Federal streamlining of peer-to-peer funding, enforcement in crowdfunding will help industries, FTC told

26th October 2016. By Leah Nylen & Xiumei Dong

Federal streamlining of state rules governing money transmission would help in developing the nascent peer-to-peer payments sector in the US, industry representatives told regulators Wednesday.

Today, peer-to-peer payment systems such as Venmo, Google Wallet, Circle, Square Wallet and others, need state-by-state approval of money transmission licenses before they can operate in the US market, said Brian Peters, executive director of Financial Innovation Now, an advocacy group for technology companies with members that include Amazon, Apple, Google, Paypal and Intuit.

“The application of these rules can be challenging. I don’t want to use the old patchwork quilt excessively, but state to state both when it comes to both licensing and enforcement you end up with a little bit of a different approach,” Peters said at a US Federal Trade Commission event in Washington. “Some kind of federal streamlining of that would be significantly helpful.”

Because of those barriers, financial technology startups need tens of millions of dollars to enter the market, which leads to fewer startups in the area, said Matt Van Buskirk, the former director of compliance for Circle, a peer-to-peer payments technology that uses traditional currencies and bitcoin.

“The rules that fintech companies are subject to are often written for the technology of the time, and then we have regulators going in and interpreting rules and applying them to new technology [and trying] to figure out how exactly it applies,” said Van Buskirk, now the CEO of Hummingbird Fintech, which focuses on incorporating technology into regulatory compliance for financial services companies.

“If we move towards having a slightly more agile regulatory framework — like the UK is doing with the sandboxes they are experimenting with — we may be able to have more principles-based, targeted focus for fintech companies to be able to meet the consumer protection obligations they have but with a slightly reduced burden,” he said.

London is one of the world’s main centers of activity in fintech, and the UK’s Financial Conduct Authority has launched a program where regulators work with companies as they create financial services products and can test them in the market with regulator scrutiny. Such “regulatory sandboxes” are also being developed in Hong Kong and Singapore.

The statements by Peters and Van Buskirk on Wednesday echoed recommendations released last week by the Information Technology and Innovation Foundation, an independent research and education group focused on the intersection of technology and public policy. In its report, ITIF recommended regulating fintech companies at the national, rather than state level, and removing potentially duplicative financial services regulations.

At the FTC’s workshop Wednesday, Beth Chun, an assistant attorney general in the consumer protection division of the Texas attorney general’s office, noted that fintech companies have to comply with not just banking and money transfer regulations, but the traditional consumer protection laws against unfair and deceptive practices.

Fintech companies “should remember that even though they are in a fast-paced industry, they need to keep consumers in mind and make sure to disclose everything that is relevant to consumers,” she said.

In May, Texas’ attorney general reached a settlement with Paypal, the owner of money-transfering app Venmo, over disclosures to consumers regarding privacy and security.

Texas investigators found that Venmo didn’t clearly disclose how it would use an individual’s phone contacts or that transactions with other users would be shared publicly. Paypal agreed to pay a $175,000 settlement to Texas and improve its consumer disclosures.

The FTC also has an open investigation into Venmo, Paypal disclosed in April. Paypal didn’t detail the focus of the probe.

Crowdfunding

The FTC workshop also focused on crowdfunding — in which people or companies solicit donations to achieve a goal or develop a product, often in exchange for some sort of payback — a phenomenon that has helped raised about $16.2 billion globally in 2014, according to research firm Massolutions.

While online crowdfunding has expanded opportunities for innovators online, Commissioner Terrell McSweeny noted that scams and fraud are also attracted to the platform.

In June 2015, the FTC brought its first enforcement action involving crowd-funding, settling allegations against an Oregon man — Erik Chevalier, also doing business as The Forking Path Co. — who received donations from 1,246 people and raised $122,000 on the Kickstarter website to create a board game, but spent that money on himself instead.

More than a year after first posting his project on Kickstarter, Chevalier posted a note to contributors in July 2013 saying that the project was being canceled. The settlement imposed a court order on Chevalier to repay the funds, but it was suspended due to his inability to pay.

As the amount of money and opportunities grow through crowdfunding, platforms have the responsibility to minimize and report the frauds, said Michal Rosenn, Kickstarter’s general counsel.

“We as a platform do have a responsibility to help shape consumer understanding and reduce risks of not just fraud but non-fulfillment,” she said. “I think there’s a role for self-regulation and for work with traditional regulations … to [help establish] evolving best practice that we can identify together.

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