Fintech’s Washington fortunes imperiled by scandals

From: POLITICO's Morning Money - Tuesday Jan 03,2023 01:36 pm

Jan 03, 2023

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This was supposed to be fintech’s big year in Washington.

Crypto firms and other financial technology startups had amassed armies of lobbyists and were poised to be at the top of the fin reg legislative agenda. Friendly lawmakers and agency officials were readying policies to give the companies a bipartisan regulatory boost.

The series of scandals that emerged in late 2022 are derailing that momentum, putting the once-ascendant challengers to traditional banks on defense. Here’s how it’s shaking out.

— The crypto meltdown continues — Americans are getting bad news every day about the integrity of the cryptocurrency industry, with executives now openly accusing each other of wrongdoing following the FTX fraud scandal and market crash. Some lawmakers who bought into crypto’s potential are starting to voice mea culpas. Long-time skeptics are emboldened.

Just look at what could be the biggest U.S. business story on Tuesday: FTX founder Sam Bankman-Fried’s expected not-guilty plea to sweeping criminal charges. Expect more damning revelations as the government makes its case against Bankman-Fried and other FTX and Alameda Research executives who were once the digital currency world’s leading ambassadors in Washington.

Other crypto dominoes are falling . Federal prosecutors revealed over the holiday break that bankrupt digital asset lender Voyager Digital may be the focus of a CFIUS review — an interagency process designed to police foreign investment in U.S. companies. Why does it matter? Binance.US — the domestic affiliate of the behemoth international crypto exchange Binance — is making a bid to acquire Voyager. It underscores how Binance is primed for greater Washington scrutiny for a host of reasons.

While companies rarely comment on the secretive CFIUS process, Binance.US — in a potential indicator of the political pressure it faces — wasted no time issuing a statement saying it "looks forward to working with the committee and instilling confidence in its business."

— Fraud clouds hang over fintech lenders — Fintech lenders gained major clout in Washington by shoveling out billions of dollars worth of government-backed small business rescue loans during the Covid-19 pandemic. The SBA in 2022 moved to let fintechs take on a bigger role in its flagship non-emergency lending program. But those firms are facing new investigations and political backlash after the House coronavirus subcommittee outlined in December how a number of the companies exposed the Paycheck Protection Program to fraud.

— Progressives and banks are teaming up — One big political development to watch in 2023 is the growing collaboration between former foes who now see fintech as a common enemy. Frequent bank bashers like Sens. Sherrod Brown and Elizabeth Warren are finding themselves aligned with traditional lenders when it comes to derailing fintech lobbying campaigns. Case in point is the lame-duck bill Brown introduced — with the backing bank trades and consumer groups — that would make it harder for tech firms to compete with banks through industrial loan company charters.

— Regulators are under pressure — While all of this casts a pall over fintech on Capitol Hill, it more importantly means that Biden appointees at key regulatory agencies have a new mandate to crack down. Treasury in a November report called for greater oversight of fintechs in the consumer space. SEC Chair Gary Gensler has spent his tenure warning about the dangers of crypto and will now be expected to do something about it — in particular when it comes to the big exchanges that he says are skirting securities laws. CFPB Director Rohit Chopra, a Warren ally, has a make-or-break piece of fintech-related policy at the top of his agenda — standards for the sharing of banking data. The SBA has also started to take, at least publicly, a more skeptical tone toward fintech lenders in the wake of the House fraud investigation.

— Elon Musk is a wildcard — Musk has hinted that he wants to build out Twitter’s financial services offerings. A big move by the social media giant — as Meta learned the hard way with Libra — could trigger a backlash.

Welcome back – Thanks for returning to MM after our brief hiatus. What’s on your Washington to-do list in 2023? Hit us up at zwarmbrodt@politico.com and ssutton@politico.com.

Driving the week … House Republicans will decide Tuesday whether to make Rep. Kevin McCarthy the next speaker of the House … House GOP committee chairs will be able to unveil subcommittee structures and leaders after the speaker vote … Japan’s Minister of Economy, Trade and Industry, Yasutoshi Nishimura, speaks at CSIS Thursday at noon … December unemployment numbers are out Friday at 8:30 a.m. .. Officials from Treasury, the Fed and other agencies speak at the American Bar Association's Banking Law Committee annual meeting Friday and Saturday …

Driving the Day

New Congress prep: Wall Street’s lobbying dilemma — Set aside whether McCarthy has the support he needs to become House speaker. The incoming Republican majority is already making life difficult for corporate lobbyists.

Your MM host reported how the world’s biggest asset managers — mainly BlackRock, State Street and Vanguard — are finding themselves politically isolated as GOP lawmakers plan to pummel them for advancing environmental and social investing causes.

They aren’t getting cover from major business trade groups whose members are divided on the issue, and they have no Republican allies, according to nearly a dozen industry representatives, lawmakers and climate advocates. The U.S. Chamber of Commerce, which has been on the outs with Republicans in the Biden era, is among the groups caught in the middle.

MM economic roundup: The outlook for 2023

— More than two-thirds of the economists at 23 large financial institutions that trade with the Fed are betting the U.S. will have a recession in 2023. They’re citing Americans who are spending down their pandemic savings, a declining housing market and tightening lending standards.

— China ended 2022 in a major economic slump as business and consumer spending plunged. A Covid surge will hold back a recovery in the early months of this year.

— The UK is facing one of the worst recessions in the G7, according to economists.

— State leaders overseeing some of the nation’s largest pension systems are bracing for a hit, threatening the political aspirations of Democrats including California Gov. Gavin Newsom and New Jersey Gov. Phil Murphy.

— Higher-income professionals have felt the brunt of U.S. layoffs so far but lower-income workers could quickly feel the pain if a recession arrives as many economists predict.

Biden’s next economic challenge — NYT: “One vital test Mr. Biden faces is making all his new economic laws work as intended. Much of his economic legacy will depend on how effectively his administration allocates trillions of dollars in spending and tax incentives contained in the economic bills that Mr. Biden signed into law during his first two years in office.”

— As National Economic Council Director Brian Deese told MM last month, “Making good on the policy tailwinds that we’ve now enacted but haven’t gotten through into the system is going to be a big, important priority starting on Jan. 1.”

Crypto

Crypto crash triggers executive feud — WSJ: “Tensions between crypto magnates Cameron Winklevoss and Barry Silbert erupted into an open dispute on Twitter at the start of the new year, with Mr. Winklevoss accusing Mr. Silbert of ‘bad faith stall tactics’ that are hurting rank-and-file customers.

“The back-and-forth on Monday deals another blow to a sector struggling for credibility, especially since the collapse of FTX and its affiliated trading firm, Alameda Research. The fall of the two companies led to outflows from other crypto exchanges and the near-erasure in value of coins tied to FTX and Alameda, domino effects in a closely linked industry.”

David Marcus sees two more years of crypto winter — David Marcus, who once led PayPal and spearheaded Meta’s foray into digital currency, says it will take the digital asset market a couple more years to recover from "the abuse of unscrupulous players, and for responsible regulation to come through.” Marcus is CEO of the Bitcoin-focused company Lightspark.

“Consumer trust is also going to take a few years to rebuild, but ultimately I believe this will prove to be a beneficial reset for legitimate industry players over the long run.”

Regulatory Corner

The 2023 fin reg outlook — Cravath, Swaine & Moore: “Policymakers for the U.S. banking sector have a packed agenda in 2023, in part because of a backlog of matters that require attention and in part because the market continues to present policy issues that require attention.”

Credit union regulator warns of looming risks — National Credit Union Administration Chair Todd Harper in a Q&A with MM and POLITICO’s Victoria Guida: “We’re looking at interest rate risks. We’re looking at liquidity risk also. We are looking at cybersecurity risk. We’re remaining watchful in all of those areas.”

Fly Around

Biden antitrust aide to step down – NYT: “Tim Wu, a central architect of President Biden’s push to clip the wings of the nation’s largest companies, is leaving the White House. Mr. Wu’s last day at the National Economic Council will be Wednesday, ending his 22-month tenure as special assistant to the president for competition and tech policy, the White House said.”

Japan to offer families ¥1mn per child to leave Tokyo – FT: “Japan is planning to sweeten the financial incentive for parents who opt to move out of Tokyo as the government attempts to reverse decades of demographic decline, economic migration and the lure of the world’s biggest metropolis."

Tesla faces demand problem – Bloomberg: “Tesla Inc. delivered fewer vehicles than analysts expected last quarter, missing estimates despite taking the unusual step of offering hefty incentives in its two biggest markets.”

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