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Jackson Mueller
Associate Director, Center for Financial Markets
Jackson Mueller is an associate director at the Milken Institute's Center for Financial Markets. He focuses on fintech, capital formation policy and financial markets education initiatives. Prior to joining the Institute, Mueller was an assistant vice president at the Securities Industry and Financial Markets Association (SIFMA), where he focused on...
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FinTech in Focus

By: Jackson Mueller
November 16, 2016
   
   

“Brexit” — it’s the new “FinTech”

A UK Supreme Court decision on the upcoming appeal of the High Court’s decision by Prime Minister Theresa May is unlikely to be rendered until early 2017. Even so, the UK Government is preparing the first draft of a bill that would trigger Article 50, which the UK Parliament would vote on before March 2017 — the self-imposed deadline for invoking Article 50. Despite the continued uncertainty as to how all of this ultimately plays out, institutional investors’ appetite for private debt, according to one study, remains robust with more than half of respondents “upbeat about the private debt market’s continued expansion over the year ahead.” Meanwhile, both corporations and investors have mixed sentiments when it comes to Brexit, according to a report by Allen & Overy, with 42 percent of corporations and 29 percent of investors saying that Brexit has no impact on plans to obtain or provide funding. However, 50 percent of corporations indicated that Brexit has put a hold on obtaining funding from alternative providers or limits their opportunities to do so.

What is the impact of Brexit on your plans for obtaining funding from alternative providers?

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Source: Allen & Overy, Funding European business: Strengthening alternatives

Global Developments

Hong Kong: Acting Secretary for Financial Services and the Treasury, James Lau, provided opening remarks at Hong Kong's first-ever FinTech week, where he focused on FinTech developments, RegTech, and wealth management. According to Lau, “the Securities and Futures Commission Fintech Contact Point has received the most regulatory enquiries among the three liaison platforms provided by our three regulators. This suggests a strong appetite for innovation in the securities and investment sector.” Following the remarks, the Hong Kong Monetary Authority released a white paper covering distributed ledger technology (DLT). According to the report,  there are a host of risk management and regulatory compliance issues associated with DLT that need to be thoroughly examined, including potential money laundering issues, personal data privacy issues, issues related to cross-border data flows, legal enforceability, liability, and extraterritorial reach. “As a regulatory authority, we need to have a thorough understanding of the various governance, risk management and legal issues associated with DLT before its wider use begins in earnest,” the report states.

U.S.: Looking for a job? The Department of Justice is hiring digital currency legal experts to help develop digital currency regulations. Meanwhile, FINRA has pulled uFundingPortal — a Regulation Crowdfunding platform — from its list of approved platforms. Separately, the U.S. Payments Forum announced the formation of a working committee focused on mobile and contactless payments, which will hold its first in-person meeting in early December. And lastly, the U.S. Treasury Inspector General for Tax Administration has warned that the Internal Revenue Service "needs to ensure that it develops a strategic plan that includes management oversight as well as adequate internal controls for its virtual currency programs. Until a comprehensive virtual currency strategy is developed, the IRS is open to the risk that undetected noncompliance of virtual currency taxable transactions will result in an increase to the Tax Gap."

UK: The Bank of England's chief operating officer, Charlottee Hogg, gave an update on the Bank's FinTech Accelerator, the world’s first by a central bank. According to Hogg, "We set up the Bank’s FinTech Accelerator in the Bank, launched in June this year, precisely to develop our practical experience of FinTech.  In the Accelerator, we seek to engage with a large number of FinTech firms and technologies, and to run a series of targeted, rapid proof of concepts (POCs) with a number of them.  All POCs are work on problems or challenges that are important to us, and the firms are carefully chosen through an open process based on our published criteria ... Recent POCs have covered three main areas — data analytics, information security, and some work exploring distributed ledgers." Meanwhile, the Financial Conduct Authority (FCA) signed a co-operation agreement with the People's Bank of China to "provide a framework for cooperation between the Parties with respect to promoting innovation in financial services." The partnership was formalized during the 8th annual UK-China Economic and Financial Dialogue. Earlier this month FCA chief executive Andrew Bailey discussed the regulator’s approach to fighting financial crime. According to Bailey, “If ever there was an area that strikes me as ripe for applying technology to harness the power of Big Data alongside distributed ledger technologies to produce better outcomes, while rationalizing the process and cutting costs, it is financial crime.”

Denmark: The Financial Services Union Denmark, the City of Copenhagen and the Danish Bankers Association formed Copenhagen FinTech — “a new association that will develop an ecosystem for FinTech entrepreneurs in the city.” The Danish FinTech sector is made up of nearly 400 companies employing 14,000 people, according to a report published in December 2015.

India: The government’s efforts to facilitate a cashless economy, including the abolishment of Rs 500 ($7.50) and Rs 1000 ($15) notes from circulation, is a boon to the FinTech community. According to one report, Paytm and Mobikwik — two rival digital wallet companies — have seen usage and transactions spike.

Singapore: Roughly 11,000 participants from 50 countries are taking part in Singapore’s FinTech Week this week. The party started off with a bang even before the week began after reports circulated suggesting Singapore’s government would relax regulations on venture capital firms in an effort to support its FinTech ecosystem. The measures are expected to be introduced by the Monetary Authority of Singapore in July 2017.

Europe: The European Commission has launched the Pan-European Venture Capital Fund(s)-of-Funds program to invest in venture capital funds across the EU in support of small businesses and startups.

Blockchain / Digital Currency Update

The Winklevoss brothers' bitcoin and ether exchange Gemini launched in Japan and South Korea. According to the press release, “our expansion to Japan and South Korea represents another milestone in Gemini’s pursuit of building a global next generation digital asset exchange.” Meanwhile, R3 has partnered with the Monetary Authority of Singapore (MAS) to launch a blockchain lab where the Authority "will support the development of the R3 Asia Lab to foster collaboration across traditionally competing institutions in the region on use cases and projects in order to innovate and further the advancement of distributed ledger technology (DLT)." And finally, Deloitte has decided to open source its Ethereum-based Smart Identity platform. The platform "consists of three main components: individual identity creation, institutional identity creation and analytics."

A Few Payments Developments

Citi announced the launch of Citi Pay last week for Citi customers to use for online and in-app purchases. Citi Pay is leveraging Mastercard's Masterpass "to allow Citi customers to use Citi Pay at hundreds of thousands of merchants across 33 countries at launch." The bank has also launched its API Developer Hub — opening up some of Citi's APIs to third-party developers. The portal will allow developers "to build their own financial services applications and client solutions that easily connect to Citi." Meanwhile, a PayPal update on the Apple iOS 10 now allows Apple users to transfer money to friends and family using Siri. Consumers in 30 countries will be able to use the service. In 2015, peer-to-peer volume across PayPal, Venmo and Xoom surpassed $40 billion. And finally, Dwolla is making the transition from an application to a platform with the recent announcement that it will abandon its mobile application (and consumer-facing products) to focus on business products. According to a blog post, “Today, Dwolla is a platform. Our APIs and business tools make the bank transfer network easy to use, understand, and integrate into software applications. Instead of using our mobile application or Dwolla.com, our partners are building their own. And, with each launch, our partners provide a new world-class user experience to their users — we couldn’t be more excited.”

South Africa and Domestic Remittances

According to a report by TechnoServe, domestic remittances account for up to four percent of the country’s GDP. The report looks into the use of remittances to spur financial inclusion in a country where nearly a quarter of the population does not have a bank account. As the report notes, "opportunities remain to improve user experience and leverage the potential of remittance interactions to strengthen overall financial inclusion" and current domestic remittance products "do not sufficiently strengthen ties to a broader range of financial products." Despite the entrance of MTN Mobile Money and M-Pesa, "they had trouble generating a regular user base." M-Pesa shut down operations in June 2016. Over 25 percent of transfers are cash-based, and between 70 and 75 percent "send or receive at least some remittances in cash, even if they primarily use an electronic method."

Overview of South African remittance market

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Source: TechnoServe, Domestic Remittances in South Africa