Today, Treasury released its long-awaited FinTech report entitled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation”. While the report provided only a very truncated discussion of distributed ledger technologies, blockchain, and digital assets, it discussed at length other key innovation and technology issues that are impacting the market for financial services. While DLT and digital assets appropriately garner many headlines, the innovative potential of new technologies for how financial services are accessed, delivered, bundled, analyzed, marketed, and regulated offers great opportunities as well as risks. The focus of the Treasury FinTech report on these fundamental issues no doubt will spur even more examination of our changing financial environment.

We will be providing further analyses of these issues in the coming days and weeks. These issues will benefit from an integrative analysis of market developments in light of the Treasury recommendations.

Perhaps the most immediate reaction to the Treasury FinTech report was to its recommendation that U.S. regulators examine how to update the regulatory options for providing financial services. Treasury somewhat surprisingly supported the development of “regulatory sandboxes” to spur innovation and examination of the best way to regulate FinTech innovations. Perhaps most significantly, Treasury recommended that the “OCC should move forward with thoughtful consideration of applications for special purpose national bank charters.” The report also suggested that states, as well as federal regulators, pursue innovative ways of allowing delivery of financial services and look to harmonize the current patchwork of state and federal laws.

Not surprisingly, this afternoon the OCC promptly seized on the recommendation to announce that it would begin to consider applications for special purpose national bank charters. Simultaneously, the OCC released a Policy Statement on eligibility for national bank charters focused on financial technology companies and a Comptroller’s licensing manual supplement on the standards for considering such charters. While both documents principally build on the OCC’s prior publications on how it would consider such applications, there are many important issues that will require further development and refinement in the context of specific applications. This process will be a critical test of the OCC’s development of standards that maintain strong safety and soundness requirements, while recognizing the different characteristics of many FinTech businesses.

Equally unsurprising is that state regulators are likely to renew their strong opposition to this proposed national special purpose bank charters. New York Department of Financial Services Superintendent Maria Vullo released a statement this afternoon decrying both the Treasury endorsement of “regulatory sandboxes” and the OCC announcement that it would begin to accept applications for special purpose national bank charters. It is fair to say that Superintendent Vullo’s statement was strongly worded, noting among other comments that “Toddlers play in sandboxes. Adults play by the rules.”

We will explore these issues as well in the coming days and weeks. The competition between federal and state charters and regulation is long-standing and will, it is obvious, continue. There is merit on both sides. A national, and indeed international, market for financial services – and particularly for new products, asset classes, and services that almost by definition move independent of national boundaries – will greatly benefit from more consistency in regulatory oversight. This will reduce costs, spur innovation, and allow for a freer interchange of those products, assets, and services. Equally importantly, states have in fact often been innovative in their regulatory approaches, which have been the precursors to new approaches on the federal and international level. There is a value for state regulation in many areas, including in consumer protection.

One of the key questions as we move forward in an era of more rapidly accelerating innovation in the financial services marketplace will be the evolution of state-federal competition. If the states are unable to work cooperatively to reduce unnecessary burdens, delays, and costs then the market may look increasingly to federal models. However, if the federal models are too constraining, costly, and unable to address the different characteristics of FinTech business models, then the states will continue to be a focus for regulation of this market. If the states work cooperatively, they may continue to provide innovative approaches that will be embraced by the marketplace. Stay tuned.