Cryptos And Sandboxes And Streamlined Money Licensing (Oh My!)

Streamlined money transfer applications dominated regulatory news this past week as seven states took the initiative to make it easier for traditional FIs and fintechs to broaden their reach across the nation. PYMNTS spoke with Charles Clark, acting director of the Washington State Department of Financial Institutions, who said that redundant processes remain the sticking point. And abroad, was it any wonder that cryptos held sway? Look a little closer, and central banks are also examining the sandboxes suitable for FinTech playing and innovating.

Can the states make licensing – of the money movement kind – any easier? As was widely reported this past week, seven of them are trying to do so.

Through the Conference of State Bank Supervisors, Georgia, Illinois, Kansas, Massachusetts, Texas, Tennessee and Washington are looking to standardize the ways firms across traditional financial services and FinTech upstarts apply for, and are granted, licenses.

In an interview with PYMNTS, Charles Clark, acting deputy director of the Washington State Department of Financial Institutions, said there had been complaints by industry participants about the differing legal requirements of getting licensed in each individual state as a money transmitter, especially in terms of disparate procedures. There are different term times in different states for applications, and there also exists some redundancy, he told PYMNTS.

As Clark noted, “some companies that are applying for licenses in multiple states may have to submit the same or similar information multiple times.” He said that in his own state of Washington, state regulators have been looking at those issues for some time to determine the possibility of some sort of reciprocity or sharing of information.

“It did seem possible to share in some of the work,” he said, noting that the Conference had announced Vision 2020 last year, aimed at FinTech and non-bank regulation. “We came up with a proposal basically breaking up the licensing process into two phases, with phase one being a review of all those common licensing items where we think there is the ability to share work, among those states.”

Clark said he had started to discuss the concept with his counterparts in other states and that he put a proposal down in writing for states that had been receptive to the concept.

“The goal was really all along to write the agreement in such a way that we could invite other states around the country to join,” he told PYMNTS.

Clark pointed out that the concept has seen interest from other states, and that several have approached him with the idea of exploring whether to sign on.

The pilot being run with those initial seven states will provide some answers for how state regulators can streamline the process. While there has been discussion related to FinTech companies, it would include traditional money transmitter business models, and does not in any way reduce the standards required in those states – and in some states, there might be an elevated standard (reviewed only once in the phase one part of the process). The standards include a review of cybersecurity policy and anti-money laundering policies.

In a hypothetical scenario – whether it’s FinTech or traditional finance, though FinTech gets the headlines – Clark explained that the license applicant, a money transmitter or a FinTech that engages in money transmission (or plans to) would contact one of the seven states and say “we wish to pursue licensure under this protocol,” rather than under standard procedure outside the protocol mandated on a state-by-state basis.

The states and their regulators, as a group under the agreement, would decide which state would conduct a phase one review. At that point, said Clark, the applicant would submit the information to the state conducting the review, without applications being submitted to the other states. The state would then review all of the licensing standards that are common across the pantheon of participating states.

If the hypothetical applicant meets the aforementioned standards, the phase one reviewing state will issue a certification. At that point, the option exists for all of those states to proceed to a phase two review, which would include specific net worth requirements, state-specific bonding requirements and any unique requirements that exist on a state-by-state basis. The participants have a 25-day application term time.

Said Clark, “one key component of the phase one review is that many of the states conduct background checks and credit checks, which can be time-consuming. Including those in a phase one review – and providing the application term time requirements – will help speed up the process collectively.”

Regulatory News, of the Global Type

The regulatory landscape this past week was global in scope, with particular attention on FinTech and competition.

In Europe, financial leaders said that tech giants, such as Facebook, have been setting up shop in the financial realm, yet don’t face the same constraints from financial regulations. That comes as Open Banking bowed in Europe last month. As the big financial players grappled with data sharing mandates, warnings came – such as one from Francisco González, executive chairman of Spanish bank BBVA, who said that juggernauts, like Amazon in the U.S. and Alibaba in China, may be able to “replace many banks.” He further noted that if “I need capital to lend, then let’s have the same rules for everyone – for the internet giants, too.”

The executive’s remarks came as Amazon pushed deeper into payments and Facebook has been obtaining electronic money licenses in Europe.

Elsewhere, in India, that country’s Reserve Bank has floated a raft of proposals seeking to boost the FinTech space, with a focus on innovation labs and data protection, among other initiatives.

The Bank, as noted in The Economic Times, had created a working group that counted far-flung regulatory agencies among its membership, such as the Securities and Exchange Board of India, the State Bank of India and the National Payments Corp. of India. Comments and suggestions from industry stakeholders are due before the end of the month.

The group has said there is a need to have a better handle on the potential implications of regulation before new rules take effect. One consideration, the group has said, includes regulatory sandbox/innovation hubs that provide industry support as innovation comes to market. The group also said, as The Times noted, that a “dedicated organizational structure” housed in each regulator should help monitor FinTech developments.

Another central bank, the Bank of Indonesia, is currently crafting a regulatory framework that is also eyeing the advances in FinTech, taking into account the movement of payments to bits and bytes. Sukarelawati Permana, director of the policy and payment department at the central bank, said last week that the bank is collaborating with the Financial Services Authority with the goal of creating “a roadmap” to regulate FinTech.

As reported by Jakarta Globe, the bank had issued provisions to support innovation in the FinTech sector, also with the aim of supporting consumer protection, risk management and prudence. The central bank is also conducting a study on issuing digital currency.

In the bitcoin realm, finance officials from France and Germany have requested that discussion of cryptocurrencies – specifically on policy – be part of the agenda at next month’s G20 meeting. That request has been formalized by a letter sent from French Finance Minister Bruno Le Maire, German finance officials Jens Weidmann and Peter Altmaier, and French Central Bank Governor Francois Villeroy de Galhau to G20 President Mauricio Macri of Argentina.

The letter read in part that “we believe there may be new opportunities arising from the tokens and the technologies behind them. However, tokens could pose substantial risks for investors and can be vulnerable to financial crime without appropriate measures.”

Separately, and also related to cryptos, Gibraltar is becoming the first country to put regulations in place that would govern international coin offerings (ICOs), which will be bespoke in nature and which seek to expand Gibraltar’s financial service offerings.

Jay Clayton, head of the U.S. Securities and Exchange Commission, said that tokens are securities, and thus subject to the same investor protection rules as share offerings.




New PYMNTS Report: Preventing Financial Crimes Playbook – July 2020 

Call it the great tug-of-war. Fraudsters are teaming up to form elaborate rings that work in sync to launch account takeovers. Chris Tremont, EVP at Radius Bank, tells PYMNTS that financial institutions (FIs) can beat such highly organized fraudsters at their own game. In the July 2020 Preventing Financial Crimes Playbook, Tremont lays out how.