GOP midterm win will put pressure on fintech regulators

If Republicans win control of Congress in November, fintech watchers expect intense pressure on regulators to push crypto-friendly rules across the finish line.

Lawmakers from both parties have teamed up on legislation that would regulate the industry after a chaotic year with a stablecoin failure and bankruptcies of crypto-lending companies. Bitcoin, one of the most popular cryptocurrencies, has lost over 60 percent of its value since November 2021.

However, Republicans have been particularly keen to demand more clearly defined driving rules from regulators. Sen. Patrick J. Toomey, R-Pennsylvania, for example, has chastised regulators for not providing more clarity.

And Republicans also oppose government fulfilling a role they see as the domain of the private sector, an example being a digital central bank currency issued by the Federal Reserve.

Lee Reiners, policy director at the Duke Financial Economics Center in North Carolina, said Republicans have rallied around a view that the Fed does not need to create its own digital currency because it will compete with stablecoins already on the market.

“Would it shock me if they introduced a bill that would prohibit the Federal Reserve from issuing a central bank digital currency or digital dollar?” Reiners said in an interview. “I wouldn’t be shocked.”

Republicans are favored to win the House of Representatives, but the battle for the Senate is less certain. Inside Elections with Nathan L. Gonzales reports that the GOP’s margins have narrowed as the election approaches.

However, even in a divided Congress, some action on crypto is likely.

“I think no matter what happens with the November election, Congress is going to continue to have an appetite to act on legislation related to cryptocurrencies and stablecoins,” Kristin Smith, executive director of the Blockchain Association, said in an interview. Stablecoins are digital tokens whose value is tied to an asset such as the dollar.

Bipartisan bills have circulated. One bill, introduced in August by Senate Agriculture Chair Debbie Stabenow, D-Michigan, and co-sponsored by Ranking Member John Boozman, R-Arkansas, would give the Commodity Futures Trading Commission authority to regulate some of the biggest digital commodities, including bitcoin.

A similar one, introduced in July by sponsor Sen. Cynthia Lummis, R-Wyoming, and co-sponsored by Sen. Kirsten Gillibrand, D-New York, would put the CFTC as the top crypto regulator, but include a wide range of other cryptocurrencies. provisions and also have tax consequences.

Even more legislation is expected from Maxine Waters, D-California, chair of the House Financial Services Committee, and Patrick T. McHenry of North Carolina, ranking member and likely chair of the panel if Republicans take the House.

“He’s very passionate about these issues,” Smith said of McHenry. “So I think he could be more of a driving force than if the Democrats (retain) control.” McHenry would work to get something done quickly, Smith added.

However, a digital central bank currency, a digital form of money that would be issued and backed by the Fed, is an issue that could be more partisan, Smith said.

Rep. Tom Emmer, R-Minnesota, chairman of the Blockchain Caucus, introduced a bill in January that would prohibit the central bank from issuing a CBDC directly to individuals.

Banks or fintech?

Agencies are also moving forward with potential new rules.

The Consumer Financial Protection Bureau is reviewing rules for sharing customer data, Reiners noted. A proposal that would give bank customers control over their data would affect the relationship between traditional financial accounts and third-party apps like Venmo.

Banks are generally not keen on being required to share customers’ data, in part because it is extremely valuable, Reiners said. That could mean a choice for Republicans about which they support most — banks or the fintech industry, he said.

“Historically, Republicans have been broadly supportive of the banking industry, so this would kind of pit two of their constituencies against each other,” he said.

Republicans could also pave the way for what some call “rent-a-charter” schemes, where fintech companies partner with banks to make loans. If a non-bank fintech lending platform makes loans, it is subject to state lender licensing requirements and also state-by-state interest and fee restrictions, according to a post by Reiners and Joseph Caputo for the Duke Financial Economics Center.

Many fintech lenders already work with banks to avoid government restrictions by structuring their agreements with banks so that the fintech credit platform markets to potential borrowers and the bank guarantees the loan, they said.

Democrats see it as a new form of payday lending, while Republicans see it as competition that benefits consumers by giving them more choices, Reiners said.

Late in former President Donald Trump’s administration, the Office of the Comptroller of the Currency issued the “true lender” rule, which determined that a bank, and not the fintech company, makes the loan, therefore allowing such arrangements. Many on the left were concerned that the rule would allow predatory interest rates for low-income consumers, Reiners said.

Congress used the Congressional Review Act to reverse the rule in June 2021.

At the time, President Joe Biden said that “loan sharks and online lenders” had figured out how to get around interest rate caps. “These are so-called ‘rent-a-bank’ schemes,” Biden said. “And they allow lenders to prey on veterans, seniors and other unsuspecting borrowers … trapping them in a cycle of debt.”

Republicans want to see the true lender rule return.

“That would be pressure applied directly to the OCC and the FDIC [Federal Deposit Insurance Corporation]”, Reiners said.

A Republican Congress would also mean increased oversight of regulators led by Biden appointees, said Aaron Klein, a senior fellow at the Brookings Institution.

“Regulators have significant, independent authority, and particular regulators can usually move forward even in the face of congressional opposition,” Klein said.

Klein said he expected the election’s impact on fintech regulation to be minimal.

“Perhaps the biggest change would be if the Republicans took the Senate and slowed down the nomination process for new appointees,” Klein said.

Nicole Valentine, fintech director for the Center for Financial Markets at the Milken Institute, said she expects some momentum in legislation and hearings in the next term.

“The US is a market leader and it would be great to see their continued leadership in this era of fintech and crypto,” Valentine said.

2022 CQ-Roll Call, Inc.

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