The payments industry and the digital assets sector are both on the cusp of transformative changes. As bodies like the Federal Reserve and the Financial Stability Board increase their focus, the traditionally stable regulatory environment for payments faces potential shifts. At the same time, the regulatory landscape for digital assets remains uncertain, with new legislative efforts like the Financial Innovation and Technology for the 21st Century Act (FIT21) aiming to clarify the treatment of digital assets.

We talked to Dina Ellis Rochkind, Counsel for Government Affairs and Strategy for Paul Hastings LLP, to get her insights on this rapidly changing ecosystem

The Convergence of Tech and Financial Services 

The payments industry has remained relatively stable in its regulatory framework but is poised for potential changes due to increased interest from regulatory bodies like the Federal Reserve and the Financial Stability Board. Along with a significant rise in competition and innovation, there’s also a deepening integration between technology and financial services. So future regulatory approaches will likely become more aligned with financial services, leading to greater regulation of these products.

“Every financial services company is a tech company and every tech company is a financial services company,” says Ellis Rochkind. Indeed, every major tech company – Uber, Apple and Netflix, just to name a few – now has a payments component. So will future regulatory approaches lean more towards tech or financial services regulations? “My guess is over time, it becomes more and more of a financial services approach, where there’s greater regulation in terms of some of these products,” she says.

The Uncertain Regulatory Landscape for Digital Assets

“We are seeing traditional finance companies that are actively getting into the [digital asset] space. These companies are regularly working with the government. … These are US-based companies that have an international presence, which gives the US a lot more control over the future of digital assets and Web3.” The Financial Innovation and Technology for the 21st Century Act (FIT21) bill includes a “decentralization test” to determine whether a token is a security or a commodity. “In the House, that bill passed overwhelmingly with bipartisan support. But I don’t see a clear path for it in the Senate.”

The US regulatory environment for crypto and blockchain remains uncertain, with companies often looking outside the US for capital raises, Ellis Rochkind notes. “The biggest issue, I think, for the US is AML [Anti-money laundering] and KYC [Know Your Customer] … there’s always a tension between privacy and national security.”

Trends and Considerations

Looking ahead, Ellis Rochkind identifies several key trends and considerations for fintech and digital asset companies:

• Increased Focus on Non-Bank Financial Institutions: Regulatory bodies like the Federal Reserve are paying more attention to non-bank financial institutions, which could lead to stricter compliance requirements.
• Partnerships and Due Diligence: Fintech companies partnering with banks must ensure robust compliance practices, as banks will be held accountable for their third-party vendors.
• Potential for SIFI Designation: The threat of Systemically Important Financial Institution (SIFI) designation looms, which could impose additional regulatory burdens.
• Evolving Regulatory Certainty for Crypto and Blockchain: The US regulatory environment for crypto and blockchain remains uncertain, with companies often looking outside the US for capital raises. Regulatory clarity may worsen before it improves.
• Balancing Privacy and National Security: AML and KYC requirements will continue to be a focal point.

However, elections could impact the legislative and regulatory outcome for the fintech and cryptocurrency industries. She notes that Republicans have promised a more favorable regulatory environment that provides greater certainty rather than regulation by enforcement.

“Either a Harris or Trump Administration are likely to treat AML/KYC and other national-security-related issues similarly,” adds Ellis Rochkind.

Her recommendation is to stay up to date on the rapidly changing technological and regulatory updates.

“Industry participants should engage in the regulatory and legislative process to the greatest extent possible through their lawyers, lobbyists, and trade associations.”

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