Congressman Patrick McHenry, or ‘Mr. Fintech’ to his peers in the House, is announcing the reintroduction of the Financial Services Innovation Act, a bill that would create what he calls “permanent beta testing,” or many jurisdictions call “regulatory sandboxes,” in which entrepreneurs can apply for regulatory approval to conduct innovative experiments. The bill is intended to get regulators into a position where their default leans more toward yes than no. He describes how this would affect teams that want to conduct ICOs, how it would square with the phenomenon of some token teams trying to raise through Reg A+, and whether it would allow exchanges without BitLicenses to operate in New York. He also discusses what type of digital currency he believes is best suited to compete against a Chinese digital yuan, and says the government is currently looking into whether or not the Federal Reserve has the authority to issue a digital dollar.
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Episode links:
Congressman McHenry: https://mchenry.house.gov/
On Twitter: https://twitter.com/
The House Libra hearings from July 2019: https://www.youtube.com/watch?
Financial Services Innovation Act explainer: https://www.alta.org/file.cfm?
Introduction of the bill in 2016: https://www.wsj.com/articles/
Congressman McHenry’s interest in fintech: https://www.politico.com/
CNBC article on how Libra is being slowed by regulation while China’s central bank digital currency speeds ahead: https://www.cnbc.com/2019/10/
Fortune article: https://fortune.com/2019/10/
Transcript:
Laura Shin:
Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I’m your host, Laura Shin.
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Laura Shin:
My guest today is Congressman Patrick McHenry the ranking member of the House Financial Services Committee. Welcome, Congressman McHenry.
Patrick McHenry:
Well, thank you. Thanks for having me on Laura.
Laura Shin:
One quick note before we begin. There are votes in the House today and so Congressman McHenry may be called away a bit abruptly, which we might all hear with a buzzer. Hopefully, that won’t happen but I wanted to give you all a heads-up just in case. Congressman McHenry, you’re well known in the crypto community for your support of the crypto and blockchain space. You’ve called big client “An unstoppable force” in last summer’s hearings on Libra. You’re also known as the House’s Mr. Fintech. And you have some news that you are announcing today the day that my podcast is being released, but before we get into all that I actually just want to ask you first how did you hear about and become interested in Bitcoin and crypto?
Patrick McHenry:
Well look I’m interested in the world of payments and I think for many the crypto space is a fascinating area of technology moving much faster than what the regulated have been able to do. And so I saw this early on in Bitcoin first with a whitepaper and trying to understand what this meant and then the ramp up in value of Bitcoin and then other cryptocurrencies trying to emulate what Satoshi brought to the world. And so I’ve been fascinated by it and watched from a distance and tried to make sense of what the right governmental response was. And my conclusion was any action by government, really up until the last two or three years, any action by the government would be negative, would impair innovation and would restrict the development of cryptocurrencies and their enormous value now and in the future.
And so it was far better to have folks slowly be informed on Capitol Hill rather than rush to go kill an idea or try to kill an idea. Now, we’re at a different phase when it comes to cryptocurrencies and we need to have smarter regulations so that you can have money brought to bear, legitimate long-term investors brought to bear for these new innovations that are taking place. So we need to have some certainly of a CFTC and out of the Securities and Exchange Commission here in Washington, DC, as well as a better understanding from Treasury and the IRS about taxing authority. So I think there’s real government work that still needs to be done.
Laura Shin:
And so that’s actually a perfect segue to your news today you are reintroducing the Financial Services Innovation Act. What does this bill do and what problem are you trying to solve with it?
Patrick McHenry:
Well, the bill states that we need to have financial service innovation offices within every office of the government that deals with financial service issues. And there are 10 of them, actually, from the Federal Reserve and the CFPB to the Treasury Department to the FDIC and all the other banking regulators we know of as well as the Securities and Exchange Commission. What this bill is about is ensuring that our regulators are innovation forward, innovation permissioned and situated to say yes rather than a default no. I want the default to be yes to innovation, not the current default of no. And so this would allow agencies to provide space for new innovations in the marketplace.
In Great Britain they call it sandboxes, what I think of for us in the United States is permanent beta testing. We should allow data to be collected and for us to meet societal goals. And the way this act allows for that is by those innovators should go to these offices and get an enforcement compliance agreement that if accepted would allow them to provide innovative products or services under an alternative compliance plan, which would provide waivers or modifications to current regulations that are out of date or unduly burdensome. And I think this is a necessary step towards creating a regulatory process that works with financial innovation rather than against it.
Laura Shin:
And in the announcement you actually specifically call out that the bill could have an impact on the blockchain and crypto space and you mentioned that the bill would give the SEC and the CFTC a more formalized process to collaborate with innovators and provide them with regulatory certainty. You probably are aware that a lot of crypto teams in particular have been complaining or I don’t know if complaining is the right word, but criticizing the SEC. And so I was just curious to know how would this affect, for instance, a team that wanted to issue a coin through what, you know, used to be called an initial coin offering?
Patrick McHenry:
Well, I think this would drive this process forward in a more aggressive way. And I think it is of particular value to the blockchain cryptocurrency space because we’re going to have new products that are going to be layered on top of this technology in this new form of decentralized distributed ledgers. And what this will enable is these teams should go to the regulators and get a space to operate in, provide data back to the regulators and say you know here’s what’s working and here’s how we’re meeting these societal goals that are stated in law, but we’re doing it in a different way.
And so, you know, we still have regulations on the books that are driven about the innovations of the ‘30s and ‘40s, which is using a telephone or telegraph to get information provided more quickly. We’ve got to update those things and we have to force the regulators to update these things in a changing environment, because it’s not really just about the United States anymore it’s about global competition for this innovation. So when I think of this Financial Services Innovation Act I think of the cryptocurrency space as being a great beneficiary of it and changing the mindset of these regulators to be permissioned to go in and want to be yes rather than desire to be no.
Laura Shin:
And so in recent months, I guess, because you know a lot of these different teams that want to build cryptonetworks have been worried about action from the SEC, the new trend, or trend isn’t the word because this is so onerous very few people are doing it, but at least one of the teams or a couple of the teams have gone the Reg A+ route of trying to fundraise.
Patrick McHenry:
Right at Blockstack, right?
Laura Shin:
Yeah and I think YouNow is another. So how would these innovation, what did you call them the ECA’s basically the enforcement compliance agreements as you called them in the bill, how would that work with something like these JOBS Act options that people are pursuing?
Patrick McHenry:
Well, this act would enable the CFTC and SEC to work together on a framework. On a frame and then get information back on how the capital raise went and how the conversion from that capital raise into the technology into a coin. And the nature of that conversion and get data back. Right now we have these regulators making decisions without real data and I think that’s quite unfortunate.
Laura Shin:
So what you’re saying is like it would enable these teams to do a fundraise without having to go through the exact Reg A process, but maybe it wouldn’t look like the initial coin offerings of 2017. Is it somewhere like in the middle? Is that what this would look like?
Patrick McHenry:
Well, they would be able to petition to the SEC, get an understanding and then do the raise. And so what this would do is give the SEC the capacity to give new forms of capital raise opportunities. So what I’m saying is something new could be invented that isn’t, you know, Reg A+ or a Reg A offering was not designed for initial coin offerings and initial coin offerings weren’t designed to meet Reg A rules. So you basically had to engineer initial coin offerings into this weird box of a rule that was not contemplated for the technology or much less this type of technology.
Laura Shin:
Right. Right. That makes sense. And one other thing I was curious about is would this apply in any way to the crypto projects that did have initial coin offerings in 2017 or is it not retroactive so any SEC enforcement actions could still happen against those?
Patrick McHenry:
Sure. It doesn’t preclude SEC enforcement action on a going forward basis or a look back basis we don’t deal with that. What we do is create a new permissioned system that didn’t exist, that hasn’t existed in the United States before.
Laura Shin:
And so your bill, you know as you mentioned, would essentially create these different regulatory sandboxes. And I was just wondering why did you structure it so that each of these agencies has its own financial services innovation office rather than one single sandbox that’s overseen by one of the departments like, say, the Commerce Department?
Patrick McHenry:
Well, the reason why I went with each one of these regulators is because they do very specific things. So if you’re talking about the Commodity Futures Trading Commission they’re dealing with commodities whereas the Securities and Exchange Commission is dealing with securities, sort of a basic differential. And the Office of the Comptroller of Currency deals with national bank charters. So we wanted to use that regulatory expertise within these agencies for their specific rules and regulations that they enforce and get them to open these new offices for financial innovation. A few of them have done offices of financial innovation, but none of them have the force of law necessary to provide flexibility and regulation and what we’re doing is changing that mindset.
The issue here in the United States is that we have a very complicated regulatory regime when it comes to financial products. We have things that are regulated at the state level, not at the federal level. Other things that are regulated at the federal level and not at the state level. Then once you get to the federal level somebody could be a bank and be regulated by one regulator or be another bank and be regulated by two or three regulators, and if you’re a public company you have a whole separate set of regulation. So what we’ve tried to do is not get into that bigger battle about having a streamlined regulatory approach for financial products that is a bigger fight than I think what we’re trying to achieve with this. What we want is financial innovation for all of these regulators to be at the forefront of what they do rather than some backwater and we want them to be positioned to say yes not their default no.
Laura Shin:
And you may not know these details, but I just wanted to ask these questions in case you do. What does it look like for somebody to apply for one of these so-called enforceable compliance agreements? And you know when you obtain one what does that allow you to do? Does it cost anything to apply for one? How long does it take to get the approval? Like, just walk through the process.
Patrick McHenry:
Well, we want the approval process to be pretty fast, but we’re still working through the details of how that would happen. In terms of the cost, it would be a minimal cost to do this. But the goal here, so what you would in essence do whether or not you’re a large or a small entity you could approach the regulator with your particular jurisdiction, approach them and say we seek to do X, however you have a regulation on your books that says that we cannot do X because we’re using a piece of technology that we can’t have somebody sign a physical piece of paper.
We’d like them to be able to take a picture of their signature rather than fax us something, which is your current regulation. That would be just one small example of using technology, not in a groundbreaking way, in a very simple basic way. And then you get permission through these enforcement compliance agreements to do that trial for that period of time with those new restrictions on how you’d use the product and the data sharing back to the regulators, so that they can fix…there we have the bells for votes.
Laura Shin:
Okay.
Patrick McHenry:
And for your listeners bells here on Capitol Hill sound like buzzers, but that means that the House is voting now. But the approach here is to get a modification to current regulation or a waiver of current regulation in order to have a new product. That’s what we’re trying to get and so you can think of it this way. I said beta testing at the opening to explain this, but the idea of beta testing means that you’re not locked in for what this is. You think it might work and the experience may be that it absolutely doesn’t work or you want to take it to scale. And so what we’re trying to do is get the regulators to think of this as beta testing, to think of this as a small change to see how it works. And if it works then you go forward at scale and if it doesn’t work then you stop it. And that’s what we’re trying to work through.
Laura Shin:
And if I’m an exchange that doesn’t currently have a BitLicense could I use one of these compliance agreements to serve New York customers?
Patrick McHenry:
Potentially. Potentially, that still has to be worked out and the way that this act will be utilized is really broad and quite open, not just for cryptocurrency, but for financial technology at large.
Laura Shin:
And you first tried to introduce this bill in 2016 do you have any sense of what the chances are that it will be passed now?
Patrick McHenry:
Well, we’re still working through that it’s very early. We have interest from a number of senators on the Republican and Democratic side of the aisle to team up with us on this and we do have a group of folks among Republicans and Democrats in the House that want to have clarity for cryptocurrencies. And a wider group that perhaps is inclined around blockchain and that’s just a general inclination because they don’t quite understand cryptocurrency and are not willing to dive more deeply in. And so there is a bipartisan group that is interested in this type of legislating around financial innovation, so we’re hopeful that we can get something done in this Congress.
Laura Shin:
In a moment we’ll discuss Libra, but first a quick word from the sponsors who make this show possible.
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Laura Shin:
Back to my conversation with Congressman McHenry. Let’s switch to central bank digital currency and Libra. The People’s Bank of China is going to be releasing its own digital currency and there was a note that some RBC analysts published where they said, “If US regulators ultimately dismiss Libra and decide not to draft regulation to encourage crypto innovation in the US, China’s central bank digital currency may be strategically positioned to become the de facto global digital currency in emerging economies, largely through Alipay, WeChat, UnionPay and other messaging and payment apps.” What do you think would be best positioned to compete with the Chinese central bank digital currency? A US central bank digital currency or an app-based one such as Libra or Telegram’s cryptocurrency or a completely decentralized one such as Bitcoin or something else?
Patrick McHenry:
Well, look let me start by saying this. I think Libra has opened a lot of new people’s eyes about the value of cryptocurrency. Libra is not cryptocurrency, however, and we need to stop lumping it together with very real, very important projects that are out there like Bitcoin. And that’s not to bash Facebook or the Libra project, but the distinction between a wholly new financial invention like Bitcoin. I think that has enormous long-term value, enormous long-term value. And like many things Bitcoin is at such a very early stage relative to the rest of human invention and so how Bitcoin will be used we don’t know. In 20 years what Bitcoin looks like I don’t have the capacity to predict, but I do think it will be of enormous value and utility.
When it comes to the question of a digitized US dollar I think that is a reasonable next step for our central bank. Your interview with the Federal Reserve’s chief economist was quite instructive because it exposes the fact to the public that the Federal Reserve is contemplating and is trying to understand digital currency and their appropriate role as a dollar is a store of value and international trade. So I think there’s enormous value there. I think as an American I would like to have a response to Alipay. We should not allow the Chinese to write the rules of the road of international finance and we therefore have to have a more competitive mindset about ensuring that there is international commerce using a system that is not Chinese-based.
Laura Shin:
So when you say that we should have some kind of response what do you think would be best? A US central bank digital currency or something that is already tied to an app like Libra or like Bitcoin, you know, something completely different? Those aren’t the only choices.
Patrick McHenry:
Right. I mean, I think what you’re talking about they’re very different things. I think when you’re talking about a truly decentralized long-term store of value and a belief in the system, not a belief in a government or governmental entities. I think true crypto currency has enormous value separate and aside from this conversation. But as an American I would say, and as an American policymaker, I think the US dollar and the Federal Reserve having basically a digital asset version of the US dollar is of enormous value for global trade and the safety of that global trade. So I think that has huge value. I also think that there is value in American companies creating these innovations, whether it’s a truly decentralized asset and capacity of trade like Bitcoin or something of that sort or something that is more traditional in nature, which is sort of a different derivation of PayPal, whether it be sort of the Chinese version, which is Alipay or some new creation like Libra.
Laura Shin:
So from what you said is it correct to assume that you would then kind of encourage the launch of Libra, but also maybe be supportive of a US central bank digital currency?
Patrick McHenry:
Absolutely.
Laura Shin:
Are you in a position to like introduce legislation to get that going you know a US digital dollar?
Patrick McHenry:
We’re looking into whether or not the Federal Reserve has the legal capacity currently to issue a digital currency and until we’re able to come to a serious conclusion there or a proper understanding I’m not going to file legislation. If they do not currently have the legal authority I will support legislation that gives the Federal Reserve that capacity.
Laura Shin:
And how quickly do you think all that would take? Because as far as I understand, I think, the Chinese digital currency is going to be released in the next few months.
Patrick McHenry:
I don’t know the timeframe, but we have to change our mindset here. The American government, my government has had the view that we don’t have to compete for things that are governmental. Meaning, the value of our currency, our regulatory regime we think that you know since we’re a dominant economy on the globe, a large economy on the globe that we can write the rules for the rest of world. We have to change our mindset we have to be aware that we have to compete against other regimes around the globe and we have to compete with private sector innovation. And so I think there’s huge value in us changing the mindset from the Federal Reserve and financial regulators so that we have a competitive mindset rather than a reactionary one.
Laura Shin:
And do we have time for one quick question before, I think, you have to run in a moment?
Patrick McHenry:
Sure.
Laura Shin:
Okay. So I was just wondering, I mean, you seem to be quite forward thinking about all of these issues and to really have your finger on the pulse. But I was wondering if you could describe the overall either attitude toward and / or like level of education about these issues amongst your fellow congressmen and congresswomen.
Patrick McHenry:
We have folks that have spent time to deeply study cryptocurrency, for instance. And we have a bipartisan group that have sponsored a bill written by a colleague of mine Warren Davidson of Ohio called the Token Taxonomy Act, which defines digital currencies and the conversion point from when you do an ICO to what becomes a new object in the world, which is that coin offering. Which is wholly different in most respects from previous creations by securities regulation. There is a bipartisan group that understands cryptocurrency. It’s not a big group. I would say relative to the size of the House and Senate it’s a very, very small group, but really informed and quite inclined towards cryptocurrency and this innovation. That’s positive.
We have a larger group that is distrustful of technology and I think that is problematic, but since the beginning of time since it being an innovation, you know, Luddites have existed. I mean, quite frankly, the word Luddite comes from innovation and textile manufacturing and the belief that, that innovation would’ve destroyed jobs. It did not destroy jobs. It created more jobs in the textile industry, though they were scared of the innovation at the time, so we need to make sure that we have more folks that are informed. And so for your listeners it is really important they engage in Washington, because we need smart policymakers when it comes to cryptocurrency, we need smart governmental leaders and we need regulators that are informed so that we can lead the world and not be a backwater to the world when it comes to cryptocurrencies.
Laura Shin:
Okay, great. Well, where can people learn more about you and this bill?
Patrick McHenry:
My website, which is mchenry.house.gov. And I’m on Twitter, Facebook and you know all the other interactions you can possibly have online. It’s easy to find me on Twitter for sure and that’s the best engagement. I’ve learned a great deal off of Twitter. It’s not all a dumpster fire and around innovation it’s some of the best information I’m able to glean from the world, so Twitter would be a great spot to get me.
Laura Shin:
Okay, perfect. I will link to your Twitter page in the show notes. Well, thank you so much.
Patrick McHenry:
Thank you, Laura. And thanks for what you’re doing to make sure the world is a better place and better understands the value and the change that is occurring. And you’ve engaged so well with every aspect around cryptocurrencies from the real innovators to the distrustful regulators and everywhere in between. So I’m grateful for the information that you’re able to glean and share and glad to be a listener.
Laura Shin:
Thank you. Thanks for listening and I hope to have you back on the show.
Patrick McHenry:
Thank you, Laura.
Laura Shin:
Thanks so much for joining us today. To learn more about Congressman McHenry checkout the show notes inside your podcast player. If you’re not yet subscribed to my other podcast Unconfirmed, which is shorter, a bit newsier and now features a short news recap be sure to check that out. Also, find out what I think are the top crypto stories each week by signing up for email newsletter at unchainedpodcast.com. Unchained is produced by me, Laura Shin, with help from Fractal Recording, Anthony Yoon, Daniel Ness and Josh Durham. Thanks for listening.
