There are many types of financial innovation. Some (ATM withdrawals) are more trustworthy than others (subprime mortgage-backed bonds). Yet, too often, in fintech and crypto circles, technological stability is mistaken for financial stability. Companies demand we trust but not verify. The first corporations to use telephones and index cards, personal computers and spreadsheets, and electronic recording systems for finance also argued we should suspend skepticism of these products due to the new tech involved. They were all wrong to do so.
Stability flows not only from technology but from law and regulation. When we scratch the surface of the loose mix of companies labeled “fintech” or “crypto,” we often find old ideas. On the other hand, there are genuinely novel developments, mostly centered around data collection and governance. We need regulators who can distinguish between the old and new forms of finance if we are to have democratic accountability.
So, it is shocking to see the attacks on Prof. Saule Omarova, President Joe Biden’s pick to head the Office of the Comptroller of the Currency (OCC). Whether it’s libertarian magazines jumping to conclusions about a single phrase in a single paper (on an issue outside of the OCC’s ambit) or longtime crypto activists engaging in red-baiting, many people skeptical of concentrated power have ironically toed the bankers’ line against Omarova.
Now, Omarova has recognized the power of financial innovation to improve the quality of our lives. She acknowledges the U.S. lacks a unified strategy for fintech regulation and does not profess to have all the answers. She argues our payment and banking systems need to be more inclusive of low-income households and marginalized communities, goals the new industries say they respect. She has even emphasized the importance of data security and privacy, and deftly highlighted that opinions on these matters are not uniform among innovators.
Omarova takes a serious, long-term, big-picture attitude toward the entire financial system in favor of regulatory principles rather than any single industry’s agenda. She has long been a vocal critic of traditional finance and the largest, most entrenched players within it. And, she has argued the public interest is not served by allowing Facebook to issue its own money or Rakuten, the “Amazon of Japan,” to own a bank.
Indeed, to the astute observer, recent opposition to Omarova’s nomination from multiple corners of the fintech world exposes a sad reality: Many of the biggest players have the same anti-competitive aspirations as JPMorgan Chase or Google.
Omarova is in sync with most existing regulators, not outside the mainstream. From a financial stability perspective, her skepticism about “private money” is entirely justified. Today’s stablecoins can be seen as part of a longer history of companies offering financial instruments to the public, claiming they can be redeemed at a stable, nominal redemption value, while also evading consumer protections, federal deposit insurance and broader banking regulations. The history of wildcat banking and, more recently, money market funds, shows this design is at the root of shadow banking crises. No technological arrangement mitigates these concerns.
Consumers and investors deserve protections regardless of the tech involved. As Andrew Park, a senior policy analyst for Americans for Financial Reform, observed after crypto users lost $90 million due to a company error, “There are reasons to criticize the existing banking system, but there are a lot of safeguards in place to prevent these kinds of things from happening.”
At the federal level, companies offering deposits are regulated by the OCC, yes, but also by the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and a host of supporting agencies. Companies offering investment products are regulated by the Securities and Exchange Commission and Commodity Futures Trading Commission, which can coordinate jurisdiction with respect to new products. The Consumer Financial Protection Bureau patrols the user interface beyond investments.
Companies attempting to engage with customers in good faith, according to reasonable expectations, given laws on the books, have nothing to fear. There are clearly bright lines: For instance, as an advocate of financial inclusion and an anti-monopolist, Omarova is mindful that approaching fintech and techfin companies (or any powerful player) with a too-light touch, without considering the effects on institutions like community banks, would be irresponsible.
Omarova’s scholarship does not suggest she’d take a blunt approach. If fintech and crypto firms truly want to beat big banks at the game of serving retail investors and consumers, then they’ll have an ally in Omarova, whose work emphasizes the role of fair competition. If companies want to find new ways to avoid accountability to the people buying their products – as the dinosaur institutions have long done – history has many labels to describe them. “Innovators” is not one. “Fraudsters” comes close.
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