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  • Writer's pictureVeronica Irwin

Congress and the big banks have fintech on the brain

Good morning, and welcome to Protocol Fintech. This Thursday: throwing fintech shade in Washington, Jesse Powell is out as Kraken CEO, and Ryan Breslow stages a comeback.


Co-byline with Ryan Deffenbaugh

How do you take your bank CEOs?

Big bank leaders arrived on Capitol Hill Wednesday for day one of their semi-regular grilling by Congressional leaders. (Olive oil, salt, pepper, and some light balance sheet scrutiny, that kind of thing.) Though the hearing focused on traditional finance, the daylong affair included rounds of questions from lawmakers on two big fintech topics: peer-to-peer payment systems and a digital dollar.

There was some early shade thrown at big-name fintechs. "Despite the headlines, disputes within the Zelle network make up less than 10 basis points of all transactions," said PNC Bank CEO Bill Demchak. "That is not true of unregulated P2P digital payment services."

  • Zelle is the money transfer network owned by many of the nation’s largest banks that competes with Block's Cash App and PayPal, which also owns Venmo.

  • The Financial Technology Association, a trade group that counts PayPal and Block as members, called Demchak’s comments misleading. “As the banking CEOs know, non-banks are regulated at the federal and state levels and uphold robust consumer protection standards, including for privacy and fraud responses in electronic funds transfers,” CEO Penny Lee told Protocol. (We noted yesterday that Demchak’s description was off.)

  • Regulators are homing in on complaints of fraud on P2P services and banks appear to be distancing themselves from tech players. The Bank Policy Institute, a think tank representing the financial institutions, released a report earlier this week that said Zelle had the lowest rate of disputed transactions among P2P payment platforms. Their own report, though, showed Venmo’s fraud rate was only 0.004 percentage points higher than Zelle, and it didn’t examine all P2P transactions — just the ones at eight large banks surveyed.

  • Bank leaders said that they reimburse customers for “unauthorized” transfers but the broader question is whether banks are responsible for scams that trick customers into sending money. The Wall Street Journal reported that the CFPB is considering requiring banks to reimburse customers tricked by popular scams, such as someone pretending to represent the bank. Banks have pushed back, saying that could actually encourage more scams.

Big Banks are financial “leaders,” multiple representatives said, but they won’t take the lead on adopting a CBDC. Banks took a passive approach when asked about a digital U.S. dollar, signaling they will not proactively push implementation along. The crypto industry, meanwhile, has been rallying around asset-backed stablecoins.

  • JPMorgan Chase’s Jamie Dimon said he thinks CBDCs are a fair idea, but doesn’t expect the Federal Reserve to implement its use smoothly. He described the Fed as less nimble than private institutions, and ill equipped for something so technically complicated. “You’re not going to see the Fed running call centers,” he mused. “There’s a lot more to banking services than a token that moves the money.”

  • Specifically, Dimon said he was wary of the Fed’s ability to manage fraud, risk prevention and regulatory responsibilities like the Community Reinvestment Act. (He also threw out there that he considers other cryptocurrencies, like bitcoin, to be “decentralized Ponzi schemes.”)

  • DeFi, meanwhile, increasingly relies on stablecoin providers. After the luna crash earlier this summer, the importance of having a genuinely stable digital dollar became clear. Circle’s USDC has increasingly become the stablecoin of choice for DeFi, though Tether, with more questionable backing, still has the highest market cap.

  • The witnesses have signaled a serious interest in stablecoins previously. JPMorgan, for example, created JPM Coin to use as a payment rail and deposit ledger for certain institutional clients. Wells Fargo piloted a stablecoin for use in transfers that it said could be more effective than SWIFT. Citi, meanwhile, has had a more cautious approach. Though he acknowledged that stablecoins could create more utility in crypto, Citi’s managing director of emerging payments for treasury and trade solutions wrote that competition between CBDCs and stablecoins could generate considerable instability in the banking system.

  • As we wrote in May, should stablecoins become widely adopted, a digital U.S. dollar could prove moot.

The hearing showed lawmakers still see plenty of flaws in traditional finance — areas where they may be more primed to accept disruption from potential incumbents despite increasing skepticism of tech in general. It also demonstrated where regulators are concerned that new tech companies may be perpetuating the same harms. Fintech leaders would be smart to tread carefully with P2P payments and pushing for a CBDC, and to appear keen to do so in a way that doesn’t perpetuate harm to consumers. Otherwise they may find it’s their turn for a Capitol roasting.

— Veronica Irwin (email | twitter) and Ryan Deffenbaugh (email | twitter)

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