FROM THE OFFICE OF PUBLIC AFFAIRS

Good evening and thank you for inviting me to speak to you tonight. I would particularly like to thank your president, Diane Casey, and to congratulate Women in Housing and Finance on its 20 year anniversary. You have built a remarkable organization, and I am pleased to say that many Treasury officials and staff are among your members.

I would like to use this opportunity to focus on the dramatic change that technology is bringing to the financial world. We have already responded to some of these changes with two landmark pieces of legislation that I would like to briefly discuss later on.

But my main focus this evening will be on the future. None of us are clairvoyants and it would be futile for us to attempt precise forecasts about where this exciting technological journey will take us. We can at least make reasonable guesses, however, as to some of the likely paths along the way and discuss the potential implications of traveling them.

When this Administration took office in January 1993, there were fewer than 1,000 websites on the Internet. Many people had not heard of the World Wide Web, let alone come to terms with e-mail, URLs, or online shopping. Now, of course, these terms are part of our everyday language. Almost 30 percent of Americans are now "on-line" and e-commerce has become a reality. The Internet, once a curiosity used solely by government engineers and scientists, is now an integral part of everyday life.

While it is impossible to predict the exact nature of the changes that e-commerce will bring to the world of finance over the next few years, I will venture to say that the changes will be profound. We can be sure that Americans will increasingly be in a position to conduct their finances online. It will become normal for Americans to use the Internet to pay their bills, manage their bank accounts, secure mortgages or life insurance, and organize their personal savings. Why? Because it is cheaper, easier, and more convenient for them to do so on-line, and because the Internet provides them with greater choice. For the first time, Americans in small towns and big cities alike will have access, at the click of a mouse, to a wide variety of financial institutions and a much broader array of products and services.

Rapid developments in electronic financial services pose an important challenge for those of us in the various branches of government. The Administration has worked hard to facilitate the growth of these services. We have already taken two very important steps to put in place a framework for the future that lies ahead for the financial industry.

The one step that has received significant attention is the landmark financial modernization act signed by the President last fall. By breaking down outdated barriers between banks and other financial service companies, that Act opened the door to greater innovation and competition. We have equipped the financial industry to take advantage of the rapid technological changes that are taking place, while providing consumers with greater choice and lower costs. At the same time, we worked hard to ensure that the legislation took the important first steps toward the privacy protections necessary in an increasingly electronic financial world.

Last week, we took a second, but less talked about step, as Congress passed the Electronic Signatures in Global and National Commerce Act. The "E-Sign" or "Digital Signature" Act, as it has been called, removes legal impediments to conducting transactions on-line. This legislation is a major milestone in the development of electronic finance. It provides the legal certainty for electronic transactions that business needs by preempting laws that require paper contracts, notices, and records. We worked very hard to ensure that this Act provided a viable framework for the future, by ensuring that consumers will continue to benefit from the protections they currently enjoy offline.

Both the financial modernization legislation and the digital signature bill represent critical and, I believe, historic steps forward for the American financial industry. They lay the groundwork for the rapid development of online financial services. While we are only in the early stages of what will clearly be a dynamic process, we can at least guess at some of the likely issues with which Congress and regulators may have to grapple in the years ahead.

• First, the accelerating and dramatic pace of change in how financial services are delivered underscores the priority of ensuring that both consumer protection and consumer confidence are as strong on-line as off-line.
• Second, in a world of disappearing geographic boundaries, it is likely that we may have to adapt our legal and regulatory framework.
• And third, rapid changes in the nature of products and market structures are likely to create challenges for our legal and regulatory framework as boundaries between products continue to break down.

I. Encouraging Growth by Building Consumer Confidence.

Of all the goods and services traded in our economy, financial services are among the best suited for electronic delivery. When we buy a financial product, we don't need to kick the tires or try it on for size. For the financial services industry to realize the full potential of electronic commerce, however, consumers must have confidence that they will not suffer by moving their financial activities on-line.

As the President said recently: "Just as at the dawn of the Industrial Age a hundred years ago, new rules were required to make sure that the Industrial Revolution worked for all our people...so we also need new rules for the Information Age to protect those old values."

As Congress moved forward on electronic signatures legislation, the Administration worked hard to ensure that the bill would give Americans the same consumer protections on-line that they have today in a paper world. Among other things, the legislation states that consumers must consent electronically to receive electronic notices and reasonably demonstrate that they have the ability to do so. Critical exceptions were added for certain types of notices, such as cancellation of insurance, foreclosure on a residence, product recalls, and court orders. The Administration believes that these protections are essential to preserve the vitality of consumer protection statutes and the continued development of electronic commerce.

Just as consumers need to know that existing protections will not be diminished on-line, they also need to know electronic finance will not create new problems? Americans also need to have confidence in how their financial institutions are using the information amassed from their electronic transactions. Americans should not have to forgo participating in our modern economy out of fear of losing their right to privacy.

The President has announced new legislation to protect the financial privacy of consumers. The proposal builds on the progress made in last year's financial modernization legislation, but would extend those protections to data shared within large financial organizations, and would add strong protections for the most sensitive data. At the same time, the legislation is structured in a balanced way so as to preserve the benefits that flow from the growing integration of the financial services industry.

We believe that our proposed privacy legislation, like the electronic signatures bill that just passed, will enhance consumer confidence in the financial services industry. That confidence will be crucial to providing a sound basis for the continued growth of electronic financial services. And it also lays the basis for what will surely be more groundbreaking legislation in the years to come as financial e-commerce becomes more widespread.

II. Adapting to a World without Borders.

The Internet knows no geographic borders. None of us are visionaries. But it is surely not impossible to imagine a world in the not-too-distant future where it is typical for an Internet customer to buy her mortgage in one continent, her insurance in another, and manage her finances in a third without even being aware of it.

We saw one example of the negative side to these dramatic changes, however, at yesterday's House Banking hearing on Internet gambling. While operating an on-line casino is illegal in the United States, on-line casinos have proliferated overseas. This kind of cross-border activity raises many challenges for our legal system in a very short period of time. Would any of you have imagined two years ago that Congress, let alone the House Banking Committee, would so soon be holding hearings on Internet gambling?

How will we effectively regulate activities in a world where geographic borders offer less constraint than ever? We are rapidly approaching a world in which it is as easy to trade shares listed in Tokyo or Frankfurt as in New York. Regulators will increasingly be challenged by the geographic limitations of their jurisdictions. Even within the United States, the availability of on-line financial services raises significant questions for products, such as insurance, that are regulated on a state-by-state basis. Beyond the world of finance, these questions already have raised many issues for taxation.

Let me suggest a few likely developments:

• First, national regulators will have to cooperate to a greater degree to prevent a "race to the bottom" in standards of supervision and oversight. New technology is likely to spur a gradual internationalization of standards and the cross-border consolidation of stock and derivatives exchanges as globalization intensifies.
• Second, we will need to develop common - or at least consistent - standards of accounting and auditing. We have already made progress in this area, but the process is likely to go further to ensure that the same high standards of financial accounting and auditing apply wherever a stock is listed.
• Third, for some products, Congress and the States will most likely revisit issues concerning the appropriate mix of federal and state regulation. Indeed, we have recently seen Congress address issues related to insurance products as part of both the Digital Signatures and Financial Modernization Acts. Doubtless Congress and the States will have to confront similar challenges as technological change gathers pace.

III. Adapting to a World of Rapidly Changing Conceptual Boundaries.

Technology does not just challenge the existence of national boundaries. It also breaks down barriers between once distinct market structures and the products that trade within them. As technology facilitates the development of new products and new ways of delivering existing products, the distinction between different types of products and markets will increasingly blur. These developments will change the way we think about product and market regulation.

We have already seen these challenges in the OTC derivatives markets, where the development of new products and electronic trading mechanisms has raised questions about the appropriate regulatory approaches for some time. Our position has been to adapt the regulatory environment to suit changing circumstances by calling for legal certainty for the OTC derivatives market. We are confident that Congress will enact these measures. Electronic trading systems are profoundly altering the structure of the securities markets, as well. Regulators and the exchanges are grabbling with these issues already. I expect that the pressures for change will increase as time goes on.

This convergence of products will continue to present challenges to Congress and the regulators. I expect that banking, insurance, and securities products will become less and less distinguishable over time. New products will present increasing challenges to our regulatory structure and to the concept of functional regulation. Looking further ahead, it is possible that old definitions will not be as relevant as they were and that Congress might find it appropriate from time to time to review the scope of regulatory boundaries.

IV. Conclusion.

These issues will only become more challenging, not less, as technology develops. If we are to preserve the competitiveness of our institutions and markets, it is essential that we find rational solutions that will both preserve market integrity and encourage innovation. We will have to continually examine our laws and regulatory structures to ensure that they are keeping up with our finance in this ever-changing environment.

Thank you very much.