Regulators warn Congress not to pre-empt state fintech rules

“Investor protections must not be diminished at the state or federal levels”

The North American Securities Administrators Association is calling on lawmakers to be cautious when implementing fintech laws. (Dan Kitwood/Getty Images file photo)

State securities regulators are concerned Congress could pre-empt state laws governing financial technology such as blockchain and cryptocurrency that are designed to protect consumers.

The North American Securities Administrators Association on Wednesday issued its legislative priorities for the 116th Congress, calling on lawmakers to be cautious when implementing fintech laws.

“Investor protections must not be diminished at the state or federal levels for the sake of potential yet unproven innovation in the financial services industry,” NASAA said in a statement. “Congress should, therefore, refrain from preempting any protections afforded to investors under state law.”

NASAA said it is concerned about congressional involvement in a number of fintech areas, including cryptocurrency and initial coin offerings, which are digital tokens that may be issued to raise money to build new software applications or as future credit for a company’s product or service. Congress needs to conduct rigorous oversight of potential fraud in the cryptocurrency market, it said.

“Scams in this marketplace were the subject of numerous coordinated state enforcement actions in 2018, and the risk in this area is not receding,” NASAA said. Congress should require the Securities and Exchange Commission to provide guidance about the treatment of ICOs to limit risk to investors, it said.

The group also wants federal lawmakers to refrain from creating so-called regulatory sandboxes, which are testing grounds for new regulations or exemptions from existing ones.

Few bills referencing fintech have been introduced in Congress. And those that do reference it do not seek to establish regulatory sandboxes. The closest might be a bill by Georgia Democratic Rep. David Scott that would establish a FinTech Council to designate a single primary regulator of eligible fintech startups, and would create an office of financial innovation.

Proponents of sandboxes say they give new technology a way to innovate without strict regulations, while still allowing consumer protections. NASAA argues federal agencies already have this authority, and Congress shouldn’t interfere.

“Many federal agencies already have flexibility under their existing authority to establish sandboxes or similar arrangements to accommodate and encourage bona fide financial innovation without the need for federal legislation,” the group said. Without careful construction, these proposals could create problems, including opportunity for “regulatory arbitrage,” which means companies migrate to jurisdictions with the loosest regulation.

Several sandboxes are already in the works or up and running at the agency level. The Consumer Financial Protection Bureau proposed a sandbox in September that is primarily focused on “trial” disclosures that fintech companies would test in place of existing disclosures, if they can persuade the agency the trial disclosures are more appropriate.

Likewise, the Commodity Futures Trading Commission has a project where it meets with innovators in the early stages to help onramp them to compliance.

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