If government employees need new software to test how a financial technology project might work — software they lack expertise to write themselves — they can’t get it from the industry because rules deem such software as a gift and block the government from receiving it.

The result, according to regulators, is the rules are slowing down U.S. innovation in fintech, leaving the country to fall behind others.

Christopher Giancarlo, the chairman of the Commodity Futures Trading Commission, told CQ Roll Call in an interview this month that the agency’s general counsel determined the CFTC can’t work too closely with fintech companies. The agency is trying to allow companies to develop new products and services with less fear of running afoul of the regulations on legacy financial systems.

Giancarlo said he supports legislation Georgia Republican Rep. Austin Scott offered in 2018 that would create an exception for the CFTC, allowing it to participate in proofs of concept on technology such as blockchain. The technology, sometimes known as a public ledger, is run by its individual participants. Giancarlo said the CFTC has been invited to participate in projects but can’t because of the gift rule.

The result, according to Giancarlo, is that it’s difficult to test possible regulations on distributed ledgers, and that, in turn, leaves the fintech companies unclear about the future.

Blockchain, which underpins the cryptocurrency bitcoin, runs on a network of computers with no centralized governing or regulatory authority. The technology is being explored by banks and financial services firms, governments and startup businesses for its potential to improve the effectiveness of payment systems and cut costs.

U.S. regulators are worried they are falling behind as regulators abroad use public-private partnerships to give them a closer look at the technology as it develops.

The Bank of England, for example, says on its website that it’s using partnerships with more than a dozen private entities in the area of cybersecurity, a model the CFTC officials say it would like to emulate for fintech. The U.K. central bank says it is working with a vendor that helps companies test safeguards against cyberattack, and with other companies to create databases on threats. It also worked with accounting giant PricewaterhouseCoopers International Ltd. on possible applications of blockchain and other distributed ledgers.

CFTC officials say they are urging Congress to provide it with what is called transaction authority, which would enable the agency to have similar conversations with private technology firms. NASA has had such ability since 1958, and other agencies, including the Department of Defense, have received it since then.

The authority gives the agencies the flexibility to provide financial assistance to companies and to strike research and development agreements for projects. It also allows transfers of intellectual property between the government and the private sector, a status that has reduced accounting burdens, according to the Government Accountability Office.

LabCFTC, a new endeavor, is the CFTC’s unit working with fintech. Daniel Gorfine, the director, and staff have met with hundreds of organizations to discuss topics including machine learning, artificial technology, blockchain, virtual currencies and algorithmic trading, CFTC officials say.

Gorfine said the agency needs more flexible rules to engage with innovators.

Proof of concept testing

The new authority would make it easier for the CFTC to participate in so-called proof of concept, the practice by which the parties seek to demonstrate the viability of a fintech project. According to the GAO, the proofs of concept involve regular interaction between the company offering the product and government agencies before it becomes available to the market.

The Bank of England said it has conducted proofs with the private sector on how technology can speed up the settlement of currency transactions, ways to keep data private on a distributed ledger, and the use of extensible business reporting language, a standard for data reporting in use throughout most of the world, including in filings made with the Securities and Exchange Commission.

The CFTC is not the only regulator working to up its game in fintech.

The SEC is seeking private vendors to gather data from most widely used blockchain ledgers to help it police digital assets. It is looking for experts who can convert blockchain data into an understandable format, and provide market data on digital assets, including prices, the agency wrote in a notice in January. It plans to use the information to “monitor risk, improve compliance, and inform commission policy with respect to digital assets.”

The agency issued a general solicitation for business and appears ready to pay for the privilege, so the procurement rules wouldn’t restrict such an arrangement.

The federal agencies’ interest in gaining the authority has its critics. Some state regulators worry fintech groups may opt for federal authority to try to avoid state law and undermine investor protection. The North American Securities Administrators Association is urging Congress to be aware of regulatory arbitrage, in which private actors seek out approval from the agency with the least regulation. The group said it is unclear whether federal regulation is needed.

And New York regulators are suing to block an effort by federal bank regulators to provide bank charters to fintech firms. Fintech firms that receive such charters could avoid state usury laws and bans on payday lending, according to the New York Department of Financial Services.

Another group of state regulators, the Conference of State Bank Supervisors, has a similar lawsuit. Another worry of the states is that federal oversight of fintech, if it allows them to avoid state charters, might deprive the states of revenue.