Bipartisan Policy Center
“Payments Policy in the 21st Century: The Promise of Innovation and the Challenge of Regulation”
Thursday, December 18, 2014
Key Topics & Takeaways
- New York BitLicense Framework: Benjamin Lawsky announced that the proposed BitLicense framework for regulating virtual currencies would be posted on his agency’s website and in the New York State Register for a new round of public comments in the coming days.
- TRIA: Lawsky stated that the failed extension of TRIA could lead to a “huge problem” if it continues to not be extended through January, adding that it “needs to be reauthorized.”
- Cybersecurity: Lawsky stated that “if we don’t do a lot more to start upping the game with cybersecurity, we’re going to regret it later.”
- Tokenization: Robert Hunter described a piloted tokenization program created by The Clearing House that would take consumer credentials out of the market and put behind bank firewalls.
- Faster Payment Systems: Hunter stated that while other countries have real-time payment systems due to their small number of banks, it would not be beneficial for U.S. banks to create a real-time payment system that only a few banks could use.
- Benjamin M. Lawsky, Superintendent, New York Department of Financial Services
- Cyrus Amir-Mokri, Partner, Skadden, Arps, Slate, Meagher & Flom LLP; Former Assistant Secretary for Financial Institutions, U.S. Department of Treasury
- James Chessen, Executive Vice President and Chief Economist, American Bankers Association
- Jeanne Hogarth, Vice President for Policy, Center for Financial Services Innovation
- Robert Hunter, Executive Managing Director and Deputy General Counsel, The Clearing House
- Aaron Klein, Director of the Financial Regulatory Reform Initiative, Bipartisan Policy Center
Benjamin M. Lawsky, Superintendent of the New York Department of Financial Services (DFS), in his keynote address, explained that the DFS announced a new proposed BitLicense framework for regulating virtual currencies after making several updates to the draft released earlier this year. He continued that the new framework would be posted on DFS’s website and in the New York State Register for a new round of public comments in the coming days.
Lawsky specified that the framework would only regulate financial intermediaries, as the DFS has no intention of monitoring software developments. He continued that the revised regulation will offer a two-year transitional BitLicense that can be issued to firms who are unable to satisfy the requirements of a full license and that this license will be tailored to individual startups and small businesses. A broader range of financial assets, including virtual currencies, will count toward the licensee’s capital requirements, he added.
Lawsky went on to discuss broader issues, trends, and challenges in payment technology, stating there are “significant concerns” that financial institutions and regulators are not keeping up with the expectations of consumers for fast and reliable digital transactions. Lawsky explained that virtual currencies could push banks and other financial institutions to “up their game” when considering new payment technologies.
Lawsky stated that it is important for regulators to listen and see where regulations may or may not make sense in the payment technology area and be willing to correct regulations as time goes on. He gave the example of the Automated Clearing House (ACH), stating that the system has not changed much since its creation in the 1970s. Lawsky explained that it currently takes longer to transfer money electronically than to physically transport cash to another state or country and that consumers are perplexed because information can be shared in a matter of seconds, yet it continues to take days to transfer money.
Lawsky continued that virtual currencies like Bitcoin are a long way of being a credible challenger to banks and existing payment systems, but that virtual currencies could cause “self reflection” in the banking system.
When asked about the failed extension of the Terrorism Risk Insurance Act (TRIA), Lawsky stated that he “hopes the lapse is a short time,” and that while he does not believe anything will happen on January 1, it could lead to a “huge problem” if it continues to not be extended through January, adding that TRIA “needs to be reauthorized.”
Lawsky concluded by explaining that the DFS has sent the banks they regulate new information about the questions the DFS will be asking when it comes to cybersecurity. He explained that in the past, cybersecurity was dealt with on a “checklist” like other issues, but said banks have learned over the course of the year that cybersecurity needs to have a “more robust process.” “If we don’t do a lot more to start ‘upping the game’ with cybersecurity,” he added, “we’re going to regret it later.”
Smartphones as Payment Devices
Aaron Klein, Director of the Financial Regulatory Reform Initiative at the Bipartisan Policy Center, opened the discussion by asking the panelists how smartphones may impact the use of traditional payments, such as checks and debit/credit cards.
Cyrus Amir-Mokri, Former Assistant Secretary for Financial Institutions at the Department of Treasury, stated that there will be simultaneous use of the different payment mediums. James Chessen, Executive Vice President and Chief Economist at the American Bankers Association, agreed, adding that the transition from traditional payment methods to smartphones will happen due to “convenience.”
Jeanne Hogarth, Vice President for Policy at the Center for Financial Services Innovation, explained that people are attached to the financial system in different ways and that some people will continue to use credit cards, while others use cash. She continued that while the smartphone may “become the wallet” in many segments, there will still be a reliance on traditional payment methods. Robert Hunter, Executive Managing Director and Deputy General Counsel at The Clearing House (TCH), agreed with Hogarth.
Tokenization and Security Issues
Hunter described a piloted tokenization program the TCH created that would take consumer credentials out of the market and put behind bank firewalls. He explained that account credentials would be replaced with a “limited use token,” which would prevent fraudsters from being able to use the token and access someone’s money.
Hunter continued that fraudsters will always attack the weakest link and said the merchant community is the weakest link in the payment system. He explained that when credentials are breached currently, banks hold the liability that results from the fraudulent acts. He said the cost of “re-credentializing” consumers can be an “extraordinary expenditure,” especially for small banks. Hunter stated, however that the account environment could not be tokenized fast enough to meet current security needs.
Klein asked the panelists what the implications are for consumers using alternative non-bank payment systems and whether consumers should assume they have the same rights and protections that traditional payment systems offer.
The panelists agreed that consumers may assume they are protected in the same ways, but warned that it may not be the case. Hunter explained that if consumers look at the terms and conditions of non-bank providers, it clearly states that the provider is not responsible for “anything.” He added that banks would not be allowed to “get away” with this language. Hunter continued that the Consumer Financial Protection Bureau’s (CFPB) new prepaid card proposal is a “positive step,” as it will be applicable to many non-bank providers that hold account balances on behalf of customers.
Amir-Mokri stated the current a system of consumer protection is favorable for business and that any new payment system has to provide the protections that existing systems have. He continued that regulators and federal authorities have a role to play in this consumer protection. Amir-Mokri stated that regulators do not want to introduce legislation that will favor one type of technology because it may be displaced by another technology by the time the legislation comes out.
Faster Payment Systems
Klein stated that the traditional payment system “appears stuck on a slow trend” and asked the panelists if there will be a movement toward a faster payment system.
Chessen stated that there is a financial incentive to move to faster payments, as people pay for speed, but noted that “it takes a minor accident somewhere to make a mess everywhere.” He continued that “not all payments need to be fast.”
Hunter explained that TCH member banks are committed to a real-time payment system and that the process is currently in the requirements and specifications stage. He added that when the U.S. is compared with countries that have set up faster payment systems more rapidly, it is because these other countries have only a “handful of banks,” while the U.S. has thousands. Hunter continued that it would not be beneficial for the U.S. to create a real-time payment system if only a few banks could use it.
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