New York, long the hub of the financial world and an early epicenter of the COVID-19 outbreak, is looking to innovative financial technologies as one source to help its pandemic-battered economy.
The state’s Department of Financial Services is working on three fintech and virtual currency initiatives designed to promote collaborative efforts by regulators and financial technology firms.
The department in June put out final guidelines for BitLicense holders to allow virtual currency trading by “self-certifying” that a digital coin satisfies state consumer protection standards. Just prior to those guidelines, the department launched what it calls the “FastForward” program to support innovators looking to deliver new fintech and health technology solutions in the COVID-19 era.
“The purpose here really is to get speed to market for innovators, reduce barriers and help them help New York to build back better in terms of job creation and better products and services,” Linda Lacewell, the state’s superintendent of Financial Services, said on the FintechBeat podcast produced by CQ Roll Call. “This is the time for government to step up, but it is also the time for innovators to step up.”
These and other initiatives are drawing praise from fintech advocates.
Jo Ann Barefoot, CEO and co-founder of the policy group Alliance for Innovative Regulation, said she admires Lacewell’s initiative.
“She’s clearly prioritizing tech innovation and building the needed muscle to oversee it well. It’s the right thing at the right time,” Barefoot said in an email, citing the pandemic and recent civil unrest.
Aiming at recovery
The self-certifying guidelines the department put out last month mirror what happens in U.S. commodity markets, where new financial products can start trading without having to wait for regulatory approval as long as they adhere to certain rules. The goal is to reduce red tape and allow markets to operate more efficiently.
The FastForward program speeds up approval for digital innovation aimed at facilitating recovery from COVID-19, particularly when the product enables small businesses to survive, adapt and grow; improves access to health care, such as telehealth tools; or helps the state’s households hardest hit by COVID-19 to build greater financial resilience.
The department’s other initiatives include partnering with the State University of New York last month to jointly advise businesses on obtaining virtual currency licenses. Individual SUNY campuses throughout the state will provide individuals and businesses from local communities, including organizations started or run by students or alumni, with guidance in applying for virtual currency business licenses known as BitLicenses.
SUNY and the department plan to share information on any relevant issue involving fintech.
And the department is now accepting public comments on another proposal unveiled in June to grant fintech firms a conditional virtual currency BitLicense if they team up with a fully licensed business. A firm seeking to engage in a virtual currency business under a conditional license would collaborate with an authorized cryptocurrency business to assist in providing services and support, including help with capital and personnel, before eventually seeking a full BitLicense.
“As New York begins reopening, new cutting-edge and innovative solutions will be needed to adapt the New York marketplace to a new normal due to COVID-19,” Lacewell said last month.
Melissa Koide, president of the FinRegLab, a Washington-based research group, said Lacewell has “gone out of her way” to allow innovation and technology to promote financial inclusion while making certain fintechs adhere to consumer protection standards. Koide was the Treasury Department’s assistant secretary for consumer policy during the Obama administration.
“The door is open to fintech in New York, but there is also a real commitment to making sure innovators understand the need to prioritize consumers,” she said.
First state to license
The state began granting BitLicenses in 2015. It was the first comprehensive virtual currency regulatory regime proposed and enacted in the United States, according to international law firm Davis Polk & Wardwell LLP.
Barefoot, who was formerly U.S. deputy comptroller of the currency, says New York has been accelerating its leadership role since Lacewell took office last year, including the launch of a division dedicated solely to financial technology regulation.
“Technology is transforming finance, which means financial regulation will have to transform too,” she said.
Lacewell said on the podcast that the small office that handled cryptocurrency has been converted into a full-fledged division “parallel in scope and status as our banking and insurance division.”
The state’s relationship with the fintech industry has evolved since the early days, when the BitLicense regime drew complaints of inadequate and inefficient application processing and a perceived lack of technological expertise.
Kraken, a global bitcoin exchange, discontinued service to New York residents several years ago, laying the blame for the decision on BitLicense.
“Regrettably, the abominable BitLicense has awakened,” the company said in 2015. “It is a creature so foul, so cruel that not even Kraken possesses the courage or strength to face its nasty, big, pointy teeth.”
And in 2019, a public spat between the department and Bittrex, a Seattle-based virtual currency business, erupted after New York denied the company a BitLicense because of numerous deficiencies, including weak customer due diligence and an absence of experienced compliance staff. Bittrex accused the department of overstepping its regulatory authority and changing rules on the fly, saying the “personal and vindictive” decision would drive fintech away from the state.
That doesn’t appear to be the case, as the department has granted 25 virtual currency licenses and charters since it began licensing the businesses.
Despite the leadership of states like New York and, Barefoot says, California, some industry observers say a patchwork of state-by-state regulation is inefficient and wasteful and they are calling instead for a national regulatory regime.
Kristin Smith, executive director of the Blockchain Association, told CQ Roll Call in an email that “while we’re glad that New York and other states are acknowledging the promise of innovative fintech products, we believe that consumers deserve the benefit of a single, national rule system to cut down on confusion and boost adoption.”
“One of the major benefits of these developing technologies is their borderless nature,” Smith wrote. “Consumers expect simplicity and effectiveness from their financial tech and regulations should operate under those same principles.”