The US government shutdown is starting to create serious problems for financial technology firms — slowing dealmaking, impairing supervision and casting a pall over the presumed pre-eminence of the US as a fintech superpower, writes Chris Brummer, a professor at Georgetown Law, for media outlet Roll Call.
The federal government’s influence on fintech is proving even more expansive than many expected, touching on the latest developments in banking, derivatives, securities, online lending and more. The halt of most agency operations is impacting a host of key issues concerning every fintech business, from the rate at which money can be raised to how (and even whether) business plans are finalized. However, not all pockets of the industry are impacted in the same way.
Most visibly affected are companies issuing securities to raise capital. Large technology firms planning to do initial public offerings (IPOs) — think Lyft, Airbnb and Slack (Note: Wall Street Journal reported that $7bn-valued Slack is planning a direct listing, bypassing an IPO, in Q2) — could be affected with no one at the Securities and Exchange Commission to process registration statements of firms seeking to sell stock to the public. Planned IPOs would then have to be delayed, and if the stock market deteriorated, indefinitely postponed. In any event, when the SEC reopens, staff face a daunting backlog of filings.
But the problem isn’t just with the big tech firms. Under the radar are also dozens of delays facing technology startups that have filed to make securities offerings as “mini-IPOs” under Regulation A+. Among them are cryptocurrency and blockchain-related firms.
In 2018, the SEC asserted jurisdiction in the sector and held that most (if not all) initial coin offerings (ICOs) were securities, and that would-be ICO issuers needed to register or find a proper alternative route like private offerings or Regulation A+ offerings. However, with SEC staff furloughed, dozens of the latter can’t be reviewed and processed, grinding new issuances to a halt. Only companies that were deemed “qualified” (or registered) with the SEC before the crisis will be able to move forward.
Marketplace lenders that securitize their loans face similar problems. Again, with no SEC staff in place, online lenders will be prevented from getting permission from the agency to repackage their loans and sell them to investors in the public market. To make do, many platform lenders may find themselves stuck with loans and dependent on bridge and credit financing during the shutdown. The irony, of course, is that some of these very same lenders might also be serving as emergency backstops for cash-strapped federal workers who aren’t being paid — and with few means to sell their loans off to investors, many online lenders might have to charge higher rates for furloughed borrowers.
The SEC has held that online platforms that trade digital assets must register with the agency as broker-dealers, alternative trading systems, or national securities exchanges. Yet the registration of such intermediaries — many of them nervous about the legality of their own operations as unlicensed market participants — is impossible with an agency on furlough. Notably, some aren’t even sure whether their compliance meets newly declared expectations, and there is no one to confirm or deny it.
Similarly, applications for bitcoin-related exchange-traded funds (ETFs) won’t happen until the shutdown standoff ends, and neither will registrations for less controversial, but highly popular, robo-advisers.
Although most federal agencies have kept some enforcement staff on duty, surveillance efforts are sure to be impaired. Most enforcement staff will be preoccupied with prosecuting offenses already being litigated (to the extent federal courthouses are still open). New cases, in the meantime, will likely slow dramatically. The Federal Trade Commission’s Complaint Assistant website, for example, has been shut down entirely.
Still, with the shutdown continuing with no obvious end in sight, it’s worth wondering just how much damage the dysfunction is ultimately wrecking the reputation of the US as an attractive place to launch and do fintech business. With other regimes in Europe, and even Asia, working actively to add clarity and stronger protections, a prolonged halt to government functions could spell trouble for America’s competitiveness in the sector.