On December 19, 2018, the Financial Stability Oversight Council (the “FSOC”) released its 2018 Annual Report (the “Report”). The FSOC was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act to identify and mitigate risks to the financial stability of the United States.
Among other issues, the Report identifies recent developments in financial innovation. The Report’s choice of topics—including its assessment of the benefits and risks associated with recent developments in financial innovation—is a timely barometer of U.S. regulatory policy toward Fintechs and financial innovation.
The Report’s message is generally consistent with the earlier U.S. Treasury Department Report entitled “A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation”. The FSOC’s Report affirms that financial innovation, particularly in the form of technology-enabled products and services, can benefit firms, households, and financial institutions in numerous ways, including potentially reducing the cost of financial services, increasing the convenience of payments, and potentially increasing the availability of credit. However, the Report also emphasizes that financial innovations can create new risks.
Specifically, the Report:
recommends that financial regulators remain vigilant in identifying new products and services in order to evaluate how they are used and can be misused; monitor how they affect consumers, regulated entities, and financial markets; and coordinate regulatory approaches;
encourages regulators to evaluate the potential effects of new financial products and services on financial stability, and to share relevant information on financial innovations with the FSOC and member agencies to provide visibility into innovations and developments across the financial system;
encourages regulators to consider appropriate approaches to regulation to reduce regulatory fragmentation while supporting the benefits of innovation; and
recommends that FSOC member agencies develop and employ robust and consistent standards of cybersecurity monitoring and examination of financial markets, institutions, and infrastructures, and encourages continued partnership across government agencies and private firms to enhance financial sector capabilities to mitigate vulnerabilities and maintain a strong cybersecurity posture.
Other topics discussed in the Report include peer-to-peer payments, marketplace lending, the role of large technology firms in financial services, and the reliance of financial institutions on third-party service providers.
Finally, the Report discusses, in some detail, digital assets such as Bitcoin and its underlying distributed ledger technology. It devotes an entire Box to the activities of FSOC’s Digital Assets Working Group due to the growth in digital assets. Highlighting this topic in a “Box” indicates to readers that a significant amount of discussion was devoted to this topic by FSOC’s Digital Assets Working Group. Formed in 2017, the working group examines financial institutions’ exposure to digital assets, potential related cybersecurity and operational risks, illicit activity, and international coordination in the digital assets marketplace. Although the Report concludes that digital assets do not currently appear to present a threat to financial stability, the FSOC continues to monitor potential risks arising from their use.