ANALYSIS — The consequences of the partial government shutdown for the poor, the environment, federal employees and those relying on government services or benefits have become painfully evident, and are getting worse. The shutdown is also starting to create serious problems for financial technology firms — slowing dealmaking, impairing supervision and casting a pall over the presumed pre-eminence of the U.S. as a fintech superpower.
It’s coming as quite a surprise for many Silicon Valley investors and Wall Street firms that have long viewed the federal government as a drag on innovation rather than a facilitator of it.
The federal government’s influence on fintech is proving even more expansive than many expected, touching on the latest developments in banking, derivatives, securities, online lending and more. The halt of most agency operations is impacting a host of key issues concerning every fintech business, from the rate at which money can be raised to how (and even whether) business plans are finalized. However, not all pockets of the industry are impacted in the same way.
Most visibly affected are companies issuing securities to raise capital. Large technology firms planning to do initial public offerings (IPOs) — think Lyft, Airbnb and Slack — could be affected with no one at the Securities and Exchange Commission to process registration statements of firms seeking to sell stock to the public. Planned IPOs would then have to be delayed, and if the stock market deteriorated, indefinitely postponed. In any event, when the SEC reopens, staff face a daunting backlog of filings.
But the problem isn’t just with the big tech firms.
Under the radar are also dozens of delays facing technology startups that have filed to make securities offerings as “mini-IPOs” under Regulation A+. Among them are cryptocurrency and blockchain-related firms.
In 2018, the SEC asserted jurisdiction in the sector and held that most (if not all) initial coin offerings (ICOs) were securities, and that would-be ICO issuers needed to register or find a proper alternative route like private offerings or Regulation A+ offerings. However, with SEC staff furloughed, dozens of the latter can’t be reviewed and processed, grinding new issuances to a halt. Only companies that were deemed “qualified” (or registered) with the SEC before the crisis will be able to move forward.
Not Just IPOs …
Marketplace lenders that securitize their loans face similar problems. Again, with no SEC staff in place, online lenders will be prevented from getting permission from the agency to repackage their loans and sell them to investors in the public market. To make do, many platform lenders may find themselves stuck with loans and dependent on bridge and credit financing during the shutdown. The irony, of course, is that some of these very same lenders might also be serving as emergency backstops for cash-strapped federal workers who aren’t being paid — and with few means to sell their loans off to investors, many online lenders might have to charge higher rates for furloughed borrowers.
Other intermediaries face even stiffer challenges.
The SEC has held that online platforms that trade digital assets must register with the agency as broker-dealers, alternative trading systems, or national securities exchanges. Yet the registration of such intermediaries — many of them nervous about the legality of their own operations as unlicensed market participants — is impossible with an agency on furlough. Notably, some aren’t even sure whether their compliance meets newly declared expectations, and there is no one to confirm or deny it.
Similarly, applications for bitcoin-related exchange-traded funds (ETFs) won’t happen until the shutdown standoff ends, and neither will registrations for less controversial, but highly popular, robo-advisers.
Although most federal agencies have kept some enforcement staff on duty, surveillance efforts are sure to be impaired. Most enforcement staff will be preoccupied with prosecuting offenses already being litigated (to the extent federal courthouses are still open). New cases, in the meantime, will likely slow dramatically. The Federal Trade Commission’s Complaint Assistant website, for example, has been shut down entirely.
Policy development frozen
Fintech policy development is for the most part on hold across the country.
On Dec. 11, the Commodity Futures Trading Commission requested comments on Ether and its use on the Ethereum Network in order to better inform its understanding of the technology, mechanics and markets for virtual currencies beyond bitcoin. The comment period won’t expire until mid-February, but there is no staff in place to begin undertaking the review.
Meanwhile, the in-house think tanks for the agency — the so-called advisory committees that discuss issues like cybersecurity and virtual currency policy — have canceled meetings, even though most members have jobs in the private sector.
The partial government shutdown has also, according to the National Law Review, hampered the Treasury Department’s many anti-money laundering and counter-terrorist financing efforts. Treasury’s Financial Crimes Enforcement Network (FinCEN), an office tasked with writing and applying guidelines for money transmitters, won’t be working on regulatory guidance or rulemaking. It also won’t be able to assist requests made by foreign law enforcement agencies for financial intelligence. Though sufficient staff will remain to allow FinCEN to maintain the IT systems that banks, online lenders, fintech firms and others use to file Suspicious Activity Reports, it is unclear whether there will be enough people in place, if any, to monitor them.
And nobody is working from home, either for free or out of patriotism: By rule, furloughed workers are not permitted to even check their government email.
Not all regulators have been impacted in such dramatic ways, however.
Both the Federal Deposit Insurance Corporation and the Federal Reserve aren’t subject to congressional appropriations and thus are able to function normally. State agencies are similarly unaffected. Thus, the processing of banking licenses will continue, as will the development of policy at the FDIC, in particular aiming to make banks as competitive as fintech firms. Interestingly, issuers can still conceivably engage in intrastate offerings with state regulators.
Another surprisingly unscathed agency is the Consumer Financial Protection Bureau, which receives its funding from the Fed. As such, key initiatives, including its new innovation sandbox, remain actively under development. Similarly, because the Office of the Comptroller of the Currency is funded through assessments on banks, its operations, including the development of its “fintech charter” program, will continue, as will its assessment of potential applicants.
Finally, the processing of crowdfunding portals applications can continue since they are for the most part done by the self-regulatory body, the Financial Industry Regulatory Authority.
Still, with the shutdown continuing with no obvious end in sight, it’s worth wondering just how much damage the dysfunction is ultimately wrecking the reputation of the U.S. as an attractive place to launch and do fintech business. With other regimes in Europe, and even Asia, working actively to add clarity and stronger protections, a prolonged halt to government functions could spell trouble for America’s competitiveness in the sector.
Editor’s Note: Chris Brummer is a professor at Georgetown Law. He is partnering with CQ, Roll Call and FiscalNote to launch coverage of fintech and its implications for businesses, consumers, regulators and lawmakers.