Responsible Innovation in Federal Agencies

The U.S. government faces compounding challenges in promoting and ensuring responsible technological innovation. Rapid changes in technology continually raise new privacy and ethical challenges. Businesses in the United States and across the globe are racing to develop and deploy artificial intelligence, machine learning, and emerging technologies, with relatively limited regulatory guidance. The expanding adoption of new technologies, such as those in financial technology (FinTech) like digital assets, present novel interpretive challenges to existing regulatory authorities.

Not only does the federal government have responsibility for ensuring Americans’ safety, encouraging business innovation and growth, and facilitating thriving U.S. markets, agencies also must successfully deploy their own regulatory technology (RegTech) initiatives.

To meet these challenges, multiple federal agencies have established Offices of Innovation. The common mission of these offices is to:

• Engage with innovators and stakeholders to promote and ensure responsible innovation and to influence policy development
• Reduce barriers to innovation
• Partner with the network of regulatory agencies and oversight entities in the United States and internationally to coordinate efforts and share best practices
• Develop RegTech solutions

Here is a glance at some of the Offices of Innovation within the U.S. federal government:

SEC FinHub – Securities and Exchange Commission

The SEC’s Strategic Hub for Innovation and Financial Technology (FinHub) engages with innovators, developers, and entrepreneurs on financial technologies, methods of capital formation, market structures, and investor interfaces. Issues include:

• Blockchain/Distributed Ledger: Databases that maintain information across a network of computers in a decentralized or distributed manner. These networks commonly use cryptographic protocols to ensure data integrity. Blockchains are often used to issue and transfer ownership of digital assets that may be securities, depending on the facts and circumstances.
• Digital Marketplace Financing: Financing methods that do not use traditional financial institutions as intermediaries. The financing can be in the form of loans, often called online marketplace lending, or equity or equity-like securities, often called crowdfunding.
• Automated Investment Advice: Investment advisers that typically provide asset management services through online algorithmic-based programs.
• Artificial Intelligence/Machine Learning: Rapidly evolving methods of using computers to mine and analyze large data sets.

CFPB Office of Innovation – Consumer Financial Protection Bureau

The CFPB Office of Innovation promotes innovation, competition, and consumer access within financial services. The Office creates policies and sandboxes to reduce potential barriers to innovation, engages with stakeholders interested in promoting consumer-beneficial innovation, and coordinates with Federal, State and international regulators.

Objectives:

• Develop actionable technology-focused solutions to a variety of regulatory and consumer protection challenges
• Harness technology to reduce burden, improve results, and create greater efficiencies across financial markets
• Explore how technology can reshape compliance and speed effective interaction between regulators and financial institutions

The CFPB Office of Innovation has developed several approaches to encourage innovation, including:

• Compliance Assistance Sandbox, in which companies can obtain a safe harbor for testing innovative products and services (for a limited period of time) while sharing data with the CFPB.
• Trial Disclosure Sandbox, in which companies can obtain a safe harbor for testing disclosures (for a limited period of time) that improve upon existing disclosures, while sharing data with the CFPB.
• Tech Sprints, in which technologists and financial, consumer, and regulatory stakeholders come together for short, intense problem-solving sessions.

The CFPB Office of Innovation also plays a key role in coordinating other financial regulators and oversight entities across the world, such as:

• American Consumer Financial Innovation Network (ACFIN): Federal and State officials coordinate efforts to facilitate innovation and further objectives such as consumer access, competition, and financial inclusion and help regulators keep pace with innovation to help ensure consumer financial services markets are free from fraud, discrimination, and deceptive practices.

• Global Financial Innovation Network (GFIN): Seeks to provide a more efficient way for innovators to interact with regulators as they look to scale new ideas and to create a new framework of cooperation among financial services regulators around the world.

LabCFTC – Commodity Futures Trading Commission

LabCFTC promotes responsible FinTech innovation and fair competition through engagement with the fintech innovation community. These efforts allow it to better inform the CFTC’s understanding of new technologies and to influence policy development. LabCFTC promotes responsible fintech innovation to improve the quality, resiliency, and competitiveness of U.S. derivative markets; and accelerates CFTC engagement with fintech and RegTech solutions that may enable the CFTC to carry out its mission responsibilities more effectively and efficiently.

Objectives:

• Proactive engagement with the innovator community to better understand how new innovations interact with the regulatory and supervisory framework, and identify areas where the framework could better support responsible innovation.
• Collaboration among the fintech industry and CFTC market participants that facilitate responsible innovation in derivative markets and within the agency.
• Participation in studies and research that facilitate responsible innovation in our markets and promote the use of technology within our agency.
• Coordination with financial regulators in the U.S. and internationally.
• Monitoring of trends and developments to ensure that regulatory frameworks support, and not unduly impede, responsible technological innovation.
• Information sharing about applications of fintech, including potential use cases, benefits, risks, and solutions.
• Engagement with academia, students and professionals on applications of fintech relevant in the CFTC space.

OCC Office of Innovation – Office of the Comptroller of the Currency

The Office of Innovation supports responsible innovation that enhances the safety and soundness of the federal banking system, treats customers fairly, and promotes financial inclusion. It ensures that institutions with federal charters have a regulatory framework that is receptive to responsible innovation and the supervision that supports it.

Objectives:

• Engage with financial institutions, especially FinTech, to help them navigate the regulatory world, and to provide technical assistance.
• Ensure examiners understand developing innovations and safety and soundness controls.
• Coordinate and facilitate with other financial regulators and oversight entities in the United States and internationally.

Other Agencies and Offices with Authority over Responsible Innovation

Federal Trade Commission (FTC)

Protecting consumer privacy and security is an ever-expanding area of authority for the FTC. The agency uses law enforcement, policy initiatives, and consumer and business education to protect consumers’ personal information and ensure consumer confidence in the U.S. marketplace.

U.S. Digital Service

USDS deploys small groups of designers, engineers, product managers, and government management specialists to partner with civil servants in sharing best practices and new approaches to support government modernization efforts.

Objectives:

• Transform critical, public-facing services
• Expand the use of common platforms, services, and tools
• Rethink how the Government buys digital services
• Bring top technical talent into civic service