US Comptroller Gears Up for Blockchain and Internet Finance

The U.S. Office of the Comptroller of the Currency has a lot of catching up to do in dealing with innovative information technology, as it affects not only conventional finance, but also new channels of e-commerce made possible through advances in IT. These channels include cryptocurrencies such as bitcoin, related “blockchain” technologies, and other Internet-driven financial services.

The OCC, a unit of the U.S. Department of the Treasury, has established an Office of Innovation that will operate as the agency’s central point of contact and clearinghouse for requests and information related to innovation.

The office will become an internal resource for the agency to monitor and understand advanced technologies, ensuring that the OCC properly addresses the impact of such innovations in the regulation of financial institutions.

The office will become operational in the first quarter of 2017, OCC said.

The creation of the office is a component of the Responsible Innovation Framework that the OCC adopted last month. The policy framework emerged from the agency’s launch of an exploration of technology issues earlier this year.

“The OCC supports responsible innovation that enhances the safety and soundness of the federal banking system, treats customers fairly, and promotes financial inclusion,” said Comptroller Thomas Curry. “By establishing an Office of Innovation, we are ensuring that institutions with federal charters have a regulatory framework that is receptive to responsible innovation and the supervision that supports it.”

The office will implement various aspects of the OCC’s innovation framework, including the following:

• an outreach and technical assistance program for banks and nonbanks;
• awareness and training activities for OCC staff; and
• coordination and facilitation.

The new unit also will be charged with establishing an innovation research function, and with promoting interagency collaboration on technology issues. OCC described the range of innovation in a study it released earlier this year.

New IT Tools Pose Challenges

“The financial services industry in the United States is undergoing rapid technological change aimed at meeting evolving consumer and business expectations and needs. Mobile payment services and mobile wallets are changing the way consumers make retail payments. New distributed ledger technology has the potential to transform how transactions are processed and settled,” notes the OCC study.

“Distributed ledger” refers to the open source technology for connecting and sharing financial transaction data — often called “blockchain” — that supports digital currency mechanisms.

Innovative technology services “offer the prospect of a banking relationship that exists only on a smartphone, tablet or personal computer,” the study points out. In addition, “marketplace lending has the potential to change how loans are underwritten and funded.”

Further, “automated systems are competing with traditional financial advisors, and crowdfunding sites are raising equity capital for new and existing companies,” the study indicates.

Federal regulators generally have refrained from imposing rules governing digital currency and simply are exploring the phenomenon. The OCC’s initiative is in step with other agencies.

Finance Sector Registers Qualified Support

The OCC’s efforts have drawn industry approval, but with some reservations.

“The Chamber of Digital Commerce appreciates Comptroller Curry’s decision to develop the Office of Innovation to encourage and foster financial technology,” Chamber of Digital Commerce President Perianne Boring told the E-Commerce Times.

The trade association, which Boring founded two years ago, is dedicated to promoting the understanding, acceptance and use of digital assets and blockchain-based technologies. Members include IBM, Microsoft, and a number of financial technology providers, including Bloq and Ripple.

“We commend the OCC for developing a central hub for innovation which is tasked with being a conduit to the private sector innovation community, and with developing the proposed Innovation Framework,” said Chris Feeney, president of BITS, the technology policy section of the Financial Services Roundtable.

One element of concern among industry groups is the OCC’s perspective on the use of experimental pilot projects for developing innovations in finance — often referred to as innovation “sandboxes.”

While supportive of the concept, OCC said that such projects should not be undertaken totally free of regulation.

“Comptroller Curry has stated that technology pilot projects should not provide a ‘safe space’ for firms to experiment with new products and processes without the risk of penalty for violating banking regulations or consumer protection laws,” said Boring.

“However, we believe that sandboxes are necessary to allow firms to innovate and to compete in the global fintech industry,” she said.

The Commodity Futures Trading Commission has indicated that participants in such projects should be provided with some relief from the fear of enforcement or regulatory fines, Boring noted.

A Debate Over Safe-Harbor Status

CFTC Chairman Chris Giancarlo has “noted that sandboxes, regardless of whether they provide some or full protection from regulatory scrutiny, should account for consumer safety and protection,” Boring said.

“In this regard, the chamber looks forward to working with the OCC, the Office of Innovation, and other stakeholders in developing sound, safe, consumer-friendly technology; while accompanying a regulatory framework that will effectively address, but not stifle the rapidly developing fintech industry,” she added.

“While the OCC mentioned the term ‘sandbox,’ it seemed as if the agency tried to make a distinction and purposely used the phrase ‘bank-run’ pilots,” FSR’s Feeney told the E-Commerce Times.

Since banks are subject to government oversight, the term “bank-run” would introduce a regulatory context to experimental projects.

“With sandboxes, it does connote the idea of a safe harbor, but it does not appear as if OCC would be granting that. We support this more tailored approach, wherein the OCC opens up its lens in how it views risk, allowing for some experimentation, but experimentation that still protects the consumer and the safety and soundness of the financial system. That approach is in accord with our past recommendations,” Feeney said.

Private Sector Stresses Dialog

Another concern is that the OCC maintain a dialog with the commercial community.

“The one area that we would request the OCC to consider is the development of a Federal Advisory Committee that is inclusive of private sector innovators that could act as a sounding board to potential proposals and how they might impact firms and consumers alike,” Feeney said.

“We welcome and support the opportunity for greater dialogue with the OCC and with its federal and state counterparts. For this reason, if the OCC establishes an Office on Innovation, which we strongly encourage, we urge that it be open to discussions with service providers whose technology underpins new solutions,” said Jason Albert, assistant general counsel at Microsoft, in comments submitted to the OCC in May 2016.

“Technology service providers, including hyper-scale cloud providers, can provide insight into the latest security technologies, middleware services, and other innovations,” he said, “and serve as a resource for regulators about the promise of new technologies, and policy issues and risks they should consider in developing the regulatory framework.”