Hello Fintech Friends,

Welcome to another week of fintech policy updates! Last week brought major developments in crypto regulation, with the U.S. House Committee on Financial Services approving four crypto bills. We delve into what this means for the industry and discuss other crypto regulation updates both in the U.S. and globally. We also cover important enforcement-related news from the broader fintech space. And, for the first time, we are introducing a new section dedicated to artificial intelligence (AI) and its policy implications in finance. Lastly, we are delighted to present the fourth and final contribution on open banking by our friend Phil Chang, the General Counsel of Method Financial.

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1. Crypto Regulation: The Bills

Last week, the Republican-led U.S. House Committee on Financial Services approved four crypto bills, paving the way for these drafts to advance to a floor vote in the House. The approved bills are as follows:

a. The Financial Innovation and Technology (FIT) Law for the 21^st Century: The bill, sponsored by Rep. French Hill (R-AR), received approval in a 35-15 vote, with only six Democrats in support, while major Democrat members on the Committee opposed it. This legislation aims to provide clarity on the definition and classification of digital assets. It also grants the Commodity Futures Trading Commission (CFTC) spot jurisdiction over digital assets and directs the establishment of a joint rule-making committee on digital assets between the CFTC and the Securities and Exchange Commission (SEC). The Bill was also unanimously adopted by the House Committee on Agriculture, which oversees the CFTC.

b. The Clarity Act for Payment Stablecoins: The bill was approved by a 34-16 vote but faced challenges due to a stalemate between Democrats and Republicans, with the Chair of the Committee on Financial Services, Rep. Patrick McHenry (R-NC) blaming the divide on White House, and Ranking Member, Rep. Maxine Waters (D-CA), accusing McHenry of abruptly ending the bipartisan talks on the bill without reaching an agreement. The bill creates pathways for stablecoin issuers to get approved and regulated and includes consumer protection clauses.

c. The Blockchain Regulatory Certainty Act: The bill was presented by Rep. Tom Emmer (R-MN) and offers certain blockchain developers exemptions from regulations applicable to money transmitters and financial institutions unless they normally have custody of user funds.

d. The Keep Your Coins Act: The bill, sponsored by Rep. Warren Davidson (R-OH), aims to ensure consumers can maintain custody of their digital assets in self-hosted wallets and prohibits federal agencies from restricting the use of convertible virtual currency for purchasing goods or services for personal use.

Despite gaining approval from the House Committee on Financial Services, the prospects of these bills becoming enacted into law are uncertain due to their limited bipartisan support. Prominent Democrat members of the Committee have expressed strong opposition, including Rep. Maxine Waters (D-CA) who harshly criticized the FIT, referring to it as a "wish list" for the crypto industry, while Rep. Stephen Lynch (D-MA) went as far as calling it "the worst piece of legislation that has been presented for markup” in his 20-year service on the Committee.

Not far from the House, crypto regulation was lively debated in the Senate. On Thursday night, with an 86-11 vote, the Senate passed the National Defense Authorization Act of 2024, which had important crypto-related provisions. The provisions aim to strengthen anti-money laundering efforts and enforce compliance with sanctions laws. They also direct the Treasury Department to establish crypto asset verification standards and conduct a study on combating anonymous crypto asset transactions, including those facilitated through crypto mixers. Unlike the House bills, the large bipartisan support of these amendments indicates that they are much more likely to pass into law.

2. Crypto Regulation: Other News

In other crypto regulation news, Paul Munter, the chief accountant of the SEC, issued a statement warning accounting firms of liability in case the crypto firms they audit make “material misstatements” about the scope of the audit; Representatives Gus Bilirakis (R-FL) and Jan Schakowsky (D-IL) have raised concerns about blockchain innovation being stifled by Apple's App Store policies in a bipartisan letter sent to Apple CEO Tim Cook; and the SEC will require public companies, including listed crypto firms, to disclose any "material" cybersecurity incidents within four days, except when it poses national security or public safety risks. Internationally, the UK and Singapore have joined forces to develop global regulatory standards for digital assets, including central bank digital currencies. Additionally, Canada's Office of the Superintendent of Financial Institutions is proposing stringent new guidelines to regulate banks’ and insurance companies' exposure to digital assets.

3. Enforcement

Digital payments industry leader Block, led by X (fka Twitter) founder Jack Dorsey, has filed a lawsuit against payment card giants Mastercard and Visa. The lawsuit, filed on July 14 in a federal court in New York, accuses the two companies of participating in anti-competitive practices and imposing exorbitant fees on merchants. Block also claims that banks linked to both networks collude to maintain higher interchange fees.

4. AI
A group of prominent tech companies, including GitHub, Hugging Face, and Creative Commons, have issued an open letter urging the European Union to reconsider certain aspects of its AI Act. The letter emphasizes the need to ease regulations on upstream open-source AI models, stating that treating them like commercial products or deployed AI systems would stifle open-source AI development. Meanwhile, France and Germany have launched investigations into the controversial crypto project Worldcoin, co-founded by OpenAI's Sam Altman. The project, which offers a "digital passport" and token payment to individuals who have their irises scanned, has raised concerns in these European countries over data protection and privacy. In the United States, the SEC approved changes to rules governing the use of "optimization functions" by brokers, particularly concerning the use of AI, for fear of potential conflicts of interest that could arise through investor interactions involving these technologies.

5. Open Banking (from our guest contributor, Phil Chang, General Counsel of Method Financial)

Banking is sticky. A 2022 survey found that most U.S. consumers have held the same transaction account for about 17 years. Large incumbent banks have benefited, enjoying significant advantages of scale due, in part, to the massive capital and data pools flowing from those accounts.

Those advantages are highly unlikely to change with open banking. Any such fears are overstated. While open banking requires incumbents to share consumer-permissioned data with third-parties, which can reduce stickiness to facilitate account portability and, in turn, lead to deposit loss, this would only occur on a customer-by-customer basis. The most recent data from 2019 shows the median value of consumer transaction accounts is $5,300. Compare that with the trillions of dollars in domestic deposits held by the largest U.S. banks.

But stickiness is more than just the inconvenience of switching banks. Even if it’s easy, customers will only leave if there’s materially better options elsewhere. And open banking is a two-way street; incumbents can also adopt it to increase their customer base for consumers who have chosen them. Thus, any net depletion in capital or data would not be caused by open banking itself, but rather by an incumbent’s decision to fight the tide to keep a captive audience versus innovating and competing in a new open banking world.

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See you next week!