Banking

States should take lead on regulating innovation: Wyoming senator

WASHINGTON — The Senate’s newest advocate for financial innovation did not come to the capital because she thinks the federal government needs to validate the digital banking sector.

Rather, the central message of Republican Cynthia Lummis of Wyoming is to let states like hers lead the way in regulating cryptocurrency firms. When federal regulators are involved in setting innovation standards, Lummis argues, they are often just getting in the way.

“We need to innovate and innovation occurs when regulatory climates and opportunities in states are allowed to flourish,” said Lummis, who was elected in November. “And if there’s these so-called standards that are developed at the federal level, they are apt to gum up the works.”

Lummis’s home state is attempting to become the go-to jurisdiction for chartering crypto firms that want to offer banklike custody services.

Two such companies, Kraken Financial and Avanti Bank, have been approved for a new special-purpose depository institution charter from Wyoming regulators.

“I’m way more comfortable as a former state legislator and a believer that states are truly the innovators when it comes to governments being able to reach out and work with the private sector,” said Sen. Cynthia Lummis, R-Wyo.

Bloomberg News

“I’m way more comfortable as a former state legislator and a believer that states are truly the innovators when it comes to governments being able to reach out and work with the private sector, that states are much better equipped for that than the federal government,” Lummis said.

Still, Lummis sees her role as educating other lawmakers about the crypto industry. She has established a financial innovation caucus in Congress with Sen. Kyrsten Sinema, a fellow member of the Banking Committee. And if the federal government wants to set clearer rules of the road for regulating fintech, Lummis says, it should look to states like Wyoming as the road map.

“Very few” members of Congress “know what bitcoin is. But the ones who do have the same concerns that early adopters of Bitcoin did, she said. “Is it safe? Is it being used for dark money uses or nefarious causes? Learning how to answer those questions and understand them has really helped provide some of the impetus for the financial innovation caucus.”

Lummis said she believes bitcoin and other cryptocurrencies have the potential to create a more inclusive financial system. She also supports efforts by the Federal Reserve to explore a central bank digital currency because she believes that the U.S. needs to keep its place as the “global financial leader.” She was one of three Republicans who supported Gary Gensler’s nomination to serve as chairman of the Securities and Exchange Commissions. She said she believes Gensler is an “ally of financial innovation.”

Below is an edited transcript of a discussion with Lummis about U.S. financial innovation and her plans for the new caucus.

How did you become interested in digital currencies and what was your goal in starting a financial innovation caucus in the Senate?

SEN. CYNTHIA LUMMIS: I was Wyoming’s state treasurer earlier this century and I got to invest Wyoming’s permanent funds. … I was always looking for a great store of value that would grow over time, and I was also looking for sources of short-term revenue, annual revenue that we could give to our general fund. So we got in the stock market, but I continued to look for ways that we could stabilize and have a long-term value proposition.

Bitcoin didn’t exist then. But I came to see bitcoin later as an asset that has many of the qualities of gold, a mined commodity. And in fact, bitcoin is considered a commodity. So the more I learned about bitcoin, the more interested I was, because I was always looking for a store of value.

I bought some bitcoin in 2013, and of course, anytime you have even a little skin in the game, you stay more interested. And that’s what happened to me. … I bought three bitcoin for $1,000. And I continue to read about bitcoin and learn more about it. And now I can see that it really is that store of value that I hoped it would be.

I want to share that with my colleagues in the U.S. Senate, very few of whom know what bitcoin is. But the ones who do have the same concerns that early adopters of bitcoin did. … Is it safe? Is it being used for dark money uses or nefarious causes? Learning how to answer those questions and understand them has really helped provide some of the impetus for the financial innovation caucus.

We decided to create it as the financial innovation caucus, not limited to cryptocurrency, because there are other areas that need to be explored with regard to financial innovation. So my co-chair is Sen. Kyrsten Sinema from Arizona. And we are going to bring in innovators in the financial space: people that are interested in same-day settlement or next-day settlement, people who are interested in using the blockchain, in digitizing the dollar. All of these are going to be items on the agenda of the financial innovation caucus. And we want to bring in the great innovators and leaders in this space to share their knowledge and advise us. Rather than legislate first and learn later, we want to do just the opposite.

Do you have any legislative goals for the caucus at this point in time?

For the first two years, really it’s way more about information sharing and educating ourselves than it is about legislation.

But we also want to stay in touch with the regulators because they’re going to be on the front lines of this before the Congress is. So we want to bring in people from the [Federal Deposit Insurance Corp.] … the SEC.

And then we want to make sure that laws like the Bank Secrecy Act, and know-your-customer laws, are appropriately administered. We want to make sure that in states like Wyoming, a huge innovator in this space that has created laws that have allowed for the chartering of special purpose depository institutions, that we can have … the federal regulators look at these state laws and regulations around them as the prototype for federal regulation.

What convinced you to support Gary Gensler’s nomination to chair the Securities and Exchange Commission and how do you think he will approach innovation?

I do see him as an ally of financial innovation and as someone who is thinking and speaking thoughtfully about these issues. I know a number of my colleagues are concerned about other aspects of his financial regulation background, and it has more to do with stocks.

But I’m so motivated to see that the United States government gets off on a good foot and a smart foot with regard to its engagement with this space, meaning the digital asset space, and I see Gary Gensler as someone who thinks the same way. So I’m really optimistic that he’s going to prioritize innovation. He’s worked with digital assets and the fintech industry, and for those reasons, I chose to support his nomination.

Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell have supported research into the U.S. launching a central bank digital currency. Do you think it is appropriate for the U.S. to have a digital dollar backed by the Fed?

I do think that the United States has to make progress in this space. We want to continue to be the global leader in the global financial system. The dollar is the world’s reserve currency, but we can’t be complacent.

I guess right now, about 88% of the transactions in the world are done in U.S. dollars. Some people think that just absolutely cements us as irreplaceable. And it will until somebody else comes along and replaces us.

The point is, we have to be ever vigilant. Our role is as the global financial leader, and we want to stay that way by taking charge of every innovation that we can grasp on to. So I was very pleased that … the Fed took on a project with [the Massachusetts Institute of Technology] to create a digital asset, a U.S. dollar that’s digitized. And we know that will be not only a more secure asset than the Chinese effort to digitize their currency, but that it’ll be more private. I have no faith that the Chinese digital currency would protect my privacy or yours. So it’s very important that we innovate in this space.

How do you think digital assets can promote financial inclusion?

The nice thing is everybody can have a bitcoin wallet, and everybody can buy bitcoin or its ‘satoshis,’ that are a fraction of a bitcoin. You don’t need to have a bank account to do that. So that already makes it very available to underserved communities. It’s just a matter of informing them about how to go about it. And that will be something that I’m excited about the industry getting into.

Coinbase had its [initial public offering] … and it was hugely successful. Those are the kinds of businesses and companies that will benefit from teaching the gentleman who is out working on this building today or the rancher on an Indian reservation, about how to have a digital wallet that they can use, without needing to have a bank account. And to boot, it’s a great store of value.

The Native American rancher on an Indian reservation who doesn’t have a bank account, if he has a digital wallet and can save in bitcoin, he can continue to do daily transactions in U.S. dollars. But when he’s older, and he needs to retire, he’ll have an asset that is a great store of value that is not correlated to other assets that he can draw from. So I’m very excited to see the private sector, quite frankly, be the ones that innovate with regard to matching up people who are unbanked with bitcoin and other digital assets.

So you don’t think Sen. Sherrod Brown’s proposal for all consumers to have access to government-backed FedAccount digital wallets is necessary?

You know, I really don’t. One of the great advantages of bitcoin is it has anonymity. It has privacy. Yes, every transaction that’s ever been made in bitcoin on the blockchain is open for everyone to see, meaning someone sells a bitcoin and someone buys a bitcoin, it’s readily acknowledgeable and visible on the blockchain. The thing is, nobody knows who bought it, and who sold it. That’s where the nice privacy component of bitcoin comes in.

Wyoming recently enabled companies to apply for special purpose depository institution charters. Do you think other states should follow suit?

Custody in itself is an important issue in the digital asset industry, because we do need to safeguard the so-called private keys and technology risk. Having a depository institution, a custodian, for these assets is a very valuable service.

Wyoming has led the way here. So we have one or two chartered. We have two or three in the pipeline to be chartered. No bank grade custodial solution for digital assets exists that can pass SEC muster right now. So Wyoming solved that by the creation of a custody bank charter for digital assets, complete with a digital asset specific rule. And it also has an over 700-page supervisory manual covering custody, the Bank Secrecy Act, and IT risk and digital asset valuation issues.

If other states want to follow us, I totally get it. When you see one state innovate, everybody wants to copy that state. I don’t blame them. But Wyoming is out in front and we hope to stay there.

Do you support the OCC’s efforts to establish a special-purpose fintech charter?

The OCC has been an innovative regulator. But many of the steps they’ve taken haven’t had appropriate sideboards in place, like the necessary rules and supervisory guidance. Wyoming has been very careful to do this.

As you may know, the OCC is currently being sued by state banking regulators, because it has declared its authority under the National Banking Act to charter banks that don’t necessarily take deposits, which may make payments or loans. So these are all issues that are in litigation. The case is before the Second Circuit Court of Appeals, and it might go to the U.S. Supreme Court.

Do you think federal regulations for fintech are appropriate given the current patchwork of different state laws?

Not right now. We need to innovate and innovation occurs when regulatory climates and opportunities in states are allowed to flourish. And if there’s these so-called standards that are developed at the federal level, they are apt to gum up the works.

The other thing is that some of the companies that are coming into Wyoming are very new and nimble, and some of them are long established companies, but that are very nimble.

Some of the big Wall Street institutions that want to get into this space, because they see it being a new source of financial technology and innovation that they want to be a part of, are not nimble companies. So they’re the ones that are more apt to want to look to the federal government. Whereas these more nimble innovators, the people who have really put bitcoin and other digital assets on the map, are the ones that are coming to the states and making their mark.

So quite frankly, I’m way more comfortable as a former state legislator and a believer that states are truly the innovators when it comes to governments being able to reach out and work with the private sector, that states are much better equipped for that than the federal government.

Traditional banks are concerned that special-purpose depository institutions aren’t regulated as stringently as banks and could pose risks to the financial system. Do you share those concerns?

I don’t share those concerns. But I would encourage banks, including in my state, Wyoming community banks, get yourself a charter, an SPDI charter. Get involved in this space. That’s the best way to assure yourselves that this is an area that now has looked at the Bank Secrecy Act that has these 776 pages of guidance.

There’s so much that Wyoming has done to lay a solid foundation, and not only for companies that choose Wyoming to charter, but when the federal government looks at this space, they can turn to Wyoming as the great innovator. So I would say to community banks that are worried about this kind of thing, read Wyoming’s laws, read Wyoming’s submissions to the Federal Reserve, and get familiar with them, because that really is an adjunct to community banking that millennials will embrace.


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