Disruptive Technologies

Regulators Are Off to the (Tech) Races

Putting their own spin on hackathons, supervisory agencies are sending the message that they, too, can be digitally agile and innovative

Wednesday, November 25, 2020

By Jeffrey Kutler


Speed and competition are hallmarks of high-tech culture. The financial industry has sought to infuse these values into its fintech initiatives, and the regulatory community is following suit.

As with many things fintech, regtech (regulatory technology) and suptech (supervisory technology), the impetus came initially from the U.K.'s Financial Conduct Authority. The agency that pioneered fintech-incubating regulatory sandboxes held its first two so-called TechSprints in 2016, as recounted in a March 2020 paper, Fostering Innovation Through Collaboration. Ten and 30 organizations, respectively, took part in those two-day hackathons on the themes of consumer access and unlocking regulatory reporting.

The seventh TechSprint, in 2019, on anti-money-laundering and financial crime, was a week long, with 40 organizations and 140 participating attendees in London and Washington, D.C., and hundreds more on the livestream. FCA collaborated in that case with the Alliance for Innovative Regulation (AIR), a U.S. nonprofit co-founded by financial policy and technology veterans Jo Ann Barefoot and David Ehrich. As a TechSprint evangelist, AIR has published a how-to manual and spreads the word at events like the Central Bank of the Future Conference, sponsored by the Federal Reserve Bank of San Francisco and University of Michigan Center on Finance, Law & Policy, where Ehrich led a panel discussion on November 18.

David Ehrich headshot
David Ehrich, executive director, Alliance for Innovative Regulation, which has published “How to Produce a TechSprint.”

Indicating the concept's growth and momentum, 16 U.S. regulatory agencies were represented at the FCA-AIR 2019 TechSprint, and several launched projects of their own in 2020. And the Bank for International Settlements, through its BIS Innovation Hub and in conjunction with the Saudi Arabian G-20 presidency, held a TechSprint that culminated in October with the naming of three winners, each having produced a solution to a foundational “problem statement.” Billed as the first truly global TechSprint, the G-20 program had “the support of the Monetary Authority of Singapore, the Saudi Arabian Monetary Authority, the Financial Stability Board, API Exchange, and Regtech for Regulators Accelerator,” the BIS said.

Oversight agencies are keen to bring 21st century technology into regulatory reporting processes, and that was one of the G-20 sprint's categories. That winner was a project of the International Swaps and Derivatives Association and REGnosys, using ISDA's Common Domain Model in a pilot of digital derivatives reporting to the Monetary Authority of Singapore.

Acknowledging the recognition and its impact, Tara Kruse, global head of infrastructure, data and non-cleared margin at ISDA, said, “Winning this competition highlights what the CDM and digital regulatory reporting have achieved in multiple jurisdictions over the past few years. Public-sector support and endorsement of our work in this area is very valuable as we continue to work with regulators around the world on digital reporting initiatives.”

Evolution of Competition

Organized innovation competitions have evolved along with the fintech phenomenon. The Swift international financial communications network's Innotribe, introduced in 2008, and the FinTech Innovation Lab, which began in New York in 2010 and was replicated in Europe and Asia by Accenture, grew into sizable and technologically diversified ecosystems where entrepreneurs can meet mentors, financiers and prospective customers.

TechSprints, typically tackling a specific problem within a defined timeframe, are “a young form of regulatory innovation,” AIR says. The name is a matter of branding, putting a distinct regulatory and compliance spin on the hackathons that are technology industry staples. The sprints' problem-solvers are nevertheless referred to as hackers, the AIR manual explains, and the programs may run for days, weeks or months.

The U.S. Consumer Financial Protection Bureau, for example, held a five-day virtual sprint - distancing now being the norm - October 5-9, focused on delivery of consumer adverse action notices.

The G-20 TechSprint was announced in April; by August, 128 submissions from 35 countries were winnowed down to a shortlist of 20.

The G-20 winners, alongside ISDA-REGnosys, were FNA and its real-time regtech/suptech analytics platform, recognizing what founder and CEO Kimmo SoramÄki said is “the value in applying network analytics and simulations to uncover key insights, trends and patterns in complex datasets; and Tookitaki for its Cryptocurrency AML Typology Repository Management solution. Each problem solved won a $50,000 prize and the opportunity to be showcased at the Singapore FinTech Festival in December.

Adam Zarazinski headshot
Adam Zarazinski, CEO of NTerminal, winner of CFTC's Project Streetlamp competition.

Government Variation

A Commodity Futures Trading Commission competition, Project Streetlamp, was open for submissions from April through September. Although it had TechSprint-like elements, it was the first financial regulatory contest conducted under a federal government science prize framework.

Publicly announced as the winner, on November 17, was artificial intelligence developer Nakamoto Terminal (NTerminal) for a tool that identifies foreign entities for the agency's Registration Deficient (RED) List, and with it came the designation CFTC Innovator of the Year.

Adam Zarazinski, co-founder and CEO of the two-year-old company, said its system takes 1.7 seconds to decide if a company should be added to the RED List, and its technology has numerous market surveillance, anti-money-laundering and anticrime, and security applications. CFTC said it “currently uses NTerminal for market surveillance, investigations, and litigation support through real-time analysis of digital asset financial, technical, blockchain, and natural language data.”

NTerminal's innovation “not only helps the commission, but also will ultimately help investors make more informed decisions,” said Melissa Netram, CFTC chief innovation officer and director of LabCFTC.

Such competitions “can be a useful tool to support responsible innovation,” added Brian Trackman, LabCFTC senior counsel and leader of the Project Streetlamp effort.

“Win-Win Dynamic”

Effective TechSprints yield productive system innovations or enhancements, and perhaps incentives that can include prize money, but particular value is placed on interaction and collaboration across various categories of stakeholders.

“Traditionally, a hackathon is a technology-focused design sprint, bringing together computer programmers, interface designers, domain experts, etc., to collaborate intensively over a short period of time on a software project,” FCA says in its paper. “This seemed like an approach that we could adapt and apply to regulatory issues, and we decided to trial the model.”

With seven TechSprints, six regulatory sandbox cohorts, and a three-week “DataSprint” in July and August this year under its belt, the FCA has teamed up with the City of London Corporation on a Digital Sandbox Pilot, running through next February 5, “to test and develop innovative products and services in response to challenges presented by the COVID-19 pandemic.” One of the listed success criteria is the “role played in fostering collaboration, facilitating diversity of thinking and creating an ecosystem of key organizations.”

Says AIR: “Regulator-sponsored TechSprints have explored issues as diverse as anti-money laundering, privacy-enhancing technologies for data sharing, financial inclusion, financial challenges for consumers with mental disabilities, regulatory reporting, and machine-executable regulation . . .

“Some TechSprints enable individual companies to compete, while others require multi-entity teamwork. Some solve for problems that relate to technology, but generate non-technology solutions. Some are sponsored officially by regulatory bodies, and some are run by other entities that work with regulatory issues. All have the elements of high collaboration, practical solution-building, and rapid innovation.”

AIR suggests that in view of the many regulatory-ecosystem challenges that might be addressed, “look for a solution that would have high impact and would be easy to implement. A great way to choose a problem statement is to identify mutually-shared pain points between market participants and regulators. When both sets of stakeholders can benefit from the potential outcome, the resulting win-win dynamic can make it easier and more desirable for stakeholders to engage.”

More Reporting Initiatives

Among others TechSprinting in the U.S. are the Federal Deposit Insurance Corp. and the New York State Department of Financial Services (DFS).

The FDIC on June 30 initiated what it called a rapid prototyping competition, a months-long hackathon “to help develop a new and innovative approach to financial reporting, particularly for community banks.” On October 15, the agency revealed that 14 companies were selected for the next phase, with finalists expected to demonstrate prototypes within 70 days. The companies include Accenture Federal Services, Donnelly Financial, Fidelity Information Services, Palantir Technologies and S&P Global Market Intelligence.

Jelena McWilliams headshot
FDIC's TechSprint is the start of “a long journey to eliminate call reports,” says chairman Jelena McWilliams.

“The supervisory technology that the competing teams will develop will be the initial step in a long journey to eliminate call reports,” said FDIC chairman Jelena McWilliams.

Also on October 15, New York's DFS announced that it is working with the Conference of State Bank Supervisors and AIR on Digital Regulatory Reporting. Early next year, following a series of design workshops, a TechSprint will focus on virtual currency companies, to automate report filings that have traditionally been handled manually and prone to timeliness and data-quality issues.

“The future of financial supervision is digital and needs to happen now,” said state financial services superintendent Linda Lacewell. “With this first-ever TechSprint Series, the department is making progress towards automating the reporting of financial and operational data by our regulated entities, enhancing collaboration between the department and industry, and helping to foster a safer marketplace for the consumers who depend on it.”

Jo Ann Barefoot headshot
Digitized reporting is “the future of financial regulation,” says AIR chief executive Jo Ann Barefoot.

“Digitized regulatory reporting can bring light into current blind spots and can enable data analysis through artificial intelligence. It's the future of financial regulation,” said AIR chief executive officer Jo Ann Barefoot.

In August, in a comment on an Office of the Comptroller of the Currency advance notice of proposed rulemaking, Barefoot, a former deputy Comptroller, wrote that the technology transformation challenges banks and regulatory bodies alike, “both to reap its potential benefits and to counter emerging risks.” She stated that “technological change moves at exponential speed, while regulatory change, and much of the change in the banking system, typically has a linear pace,” and that “regulatory agencies must, quite simply, speed up.”

Acting Comptroller of the Currency Brian Brooks doesn't need convincing. In recent months he has stressed the need to adapt to technological and market changes, including stepped-up activity by his agency's Office of Innovation; developed a special-purpose payments charter for nonbanks; issued two interpretive letters relating to crypto assets; and has said, “We need to learn how to move at tech time, not at regulator time.”


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