US Fintech Regulatory Outlook: 5 Trends to Watch in 2021

With a new administration and fresh appointees to multiple agencies, fintech regulation will be an exciting (and at times, challenging) space to watch in 2021. Meanwhile, innovations in the industry are happening at near warp speed. The result is a dynamic landscape – and one that merits examination as we move into a new year and administration. I recently had the opportunity to interview Jonah Crane, a former deputy assistant secretary in the US Treasury Department and current partner at Klaros Group, for an Anthemis webinar.

Crane’s in-depth experience includes advising multiple fintechs, financial institutions and lawmakers. Over the course of our conversation, he outlined the pressing issues facing regulators, the priorities of the Biden administration and its proposed appointees, and how regulation may shape the fintech landscape. Here are five highlights:

1. Pandemic response remains a top priority – and could lead to increased fintech scrutiny.

The Biden administration has made it clear that pandemic response is its first concern. They’re looking at the health crisis and the impact on the economy and the financial sector. The policy responses to-date have provided an economic buffer, which has indirectly supported the financial and fintech sectors. Looking ahead, Jonah noted that the question is: How long will the buffer last? For example, at least 11 million homeowners or renters are in forbearance on their mortgage or lease payments, and those bills haven’t come due. The recently approved stimulus package will help. Fintechs have already played a big role in enabling the distribution of government support to consumers and businesses in need, as well helping meet the surge in digital demand. The rapid increase in fintech utilization has laid the foundation for even more growth across the industry. It’s also attracted the attention of regulators, who are now keenly focused on fintech issues and risks.

2. Regulators will look for ways to address racial inequalities.

The pandemic shone a spotlight on economic and racial inequities. “This administration will take a lot of steps to try to fix that,” Jonah said. “I think that has its own set of ramifications for financial services and financial regulation, and in some ways, some pretty direct impacts.” For example, Gary Gensler, the nominee for the head of the SEC, has had to defend his definition of materiality of information investors want and need to see. To that end, there’s increased investor pressure to see more disclosure around diversity and to see new and different practices concerning diversity on boards. “I think he’s going to try to pursue the administration’s priorities across the board in terms of where the SEC has jurisdiction,” Jonah said. The emphasis from regulators could impact fintech startups that see the opportunity to create companies that prioritize diversity and equity from the start. In our experience, companies with inclusive boards and leadership are more apt to understand the needs of multiple markets, and provide innovative products to meet them.

3. Regulators are paying increased attention to climate risk.

Treasury Secretary Janet Yellen has mentioned climate change as a systematic risk to the U.S. financial system, and the SEC announced in February that it would focus on climate-related investment risks. In our conversation, Jonah noted that from a regulatory perspective, this could play out in various ways. For example, with the SEC, we may see increased disclosure regarding how climate risk impacts business. That means both physical consequences, such as the effects on what you produce or your company locations. But it also refers to the economic transition driven by climate change – for example, the impact of moving toward lower-emission fuels. For financial service companies, Jonah said that the risk is less operational and more about how climate change impacts portfolio holdings. Fintechs may play a role in this space, creating solutions that drive more sustainable investing practices and providing valuable data and analytics regarding the climate risk financial organizations face.

4. There will likely be more clarity around cryptocurrencies – but an overarching regulatory framework is unlikely.

Jonah and Gary Gensler co-authored a paper in 2018 on blockchain and its potential impact on financial services. Jonah noted that Gary has always focused intently on the fact that crypto exchanges should provide appropriate investor protections. However, the issue of whether crypto is considered a security and who decides that remains. The SEC did note in early March that it will be looking into issues of whether cryptocurrencies serve the best interest of the investors. Overseeing cryptocurrencies would create a whole new jurisdiction for the agency and could potentially lead to a turf war between the SEC and the Commodity Futures Trading Commission. “I think the best we can hope for is good inter-agency coordination,” Jonah said. “I think, unfortunately, we’re unlikely to see much in the way of clarity. I don’t think we’re going to see clear frameworks coming from Congress or the regulators on beyond what we have now.”

5. Evolution in bank charters will continue.

There’s been rising interest and controversy regarding charters for non-depository banks. Most recently, blockchain fintech Figure applied to the OCC for a national bank charter that among things would accept uninsured retail deposits. Jonah noted that such a charter is appealing to fintechs because it establishes one federal regulator (for example, Figure has over 100 state licenses to support its products). Also, a non-depository bank isn’t subject to the Bank Holding Company Act, meaning that the Fed doesn’t have oversight over fintech’s holding companies. The latter could include venture capital investors if they own more than 10% equity in the company. So the Figure application is something to keep an eye on and may spur similar applications in its wake. Additionally, Jonah said that we will likely “see continued evolution in bank charters”. If not at the federal level, you’ll see it at the state level.”

Fintech has only gotten more entrenched in day-to-day financial services during Covid-19. And regulations are naturally striving to keep pace. A huge thank you to Jonah for the conversation and insights.