About a year apart, in the wake of the global financial crisis, two documents that would dramatically change the future of finance were published: in 2008, the 9‑page white paper “Bitcoin: A Peer‐to‐Peer Electronic Cash System” and in 2009, a 1,279-page draft of what would become the Dodd‐Frank Act.
The subsequent history of these two documents is one of private innovation delivering what regulation in the U.S., at least so far, has not: an open and decentralized financial ecosystem where consumers have default access to their own financial transaction data. This history provides important lessons for policymakers on how the desired outcomes of regulations can fail to materialize years after laws’ inception and the market itself can achieve policy goals more quickly than regulation and without top‐down direction.
While many are familiar with Dodd-Frank’s dramatic expansion of federal financial regulatory authority, a lesser known “open banking” provision (Section 1033), which occupies less than one page of the act, requires financial institutions to give customers access to their own transaction data in a usable format upon request, subject to Consumer Financial Protection Bureau (CFPB) rules. (While some definitions of “open banking” would have relevant laws explicitly refer to data transfers in addition to data access, Dodd-Frank’s access provision is solidly within the open banking universe.)
Last week, CFPB Director Rohit Chopra announced that the agency is planning to propose such rules in 2023, with the hope of finalizing them by 2024. Fittingly, this week was the fourteenth anniversary of the Bitcoin white paper. Over a decade on, Dodd-Frank’s goals of open banking by proclamation have languished, while Bitcoin has ushered in an entire industry unto itself that’s helped to accomplish open‐banking objectives without any regulator ordering it.
Director Chopra’s announcement of the CFPB’s rulemaking plans articulated well some of the high‐level goals of open banking and customers’ ability to port their financial data to new services, applications, and tools. Chopra argued:“A decentralized, open ecosystem will yield the most benefits for creators and consumers alike.”Expanded financial data access, if successful, will “reduce the ability for incumbents to build moats and for middlemen to serve as gatekeepers.”“It’s critical that no one ‘owns’ critical infrastructure.”And “more seamless integration … will give us all more choice.”
In a different context, Chopra’s words could be read as a laundry list of the benefits of cryptocurrencies and decentralized finance (DeFi). Open banking became a policy goal in no small part because of the gatekeeping role of centralized intermediaries. Cryptocurrencies’ main innovation is to remove reliance on such intermediaries. Accordingly, the benefits and opportunities Chopra seeks can be found in key features of the crypto ecosystem:Major cryptocurrencies are natively decentralized. Transaction histories are maintained not by a trusted intermediary but by a global network of computers incentivized to validate a cryptographically secure distributed ledger (a blockchain).Crypto users need not seek the permission of gatekeepers to access their transaction data. Rather, users are free to self‐custody their own crypto holdings by directly controlling distributed ledger accounts with their own private keys. Where users do, their complete, pseudonymized transaction histories are available to them by default on public ledgers.Where financial rails are based on open‐source software run by computers voluntarily participating in a permissionless network, the underlying infrastructure is not “owned” in the classic sense of someone possessing and controlling it with the right to exclude others.The crypto ecosystem is built on open‐source code allowing it to be highly “composable,” meaning protocols and applications are modular and interoperable. In other words, they can be unbundled and reassembled like Lego blocks.
There is not complete overlap between an orthodox definition of open banking and the capabilities of crypto. As Nic Carter argues, unlike open banking, crypto and DeFi do “not seek to link multiple financial databases through either private sector agreement or state mandate, but instead envision an entirely novel financial system where a global userbase is united on one database—the ledger maintained by the blockchain.” Nonetheless, as sketched above, they drive toward similar goals.
When it comes to realizing these goals, it is worth looking at why it is regulation that has lagged private innovation. In the U.S., at least, consumer access to financial data typically has had more to do with the latter than the former. For instance, in an example of market‐driven standardization, in 1997, software rivals Microsoft, Intuit, and CheckFree created a file format (OFX) for streaming financial information from banks to consumer desktop tools “before ‘open banking’ was even a term.” Banks in the U.S. went along based on consumer demand but became wary as their position as data gatekeepers eroded. Nonetheless, technology continued to lead the way as fintechs leveraged screen scraping software to collect data from financial institutions when consumers shared their login credentials with the fintechs.
With Dodd‐Frank Section 1033’s regulatory hook, however, a bootleggers and Baptists alliance of banks and consumer advocates has objected to such tactics on consumer privacy and cybersecurity grounds, with some advocates questioning whether fintechs’ disclosures have been sufficient for consumers to give informed consent to the transfer of their own financial data. While private coordination can help to resolve such frictions, a top‐down approach to driving market outcomes can falter by leading to zero‐sum stakeholder competition that creates inertia or leads to regulatory capture. Director Chopra himself stated the capture problem clearly: “Regulation of the financial services industry has a bad name, and rightfully so. Financial regulators have largely complied with what dominant incumbents desire by writing complicated rules to fit existing business models.”
When it comes to making progress toward the “decentralized, open ecosystem” of finance that Chopra describes, the Bitcoin whitepaper has outperformed Dodd‐Frank Section 1033 in the past decade plus. As policymakers look to further regulate the crypto ecosystem itself, they should keep top of mind the capacity of private innovation to not only achieve broad policy goals but also to get there before regulations do.