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Andrew M. Cuomo Maria T. Vullo

Governor Superintendent

CSBS Fintech Forum

Opening Remarks
Brooklyn, NY
April 10, 2108

Good Morning! As the Superintendent of the New York

Department of Financial Services, a hearty welcome to New York and to

the great borough of Brooklyn! It is a special privilege to be here in

Brooklyn at this Fintech Forum - not only because Brooklyn is where I

was born and raised, but because Brooklyn represents the diversity of

innovation that we are here to talk about today. We have a full agenda

today, and I look forward to our discussions of business innovation and

how state regulators are ahead of the curve on promoting innovation while

protecting the integrity of our markets and consumers at the same time.

As a matter of personal privilege, I must say that it is quite fitting

for us to have this nationwide discussion here in the State of New York,

where banking regulation began and where innovation thrives. New York
has a very proud and stable banking history, but many of you might not

know that New York’s banking industry actually grew and prospered out

of national instability. Those of us who are history buffs may know that

our nation’s founders were famously in disaccord over the nature and type

of banking system that our fledgling nation should adopt. Thomas

Jefferson declared back in 1799 that QUOTE “banking establishments”

“are more dangerous to our liberties than standing armies.” UNQUOTE.

Alexander Hamilton felt quite differently -- and he had already founded

the Bank of New York in June 1784 – which remains a New York state

chartered bank today.

Jefferson and Hamilton ultimately resolved their disputes by a

federalism compromise, but the debate was a continuing one for some

time. Indeed, over the course of early American history there were many

efforts to hinder state banking by federal attempts to nationalize banking,

and each such effort was met with resistance by the states. It also is a

truth that each response by the states strengthened the foundations of our

dual banking system as state banks created innovative products and

services that ultimately led to the strong and vibrant state banking system

we know today.

And it was New York that early-on pioneered such innovations as

the insurance of paper currency, so-called ‘free chartering’ of banks by

any qualified group of citizens – which was a precursor to deposit

insurance -- and the creation of a central clearing house whose collective

strength enabled the state, and ultimately the nation, to weather many of

the world's most severe financial crises. In 1838, New York enacted its

Banking Law and by 1860 some 18 states had enacted their own version

of “free chartering” or “free banking” modeled on New York’s law.

But even with these innovations in their column, state banks were

not immune from attack. By the time of the Civil War, President Abraham

Lincoln's Treasury Secretary Salmon P. Chase, a vocal proponent of

replacing state banks with a system of national banks, spear-headed the

effort to convince Congress to pass the National Bank Act of 1863,

resulting in the issuance of a common currency through national banks,

and the dual banking system endured.

Subsequently, the federal government tried again to impede state

banking, by adding a provision to tax state bank notes. For a period of

time, this caused many state banks to be unable to compete with federal

counterparts -- until the states again innovated by offering a new

instrument: demand deposits, such as checking accounts, which led to a

surge in state charters. By 1893, the tally of national and state-chartered

banks was equal at 3,807 each.1 And, today, due to continuing state

regulatory advancements and innovation, 78 percent of banks in the U.S.

are state chartered.

This resilience by the states, this courage to innovate, and this desire

to excel at providing an ever-widening array of safe and sound innovative

products, flows through the blood of our New York state chartered and

licensed institutions, and those of the many states who are present at this

forum today.

The states’ innovations and successes in keeping pace with and

indeed ahead of the curve is also demonstrated by our decades of

1 “Dual Banking System Has Stood Test of Time”, Abernathy, Wayne A., American Banker,

February 25, 2013.

regulating nondepository institutions, including many companies that

use financial technology to serve consumers. Nondepositories are a

broad and important category of financial services, and federal

regulators have never supervised them. Instead, the states have

traditionally taken the lead in regulating nondepositories.

So, as nondepository institutions rose up to address certain

consumer needs, New York’s laws and regulations adapted and

expanded along with them. To cite just two examples:

(1) New York’s Banking Department (one of DFS’s predecessor

agencies began licensing money transmitters in 1964, when the

legislature enacted a new law covering money transmitters. The goal

was then – and still is now -- to ensure that operations are carried out

safely and soundly and that consumers are protected. Requirements

have been expanded over time and today include holding sufficient

capital, safely held in permissible investments, as well as having a surety

bond that protects against certain losses. Like all banks and licensed

financial services providers, money transmitters providing services in

New York are subject to regular examinations, and receive oversight to

ensure that they meet standards and improve operations, while serving

and protecting consumers under a compliant business structure.

In 1977, New York created a Transmitter of Money Insurance

Fund, paid into through assessments on all New York licensed money

transmitters, and available to make customers whole -- in cases where

a money transmitter receives money for transmission but fails to

transmit that money. Over time, additional regulatory standards have

been developed, in areas including consumer disclosure, the use of

agents, and cybersecurity, all intended to further ensure sound operations

and the protection of consumers.

A second example of New York’s leadership in the nondepository

space is virtual currency. DFS started looking into virtual currency in

2013, long before it was on the radar for most of the financial services

world. At the time, Bitcoin was fluctuating around $100. One concern

DFS had at the time was that startups - like the Mt. Gox exchange

operating in Japan - were not prepared to protect customers, and had

deficient operations that put customer funds at risk. Another concern

was that these then unregulated small businesses were not respecting

anti-money laundering laws. DFS recognized early on that standards

needed to be set that would help improve operations and safety, and we

therefore created a channel for growing in the right way: respecting legal

obligations required of all financial services companies and protecting

customers by developing a sound infrastructure.

DFS held public hearings on virtual currency in January 2014, and

invited companies to submit proposals for chartering a virtual currency

exchange, as the problems at Mt. Gox - then handling 70% of Bitcoin

exchanges - continued to spiral out of control. DFS then issued drafts of

Virtual Currency Regulation, making the Bitcoin license final in June


Companies that have since received licenses from DFS include the

largest virtual currency exchanges in the United States and in

Japan. Virtual currency remains a novel and far from stable area of

activity. Its suitability as a payment system remains to be seen. But

while it has presented a challenge to traditional financial services, it has

spurred innovation. And DFS and the states have helped set the

standards through our application and examination processes to ensure

that customer protection is taken seriously, and cybersecurity and AML

standards are respected.

By setting standards, we have made it possible for both startups

and traditional financial service providers to pursue innovation in this

area - as well as in areas of traditional finance where innovation had

slowed down. Indeed, regulatory standards help insure that the

competition among new entrants is not a race to the bottom - where

services that seem cheap or convenient turn out to hide fatal flaws -

flaws like those that led to hacking, massive losses, and eventually the

bankruptcy of Mt. Gox.

Strong standards are important to our markets and consumers, as

well as the companies that want to be best in class in providing financial

services. The regulatory structure that we created for virtual currency

has helped our licensed companies attract greater interest from

customers, investors, and potential financial services partners seeking to

pursue further innovation, while protecting market integrity by stringent

standards applicable to all law-abiding business enterprises.

At DFS we are stewards of New York’s status as the financial

capital of the world, as well as its status as the place where the state

banking system was born and where progressive consumer protections

thrive at the same time. Our work on “fintech” reflects our support for

our state-chartered banking system and of the growth of nondepositories,

with a focus on ensuring a level playing field where everyone

conducting the same types of activities complies with the same rules.

Of course, “Fintech” is an abbreviation of the term financial

technology – which alone does not encompass any particular industry or

sector. Fintech can refer to myriad products, like APPs, software, and

other programs, which many industries use and continue to improve

upon. If you use a smartphone to check your bank balance or deposit a

check - that’s fintech, used by your local bank. Certain kinds of fintech

can be utilized quite effectively (when used responsibly) to bring

banking services to hard-to-reach consumers. When done right, and

subject to equivalent rules, this is a very good thing. Fintech – where

properly regulated - can enable an institution to underwrite transactions

more quickly by allowing for the real-time evaluation of data points –

provided that the underwriting is done with regard for risk and consumer

protection. And data collection must vigilantly protect consumers from

misuse of their data and cyber threats.

These pillars are the essence of the State bank regulatory

framework that has been in existence for a very long time. The use of

financial technology alone should not grant one an exemption from the

rules that banks and other financial institutions follow to manage risk and

protect consumers. Our state chartered community banks are serving New

York’s communities as are our state licensed nondepository lenders,

money transmitters and virtual currency firms. A fair playing field is as

important as promoting innovation. In fact, a level playing field is

essential for innovative companies to enter and strengthen the

marketplace – while ensuring that everyone abides by the same rules.

Again, welcome to New York and to today’s CSBS Fintech Forum.

We have a robust agenda ahead of us, with panel discussions from various

business sectors and standpoints. We want all of the issues put on the

table as part of a collaborative, open discussion. We will also end each

panel with an opportunity for questions. It is my fervent hope that, by the

end of the day, we will have learned something from each other, and that

the information discussed here will lead to continued dialogue and

positive results, further strengthening the state system.

Thank you again.