Fintech’s Washington fortunes threatened by scandals

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This was supposed to be fintech’s big year in Washington.

Crypto firms and other financial technology start-ups had gathered armies of lobbyists and were poised to be at the top of finreg legislation’s agenda. Friendly lawmakers and agency officials prepared guidelines to give the companies a bipartisan regulatory boost.

The series of scandals that emerged in late 2022 derailed this momentum, putting the once-progressive challengers to traditional banks on the defensive. Here’s how it shakes out.

— The crypto meltdown continues — Americans are getting bad news every day about the integrity of the cryptocurrency industry, with leaders now openly accusing each other of wrongdoing after the FTX fraud scandal and market crash. Some lawmakers who bought into crypto’s potential are beginning to voice mea culpas. Long-term skeptics are brave.

Just look at what could be the biggest US business story on Tuesday: FTX founder Sam Bankman-Fried’s expected not guilty plea to sweeping criminal charges. Expect more damning revelations as the government makes its case against Bankman-Fried and other FTX and Alameda Research executives who were once the digital currency’s leading ambassadors in Washington.

Other crypto dominoes are falling. Federal prosecutors revealed over the holiday that bankrupt digital asset lender Voyager Digital may be the focus of a CFIUS review — an interagency process designed to scrutinize foreign investment in U.S. companies. Why does it matter? Binance.US – the domestic affiliate of the huge international crypto exchange Binance – is making a bid to buy Voyager. It underscores how Binance is prepared for greater Washington scrutiny for a variety of reasons.

While companies rarely comment on the secretive CFIUS process, Binance.US — in a potential indicator of the political pressure it faces — wasted no time in issuing a statement saying it “looks forward to working with the committee and building trust to the business.”

— Clouds of fraud hang over fintech lenders – Fintech lenders gained major influence in Washington by pushing out billions of dollars in government-backed small business bailout loans during the Covid-19 pandemic. The SBA in 2022 moved to allow fintechs to take on a larger role in its flagship non-emergency lending program. But those firms are facing new investigations and political backlash after the House coronavirus subcommittee in December outlined how a number of the companies exposed the Paycheck Protection program to fraud.

— Progressives and banks team up — A major political development to be seen in 2023 is the growing cooperation between former enemies who now see fintech as a common enemy. Frequent bank bashers like Sens. Sherrod Brown and Elizabeth Warren finds itself aligned with traditional lenders in derailing fintech lobbying campaigns. An example of this is the lame-duck bill Brown introduced—backed by banking trade and consumer groups—that would make it more difficult for tech companies to compete with banks through industrial loan company charters.

— Regulators are under pressure — Although all this casts a pall over fintech on Capitol Hill, it means even more importantly that Biden appointees to key regulatory agencies have a new mandate to crack down. In a November report, the Treasury called for greater oversight of fintechs in the consumer space. SEC Chairman Gary Gensler has spent his term warning about the dangers of crypto and will now be expected to do something about it — especially when it comes to the big exchanges that he says are skirting securities laws. CFPB Director Rohit Chopra, a Warren ally, has a make-or-break piece of fintech-related policy at the top of his agenda — banking data sharing standards. The SBA has also begun to take, at least publicly, a more skeptical tone toward fintech lenders in the wake of the House fraud investigation.

— Elon Musk is a wildcard — Musk has indicated that he wants to expand Twitter’s offer of financial services. A big move by the social media giant — as Meta learned the hard way with Libra — could trigger a backlash.

welcome back – Thank you for coming back to MM after our short break. What’s on your Washington to-do list in 2023? Call us at [email protected] and [email protected].

Running the week … House Republicans will decide Tuesday whether to make Rep. Kevin McCarthy the next House speaker … GOP committee leaders will be able to reveal subcommittee structures and chairmen after the speaker vote … Japan’s Economy, Trade and Industry Minister Yasutoshi Nishimura speaks on CSIS Thursday at 12:00 p.m. … December unemployment numbers are out Friday at 8:30 a.m. .. Officials from the Treasury Department, the Fed and other agencies are speaking at the American Bar Association’s Banking Law Committee’s annual meeting Friday and Saturday …

New congressional preparation: Wall Street’s lobbying dilemma — Set aside whether McCarthy has the support he needs to become speaker. The incoming Republican majority is already making life difficult for corporate lobbyists.

Your MM host reported how the world’s biggest asset managers — mainly BlackRock, State Street and Vanguard — find themselves politically isolated as GOP lawmakers plan to beat them to advancing environmental and social investment causes.

They don’t get coverage from major business groups whose members are divided on the issue, and they have no Republican allies, according to nearly a dozen industry representatives, lawmakers and climate advocates. The U.S. Chamber of Commerce, which has been outing Republicans in the Biden era, is among the groups caught in the middle.

MM economic summary: The outlook for 2023

— More than two-thirds of economists at 23 major financial institutions that trade with the Fed predict the US will have a recession in 2023. They cite Americans draining pandemic savings, a falling housing market and tightening lending standards.

– China ended 2022 in a major economic downturn as business and consumer spending plummeted. A Covid wave will hold back a recovery in the first months of this year.

— Britain is facing one of the worst recessions in the G7, according to economists.

— State leaders who oversee some of the nation’s largest pension systems are bracing for a hit, threatening the political ambitions of Democrats including California Gov. Gavin Newsom and New Jersey Gov. Phil Murphy.

— Higher-income professionals have felt the brunt of layoffs in the U.S. so far, but lower-income workers could quickly feel the pain if a recession hits, as many economists predict.

Biden’s next economic challenge — NYT: “An important test Mr. Biden faces is making all his new economic laws work as intended. Much of his economic legacy will depend on how effectively his administration allocates the trillions of dollars in spending and tax incentives contained in the economic bills that Mr. Biden signed into law during his first two years in office.”

— As Director of the National Economic Council Brian Deese told MM last month, “Making good of the policy tailwinds that we’ve now enacted but haven’t entered the system is going to be a big, important priority starting Jan. 1.”

Crypto crash triggers leadership feud — WSJ: “Tensions between crypto tycoons Cameron Winklevoss and Barry Silbert erupted into an open spat on Twitter at the start of the new year, with Mr. Winklevoss accusing Mr. Silbert of ‘bad faith stall tactics’ that hurt the rank and file customers.

“Monday’s back-and-forth deals another blow to a sector struggling for credibility, especially since the collapse of FTX and its associated trading firm, Alameda Research. The fall of the two companies led to outflows from other crypto exchanges and nearly wiped out the value of coins linked to FTX and Alameda, domino effects in a closely related industry.”

David Marcus sees two more years of crypto winter — David Marcus, who once headed PayPal and led Meta’s foray into digital currency, says it will take the digital asset market a couple of years to recover from “the abuse of unscrupulous players, and for responsible regulation to come through.” Marcus is the CEO of the Bitcoin-focused company Lightspark.

“Consumer confidence will also take a few years to rebuild, but ultimately I believe this will prove to be a beneficial reset for legitimate industry players in the long term.”

The outlook for finnreg for 2023 — Cravath, Swaine & Moore: “U.S. banking policymakers have a packed agenda in 2023, in part because of a backlog of issues that require attention, and in part because the market continues to present policy issues that require attention.”

Credit union regulator warns of looming risks — National Credit Union Administration Chairman Todd Harper in a Q&A with MM and POLITICO’s Victoria Guida: “We’re looking at interest rate risk. We also look at liquidity risk. We look at cyber security risks. We are still vigilant in all these areas.”

Biden antitrust aide resigns – NEW: “Tim Wu, a key architect behind President Biden’s efforts to clip the wings of the nation’s largest companies, is leaving the White House. Mr. Wu’s last day at the National Economic Council will be Wednesday, ending his 22-month tenure as special assistant to the president for competition and technology policy, the White House said.

Japan will offer families ¥1 million per child to leave Tokyo – FT: “Japan plans to soften the financial incentive for parents who choose to move out of Tokyo as the government tries to reverse decades of demographic decline, economic migration and the lure of the world’s biggest metropolis.”

Tesla is facing a demand problem – Bloomberg: “Tesla Inc. delivered fewer vehicles than analysts expected last quarter, missing estimates despite taking the unusual step of offering hefty incentives in its two biggest markets.”