This past week, we saw a perfect illustration of financial
technology’s power.
To spite “hedge fund bros,” retail investors led a surge in
GameStop’s stock price largely through the trading app Robinhood. While
progressives relished watching Wall Street’s old guard scramble amid the chaos,
fintech firms like Robinhood — apps for lending, investing, and so on —
certainly aren’t seeking an end to financial capitalism. Indeed, once Wall
Street began shrieking about amateurs beating them at their own absurd game,
Robinhood warned against the very market volatility it was facilitating, then
shut down trading of GameStop and other memed stocks, leading to at least one
class-action lawsuit and Senate and House progressives calling for
investigation.
Ultimately, it looks like the hedge fund Robinhood users
targeted, Melvin Capital Management, will just be partly bought by a different,
larger hedge fund, Citadel Capital Management. A separate company called
Citadel Securities — which has the same owner as Citadel Capital Management,
Ken Griffin, the richest man in Illinois — facilitates some of Robinhood’s
transactions.
Robinhood itself makes money by selling data on users’
trades to giant Wall Street firms, who then stake their own positions based off
what the little guy is up to. The Securities and Exchange Commission also
charged Robinhood last month for offering bad trading prices to unsuspecting
users, since those trades were routed through firms paying Robinhood. If true,
Robinhood’s users were effectively paying a premium on their trades, despite
the app marketing itself as “commission free.” This took place between 2015 and
late 2018, when Robinhood was growing rapidly, according to the SEC.
You wouldn’t know any of this from Robinhood’s faux-populist
marketing about “democratizing finance.” But much like traditional Wall Street
and Big Tech firms before it, fintech is building an echo chamber of industry
voices and former regulators to ease oversight and permit its predatory
practices. These range from, as The Intercept and Type Investigations have
previously reported, high-interest lending like Best Egg to legitimately novel
efforts (at least, in our lifetimes) to privatize and surveil the basic
operations of the monetary system.
Fintech is neither inherently good nor bad; rather, like any
technology, its potential impact on society is closely tied to the policy
decisions guiding its use — and the next four years could define how much the
fintech industry is able to shape the financial system. Left to their own
devices, fintech firms could swindle average people through ill-advised
day-trading or high-interest loans, usher new systemic risks into the financial
system, and develop traceable, privately owned currencies with the potential to
replace cash.
Responding to fintech will be a key regulatory challenge for
the Biden administration. But it enters this fight with one hand already tied
behind their backs. American financial law vastly predates the digital era and
is often ill-suited to describing online financial activity. And plenty of
fintech firms design themselves to deliberately evade falling under any legal
classifications and the regulations that follow them.
AT LEAST THREE potential Biden nominees have
connections to the financial technology industry. Early reporting in January
named Michael Barr as Biden’s favorite to be the next comptroller of the
currency, a crucial regulator of national banks. Progressive legislators and
organizations (including the Revolving Door Project at the Center for Economic
and Policy Research, where the authors of this article work) pushed back,
citing Barr’s previous bank-friendly record in government and his close ties to
fintech. He currently runs a fintech project at the University of Michigan,
works separately with the Bill and Melinda Gates Foundation on fintech, and
advises a fintech-focused venture capital fund. Barr did not respond to a
request for comment.
Barr is also an adviser at the Alliance for Innovative
Regulation, a fintech-funded think tank, alongside Georgetown professor Chris
Brummer, who has been floated as a potential Commodity Futures Trading
Commission chair. AIR’s “manifesto” for digital-age regulation argues that we
need to overhaul the system — in the opposite direction, with a digital
alternative that leaves as little oversight as possible. AIR’s regulatory
manifesto calls for using biometric data in lieu of traditional know your
customer requirements, which are the parts of our anti-money laundering regime
that require companies to verify that customers are who they say they are when
making financial transactions. Brummer did not respond to a request for
comment.
Elsewhere, AIR calls to throw out or overhaul practically
everything that keeps the regulatory system accountable to the public, such as
Freedom of Information Act processes or public comment periods, in favor of
surveillance technology.
The Office of the Comptroller of the Currency, or OCC, which
is technically part of the Treasury Department but operates with a great deal
of independence, would be positioned to grant this major invasion of individual
privacy. The industry claims that biometric data will be far more secure (and
cheaper to administer) than traditional anti-money laundering tactics. Lost in
the glowing industry press releases is public input into whether people are
comfortable having their faces, eyes, fingers, and voices recorded by giant
financial companies — and whether the data is stored safely or sold to outside
actors. There’s also the question of whether biometric data, once assembled,
might be linked to a financial firm’s other activities, most especially lending
decisions. Without proper regulations, companies would be able to factor your
facial and voice data into its decision to lend to you.
Barr also previously advised the fintech firm Ripple, which
currently faces a multibillion-dollar lawsuit from the SEC. The SEC is charging
that Ripple’s cryptocurrency, XRP, the third-largest worldwide, is an
unregistered security that serves no purpose other than to funnel sales to
Ripple. (Bitcoin, by comparison, isn’t produced by a single company, so it
cannot be treated as a security; there’s no underlying asset that gains value
if Bitcoin prices go up.) Ripple’s CEO was also interviewed by Brummer last
year as part of “DC Fintech Week,” an annual confab between industry,
regulators, and political leaders that Brummer facilitates.
In response to the pushback against Barr, The American
Prospect reported that the White House is now considering California regulator
Manuel Alvarez for the OCC job. Alvarez is even more directly linked to
fintech. From 2014 to 2019, he was the chief legal officer at e-lender Affirm,
which offers “buy now, pay later” loans at checkout for retail transactions, as
well as short-term loans aimed at consumers without credit cards. According to
Consumer Reports, Affirm loans can run as high as 30 percent APR.
Alvarez now leads California’s Department of Financial
Protection and Innovation, sometimes called “the mini Consumer Financial
Protection Bureau.” But “innovation” refers to an office specifically set up to
communicate with and encourage fintech development in California. Alvarez
described the department’s goal to Yahoo Finance last week as to “proactively
engage with fintech in a non-confrontational manner, but also in a programmatic
way so that we can try and … really develop a more holistic picture of
innovation in financial services, and then let that inform the rest of the
department’s work — let it inform the supervisory work with respect to even
existing licensees like our banks and credit unions.”
In an email to The Intercept, a spokesperson for Alvarez
said that he does not support the idea of letting industry players dictate the
terms of regulation. “The DFPI is proud to be leading the nation in developing
a regulatory framework that balances consumer protection and responsible
financial innovation through expanded enforcement capabilities, a market
monitoring arm, increased consumer outreach, and early engagement with
innovators,” Alvarez’s statement read.
JOE BIDEN’S ADMINISTRATION will also have to set
itself apart from the Treasury Department under Barack Obama, which actively
encouraged private fintech development. Other parts of the federal government
built active fintech incubators, like OCC’s Responsible Innovation initiative
and the CFPB’s Project Catalyst. Obama’s chief fintech policy adviser was
Adrienne Harris, who is now Barr’s close associate at the University of
Michigan and an AIR board member. Harris also founded an online insurance
company after leaving the Obama administration.
Obama’s OCC comptroller, Thomas Curry (also on the AIR
board), introduced a policy initiative called the special purpose bank charter
in late 2016. A charter would bring fintech firms under OCC supervision, but
grant them the license to operate nationwide as special purpose national banks
with their full suite of financial products and no deposit-taking requirements.
Such proposals to charter fintechs would limit states’ regulatory powers and
empower fintech firms to partner up with national banks, potentially furthering
consolidation of financial services into a handful of too-big-to-fail
institutions. Both of Donald Trump’s appointments to the OCC attempted to
implement Curry’s proposal despite opposition from state banking regulators.
Sens. Sherrod Brown and Jeff Merkley opposed Curry’s push and the state of New
York sued the OCC in 2020 after Acting Comptroller Brian Brooks reintroduced
the fintech charter.
In California, Alvarez has already pushed for other ways for
fintech companies to sidestep regulation. A version of the legislation creating
the “mini CFPB” that he helped draft, but which was never enacted, called for
the state government to specifically encourage fintechs to register in
California as industrial loan companies. This somewhat obscure charter would
allow fintechs to take consumer deposits without being subject to federal
banking regulation at all — a workaround to the OCC’s unwillingness to grant
them bank charters. Of course, Alvarez could reverse this if appointed to lead
the OCC. Alvarez told S&P Global that his support for the industrial bank
charters stemmed from an interest in keeping fintech firms based in California.
“We cannot compel interested groups to apply in California,” Alvarez wrote,
“but we can certainly provide a glidepath.”
FINALLY, SHADOW BANKING, or lenders that don’t take
deposits and aren’t subject to regulatory oversight, are responsible for over
50 percent of the home and personal loan market in the United States. Fintech
firms are a major part of this lending boom, representing over a quarter of
loan origination in 2015, while offering significantly higher rates than
traditional banks and other shadow banking firms. And the lending gets even
more dangerous when cryptocurrencies, famously volatile, are the medium of
exchange. While still nascent, this development in fintech activity will soon
merit firm and appropriate regulatory responses from the CFPB, the SEC, and
other relevant actors.
These turf fights over individual aspects of fintech or
cryptocurrency are all ultimately proxies for a greater conflict: the “war on
cash” and the right to a public, nontraceable currency, including on the
internet, said Rohan Grey, a professor at Willamette University College of Law
who studies financial technology and the history of money, in an email.
“Fintech,” he wrote, is just the newest, brightest, shiniest manifestation of a
long struggle over public commerce.
“All the debates over ‘fintech,’ once you get beyond the
scams and the hype, are really a debate about the future of money,” said Grey.
“The recent rise of ‘fintech’ is just the latest saga in a centuries-old
struggle between democratic accountability and unaccountable private power, with
the latter hiding behind promises of technological innovation.”
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