Digital Currency: Regulatory Perspective from IDFPR
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The document outlines Illinois' regulatory perspective on digital currency, highlighting the state's financial innovation initiative and the importance of fintech in Chicago. It emphasizes the need for collaboration among regulators and innovators to facilitate a regulatory framework that promotes innovation while ensuring consumer protection. The document suggests a light-touch regulatory approach, focusing on ongoing assessment and guidance to adapt to the evolving landscape of digital currencies.
Digital Currency: Regulatory Perspective from IDFPR
- 1. Digital Currency: A Regulatory Perspective Banking Digital Currency Seminar Cab Morris | 5 June 2017 Illinois Department of Financial and Professional Regulation 1
- 2. Overview of IDFPR Fintech, Financial Services and Blockchain in Illinois IDFPR’s Financial Innovation Initiative Digital Currency: Regulatory Perspective & Approach III II I IV Agenda
- 3. IDFPR’s Reach at a Glance Mortgage & Residential Lending 1,231 13,900 Loan Originators Consumer Lending & Money Services 1,140794 Money Services Firms Mortgage Firms Consumer Lenders State-Chartered Depositories 395 $275 B Total Assets State-Chartered Credit Unions $36.2 B210 Total Assets IL Chartered IL Chartered
- 4. Chicago: An Emerging Fintech Hub #5 Global Fintech Hub Financial Services Epicenter Chicago acts as the epicenter of all FinTech activity in the Midwest, representing well over 20,000 financial institutions . Deep Workforce Chicago is home to over two fifths of the top business universities in the US and has a deep financial engineering talent pipeline. Strong Talent Pool Over 6% of the Chicago workforce are focused on the financial ecosystem contributing to its talent pool. 20K 2/5 - Deloitte “CHICAGO’S STARTUP SCENE IS ON FIRE.” – FORBES 6% 3
- 5. Illinois Blockchain Initiative Illinois Department of Commerce and Economic Opportunity Illinois Department of Innovation and Technology Illinois Department of Financial and Professional Regulation Illinois Pollution Control Board Illinois Department of Insurance Cook County Recorder of Deeds
- 6. IDFPR’s Financial Innovation Initiative
- 7. Financial Innovation Principles Early Engagement Financial regulators should participate directly in proofs of concept to advance regulatory understanding of technological innovation and determine how new innovations may help regulators do their jobs more efficiently and effectively. Risk-based Analysis Financial regulators should work closely with innovators to determine how rules and regulations could be adapted to enable 21st century technologies and business models focusing on tangible systemic or consumer protections risks vs. potential for risk. Collaborate Globally Financial regulators should provide a dedicated resources to analyze best practices across the various state, federal and foreign regulatory bodies and regimes across domestic and international jurisdictions. Global collaboration only strengthens markets. Experimentation Financial regulators should foster an environment that spurs innovation similar to the UK Financial Conduct Authority’s (FCA) sandbox, where collaboration with regulators where innovators have appropriate room to develop and test innovative solutions without fear of enforcement action and regulatory fines.
- 8. Our Approach Engagement & Assistance Education & Training Modernizing Regulation Improving staff’s awareness and understanding of emerging products/trends, ensuring access to training resources, programming via a variety of delivery channels. Look to those innovating in the field as the primary resource for these education and awareness training efforts. Outreach and engagement will be a key component in efforts to encourage and support innovation. It will be essential to foster consistent communication between regulators, fintechs, and established FS institutions to ensure innovative products are quickly brought to market in a consultative manner. In order to achieve policy goals, it will be essential to understand modern regulatory approaches/tools and how they can be implemented. As regulators this ensures we design guidance that is practical to implement, but also allows us to have agility much like the innovators in the space.
- 9. Initiative Plan of Action Office Hours Program RegHub Portal Technology Advisory Board Staffing a Financial Technology Advisory Committee advising IDFPR on technology developments in the financial services space as well as the unique licensing and regulatory compliance challenges both depository and non-depository innovators face. Implementing RegTech Developing “RegHub”, a dedicated portal on our website that provides early-stage innovators plain-language resources needed to effectively navigate compliance and regulatory obligations in Illinois as well for the broader state regulatory system. Regularly scheduled office hours at local fintech and innovation incubators to provide informal assistance to fintech companies looking to enter the market and licensed businesses looking to bring a new product to market. Explore ways “RegTech” can reduce the burden of compliance while also allow improving the Department’s capacity to identify and mitigate market and consumer risks. Expand our participation in blockchain and distributed ledger technology consortiums.
- 10. Illinois’ Regulatory Approach What is the best way to balance consumer choice, competitive markets and innovation?
- 11. Digital Currency: Policy Framework What are the use cases, who are the users and what is the market penetration? As state financial services regulators, we touch a wide variety of lending, depository and payments products, but not all. Unlike the UK, we have to know what products are directly relevant to us vs. our federal counterparts. What falls under our jurisdiction (does any)? A crucial and often overlooked step in making an informed policy decision regarding an emerging is understanding what the technology is, how it works and how it is used. As digital currencies grow in popularity, how do we balance a low-touch framework with the regulatory clarity required for businesses operating in this space? What are the risks? What are the benefits?
- 12. Overview When it comes to digital currency regulatory questions, as a state, there are two primary areas of consideration: financial surveillance consideration for banks and credit unions involved in the space and digital currency considerations for consumer protection (money transmission regulation). Does consumer protection regulation add value to Illinois-based digital currency users or is it still premature? How do we balance open innovation while clearly articulating the risks and benefits. How do digital currencies fit into our current money transmission framework? Although this primarily a function of federal regulators, as a state, we can engage the banking and digital currency side to promote a culture of best practices. Articulating our Goals: Consumer Protection: (Money Transmission Regulation) Financial Surveillance (AML/KYC): (Depository Regulation)
- 13. Digital Currency Use Cases Speculative Digital Asset/Investment Medium of Exchange Payment Rail Non-monetary Use cases Analyzing the Use Case: Although Bitcoin was initially conceived by Satoshi Nakamoto as “a purely peer-to-peer version of electronic cash (that) would allow online payments to be sent directly from one party to another without going through a financial institution.” 1 Even in its early days, it has actually proven to be a much more dynamic asset than its intended initial use as an electronic cash system:
- 14. Market Penetration (Bitcoin): Estimated User Base: (Global) 2.8 to 5.9 million2 Primary Uses: ~ 54% of users use it as an investment2 Market Capitalization $43 billion USD Daily Transactional Volume ~$320k on-chain* transactions 1. Hileman, Dr Garrick, and Michel Rauchs. "2017 Global Cryptocurrency Benchmarking Study." (2017). 2. Burniske, C., and A. White. "Bitcoin: ringing the bell for a new asset class." (2016).
- 15. Our Regulatory Framework Given our analysis, we settled on a light-touch approach A relatively small user base Digital currencies are still only used by a relatively small and highly informed consumer base. As they become more available and accessible to mainstream retail consumers, the area will need to be continuously assessed/monitored. At this point in time, state regulatory intervention adds more risk than value. Continuous collaboration Although it is still early for digital currencies and Blockchain, we believe they represent a truly innovative way to transfer value digitally. We are committed to ensuring that Illinois is a place where businesses operating in this space can thrive and feel comfortable innovating. A self-correcting market Digital currencies even early in their inception have not been immune to consumer protection concerns (i.e. Mt. Gox). In response to many of these high-profile events, crypto-markets have responded by building very strong consumer protection tools (i.e. multi-sig, n-lock etc.). Definitive guidance Although digital currencies still have a relatively small user-base, a say nothing approach creates uncertainty for innovators operating in Illinois. IDFPR’s digital currency guidance attempts to address this uncertainty by clearly delineating activities that constitute “money transmission”. 1. Nakamoto, Satoshi. "Bitcoin: A peer-to-peer electronic cash system." (2008)
- 16. Financial Surveillance Industry Concerns A recent study on the cryptocurrency industry by the Cambridge Center for Alternative Finance indicated sustainable banking relationships were one of the most consistent pain points for all industry participants, including exchanges and payment service providers: “The biggest challenge for nearly all cryptocurrency payment service providers constitutes the difficulty of obtaining and maintaining relationships with banking institutions and money transfer operators (MTOs). Only companies that provide money transfer services (as defined by the taxonomy introduced before) indicate that the high cost of regulatory compliance poses the biggest challenge to their operations.” 1 1. Hileman, Dr Garrick, and Michel Rauchs. "2017 Global Cryptocurrency Benchmarking Study." (2017).
- 17. Banking Digital Currency Businesses Our Capacity to Catalyze Change: As state financial services regulators we do not have explicit capability to implement policies or rules that will mitigate issues plaguing MSB and digital currency businesses. Systemic “de-risking” is often cultural and does not benefit the broader financial services ecosystem. Given the wide variety of financial services entities we regulate, however, we do have the capacity to engage both our state-chartered banks, credit unions, MSBs and digital currency companies to work together to ensure commercial relationships are mutually beneficial for both parties. • Knowledge-sharing and development of standards/best practices • Increase dialogue between depositories, customers & regulators • Provide guidance and feedback when and where feasible
- 18. Contact Information Bryan Schneider, Secretary Department of Financial and Professional Regulation bryan.schneider@Illinois.gov Cab Morris, Deputy Director of Strategy and Operations Department of Financial and Professional Regulation richard.morris@Illinois.gov 7 Jennifer O’Rourke, Illinois Blockchain Business Liaison Department of Commerce & Economic Opportunity Jennifer.orourke@Illinois.gov