Engaging with regulators about innovative new ideas - an interview with Tracy Basinger, former head of bank supervision at the Federal Reserve Bank of San Francisco
This week we have an interview with Tracy Basinger, who served for over 30 years as a regulator at the Federal Reserve Bank of San Francisco, culminating as head of bank supervision from 2017 to 2020. Tracy brings a unique perspective as someone who has seen multiple evolutions in financial services from a regulatory lens, including the technology-led evolution we’re in today with fintech and blockchain. She was one of the first regulators to engage in a meaningful way on these developments as the first prudential regulator to establish a dedicated team to fintech. In this interview Tracy talks about the early days of fintech, her advice to founders and what she’s optimistic about.
Tracy is now an advisor to financial services companies, including with Klaros. You can find her online here.
The Axial Studio
Tell us your story - how did you end up being a regulator, was it an intentional decision or something you fell into?
Tracy Basinger
I got out of school with a business degree and thought maybe I wanted to be a CPA. Then I bumped into somebody that I used to work with and he said “Oh hey, I'm at the Fed. I really like it and think you should apply.” I did and I thought I’d spend 3 to 5 years there figuring out what I really wanted to do. I stayed there for 32 years and retired at the end of 2020!
The Axial Studio
Is there an example of something you’re particularly proud of accomplishing during your time there?
Tracy Basinger
Our early work on fintech comes to mind first. In 2014 we were having a staff conference with some outside speakers and during the Q&A the subject of this new thing called fintech came up. One of the panelists - Jo Ann Barefoot, currently the CEO of Alliance for Innovative Regulation (AIR) - made the comment that being situated here in San Francisco and so close to Silicon Valley, we were well positioned to learn about it and be influential in this new emerging area. That gentle nudge was the start of our fintech work and resulted in us hosting the first fintech conference as a regulatory agency.
We were the first US prudential regulator to start a FinTech team and we had the first conference at a regulatory agency that included the full range of stakeholders in the space - regulators, fintechs, banks, consultants, etc. It was stunning to me how much people wanted to come to the Fed, sit in our building and give us their perspective on things. So we had a great mix of people, and I was really proud of how we leaned in on FinTech. We tried to be engaged with the industry as it was developing and learn as the industry matured. We were exploring issues at a time when it made the policymakers uncomfortable. That is what I really enjoyed the most - that we were pushing just hard enough to get attention on something that needed attention. I thought it was pretty impactful at the time.
The Axial Studio
As one of the early regulators focused on FinTech, do you remember the first time you heard about Crypto/Web3? What was your reaction?
Tracy Basinger
I can remember Web3, because it was more recent and I was curious to understand what it was about. I remember listening to a podcast with Chris Giancarlo, where he described the evolution of Web1, 2, and 3. I thought the way he described it was really fascinating, and I could get my head around it for the first time. It made me want to learn more. The first time I heard of Crypto is a little harder to remember, but it was probably in connection with Bitcoin. Everything was so new and it was changing so fast. We were just trying to figure out where we needed to pay attention. Where do we need to learn more? And is this on the list or not? I remember at one point we were doing matrices of different kinds of companies, products and technologies to understand how it all fit together.
The Axial Studio
What advice do you give founders that are trying to build in a compliant manner?
Tracy Basinger
First is to understand what rules apply to you and understand not just the letter of the law, but the spirit and the intent. I’ve found that when innovators who might not be familiar with banking regulation understand the spirit and intent of the rule, they are generally able to build products that are compliant. But I like to talk about the spirit and the intent of the law. Next, look at where risk and compliance exists in the new organization and where it fits in your organization. Ask yourself, do you have the right knowledge and the right skills to do this in a compliant way? And, are you prepared to prioritize compliance with other features in your product?
Then understand that it is important to engage with regulators. Helping regulators understand how financial services are evolving is important for all stakeholders. Establish a plan for engaging with regulators. Figure out when you want to do it, how you want to go in, what kind of conversation you want to have. So that you have a level of comfort on the rules that apply to you and how you're going to go about building a product that is compliant. And yet at the same time being willing to engage in a dialogue and get feedback from your regulator.
The Axial Studio
The San Francisco Fed was an early leader in the space, but you mentioned that it was making a lot of policymakers uncomfortable. What are your thoughts on how regulators engage with innovators?
Tracy Basinger
First, I think setting new policies and writing new regulations should be slow. You don’t want to get that wrong. You want to understand exactly what it is that requires a policy or regulatory intervention to make sure you have the best chance of getting it right. But that doesn’t mean that through your supervisory authorities you don’t engage and learn alongside the industry. That's where I think US agencies haven’t learned in the way other parts of the world have. They haven’t engaged by providing early feedback and some clarity to innovators or by creating safe spaces for testing of new ideas.
So even if the writing of regulation is slow, as I think it should be, there are ways for regulators to be helpful. They have tremendous power to convene, bring people together and engage in discussions.
The Axial Studio
What about for founders who are at a very early stage (2 people in a garage), particularly if they are coming from a different industry? What is the best way to go about learning what they don’t know?
Tracy Basinger
All the US regulatory agencies, I believe at this point, have office hours for innovators. When I was at the San Francisco Fed we'd have a lot of people who were interested in telling us about their product but then also wanted help from us in navigating the regulatory system. That’s a good avenue to start.
It’s important for the two people in a garage to understand that running fast and breaking things doesn't work really well when you're dealing with financial services, so this early engagement can be really helpful.
The Axial Studio
At what point do you start hiring a GC or building a compliance function? What can you do with advisors vs. on your own?
Tracy Basinger
The sooner is always the better, but it often comes down to a cost issue. I do think there's a lot of people out there in the advisory space that can fill that gap for you for some period of time.
The Axial Studio
How can companies help regulators as they work to figure out new areas of innovation?
Tracy Basinger
When I was at the Fed meeting with a lot of these companies, they were so puzzled as to some of the rules that applied to them. They would have a puzzled look on their face when we would explain a rule and what it was trying to achieve and say “you think this is going to achieve that objective? I can show you at least three other ways to get the same outcome in a much easier way!” There’s a lot of opportunities for people to influence how regulation gets executed because technology can make it better. And I would argue that, particularly in the consumer protection space, most public policy at best is not meeting its intended purpose and at worse is exacerbating the problem. There’s an interesting opportunity for innovators to help solve those problems.
The Axial Studio
Are there any things that you do not recommend doing when engaging a regulator?
Tracy Basinger
You don't want to go in too soon before you really completely understand what it is you are building or the regulatory process. Regulators would likely not trust that you could manage risk here. But, you also don't want to go in too late - when it's a fully baked idea and you're ready to launch. Regulators will likely put the brakes on to make sure they understand exactly what you’re doing and how you’re going to manage any risks’ So you’ve got to try and find that sweet spot in the middle. When you meet with them, be prepared to walk the regulators through what you want to do, where you see the risks with what you want to do, how you plan to mitigate those risks. Then share your thinking on how you're going to engage with the regulators going forward. If you’re missing any of those, it’s not likely going to go well.
Be prepared to have specific answers. They’re likely to have lots of questions, so be prepared to explain what it is you’re doing with them in a way they will understand. Also, be open to their input and feedback.
The Axial Studio
To close, what are you optimistic about crypto right now?
Tracy Basinger
I'm hopeful that what's happening with crypto is separating the wheat from the chaff. That we can focus more on the promise of the technology if it is used in a responsible way and less on investing in speculative assets. It feels like we might be at the bottom of the hype cycle, but we’re working our way back up to good, non speculative use cases for the technology.