While industry watchers in Washington, DC, eagerly await the next fintech charter pronouncement from the Office of the Comptroller of the Currency (OCC), the Federal Trade Commission (FTC) has quietly established itself as one of the main federal fintech regulators. The FTC was not the first federal agency active in the space—that was the Bureau of Consumer Financial Protection (Bureau) with Project Catalyst; and it has not been the splashiest either—the OCC probably has that honor. But with a combination of enforcement actions, industry outreach, and strategic appointments and initiatives, the FTC has developed a consistent fintech presence.
Fintech, as a named focus area, did not appear on the FTC's agenda until the summer of 2016, when the agency used a forum on marketplace lending to launch its FinTech Series. Through enforcement actions, however, the FTC staked out a position in fintech as early as September 2014. Under its authority to enforce Section 5 of the FTC Act and its prohibition of unfair and deceptive acts or practices, the FTC filed a complaint against Butterfly Labs, a company that sold computer hardware designed for bitcoin mining. Although the enforcement action was based specifically on the company's marketing and sales practices, the FTC used the opportunity to explain publicly the inner workings of the bitcoin ecosystem (and even created an infographic to explain mining). The FTC's action against Butterfly Labs became a hallmark of the agency's method for reaching fintech companies that may otherwise be outside its post-Dodd-Frank Act jurisdiction.
Since 2014, the FTC has frequently used its Section 5 enforcement authority to police the fintech industry. For example, in June 2015, as part of an action that the FTC called "its first case involving crowdfunding," the agency settled charges of deception with an individual who spent crowdsourced funds intended for computer game-related figurines on personal expenditures. The FTC again used Section 5 to reach a settlement with a prepaid card program. While the FTC reached a settlement in this case, former FTC Chairman Maureen K. Ohlhausen's dissent indicates that the Commission is not always unified in how it handles fintech companies. Regardless, it always behooves fintech companies that offer the market "[i]nnovative financial products" to watch the ever-changing FTC commitment to and use of its enforcement authority relating to financial technology and payments systems. Also in June 2015, the FTC settled charges with a smartphone app developer related to malware intentionally embedded in the software. While nominally providing users with a way to earn rewards for gaming, the "Prized" app loaded cryptocurrency software that surreptitiously mined cryptocurrency for the app developer.
In each of those enforcement actions, the FTC identified a violation not in the fintech product itself, but rather in how the product was marketed or distributed. For example, the developer of the Prized app violated Section 5 by stating in the product marketing that the app was free of malware, when in fact it was not. The FTC continues to target promoters of cryptocurrency-based financial products using this method. In March 2018, the FTC filed a complaint in the Southern District of Florida against three alleged chain referral schemes. In announcing the enforcement action, the agency stated "[it] will remain vigilant [for scammers] regardless of the platform—or currency used."
Starting with the 2016 marketplace lending event, the FTC has hosted regular events covering different aspects of the fintech industry. The agency's second fintech meeting was a forum on peer-to-peer payments and crowdfunding in October 2016. The events featured industry and agency panelists, and they served as public notice that the FTC intended to be active in fintech. In 2017, the FTC brought its FinTech Series closer to the center of the industry, hosting a forum on artificial intelligence and blockchain technology at the University of California, Berkeley. Both panels at the Berkeley event focused on the consumer implications of these technologies, which helped provide fintech developers with insight into the FTC's regulatory concerns.
The agency continues to host public events around the country, most recently in Chicago in June 2018. The FTC organized the June event as a workshop, built around the FTC's cryptocurrency scam-related enforcement actions. Although the workshop focused more on how consumers could identify and avoid scams, the Chicago event solidified the FTC's standing in fintech regulation. In just under two years, the FTC has hosted four major fintech events, more than any other federal agency. While some financial regulators have been opaque regarding their view of fintech, the FTC clearly wants to be seen taking a lead role.
Strategic appointments and initiatives
Although not as public as hosting an event, the FTC has signaled its fintech agenda by making strategic appointments and starting key internal initiatives. In July 2017, then Acting Chairman Ohlhausen appointed Neil Chilson as acting chief technologist. As chief technologist, Chilson oversaw the FTC's effort to inform and alert the public with regard to opportunities and risks from cryptocurrency and blockchain. This effort culminated in the creation of the FTC Blockchain Working Group (BWG), an internal initiative designed to better address the broad implications of blockchain for all of the agency's work.
Chilson formed the BWG with three goals. It is intended to build FTC staff expertise through resource sharing and by hosting outside experts. Notably for the fintech industry, the BWG is meant to facilitate internal communication and external coordination on enforcement actions. The BWG will also serve as the FTC's internal forum for brainstorming potential impacts of blockchain technology. Although Chilson has since left the FTC, the BWG is reportedly still working to fulfill its mission. Moreover, newly confirmed Commissioner Rohit Chopra has appointed his own technologist, Erie Meyer—co-founder of the U.S. Digital Service, previous staffer at the Bureau's Technology and Innovation Office, and senior advisor to then U.S. Chief Technology Officer Todd Park in the White House Office of Science and Technology Policy.
The OCC, the Bureau, and other federal financial regulators could, at some point, be more assertive in regulating the fintech industry. The OCC looked poised to do just that when it announced the creation of a Special Purpose Fintech Charter, and, as we previously discussed, the Bureau has moved Project Catalyst under a new Office of Innovation. However, with recent shifts in priorities by the financial regulators, it seems as if the FTC has taken the lead in fintech regulation. The FTC has proactively engaged in industry outreach while simultaneously developing a track record of bringing fintech enforcement actions. Until federal priorities shift again, the FTC will remain the fintech regulator to watch.