainty may be a barrier to 
deploying a new product, service, or process, and where early 
regulatory involvement may promote a clearer understanding of 
risks and related issues.
    The pilot program will also allow the OCC to further our 
understanding of innovative products and services and to assist 
in identifying supervisory approaches that might 
unintentionally or unnecessarily inhibit responsible 
innovation. The OCC invited public comment on its pilot program 
and is in the process of evaluating the comments we received.
    Many fintech companies such as marketplace lenders, payment 
processors, and custody service providers offer products and 
services that historically have been offered by banks. Since 
the early stages of our work, the companies have consistently 
asked the agency about options to conduct their businesses on a 
national scale and promote--and potential to become a national 
bank. The OCC strongly supports the dual banking system and 
believes that fintech companies engaged in the business of 
banking should have the option to conduct their businesses 
through a national bank charter when it makes sense for their 
business model. The OCC has options available for firms that 
can meet our rigorous standards.
    Fintech companies may choose to consider a full-service 
national bank charter to engage in a full array of authorized 
national bank activities including accepting deposits or to 
apply for a variety of other limited-purpose charters, if they 
are engaged in a limited range of banking activities.
    Regardless of the particular path that a fintech company 
chooses, all national banks face rigorous examination and high 
standards that include capital, liquidity, compliance, 
financial inclusion, and consumer-protection standards.
    My written statement also includes some principles for the 
task force's consideration that we believe are important, for 
example, facilitating appropriate levels of consumer 
protection, including by ensuring transparency and informed 
consent. In addition, laws or changes to laws should be 
technology-neutral, so that products and services can evolve 
regardless of changes in technology that enable them.
    The OCC is looking forward to working with the task force 
and continuing to be a resource as members explore important 
policy considerations related to financial technology. Thank 
you again for the opportunity to testify today. I am happy to 
answer questions.
    [The prepared statement of Ms. Knickerbocker can be found 
on page 54 of the appendix.]
    Chairman Lynch. Thank you very much.
    Ms. Szczepanik, you are now recognized for 5 minutes.

  STATEMENT OF VALERIE SZCZEPANIK, ASSOCIATE DIRECTOR OF THE 
DIVISION OF CORPORATION FINANCE AND SENIOR ADVISOR FOR DIGITAL 
ASSETS AND INNOVATION, U.S. SECURITIES AND EXCHANGE COMMISSION 
                             (SEC)

    Ms. Szczepanik. Thank you, Chairman Lynch, Ranking Member 
Hill, and members of the task force. Thank you for the 
opportunity to testify before you today alongside 
representatives from some of the SEC's key regulatory partners 
on the important topic of technological innovation in our 
financial markets.
    In October 2018, the SEC launched FinHub, a strong 
innovation initiative to centralize efforts and leverage 
expertise across the Commission and focus on key areas in 
financial innovation. I am the head of FinHub, and I am happy 
to be here to tell you about its activities and some of its 
plans. FinHub has tried to innovate the way we regulate. With 
FinHub, we have built both a platform and a portal. As a 
platform, it is a repository of resources for the public. 
FinHub broadcasts in one place all of the activities and views 
of the Commission in various areas in financial innovation.
    It is also a portal. It is a place for engagement with the 
public, academia, other regulators and each other, and we 
engage in a number of ways. First, through FinHub's webpage, 
entrepreneurs, developers, and their advisers routinely request 
meetings with the staff, and we have dozens of such meetings in 
Washington, D.C. Recognizing that not everyone can travel to 
D.C., we also travel around the country to meet with these 
people hosting local, peer-to-peer meetups in cities like San 
Francisco, Denver, New York, and Philadelphia. Later this week, 
I will travel to Chicago. In these office hour-type events, we 
meet with innovators developing new technologies, entrepreneurs 
looking to bring new business to market, advisers and 
advocates, universities and academics, SEC registrants and 
those seeking to register, and others. While we can't give 
legal advice, we can give guidance. We can tell people how we 
interpret our laws, and we can point out particular issues with 
potential projects.
    Second, we host public events. On May 31, 2019, we held a 
public fintech forum dedicated to distributed ledger technology 
and digital assets. This event brought together academics and 
industry participants to discuss issues before an audience of 
the public, SEC staff, and staff from other agencies. 
Approximately 2,000 people attended or viewed our webcast, and 
it is still available for viewing.
    Third, we publish guidance and seek input on specific 
issues. On April 3, 2019, FinHub staff published a framework to 
aid market participants in analyzing whether a digital asset is 
an investment contract and, therefore, a security. On the same 
day, the Division of Corporation Finance issued a no-action 
letter to a market participant seeking to issue a digital 
asset. SEC staff has issued letters welcoming public input on 
various topics such as legal and investor protection issues 
concerning digital assets.
    Finally, we collaborate internally and externally on 
initiatives. For example, FinHub staff partners with the SEC's 
Office of Investor Education and Advocacy to devise creative 
ways to reach investors. Recently, we launched a mock-up of a 
fraudulent ICO called the HoweyCoin, where potential investors 
were redirected to a web page with educational information.
    We collaborate regularly with our sibling domestic and 
international partners. Our level of coordination in this 
regard is extensive. We are continually exploring ways to 
improve our efforts, such as by seeking to hire digital asset 
experts through our visiting scholars program and regularly 
participating in industry conferences and academic events.
    I am scheduled to take part in two upcoming tech sprints, 
one of them hosted by the FCA. We are committed to 
understanding the technologies that impact our markets, and we 
are taking proactive steps to ensure that we have hands-on 
opportunities to work with these technologies.
    Those who engage with the SEC's FinHub will play a critical 
role in shaping the future of fintech and assuring that the 
U.S. capital markets continue to adhere to the high standards 
that have made them so deep, liquid, fair, and attractive for 
decades. We are eager to see new beneficial technologies 
succeed. The long-term promise of these technologies will be 
achieved if those implementing them comply with the laws, 
rules, and regulations Congress and the SEC has put in place to 
further the agency's core mission: protecting investors; 
maintaining fair, orderly, and efficient markets; and 
facilitating capital formation.
    We encourage market participants to use the materials on 
FinHub's website as a resource, to consider consulting with 
securities counsel, and to request further guidance from the 
staff if questions remain. Regrettably, while some market 
participants have engaged with us constructively, others have 
not. The SEC's Division of Enforcement has been and will 
continue to recommend enforcement actions for alleged 
violations of the Federal securities laws in order to protect 
investors in the market.
    Thank you for the opportunity to testify before you today 
about the work of SEC's FinHub and for your support of fintech 
innovation. I look forward to answering any questions you may 
have.
    [The prepared statement of Ms. Szczepanik can be found on 
page 70 of the appendix.]
    Chairman Lynch. Thank you.
    Mr. Clark, you are now recognized for 5 minutes.

 STATEMENT OF CHARLES CLARK, DIRECTOR, DEPARTMENT OF FINANCIAL 
INSTITUTIONS, STATE OF WASHINGTON, ON BEHALF OF THE CONFERENCE 
                OF STATE BANK SUPERVISORS (CSBS)

    Mr. Clark. Good afternoon, Chairman Lynch, Ranking Member 
Hill, and members of the task force. Thank you for holding this 
hearing. My name is Charlie Clark. I am the director of the 
Washington State Department of Financial Institutions. It is my 
pleasure to testify today on behalf of the Conference of State 
Bank Supervisors. I serve as the Chair of the CSBS 
nondepository supervisory committee, which provides a forum for 
State regulators to drive initiatives aimed at ensuring that 
State supervision of nonbank companies, including fintechs, is 
effective and efficient. My Department oversees more than 
17,000 State-licensed nondepository entities.
    I have been at the agency as fintechs have emerged, even 
before they were called fintechs. Our agency has made sure we 
have stayed a step ahead of these new business models and 
ensure that consumers are protected. As a primary regulator, 
State regulators have expertise, data, and real-time insight 
into how these companies are interacting with consumers and 
functioning in the marketplace. I welcome the opportunity to 
discuss State regulators' approach to regulating fintech and 
our perspective on the impact of technology on our regulated 
institutions.
    State regulation is activities-based. Whether you go to a 
storefront or use an app, money transmission is money 
transmission. Similarly, lending is lending. We don't regulate 
a company differently, just because it calls itself fintech. We 
look beyond the labels and marketing to understand the 
underlying activity and how it fits within our State laws. In 
many instances, we find that a fintech company's activities fit 
squarely within existing State financial laws and regulations. 
The Nationwide Multistate Licensing System (NMLS) is one of the 
State's regtech solutions. Through solutions for licensing, 
regulating fintech firms, and through NMLS, we have seen the 
ongoing impact of fintech across the marketplace. NMLS is 
tracking in real time the evolution of the marketplace from 
brick-and-mortar to online.
    We recognize that the current intersection between 
financial services and technology has accelerated change in the 
industry and the State system. With industry participation, we 
are leveraging technology and data to create a more networked 
system of State regulation that functions more efficiently, 
with strong consumer protections.
    State regulators have broadened the scope of how we work 
together, especially as we recognize that technology is 
enabling fintech companies to scale rapidly. That is why State 
regulators are committed to advancing Vision 2020, a set of 
initiatives designed to harmonize and strengthen State 
supervision. Current Vision 2020 initiatives include a 
transformative exam platform called the State Examination 
System, and a sweeping cybersecurity training program that will 
train 1,000 examiners by the end of the year. As part of Vision 
2020, State regulators have gathered industry input from 
fintech firms on how to streamline regulation nationwide, while 
maintaining strong consumer protections and local 
accountability. Some of the resulting initiatives are a model 
State law for money transmitters and new tools and resources to 
help industry and others navigate the State system. Washington 
State is leading a streamlined, multistate, MSB, licensing 
initiative. To date, we have 23 States that have signed on to 
this effort, which is intended to curb duplications in the 
licensing process and cut redundant work among State 
regulators.
    Through NMLS, fintechs can submit most license application 
materials only once, reducing the need to go State to State. As 
noted in greater detail in my written testimony, the States are 
committed to implementing regtech solutions and collaborating 
on new ways to improve oversight and enhance consumer 
protections while reducing regulatory burden. Thank you for the 
opportunity to testify today. I look forward to answering your 
questions.
    [The prepared statement of Mr. Clark can be found on page 
36 of the appendix.]
    Chairman Lynch. Thank you.
    Mr. Woolard, first of all, let me publicly thank you for 
making the effort to be here. The committee was extremely keen 
on getting your perspective. You are now recognized for 5 
minutes.

   STATEMENT OF CHRISTOPHER WOOLARD, EXECUTIVE DIRECTOR FOR 
 STRATEGY AND COMPETITION, UK FINANCIAL CONDUCT AUTHORITY (FCA)

    Mr. Woolard. Chairman Lynch, thank you very much. Ranking 
Member Hill, members of the task force, thank you for inviting 
me to give evidence today. As you said, Chairman Lynch, I am a 
member of the board and an executive director of the Financial 
Conduct Authority. I also lead our innovation work. I am also 
chairman of the IOSCO fintech network, which brings together 92 
regulators and other members from around the world.
    I have submitted written testimony to the committee, but in 
the interest of time, I just wanted to highlight three points 
from that: first, to highlight the FCA's approach to innovation 
policy; second, the importance that we attach to outcomes; and 
third, the importance of international cooperation in this 
sphere. And of course, I would be very happy to answer any 
questions, as well.
    Our approach at the FCA rests upon our competition duty. 
Put very simply, as well as seeking to prevent risks to the 
system, which all financial regulators do, we also consider the 
dangers of potentially beneficial innovations not happening or 
coming to market. Our journey around innovation started in 
October 2014, when I established something called Project 
Innovate within the FCA. We had the objective of fostering 
innovation in the financial services sector in the interest of 
consumers. We wanted to make it easier for innovators to get 
their ideas to market and also encourage larger firms to break 
the mold. For the most part, that has been about connecting 
those with innovative business models with our existing rule 
book. We got a huge response to this, including seeing some 
ideas that were really cutting-edge. In order to manage these, 
we established something called the FCA sandbox as a place 
where firms could trial innovative products, services, and 
business models in a live market environment, normally for a 6-
month test, while ensuring that safeguards were in place.
    And the thing I should stress is, certainly from our 
perspective, we believe that sandbox firms have to work in the 
real world from day one. So, our full suite of rules apply to 
them. They are fully regulated, and, indeed, sandbox firms are 
probably our most heavily supervised.
    The second point I just wanted to make is that we believe 
is real importance in terms of outcomes. As you know, there is 
a lot of hype around fintech. Our work needs to make a real 
difference in terms of new entrants to the market, consumer 
offerings, and our own approach to regulation. Now, we think it 
is making a difference. Demand from firms have been strong. We 
have had over 1,500 requests for help. Our sandbox cohorts are 
oversubscribed around 3 times over. We have given 149 
regulatory steers since we started this program, and more than 
a hundred new firms have come to market or have had variations 
of permission.
    The sandbox is in his fifth cohort. We have had over 110 
tests, and around 80 percent of the firms that enter the 
sandbox go on to operate fully in the market. We have also been 
able to reduce the time it takes us to take innovative firms 
into full authorization by around 40 percent, which equates 
around 3 months' reduction in time. We have seen new services 
in almost all of the sectors that we regulate for, and we 
believe that millions of consumers have had access to new 
products geared around better value or greater convenience. 
There are examples in the documents that I have submitted to 
the committee, and obviously, I am very happy to talk about 
them.
    We also use those activities to make sure they inform our 
own policymaking and how we think about using technology 
ourselves as a regulator, for example, to deal with questions 
like anti-money-laundering or transformations like digital 
reporting.
    Third, and finally, international cooperation in this 
sphere is vital. Many of the firms that we see have business 
models that are geared around international expansion, rather 
than traditional, domestic business models. We believe that 
there is work that we can do through both IOSCO and through the 
new Global Financial Innovation Network that can allow us to 
tackle cross-border issues in a really meaningful way.
    There is already significant cooperation between 
regulators, as Val already mentioned in her evidence, and we 
believe that this needs to continue. Now, I recognize that is a 
very whistle-stop tour of the issues. I hope it gives you a 
sense of the scale and value that we see in this space. Thank 
you, once again, for inviting me here today.
    [The prepared statement of Mr. Woolard can be found on page 
81 of the appendix.]
    Chairman Lynch. Thank you very much. I will now yield 
myself 5 minutes for questioning, unless Chairwoman Waters is 
here. No? Okay.
    Ms. Knickerbocker, we had the opportunity to speak with Mr. 
Otting, who came before the Full Committee a couple of weeks 
ago, and we discussed the OCC's special purpose charter of 
fintech companies. It is my understanding that as of now, we 
have no completed applicants. Is that correct?
    Ms. Knickerbocker. That is correct.
    Chairman Lynch. Okay. It was recently reported in the 
press, however, that Google and perhaps some other larger tech 
companies had reached out to the OCC about the charter. Is 
there any truth to that?
    Ms. Knickerbocker. Not that I am aware of, Mr. Chairman.
    Chairman Lynch. All right. And, of course, we have just 
received notice that Facebook announced their plans to launch 
Libra and Calibra, a cryptocurrency and digital wallet. So, we 
have this merging of--or potential merging to create some 
conflicts of interest between the heretofore traditional 
banking world and the tech space. Does the OCC have any 
concerns about the blending of these two disciplines where 
there is a fairly fixed and conservative regulatory framework 
around banking, and that is not at all sort of the culture 
within the tech community? Any concerns about that marriage?
    Ms. Knickerbocker. Well, a couple of things on that. First 
of all, one of the things that the Office of Innovation does is 
we spend a lot of time with companies that are not used to the 
regulated environment, to explain to them if they want to 
operate in the regulated environment, what that means. And we 
provide technical assistance to them and spend a lot of time 
discussing those expectations.
    For those companies that have reached out to us around the 
special-purpose charter, we have further discussions with them 
about expectations around capital, liquidity, risk management, 
governance, and those expectations. But I do think it is 
important to note that there are a lot of activities that have 
historically been in the banking industry that are now in a 
wide variety of different places, and they intersect with the 
banking industry and the regulated environment. We need to be 
aware of those.
    And with the case of Facebook, I will just point out that 
at least right now with Facebook Libra, there are no banks that 
are involved. So, the OCC is just monitoring that activity, but 
if a national bank was involved with Facebook Libra, we would 
ensure that its activity would be in compliance with the law.
    Chairman Lynch. Okay. Thank you.
    Mr. Clark, the CSBS has sued Ms. Knickerbocker's 
organization, the OCC, over this issue. What are the concerns 
that have been--I don't want you to talk about the litigation, 
but just sort of, from the 100,000-foot level, what are the 
concerns that the State supervisors have raised?
    Mr. Clark. State regulators oppose the special-purpose 
charter because it lacks statutory authority. It is up to this 
body, Congress, to decide whether the OCC should regulate these 
nonbank entities. I think the example you raise creates a 
perfect example of how such a charter would pick winners and 
losers. In a State system, currently a small company can enter 
the system, scale up, and be competitive with an innovative 
idea. But with very large companies that would essentially get 
a preference, that creates an unlevel playing field.
    Chairman Lynch. Let me ask you, Ms. Knickerbocker, you have 
talked about sort of harmonizing--well, at the end of your 
testimony, you talked about Congress sort of trying to 
introduce some of this new technology in a way that is not 
disruptive or damaging to some of the smaller firms. I think 
you called it technology-neutral legislation. And I struggle 
with that because you have huge firms with huge resources and 
great capacity from a technological side. And then I have 
community banks, so I have to balance that. It sounds good in 
theory, but I just struggle with it. What do you mean by that? 
How do we do that up here?
    Ms. Knickerbocker. When I referred to technology-neutral, 
what I was speaking about was there are a lot of different 
technologies, whether it is cloud-based technology, or 
different types of distributed ledger technology, so we 
shouldn't be choosing what type of technology a bank wants to 
use.
    Chairman Lynch. Okay. It was a different context.
    Ms. Knickerbocker. Right.
    Chairman Lynch. I have gone over my time; I apologize for 
that.
    And I now yield to Ranking Member Hill for 5 minutes.
    Mr. Hill. Thank you, my friend. Again, thank you to the 
panel. I thought your testimony was really well-delivered and 
well-prepared. Thank you for that.
    Mr. Watkins, when I looked at the Treasury report issued 
last summer that I referenced, there were a couple of major 
congressional issues that were suggested that Congress needs to 
deal with. One is regarding the Madden v. Midland Funding case, 
a topic that affects people extending credit out there called 
valid-as-made doctrine. Is that something you think that 
Congress should deal with legislatively, or do you think that 
is something that the regulators could collaborate on and 
clarify?
    Mr. Watkins. Thank you for that question, Ranking Member 
Hill. I do recall that portion of the Treasury report. It is 
certainly an important issue. To give you a full answer to 
that, I would probably need to confer with some of my 
colleagues at the Bureau, as well as these other agencies to 
determine what aspects are implicated by our existing 
jurisdiction and rulemaking and what aspects would require 
legislative action.
    Mr. Hill. What, in the Treasury report, is the CFPB's top-
of-mind item to work on?
    Mr. Watkins. We have been implementing several of the items 
in that report, starting with regulatory sandboxes, which I 
mentioned briefly in my opening statement. We have revised two 
existing policies. We have proposed a third. Another area that 
the report mentioned that is relevant to the Office of 
Innovation is collaboration, international collaboration 
through our membership in the Global Financial Innovation 
Network (GFIN), and also in each of our policies, we have 
indicated our intent to collaborate with both State and Federal 
regulators.
    Mr. Hill. I think that is important. I think all of our 
prudential regulators having a similar approach to sandboxes, 
with similar rules of the road, would make it a lot easier on 
private market participants, so I encourage you to pursue that.
    Mr. Clark, your testimony was very interesting about the 
national registry system and how that has expanded since Dodd-
Frank and your efforts in the State of Washington to lead on 
uniform laws. The Treasury report suggests that Congress 
provide guidance on State uniform laws when it comes to lending 
and money-transmission services, but it also is very clear that 
the States ought to have 3 years in which to perfect that 
effort. Can you give me a feel for--I know you have 23 States 
working. Can you expand on that and talk a little bit about 
Treasury's report and what the States are doing beyond that one 
in your testimony?
    Mr. Clark. Sure, absolutely. We were asked to make 
substantial progress in streamlining and harmonizing licensing 
and supervision, and we are absolutely doing that collectively 
as States. We have the CSBS Vision 2020, which has modernized 
and is working to modernize the NMLS. We are creating a special 
State examination system to coordinate supervision for national 
companies. We are creating a national scheduling effort to 
better coordinate scheduling of MSBs, and I can tell you, in 
the licensing area, not only is this MSB licensing agreement 
streamlining the effort where States are sharing work, there is 
less duplication, but we are also working on a model MSB law, 
so that we can better collaborate and create harmony among the 
State laws.
    Mr. Hill. Thank you. I look forward to studying your 
results.
    Mr. Woolard, thanks for crossing the pond and being here 
with us. I am interested in what--after open banking has been 
in place now for just over a year, what is the key benefit you 
have noted from a regulator's point of view, and what is the 
key shortfall? And is it true that, in your standardized 
approach, APIs are used universally for the transmission of 
customers' private data?
    Mr. Woolard. Thank you, Mr. Hill.
    We have, with open banking, the rules finally came in sort 
of full effect in January. So, it is a bit less than a year. 
But I think there are a number of things we can observe 
already. First, we have many of the large banks, which I think 
had some quite serious concerns about this when it was first 
proposed, are now actively making offerings to their customers 
around open banking, to consolidate their relationships with 
one particular bank. So, this isn't purely a sort of fintech 
versus traditional established banks. This is something that is 
happening across the market. If I look at it objectively, I 
think there is something about the limited range of products 
that are currently covered by open banking in terms of sort of 
current account, checking accounts, payment accounts. And there 
is a question there about should that be more banking there 
that is available? And, yes, to your point, APIs are the 
principal route by which these interfaces are working in a 
standardized way across the market, in contrast to perhaps 
other parts of Europe.
    Mr. Hill. Thank you, Mr. Woolard.
    I yield back, Mr. Chairman.
    Chairman Lynch. Thank you. The Chair now recognizes the 
gentleman from Georgia, Mr. Scott, for 5 minutes.
    Mr. Scott. Thank you very much, Chairman Lynch. 
Congratulations to you--
    Chairman Lynch. Thank you.
    Mr. Scott. --as the chairman of our Fintech Task Force, and 
thanks for holding this hearing, and thank you all for coming 
here and doing such a wonderful job with your testimonies.
    Ms. Knickerbocker, I want to kind of--you seemed to really 
hit the nail on the head with your opening statement when you 
said, ``When done responsibly, innovation can increase 
consumers' choice, improve the delivery of products and 
services, and enable financial institutions to more effectively 
meet the needs of consumers, including those who are unbanked 
and underbanked businesses and communities.'' I think you hit 
it right on the head there, because this is one of the reasons 
I have been involved in fintech.
    I am chairman of the bipartisan Fintech Caucus. And we have 
a bill that we are working on, along with the Chair of the full 
Financial Services Committee, Chairwoman Maxine Waters, and it 
is called the FINTECH Act. And it is to get us into some 
guardrail situations. Paramount of what we are trying to do is 
to make sure, because as you know, you are the chief regulator, 
you are the OCC, you have this special order going out for the 
fintech's regulation, so it is very important that with all of 
the different financial regulators, to a degree, to feel they 
have a piece of fintechs here, it is important for us to get 
out front a bill that will give harmonization if there are 
regulatory agencies that may feel each one has a piece of the 
action. And, hopefully, as we work through this, a point of 
entry to come into the regulatory system. And so I wanted to 
say, if you felt that our bill, the FINTECH Act, again, which 
would establish harmonization among Federal regulators to 
eliminate duplication and conflicting regulations impacting 
fintech companies--bipartisan as I said, with my good friend, 
Barry Loudermilk, and Mr. Luetkemeyer on that side. We have my 
good friends, Mr. Gottheimer and Mr. Lawson on this side, and 
of course, we are working with Chairwoman Waters on this bill. 
So, I would like for you to comment on that. Did you see, do 
you agree with us, for regulatory harmonization of fintech 
companies, to allow for certainty and stability as in our 
FINTECH Act?
    Ms. Knickerbocker. Much of the work that the Office of 
Innovation does, in fact, the majority of the work that we do 
is working with banks and fintechs to talk about what the 
expectations are in operating in a regulated environment and 
trying to understand where there are uncertainties. And 
oftentimes, those uncertainties are perceived. And I think it 
is important that, in order for us to reach those goals that we 
all believe are important around fintech and the evolution of 
banking, to be able to break down those perceptions, so that we 
can operate in a more efficient and effective manner.
    Harmonization is also important. It is a little challenging 
sometimes when you have multiple regulators that have different 
mandates, but we all are working, I believe, as effectively as 
we can, to look at opportunities for harmonization. An example 
of that is the Treasury report had talked about third-party 
risk management and having the regulators try to find places 
where we could be more in harmony, if you will. And we have, in 
fact, done that. There have been a number of discussions about 
that, and we are continuing to meet, to focus on that, because 
it is one of the biggest issues, where banks and fintechs 
partner.
    Mr. Scott. And so, if you could, very quickly, how would 
you look at the efforts that are already under way among the 
Federal banking regulators within fintech? What would be the 
landscape right now?
    Ms. Knickerbocker. I would say that the landscape right now 
is that we are working very cooperatively. All of us on this 
panel talk on a regular basis. The Office of Innovation and 
those groups of the agencies that are focused on innovation 
work on a regular basis to talk about how we can improve our 
programs. We share a lot of information.
    In addition, now what we are doing, particularly with 
fintechs or banks that have particular questions that are for 
another regulator, is we will do introductions through the 
Office of Innovation, to either Paul's group or Valerie's 
group, and that has been very effective in reducing some of 
that uncertainty.
    Mr. Scott. Thank you very much.
    Chairman Lynch. Thank you. The Chair now recognizes the 
gentleman from Missouri, Mr. Luetkemeyer, for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman. We have a great 
panel today, and a great topic. Thank you all so much for being 
here.
    Mr. Woolard, I'm always curious as to how other countries 
look at these issues and their approach and what they find 
whenever they do things. From the regulatory standpoint, how is 
your country looking regulatorily at trying to either control 
or not control, to be able to allow, not allow, in this 
particular environment innovators and the people to be able to 
access this technology, as well as how do you protect the 
information that they are out there with, if you don't mind?
    Mr. Woolard. Thank you very much. I think probably the 
easiest analogy to think of about our approach is it is rather 
like a pharmaceutical trial. So, you want to get the benefits 
here. You want to get the innovation into the market that you 
think might make things better for consumers. At the same time, 
we are taking an approach where, particularly through the 
sandbox, if it is something that is very, very new, we want to 
make sure that it is actually tested properly on a smaller 
controlled group before that innovation then works its way into 
the wider environment. That has been our broad approach.
    In all of this, what we are trying to do is, as I said, 
keep--how do we secure innovation in the interest of consumers? 
We do occasionally see ideas that are incredibly clever, 
incredibly innovative, but unfortunately, would not have a good 
impact on the market. And so, it is about making sure that we 
try and encourage the vast majority of those players that are 
really trying to bring something new and add value.
    Mr. Luetkemeyer. How do you control security for customers? 
Are you looking at that as an issue as well when you are going 
through this, with your sandbox?
    Mr. Woolard. Yes. All of our standards apply from day one. 
So, the same standards that we would expect any other regulated 
entity in the market to have around things like cybersecurity, 
around the systems and controls to protect consumer data, for 
example, we would expect those new firms to have also from day 
one.
    Mr. Luetkemeyer. Okay. You have had a number of sandboxes 
in place, according to your testimony, for quite some time, and 
I was curious, have you had any results from that? Have you 
found things that did work and things that didn't work? Would 
you share those, please?
    Mr. Woolard. Yes, of course. We have published an 
evaluation of our work around sandboxes, which I have tabled as 
part of my written testimony. But in broad terms, we have seen 
ideas that have worked across the range of areas that we--
    Mr. Luetkemeyer. Can you give us an example of one?
    Mr. Woolard. Yes, of course. So, for example, if you take 
the insurance market, there is a very small firm called CUVVA, 
C-U-V-V-A, seven guys originally based up in Scotland, who 
started a very short-term insurance app. You can get your car 
covered for a few hours or a few days or whatever it might be. 
When that launched into the market with some new technology 
that we obviously had to get very close to and understand, we 
saw the two largest incumbent firms launch a very similar 
product within months. And this was something that was 
significantly cheaper for consumers. It was a significantly 
better product. But it took the entry of a challenger to 
effectively prompt other players to come forward with those 
kinds of innovations.
    Mr. Luetkemeyer. Okay. And did you look at--does England 
have charters for their banks and savings and loans and credit 
unions and those other financial institutions and--
    Mr. Woolard. The way we operate is, as part of our founding 
legislation, there is something called a regulated activities 
order, which says, if you engage in a certain kind of activity, 
then you are regulated.
    Mr. Luetkemeyer. Okay. Are you regulating these fintech 
innovators then, too?
    Mr. Woolard. Yes, absolutely. In the particular case of the 
firm I just mentioned, they are operating as an insurer, so we 
regulate them as if they are an insurer.
    Mr. Luetkemeyer. Okay. Ms. Knickerbocker, you are with the 
OCC, and Comptroller Otting has been very aggressive in trying 
to be out front in saying he wants to put charters out there, 
but by doing it, he wants to make sure those entities are 
regulated like banks as well as anything else. I know that 
there are some concerns there whenever you do that with regards 
to limiting the ability of those entities to be able to provide 
services to community banks, credit unions, the smaller 
entities, because they can't afford to go out and purchase a 
fintech company, like Bank of America can, for instance. How do 
you view their relationship, and how progressive can it be?
    Ms. Knickerbocker. The relationship between--
    Mr. Luetkemeyer. Yes, the fintechs and the community banks. 
Where do you see your place in that?
    Ms. Knickerbocker. We see a lot of opportunity for 
community banks to partner with fintechs. Because you are 
right, they have challenges in terms of building or buying, and 
they can have a lot of success in reaching their customers 
through fintech relationships. A large amount of my time is 
spent talking to community banks about how to do that in a safe 
and sound manner, things to think about with respect to their 
strategy. And there are a number of successes out there that we 
have seen with community banks.
    Mr. Luetkemeyer. Okay. My time is up. Thank you, Mr. 
Chairman.
    Chairman Lynch. Thank you. The Chair now recognizes the 
gentleman from New Jersey, Mr. Gottheimer, for 5 minutes.
    Mr. Gottheimer. Thank you very much, Mr. Chairman.
    And thank you to all of the witnesses for being here today. 
As the U.S. and global financial systems continue to evolve at 
a break-neck pace, this hearing could not come, in my opinion, 
at a more appropriate time. I want to start with something I 
have been working on recently, expanding the sources of data 
included in credit scores, so we can help those who are thin-
filed or credit-invisible, get the access to credit they 
deserve.
    Recent advances in digital technology have allowed fintech 
lending to emerge as a potentially promising solution to reduce 
the cost of credit and increase financial inclusion. According 
to an IMF study, one of the best ways fintech has the potential 
to enhance financial inclusion and outperform traditional 
credit scoring is by looking at nontraditional data sources to 
improve the assessment of the borrower's track record. If I can 
ask everyone this question--we will start over here, Mr. 
Watkins, if you don't mind--yes or no, would you agree that 
credit-scoring models have a responsibility in today's 
financial services world to consider alternative data sources 
like rent and monthly telecom payments? If I could start with 
you, sir?
    Mr. Watkins. Thank you for that question, and I know you 
asked for a yes or no answer, and I don't want to disappoint 
you right off the bat, but the uses of alternative data 
certainly pose some of the benefits that you have identified 
and, I agree, is an essential component of fintech 
development--
    Mr. Gottheimer. Thank you, sir.
    Mr. Watkins. --and is something that we are working on. 
Thank you.
    Mr. Gottheimer. Ma'am?
    Ms. Knickerbocker. Banks have been using alternative data 
to supplement credit scores, like utility and rent payments, 
for quite some time. So, with respect to alternative data, to 
supplement if there is a credit nexus--
    Mr. Gottheimer. So you agree?
    Ms. Knickerbocker. I would agree.
    Mr. Gottheimer. Okay. Thank you. Ma'am?
    Ms. Szczepanik. It is not directly within our regulatory 
remit, but it sounds reasonable to me.
    Mr. Gottheimer. It is a good idea. Sir?
    Mr. Clark. Yes, provided that the model doesn't violate the 
law, including the fair lending law.
    Mr. Gottheimer. Thank you. Sir?
    Mr. Woolard. As part of our innovation work, we have 
actually authorized the first new credit reference firm in the 
U.K. for many years that does use alternative sources of data. 
We also have the Treasury in the U.K. undertaking a trial at 
the moment of whether you can bring, on a more consistent 
basis, things like rent payments into a wider credit score.
    Mr. Gottheimer. Thank you very much, sir. I have also 
personally heard from several companies as we have talked about 
today, in trying to provide regulatory clarity for emerging 
fintech firms, many have been instructed to set up shop in 
countries like Singapore, Switzerland, Bermuda, and beyond, to 
avoid the lack of regulatory certainty we have here in the 
United States when it comes to digital assets. That is why I 
partnered with Representative Davidson on legislation that 
would help provide this much needed clarity.
    Ms. Szczepanik, do you believe that the current regulatory 
authority over digital assets is harming the United States' 
global standing when it comes to this technology?
    Ms. Szczepanik. Thank you for that. We believe that we have 
been quite clear in how we are viewing things. We have put out 
guidance, at least on ICOs beginning in 2017, about how we 
apply the law to the issuance of digital assets. We have put 
out a number of statements since then, and we believe that the 
guidance is clear. To the extent folks still have questions, we 
have been welcoming folks to come talk to us. We have dozens of 
meetings to talk to people about particular projects and how we 
would apply our laws.
    Mr. Gottheimer. Have you heard also that there is some 
uncertainty? A lot of people visit us and say, they are not 
really sure who the regulator is or which rules to follow, and 
yet we should be the premier destination for blockchain and 
cryptocurrencies and other digital instruments, and a lot of 
people raise this as an issue. You have definitely heard there 
is some fuzziness here, right?
    Ms. Szczepanik. Sure. And we look at it, each digital asset 
is its own animal. It has to be examined on its facts and 
circumstances to determine what, in fact, it is. It could be a 
security. It could be a commodity, it could be something else. 
We stand ready to provide guidance to folks if they want to 
come talk to us. We encourage them to come talk to us before 
they do anything so they can get the benefit of our guidance. 
To the extent that folks move offshore, for example, if they 
are still conducting business within the United States, we 
believe our laws would still apply to the conduct that occurs 
in the United States.
    Mr. Gottheimer. Okay. Thank you very much.
    I yield back. Thank you.
    Chairman Lynch. Thank you. The Chair now recognizes the 
gentleman from Ohio, Mr. Davidson, for 5 minutes.
    Mr. Davidson. Thank you, Mr. Chairman, and I want to 
congratulate you and the entire committee on the establishment 
and first hearing of the Fintech Task Force. It is a bit of an 
achievement for, really, our committee. I think it is progress 
for this body and Congress, to tackle an incredibly important 
sector for America's economy and, indeed, the global economy. 
As some of you know, almost a year and a half ago, I set out to 
find a bipartisan solution to properly and effectively regulate 
digital assets. As Mr. Gottheimer, who is a cosponsor of a bill 
I created, the Token Taxonomy Act, highlighted, many firms come 
to us and say that they don't have the regulatory certainty in 
the United States, and consequently American firms, American 
innovators aren't leaving the United States to avoid U.S. 
regulations. They are leaving overwhelmingly to find regulatory 
certainty that they cannot find in United States markets. It is 
not a coincidence that Facebook launched outside the United 
States. Switzerland has some of the most clearly established 
regulatory framework. They all say that they are looking for 
this certainty, and they are effectively attracting much more 
capital than the United States is, Singapore and Switzerland, 
in particular.
    Mr. Woolard, on March 15, 2019, the FCA updated their 
policy on defining crypto assets to distinguish three types of 
tokens, as well as recommendations regarding mitigation of 
illicit activities and cyber threats. Many legal experts have 
said that FCA's policy is very similar to Switzerland. Would 
you agree with that?
    Mr. Woolard. I think our policy actually is still a bit 
distinct from the Swiss one. They have, I think, gone further 
in terms of how they have tried to define a jurisdiction around 
crypto assets. What we are trying to do is actually, I think, 9 
million miles away from the approach the SEC outlined, in many 
ways. So, we see there are three different, distinct kinds of 
uses and activities. And we regulate according to what is the 
underlying business that someone is trying to conduct around 
crypto assets. But there is more work that we are doing in this 
space and certainly more thinking that we need to do.
    Mr. Davidson. Thank you. Some of my colleagues have asked 
me why I feel such an urgency on putting a legislative text out 
here, and the reality is that we do differentiate. In the main 
bill, the base piece is: What is a security, and what is not? A 
clear definition that is in line with the Howey test, that has 
long been established in the U.S. but provides a four-point 
criteria that gives certainty so that not every company is 
forced to say: Gee, I can go cut my own deal, and it is company 
by company. This is a third-world developing economy kind of 
approach to, hey, if you want to launch a company, you go and 
negotiate with the government, and maybe you can get your deal, 
and maybe your deal is different than this other person's deal. 
We need the certainty that if you do these things, you will be 
deemed an asset, and that has been one of the drawbacks of 
regulatory guidance. It is guidance, and it is often the case 
that it is not found to be binding. Then, you wind up with a 
patchwork of court decisions that try to discern things after 
the fact. And, frankly, it scares off capital.
    I think we are--personally, I feel passionately that we are 
well beyond the sandbox stage in the United States, and we need 
a minimal touch, one of the things that the United States did 
brilliantly with the Telecommunications Act in the 1990s that 
allowed technology and innovation to flourish in the United 
States of America. And thankfully, many of my colleagues agree. 
We have eight cosponsors, and we continue to grow. It is 
clearly not an ideological bill. It spans from people on the 
furthest left of our political spectrum to towards the right 
end of our political spectrum. And so, I hope that we can move 
forward and begin to debate this text. As we would potentially 
say in Ohio, the field has been plowed; we are ready to plant. 
So, we have a framework. And as talk about international 
perspectives on fintech regulation and digital economy, we need 
to talk about a range of things. And I guess, Ms. Szczepanik, 
you have highlighted some of the work that the SEC has done. Do 
you feel the sense of urgency, would it add something to have 
this clarity?
    Ms. Szczepanik. Thank you. I think it is good to remember 
that distributed ledger technology is nascent, and it is fast 
evolving. Our laws that we have currently are flexible and 
principles-based and very broad, and they have assisted us over 
the years in taking in all kinds of new technologies as they 
occur. This isn't the first time we have had a new technology 
come to bear. I think we regulate around activity and conduct.
    Mr. Davidson. Thank you. And I agree, you have to look at 
the conduct, but look, it has been 5 or 6 years. It is not 
nascent. It has been around for a while. And I think some 
minimal law is out there, and we have a wide range of issues 
that would need to be dealt with, including how to deal with 
exchanges, all the anti-money-laundering BSL, know-your-
customer provisions, and so this is just the tip of the 
iceberg. Thankfully, we have this task force on board ready to 
tackle this and a number of issues in the space. My time has 
expired, and I yield back.
    Chairman Lynch. Thank you. The Chair now recognizes the 
gentleman from Utah, Mr. McAdams, for 5 minutes.
    Mr. McAdams. Thank you, Mr. Chairman, and thank you all for 
being here today. My State of Utah is home to a thriving 
technology and financial services industry, largely centered on 
what we call the silicon slopes. We have lending companies and 
payment processing and development of artificial intelligence 
systems, the use of Big Data, and much, much more. This growing 
fintech industry has been a boon for our local economy, and 
ultimately, I think a boon for consumers who will benefit from 
these advances in technology, many of which are already some 
household names.
    I want to encourage innovation and the next generation of 
technologies here at home, but I also recognize that government 
does play a role in setting boundaries to make sure consumers 
are properly protected. It is often a matter of fine-tuning, 
and fine-tuning that dial between appropriately protecting 
consumers and unleashing innovation. And so, I want to focus on 
how we get the dial setting correct in that regard.
    I guess my first question would be for Mr. Clark. One of 
the beauties and challenges of our Federal system is that we 
have 50 different States sometimes pursuing policy in 50 
different ways. And this can lead to some frustration for 
companies operating nationwide who must comply with a myriad of 
different requirements. But it does also allow for innovation 
and experimentation at the State and local level to see what 
works best. The CSBS represents State regulators who regulate 
both banks and nonbanks alike. Are there any particular 
approaches to fintech and innovation that States have 
pioneered, that work particularly well, that we should look to 
replicate at the Federal level?
    Mr. Clark. I can tell you that, when Congress has looked at 
the role that State banking regulators play and their important 
role in regulation, and looked at the benefits, we have come up 
with some great solutions. In the mortgage area, you passed the 
SAFE Act, which provided some uniformity, but it relied on the 
States to continue to examine and make sure that they are a 
gatekeeper for bad actors.
    Another tool that I think would really help with helping 
State regulators encourage a partnership between fintechs and 
banks is if Congress passes H.R. 241, the Bank Service Company 
Examination Coordination Act. That way, State regulators could 
be able to more easily share information with Federal 
counterparts.
    Mr. McAdams. And I guess a question for any of the 
panelists, but--maybe a two-part question--do nonbank or 
fintech companies present any unique challenges in supervision, 
and is data security and privacy a particular concern? And 
share with me your thoughts on data privacy in the Congress.
    Ms. Knickerbocker, you seem to be--yes, go ahead?
    Ms. Knickerbocker. Data security and data privacy are 
really key, particularly as we move into an environment that is 
almost exclusively digital. The OCC focuses a great amount of 
time with respect to cybersecurity and understanding the 
importance of privacy with respect to consumers, and it really 
needs to be a part of the work of the task force.
    Mr. McAdams. I started my comments talking about the fine-
tuning of this dial between appropriately protecting 
consumers--and that can be everything from predatory lending 
practices to the privacy and data privacy of consumers--but 
also making sure that we don't have such a heavy regulatory 
hand that we squelch innovation, that we allow some of this 
innovation to continue to move forward. And I think that is the 
quandary between that, of that tuning of that dial is ever 
present in the area of data security and data privacy. What 
should we be looking at? You see various States stepping 
forward with data privacy regulations and protections and some 
innovations in that regard, but also that is an area where a 
national framework may be interesting. What should we be 
thinking about as it relates to data privacy and regulation or 
freedom of data?
    Mr. Clark. I can tell you that the States are closely 
watching the FTC's rulemaking with the Federal Safeguards Rule. 
My understanding is they pulled some provisions from DFI's--or 
New York's cyber law. And so I think it is important to be 
looking at what is already there, but when looking at a Federal 
solution, it is very important that State regulators have 
enforcement authority to make sure that financial institutions 
are complying with those requirements.
    Mr. McAdams. Thank you.
    Mr. Chairman, I see I am out of time. I yield back. Thank 
you.
    Chairman Lynch. Thank you.
    The Chair now recognizes the gentleman from Wisconsin, Mr. 
Steil, for 5 minutes.
    Mr. Steil. Thank you.
    I want to start by thanking Chairwoman Waters and Ranking 
Member McHenry for starting the Fintech Task Force. I also want 
to commend Chairman Lynch and Ranking Member Hill for leading 
us as we look for ways that fintech is changing the way we do 
business, invest in retirement, and conduct our financial 
lives.
    The fintech revolution is a great opportunity for all 
Americans. Lenders are using sophisticated data analysis to 
help more families and entrepreneurs responsibly access their 
services. Insurers are using new technology and artificial 
intelligence to improve underwriting accuracy. Payment 
companies are facilitating transactions quickly and securely 
for consumers and businesses around the world.
    While we need to stay vigilant and protect consumers from 
abuse, we should make sure that we don't fall into a typical 
Washington mindset that sometimes views innovation as a threat. 
With every major innovation, pessimists often decry the 
hypothetical consumer harm and job losses that haven't 
historically always materialized. I often think back to the 
risk of ATMs to the jobs of bank tellers as an example of that 
hypothetical risk that did not materialize. I think we need to 
continue to look at ways to create environments that are 
conducive to continued fintech innovation. And today's 
discussion, I think, has been a great start to the task force's 
important work ahead.
    I have a couple of questions I would like to ask. I would 
like to start with you, Mr. Woolard. One of the concerns I 
often hear about fintech is that some new entrants may seek to 
operate in a manner similar to a depository institution but 
without the associated regulatory burden, in effect, regulatory 
arbitrage. Can you elaborate on the FCA's experience in 
deterring regulatory arbitrage?
    Mr. Woolard. Thank you very much, Mr. Steil. From an FCA 
point of view, the U.K. set-up is very much around regulated 
activities. Technically, we don't regulate banks. We actually 
regulate the act of deposit-taking and so on and so forth. And 
so, frankly, we haven't seen this kind of issue really in the 
U.K; we have the ability to look through the technology, to 
look through, if you like, the service that is being offered to 
what is the underlying activity, and we regulate it on the same 
basis as if it was a fintech or if it was a more traditional 
player in the market.
    Mr. Steil. Thank you. I want to jump and ask Ms. 
Knickerbocker and Mr. Watkins to comment here. Countries around 
the world, including the U.K., are experimenting with different 
fintech regulatory structures, and we should learn from the 
experience of foreign financial regulators as we seek to 
modernize our rules so the U.S. can remain competitive in 
fintech. Can you comment on lessons you have learned from 
policy experiments in other countries and how those are 
impacting policy proposals in the United States? I'll start 
with you, Ms. Knickerbocker.
    Ms. Knickerbocker. We spend a lot of time speaking to 
regulators around the world so that we can learn about their 
experiences and how we can apply that best in the United 
States. We also have regular conversations with the Financial 
Conduct Authority. What we have learned from those 
conversations, as well as conversations from around the globe, 
is that it is very important to be able to have a new way of 
engaging with regulated entities, and that is why we proposed 
our pilot program back in April, so that there is an 
opportunity with these complex innovations, to get involved 
early, to see what are the potential risks and what are the 
potential possible issues that could come up, and it benefits 
greatly the institutions that are working on these novel 
entities ideas as well as those that have regulatory 
uncertainty, and that has helped us quite a bit.
    Mr. Steil. Thank you.
    Mr. Watkins?
    Mr. Watkins. Thank you for highlighting this important 
issue of tracking what is happening internationally. We have 
also learned from the FCA and other regulators in developing 
some of our policies, including our sandbox policies. We are 
also in communication and monitoring developments around open 
banking, which is another important issue touching on this 
area.
    Mr. Steil. Thank you. With my limited time left, I want to 
come back to you, Mr. Woolard. Can you comment about consumer 
impacts in fintech in the U.K.? Have customers gained access to 
the services in instances where they were previously out of 
reach?
    Mr. Woolard. Thank you. Yes, we have certainly seen a 
number of areas where access might be opened up. So, for 
example, for low-income families around basic contents 
insurance on their goods that they have in their house, we have 
seen experiments there, between fintechs and established 
players. We have also seen some degree of innovation in the 
basic savings market, where you get very small sums being saved 
by low-income families. But banks serving that market, again, 
because technology makes it cheaper to do so.
    Mr. Steil. Thank you very much.
    And seeing I am out of time, I yield back. Thank you.
    Chairman Lynch. The gentleman yields back.
    The Chair now recognizes the gentleman from Florida, Mr. 
Lawson, for 5 minutes.
    Mr. Lawson. Thank you, Mr. Chairman, and witnesses, welcome 
to the task force. And this question can be for anyone. Can you 
discuss the issues around privacy and consumer protection in 
regard to regulating fintechs especially when it comes down to 
peer-to-peer lending, rural advertising, insurance technology, 
and digital banking?
    Mr. Clark. I can speak to that on behalf of State 
regulators, that we license money transmitters and consumer 
lenders, and in those areas--and peer-to-peer lenders would be 
covered--they are subject to the Gramm-Leach-Bliley Act. So, as 
far as information security, we examine for that. When we 
license a company, we make sure that they have an information 
security program in place before they even start operating, and 
as I mentioned earlier, CSBS is training up our examiners 
around the country, so that they are very skilled in 
cybersecurity.
    Mr. Lawson. Did anyone else want to respond? Mr. Watkins, 
did you want to respond to that?
    Mr. Watkins. Absolutely. So, of the examples that you 
mentioned, peer-to-peer and digital banking most closely 
intersect with our jurisdiction. The privacy provisions under 
Gramm-Leach-Bliley 501b are delegated to the FTC, but we do 
supervise pursuant to our UDAP (Unfair or Deceptive Acts or 
Practices) authority for privacy-related issues on some nonbank 
entities. With respect to peer-to-peer lending, a key element 
that we have looked at is transparency and deception, making 
sure that consumers understand the terms that are being 
disclosed.
    Mr. Lawson. Okay. What about robo advertising?
    Ms. Szczepanik. I can speak to that. So, to the extent 
someone is giving investment advice, they would likely be 
subject to our regulations that are around investment advisers. 
And we have rules in place that apply to registrants, like 
investment advisers and broker dealers, that require them to 
have policies and procedures and controls around customer data, 
customer identity and information, and so we have an 
examination staff who goes out and examines our registrants for 
compliance with those rules, and we have brought enforcement 
actions where those rules have been violated in appropriate 
circumstances.
    Mr. Lawson. All right. Can you tell me, how, in your 
opinion, will fintechs change people's careers? Can anyone 
respond to that? And that might be the wrong question to ask, 
but I think it will.
    Ms. Szczepanik. I think it certainly changed the careers of 
the folks at this table because we focus on that, and we make a 
huge effort to do outreach, both to the industry and to the 
public, to encourage them to come to talk to us about what they 
are seeing and to help us be better regulators in that regard. 
And on the flip side, I think there is a great deal of 
opportunity out there for folks who want to innovate in the 
financial industry, and we are here to help them do it in a 
compliant way.
    Mr. Lawson. Okay. Mr. Woolard, you mentioned in your 
testimony--and I don't have much time--about how this will 
affect a lot of minorities and how to get that information to 
them. What is on the horizon with that?
    Mr. Woolard. I think one of the questions here is, how does 
fintech reach into different communities? And, in particular, I 
think with many of these questions we have been debating, the 
technology itself, you could always regard as neutral. It is 
how it is used and it is how it is deployed by the people 
running the companies that makes it used for either good or for 
ill. And I think, in particular, one of the things we are 
seeing is the ability of some of these financial technology 
solutions to actually provide very cheap, low-cost, efficient 
alternatives to maybe some of the higher-cost lending that we 
have seen in the market. We certainly have about three players 
in the sandbox at the moment who are looking at those kind of 
alternative provisions. That is often about serving communities 
that are perhaps harder to reach or excluded from more 
mainstream financial services products.
    Mr. Lawson. Okay.
    Thank you, Mr. Chairman. I yield back.
    Chairman Lynch. The gentleman yields back.
    The Chair now recognizes the gentlelady from California, 
Ms. Porter, for 5 minutes.
    Ms. Porter. Thank you, sir.
    Mr. Watkins, 5 months after you were appointed to your 
position, the Consumer Financial Protection Bureau proposed 
policies that give the Office of Innovation authority to exempt 
certain fintech companies from having to comply with laws like 
the Equal Credit Opportunity Act, and they did this for the 
purpose of promoting innovation. Specifically, the Bureau 
revised its no-action letter and its product sandbox policies 
to give fintech policies a safe harbor from liability so that 
the qualifying companies would be immune from enforcement 
actions by Federal or State authorities.
    As the head of the Office of Innovation, once these 
policies go into effect, you are going to wield enormous 
influence over which anti-discrimination laws companies have to 
follow. Would you be able to wield that influence in an 
unbiassed capacity?
    Mr. Watkins. Thank you for that question, Congresswoman. 
Yes, I would.
    Ms. Porter. You mentioned in your testimony that you 
consulted with a broad spectrum of stakeholders in designing 
the proposals, the no-action proposals and the sandbox 
proposals that you have spoken about, including meeting with 
civil rights groups. Can you name a few of those groups, 
please?
    Mr. Watkins. I most recently met with Chicanos Por La 
Causa. The meetings that we have had--the prior meetings that I 
am thinking of, regarding civil rights groups, were part of 
larger groups, and I would be glad to get you that information 
but I would need to provide that to you at a later time.
    Ms. Porter. Did you meet with the Human Rights Campaign?
    Mr. Watkins. I don't recall if they were at a meeting or 
not.
    Ms. Porter. Did you meet with Equality California?
    Mr. Watkins. I don't recall if they were at a meeting or 
not.
    Ms. Porter. Did you meet with any LGBTQ rights groups?
    Mr. Watkins. I would have to look at the meeting 
participants to be able to answer that question.
    Ms. Porter. Discrimination in lending against LGBTQ 
borrowers is rampant. One recent study found, in surveying 25 
years of mortgage data, that gay couples were 73 percent more 
likely to be denied a mortgage than heterosexual couples with 
the same financial worthiness. Mr. Watkins, I studied your--as 
is my habit, I studied your CV before I came here today. I 
would like to ask you about this gap in your CV. This is from 
LinkedIn. What were you doing from 2012 to 2015?
    Mr. Watkins. Thank you for providing me the opportunity to 
respond to that allegation.
    Ms. Porter. Oh, it is my pleasure.
    Mr. Watkins. There is no gap on the resume that I submitted 
to the Bureau. The resume that I submitted to the Bureau--
    Ms. Porter. No, I am not--excuse me. I am not--reclaiming 
my time, I am not accusing you of any resume impropriety. I am 
asking--let me just ask you directly, is it true that, during 
that period, you worked for the Alliance Defending Freedom?
    Mr. Watkins. That period that you mentioned was a period 
when I had left my law firm, when I was disillusioned with the 
practice of law--
    Ms. Porter. Mr. Watkins, I am not--respectfully reclaiming 
my time. I am not interested in your life history. I just 
really want to ask about--have you ever worked for the Alliance 
Defending Freedom?
    Mr. Watkins. Yes, and I did during that time.
    Ms. Porter. Were you senior legal counsel there?
    Mr. Watkins. I was, and I would be happy to explain what 
those duties were.
    Ms. Porter. Did you know that the Alliance Defending 
Freedom has been designated a hate group by the Southern 
Poverty Law Center?
    Mr. Watkins. I don't recall if that occurred when I was 
there or afterwards, but I do know that that has happened as I 
sit here now.
    Ms. Porter. In describing the Alliance Defending Freedom, 
the Southern Poverty Law Center said that the group, ``supports 
the recriminalization of homosexuality and defends state-
sanctioned sterilization of trans people.'' Mr. Sears, the 
founder, co-founder, and CEO of the Alliance Defending Freedom, 
has described the homosexual agenda as evil and has written 
that homosexual behavior and pedophilia are often intrinsically 
linked. Do you agree with those views?
    Mr. Watkins. Congresswoman, I do not even believe that the 
organization holds those views. They would have to speak for 
themselves. What you have described is clearly 
unconstitutional, and the practices that you mentioned are 
clearly unconstitutional, and have no place in the United 
States.
    Ms. Porter. More than one-third of my staff in D.C., and in 
Orange County, are gay. Do you have a message to them to assure 
them how you will champion antidiscrimination at the Consumer 
Financial Protection Bureau after your advocacy with a gay hate 
group?
    Mr. Watkins. I did not engage in advocacy; I did not engage 
in litigation (my job was, as part of a component of that group 
that advises law students.); I did not represent parties in 
court; I did not advocate for policies in the legislature. The 
information that I believe you are basing these questions on is 
mistaken in many respects. I am committed to upholding the 
Bureau's policies, both for my internal management of my 
office, as well as upholding the constitutional and statutory 
framework as interpreted by the Bureau in my external-facing 
activities.
    Ms. Porter. Thank you, Mr. Watkins.
    My time has expired.
    Chairman Lynch. The Chair now recognizes the gentleman from 
Minnesota, Mr. Emmer, for 5 minutes.
    Mr. Emmer. Thank you.
    First, I would like to thank all of you for the work you 
are doing to encourage financial technology innovation. This 
Administration has shown at each and every agency that they are 
open to new innovations that may not necessarily fit within our 
current regulatory structure. In addition to the SEC, the OCC, 
and the CFPB, we have--it is the alphabet soup of letters in 
this town--seen some great work by Chairman Giancarlo, Daniel 
Gorfine at the CFTC, and Jelena McWilliams at the FDIC, FINRA, 
and the amount of agencies on the list could, maybe 
unfortunately, go on and on. This committee will consider 
reauthorization, as I understand it, of the Export-Import Bank 
tomorrow. Many of these financial innovations could be directly 
applied to the work done there, improving international 
finance, reducing transaction costs, and minimizing delays.
    Despite the recent negative remarks of some lawmakers, the 
use and support of cryptocurrencies by the U.S. Government 
could go a long way to improve our efficiency, as well as 
provide for anti-money-laundering oversight. I want to ask 
Valerie--I understand you go by Val--a nonsecurity commodity 
token that runs on an unowned, decentralized network can have 
its origin in a securities offering. My question is about how 
that happens. Do securities transform or transmute into 
commodities? Or does a commodity simply result from a 
securities offering with the initial investment contract and 
the commodity token being two separate independent things?
    Ms. Szczepanik. That is a great question, and thank you for 
that. The way that the staff looks at it at the SEC--and I 
think this is reflected in the remarks of Director Hinman last 
year--is that it is critical to look at the manner of offer and 
sale of a digital asset or any instrument. And at one point in 
time, an instrument can be offered and sold as a security 
whereas, at a different point in time, it can be offered and 
sold as something that isn't a security.
    One good example is the Division of Corporation Finance 
issued a no-action letter to a company that wanted to issue a 
token for jet services. When that company came to us with the 
no-action letter, it had a completely functional system, it 
wasn't raising money, it had an operational blockchain. And in 
that case, the Division issued a no-action letter. Had that 
company come to us 5 years previously when hypothetically the 
company didn't have operational technology, didn't have jets, 
didn't have the ability to provide goods and services in 
exchange for a token, and instead was issuing that token in 
order to raise the funds needed to build that ecosystem, had 
come to issue it at that point in time, the same as--the sale 
of the same digital token was likely a sale of a security.
    Mr. Emmer. As a follow-up, is the token not a security the 
moment it is handed to investors? Or do you look at the 
delivered token separately from the investment contract and 
analyze whether it is a security? And I know you are talking 
about point in time, and maybe I am just confusing the 
mechanics and I am asking you the same question again. Clarify 
for me, if you will?
    Ms. Szczepanik. I believe what you may be referring to is 
the use of a purchase agreement to sell a security or token 
that perhaps is delivered in the future. Is that correct?
    Mr. Emmer. Right. Yes. Sorry.
    Ms. Szczepanik. So, typically, we would look at that 
purchase agreement as a security, depending on the facts and 
circumstances, and that is not normally that hard of a 
question. A different question is whether the underlying token 
is a security, and that depends on the facts and circumstances.
    Mr. Emmer. Again, that is the timing, right?
    Ms. Szczepanik. It could be the timing, but it also--you 
have to look at the facts and circumstances, for example, when 
it is purchased and then when it is delivered, and have those 
changed. It is an analysis that is done really at the point of 
offer and sale.
    Mr. Emmer. Okay. In a talk at South by Southwest earlier 
this year, you said that some stable coins might be securities. 
If a stable coin is backed by a reserve of assets, the mix of 
which is actively managed by the issuer to achieve value 
stability, does it matter that the purchaser does not have an 
expectation of profits, or can such a stable coin qualify as a 
security merely by the purchaser relying on the managerial 
efforts of the issuer to keep the value stable?
    Ms. Szczepanik. Again, I think that hypothetical would need 
to be fleshed out a little bit in terms of the facts and 
circumstances of the particular case. Just because something is 
called a stable coin does not mean that there aren't the 
efforts of others involved. And so we would look behind the 
facts and circumstances and also the economic realities to see 
whether is there a central party, for example, acting to keep a 
price stabilization. Is the formula that they are using likely 
to provide a profit over time? Those would be all important 
factors that we would look at, among others.
    Mr. Emmer. I appreciate it. I see my time has expired. Mr. 
Chairman, thank you for the flexibility. Obviously, this is 
something that we would love to follow up with more because we 
need more clarity in this area. Thank you very much.
    Ms. Szczepanik. Thank you.
    Chairman Lynch. Absolutely. Thank you.
    The Chair now recognizes the gentlewoman from Iowa, Mrs. 
Axne, for 5 minutes.
    Mrs. Axne. Thank you, Mr. Chairman. And congratulations on 
the task force, and thank you to our witnesses for being here 
today.
    I am happy to be here at the first of the Fintech Task 
Force hearings, and I am excited to help shape the role of the 
Fintech Task Force and how it plays in our financial system 
and, of course, with our economy.
    Obviously, fintech is a very broad term. My husband and I 
do own a digital design firm, so we dabble somewhat with some 
of our customers related to this. I get it to some degree, but 
it is a broad term and, of course, this is new to a lot of 
folks. And so it is a burgeoning opportunity for this country 
that, obviously, those of us here feel very compelled to make 
sure is going to work appropriately.
    My question is more specifically for Mr. Clark and Mr. 
Watkins. Can you explain just a little bit more about how you 
differentiate between entirely new services and something that 
is, in fact, really an old service, but delivered in a new way?
    And then if the team, the group here itself or either one 
of you would like to explain further how you would deal with 
those differentiators differently as regulators?
    Mr. Clark. Sure. It starts with communication. And I can 
tell you, speaking for the State of Washington and bank 
regulators generally, we want to learn from companies, learn 
what is going on with new services.
    CSBS wanted to learn more from fintechs in general and 
understand the industry. So, they created a Fintech Industry 
Advisory Panel, where they had representatives from 33 
companies come in and talk about their products.
    Our staff have come up-to-speed on much of the technology 
that is out there so we can keep pace as a new company comes in 
and describes what they are doing. But the key factor that we 
try and do is decide, given their business model, are they 
engaged in money transmission, which we regulate, are they 
engaged in consumer lending, which we regulate, or mortgage or 
loan servicing? And we work with them to come to that 
conclusion.
    CSBS is working on a licensing wizard to help companies and 
their counsel learn some of that on their own. So, we are 
making progress and we are using regtech to do that. And once 
we determine whether we have jurisdiction, we either help them 
through licensure--and by the way, we communicate this with 
other State regulators. So it is not just Washington making 
those decisions. We share the information through NMLS. And if 
we don't have jurisdiction, we do not regulate them, we let 
them go forward.
    Mrs. Axne. And then my question that comes up as a result 
of that is, will we have access to--could we see what the 
licensing wizard is about? It might be helpful.
    Mr. Clark. Sure. We would be happy to give you some 
information. It is in development right now, but it is very 
promising.
    Mrs. Axne. Okay, thank you.
    Mr. Watkins, did you have anything to add to that?
    Mr. Watkins. Only that you have touched on one of the 
toughest questions in this whole area, which is, how do you 
define innovation? I think we try to approach that because of 
our jurisdiction and our focus on the consumer.
    So one way to look at this question is, what is in it for 
the consumer? What is new? What is the benefit here? Is it ease 
of experience? Is it better pricing? Is it some sort of 
functionality that makes this product more attractive for the 
consumer? That is what we try to understand as an initial 
matter.
    Mrs. Axne. Thank you.
    Do any other witnesses have any other comments?
    Mr. Woolard. I could offer one, if you like. We have dealt 
in the U.K. with around 1,500 individual firms through our 
projects. I would say the vast, vast majority of those, 
probably all but two, are offering at the end of the day 
traditional financial services products ultimately when you 
strip it all away, when you analyze back to sort of really what 
is the core of what is being done here.
    However, the thing we are looking for is, are they being 
delivered in a particularly innovative way? Is there a 
particular consumer benefit from the way in which the firm is 
operating? And, also, does that drive a particular efficiency 
or a change in the market that could be beneficial for 
consumers? But I think the underlying core product, it is quite 
hard to distinguish between things that are somehow completely 
new and ultimately financial services products that probably 
have been around for hundreds of years but delivered in very 
different forms.
    Mrs. Axne. Thank you very much.
    Chairman Lynch. The gentlelady yields back.
    What I would like to do is, I would like to give the 
ranking member of the task force an opportunity. He has 
recently returned from the Floor and was unable to join us for 
the last portion of this, but I certainly welcome him. The 
Chair recognizes Mr. Hill for 5 minutes.
    Mr. Hill. I thank my friend from Massachusetts.
    Ms. Knickerbocker, I had asked Mr. Watkins earlier about 
valid-as-made. I wonder if you have any comments on that?
    Ms. Knickerbocker. With respect to valid-as-made, the OCC 
joined a Solicitor General opinion where we believe that the 
decision in Madden was incorrect. And I believe that Mr. Otting 
has told the committee that we are looking into all of the 
options around that.
    Mr. Hill. If you have a legislative proposal, I would hope 
you would invite its consideration by the committee.
    And in a similar vein, the issue of the concept of a true 
lender, which is a similar issue in our fintech world on 
extending credit, where the bank remains the true lender under 
a fintech depository institution partnership, is that something 
you believe that the regulatory agencies, the prudential 
regulators could clarify that definition of true lender?
    Ms. Knickerbocker. Just like with valid-when-made, we will 
be looking at that issue. I would point out that the true 
lender litigation right now is with State banks and not 
national banks, but it is something that we would be willing to 
look at.
    Mr. Hill. Good. Thank you for that.
    Mr. Woolard, I noticed that, in some of the work I read 
about your testimony in preparation for the hearing, that loan 
volume declined by 11 percent in the United Kingdom after the 
introduction of a national consumer rate cap, and that that 
was, I think, the expectation. But the actual decline was it 
dropped 56 percent, 5 times what the regulatory authorities 
estimated within 18 months, and that the number of borrowers 
dropped by 53 percent versus an initial estimate of only 21 
percent.
    Given the regulators' forecast, thinking about the optimal 
outcome as it relates to payday borrowing, can you speculate 
how those impacts are all from that interest rate cap and what 
lessons has the FCA taken from that?
    Mr. Woolard. Thank you very much.
    That obviously applies, as you said, to the payday lending 
market, where we are under duty to institute a cap.
    What we have seen there is some significant benefits to 
consumers in terms of costs that have been avoided, so several 
hundred millions of pounds of charges a year. We have also seen 
when we surveyed, actually, consumers have adjusted their 
behaviors. So, looking either to effectively cope with a lack 
of access to potential credit in some cases or to look for 
alternatives to that market that actually might be cheaper. So, 
on the whole, I think we have seen in the area of our 
evaluation work actually positive benefits that have come from 
that cap.
    It is worth saying across the high-cost credit market, 
where we have a much wider program that includes a whole range 
of different products, there is only one other space where we 
have taken a parallel kind of intervention, which is around the 
rent-to-own lending market, which is about how people buy 
household goods at very high rates of interest.
    In the remaining areas, we have tended not to use caps. We 
only use those, really, as a last resort. And it is really 
about trying to find interventions that constrain the harms 
that we see in that high-cost end of the market versus the 
wider access that there might be for the public to credit.
    Mr. Hill. Thank you for that response.
    Ms. Szczepanik, let me ask you a question in regard to the 
SEC and this issue of data privacy. I mentioned earlier about 
Application APIs for use on protecting consumers' data. Do you 
believe that is a best practice for people who are trying to do 
data aggregation in the wealth management or full financial 
picture mode?
    Ms. Szczepanik. Sure. As we mentioned, or as I mentioned 
earlier, we do have rules around keeping policies, procedures, 
and systems in place to protect the data privacy of customers, 
for example, investment adviser customers or broker-dealer 
customers and others. And we typically don't prescribe the 
means that they do. We want the firms to look at what makes 
sense for their business, what is state of the art, what is the 
best practice. That could evolve over time.
    So we expect that they are constantly reevaluating the 
systems they have in place to make sure that they are 
sufficient, adequate, and state of the art to meet their 
obligations under those rules to protect data privacy.
    Mr. Hill. Thank you. I appreciate that.
    Mr. Chairman. I yield back.
    Chairman Lynch. The gentleman yields back.
    I now recognize myself for 5 minutes.
    Ms. Knickerbocker, I expressed at the beginning in my 
opening statement the dichotomy sort of, the different cultures 
in the tech world and the traditional banking world. In 
traditional banking, we in many cases apply a fiduciary 
standard, which is very exacting, and the obligations to the 
customer, to the client are quite clear, a bright line.
    On the other hand, in the tech world, we have adhesion 
contracts. We have, you know, you click, I agree to 73 pages of 
obligations, and you are basically giving away your privacy 
rights. The privacy agreement is an agreement to give away your 
privacy; it is not to keep it.
    How do we reconcile those two worlds, and who wins? Is the 
fintech merger more like the banking world in that respect, or 
is it more like the tech world, where you have big companies 
like Facebook and Google vacuuming up personal data, this 
behavioral surplus, as Shoshana Zuboff has described in her 
book. They are sucking up all this data.
    And I am told that I think it is Facebook, on their regular 
users, has like 5,000 data points on every one of their regular 
users. And now we are going to allow them to link up with a 
banking firm, and they will have all that information to 
exploit.
    How do we reconcile that?
    Ms. Knickerbocker. One of the things that the OCC did with 
respect to a special purpose charter was look at some of those 
particular issues, where you have companies that are engaged in 
traditional banking activities but are not subject to bank-like 
regulation and examination.
    And so one of the things that we looked at with respect to 
the charter was the fact that if they were engaged in these 
activities--and, again, it is a choice in the United States. 
But if they wanted to become a national bank, which we had a 
lot of folks that were interested in that, they should be 
subject to regulation. We believe that regulation is strong. It 
can promote innovation that is done responsibly. And that is 
one of the reasons why we propose the special purpose charter.
    Chairman Lynch. Okay. I just want to make sure we get that 
part of this right. There is a lot of risk in sort of that 
dimension of things.
    Ms. Knickerbocker. I would--I'm sorry.
    Chairman Lynch. No, go ahead.
    Ms. Knickerbocker. I would agree with that. I think that 
data protection, as the task force is looking at these issues, 
should be a key issue that you should look at, particularly 
with how fast things are moving now.
    Chairman Lynch. Right. Google and Facebook, they don't like 
friction. And so all of these requirements--Mr. Woolard, you 
have the General Data Protection Regulation (GDPR) in the U.K. 
What kind of friction do you see in terms of the fintech firms 
operating in that space under that regulation?
    Mr. Woolard. Thank you. I think there is a range of 
friction, if you want to use that label, that comes not just 
from GDPR. It also comes from the Payment Services Directive, 
where the underlying assumption is that data belongs 
essentially to the consumer. And you think about how that is 
being protected and how that is appropriately deployed and 
used.
    The reality is we can see models emerging where large 
amounts of data are being used by firms, artificial 
intelligence is being deployed on an increasing basis by firms 
in the financial services markets and, indeed, elsewhere.
    Again, as I also said earlier, I think a lot of these 
technologies have, if you like, a neutral purpose. It is how 
they are used and deployed is whether we think they would raise 
a regulatory concern or whether, actually, they could provide a 
benefit to consumers.
    So I think we would all be in favor of better, more 
tailored services, which that data could provide. But if that 
information is then used to price gouge people, if it is used 
to work out whether they are less tolerant to price increases, 
for example, then it obviously becomes a concern.
    Chairman Lynch. All right. Thank you.
    I do appreciate all of the testimony. The task force 
appreciates that. I think you have suffered enough. Some 
regulators were more prepared to come today than others. We 
regret that the Federal Reserve and the FDIC were not able to 
participate. One was a last-minute scheduling problem that I 
understand.
    But, without objection, the statements of the two agencies 
provided to the task force for this hearing are hereby entered 
into the record: the statement for the record of the staff of 
the Board of Governors for the Federal Reserve System submitted 
to the task force on June 25, 2019; and the statement of the 
Federal Deposit Insurance Corporation, similarly dated.
    We also have letters and testimony from the Credit Union 
National Association, the National Association of Federally-
Insured Credit Unions, and the Financial Data and Technology 
Association, which are all hereby entered into the record.
    Without objection, it is so ordered.
    I would like to thank our witnesses for their testimony 
today.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And this hearing is now adjourned.
    [Whereupon, at 4:45 p.m., the hearing was adjourned.]

                            A P P E N D I X



                             June 25, 2019

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