Mueller Jackson
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
December 11, 2017

Digital Financial Inclusion: Sub-Saharan Africa

The European Investment Bank (EIB) published an interim report on digital financial inclusion in sub-Saharan Africa (SSA) based on discussions from an EIB roundtable that took place in July 2017. Roughly 350 million out of the nearly 600 million adults in SSA are unbanked. However, the spread of mobile technology has resulted in a greater share of adults with access to an account. In 2014, more than one-third of adults in the region had access to an account, up from less than a quarter in 2011. Interestingly, the report also notes that of the 35 mobile money markets of the world that have reached 1 million active accounts, more than half are in SSA countries. 

Bank Account vs. Mobile Account Ownership in Select SSA Countries (2014)

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Some Headlines

Payments: PayPal announced that personal data for nearly 2 million TIO users might have been compromised. Back in July, PayPal completed its acquisition of TIO Networks after purchasing the company back in February for $230 million. The New York Department of Financial Services issued a response, applauding PayPal’s “rapid response” and used the instance to demonstrate “the necessity of DFS’ landmark cybersecurity regulation and underscore the strength and effectiveness of our strong state-based financial services regulatory framework, including for the FinTech industry.”

Separately, Finastra—a provider of financial services software—announced that it is "now able to connect financial institutions to EBA CLEARING's pan-European instant payments infrastructure via SIAnet.” Lastly, Amazon is rolling out monetization tools for Alexa after announcing two voice-first opportunities—Alexa In-Skill Purchasing and Amazon Pay for Alexa skills. 

Cryptocurrencies: The number of users on Coinbase—a virtual currency exchange—surpassed the number of Charles Schwab brokerage accounts. The news comes a month after the exchange was said to have added 100,000 new users over 24 hours following the rise of bitcoin’s price to $7,350 (which now seems like a minuscule figure). Currently, Coinbase now has a user base totaling more than 13 million users, up three million users since the end of 2016. 

New developments have also arisen from the U.S. Internal Revenue Service’s efforts to obtain certain user data from Coinbase. More than a year since the case was filed, the federal court in California found that the IRS may investigate Coinbase account holders who may not have paid federal taxes on profits from the sale of virtual currencies, but narrowed the scope of the original John Doe summons to pertain only to Coinbase users that have bought, sold, sent, or received at least $20,000 worth of bitcoin in a given year from 2013 to 2015. According to the court, “Coinbase argues that the Government committed an abuse of process because it seeks to enforce ‘a summons that lacks a proper investigative purpose’ and ‘the production of a vast array of documents relating to 14,000 accounts, without any proper foundation.’ The Court, however, finds that the Government has met its burden of showing that the Narrowed Summons serves the legitimate investigative purpose of enforcing the tax laws against those who profit from trading in virtual currency. And the information the Court has ordered produced is relevant and no more than necessary to serve that purpose. Coinbase’s novel insistence that it has met its burden to show abuse of process by virtue of the Government having narrowed its summons is unpersuasive. No court has even suggested such a rule, and this Court declines to be the first.”

After multiple calls for stricter oversight and enforcement of initial coin offerings (ICOs), the U.S. Securities and Exchange Commission’s Cyber Unit filed its first enforcement action against “a recidivist Quebec securities law violator, Dominic Lacroix, and his company, PlexCorps.” According to the press release, the ICO raised $15 million from thousands of investors enticed by claims that their investment in PlexCoin would yield 1,354 percent profit in 29 days. The action comes days after the SEC's director of corporation finance, William Hinman, stated that more ICO-related enforcement actions are on their way, prompting calls for the ICO community in the U.S. to do a better job at self-regulating and self-policing to lessen the effects of regulation.

Lastly, startups in Europe have raised more capital through ICOs in the last three years than any other region. Roughly 40 percent of all ICOs are based in the European Union, with 466 transactions totaling $1.76 billion, according to a report by Atomico.

Map of Funds Raised ($M) via ICO by Country

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Source: Atomico

Alternative Finance: Lending Club announced the first-of-its-kind transaction in marketplace lending, "a whole loan transaction structured as a tradeable, pass-through security called a CLUB Certificate.” According to the press release, the instrument “trades in the over-the-counter market with a CUSIP and is efficiently cleared through the Depository Trust and Clearing Company (DTCC).” Several peer-to-peer platforms have launched or are launching Innovative Finance (IF) ISAs in the U.K. Despite expected high demand, new investors will have to wait as IF ISAs are first made available to existing customers active on certain peer-to-peer platforms to maintain balance between investors willing to lend and borrower demand. 

Open Banking: FIS—a global financial technology solutions provider—announced the launch of FIS Code Connect gateway which includes 300 APIs across banking, payments, and consumer finance. "As more APIs and application use cases from both FIS and key partners are added to the portal, Code Connect will provide FIS clients and third-party developers with a growing, thriving ecosystem for use in accelerating financial and payment technology innovation," the press release states. 

Meanwhile, Chris Woolard, executive director of strategy and competition at the Financial Conduct Authority, gave prepared remarks covering open banking, among other issues. According to Woolard, “As well as clearing the way for small start-ups, some are fearful that the opening up of data will encourage tech giants like Facebook, Google, and Amazon to create platforms that can bypass incumbents entirely. So what’s the truth? The honest answer is we just don’t know for certain. We are entering into uncharted territory here, armed only with our best estimates of where the market will go.” That said, Woolard cautioned others about the hype surrounding open banking, saying that it is likely to take time for a winning formula to emerge. He added, "As the regulator, it is not for us to dictate what the precise products and services of the future should be. Rather, our role is to ensure that those that emerge produce good consumer outcomes. The goal is not technology for technology’s sake. The mere ability to push the envelope is not enough if there is no tangible benefit to consumers at the end of it.”

Blockchain Developments: BBVA, in collaboration with Wave, "conducted the first pilot that uses blockchain to automate the electronic submission of documents in an import-export transaction between Europe and Latin America." According to the release, the amount of time to send, verify, and authorize an international trade transaction fell from 7-10 days to 2.5 hours. "The pilot focused exclusively on electronic document submission, but it could be applied to the final credit card payment and even to the prior procedures and financing of the operations."

Artificial Intelligence: Two of China's leading technology firms—Baidu and Xiaomi—announced a partnership to leverage each other’s strengths in both artificial intelligence and internet of things. Intuit has selected Amazon Web Services (AWS) "as its standard for machine learning and artificial intelligence workloads." Intuit will also run its companywide data lake on AWS, according to the release.

Millennials and Teslas

Congratulations, Millennials. We’ve done it. One of our own has successfully survived a month without social media. However, the author exploited a loophole in the fact that he still had a phone and checked other mobile applications. “Scrolling urges were now channeled into more frequent app checking of the weather, email, and my bank account; sometimes I’d lift the phone and unlock the screen for no apparent reason other than to fill the void of needing to check something.” Please, someone, give this man back his access to nonsensical political rants on Twitter and Facebook.

Don’t have the means to open up an Amazon-like warehouse of servers to mine virtual currencies? No worries, just buy a Tesla. As an article in Electrek notes, “Ethically, it’s not what the Supercharger network is meant to power and therefore, some might find issue with people using it to power mining rigs instead of long distance driving.” But when the price of bitcoin, for instance, is at $16,000… do we really care about ethics? Mine on. 

Global Developments

International: Agustin Carstens, who took over as general manager of the Bank of International Settlements last Friday, commented on the rise of bitcoin and making payments systems and FinTech applications more resilient to cyberattacks. "Anything that grows in price as fast as Bitcoin has done it, without having a real clear understanding of what is behind it, should at least raise some eyebrows," he said during an interview

European Union: The European Commission adopted final rules to its Payments Services Directive (PSD2) “to modernise Europe's payment services so as to keep pace with this rapidly evolving market and allow the European e-commerce market to blossom.” Final adoption by the Commission means that the European Parliament and European Council have three months to scrutinize them. “Subject to the scrutiny period, the new rules will be published in the Official Journal of the EU. Banks and other payment services providers will then have 18 months to put the security measures and communication tools in place,” according to the press release. In the memo, the Commission notes that with the adoption of these rules, third party payment services providers "will no longer be allowed to access the customer's data through the use of techniques of 'screen scraping'." However, and according to Arturo González Mac Dowell from Eurobits Technologies, screen scraping can still be utilized for non-PSD2 regulated information (deposits, loans, pension plans, investment funds, etc.), "unless banks choose to offer an API that works better than screen scraping of electronic banking, and, is either free or cheaper than screen scraping."

In other news, Kathleen Köhn, senior officer in the insurance and pension fund supervision department at the German Federal Financial Supervisory Authority, was tapped to serve as the chair of the European Insurance and Occupational Pensions Authority InsurTech Task Force.

India: In late November, India's intelligence agencies issued instructions to troops on the Chinese border to delete 42 applications developed by Chinese firms or with links to China, citing spyware threats to national security. Separate from that announcement, a representative from the Reserve Bank of India published a report titled, “From Cash to Non-cash and Cheque to Digital: The Unfolding Revolution in India's Payment Systems.” The report found that “(i) there has been a reduction in the usage of cheques prior to demonetisation; and (ii) since demonetisation, cash transactions have moved in a sustained manner to non-cash mode of payment systems via retail electronic payment systems, point of sale terminals and cheques.” In particular, the report notes that the average monthly volume of checks during the demonetization period “was significantly higher than the pre-demonetisation period but was equal during demonetisation and post-demonetisation. However, the average monthly value of cheques was equal for all the time buckets. This implies that during the demonetisation period, there was a sudden increase in cheque volume, though cheque values did not increase significantly, suggesting that a large amount of small value cash transactions moved to non-cash mode of payments through cheques.”

Growth Rates—Pre-Demonetization, During Demonetization, and Post Demonetization 

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Source: Sasanka Sekhar Maiti, Assistant Adviser, Department of Statistics and Information Management of the RBI. 

Japan: The country's largest virtual currency exchange, bitFlyer, announced that it was granted a BitLicense from the NY Department of Financial Services (DFS) and launched services in the U.S. “DFS has approved six firms for virtual currency charters or licenses, while denying those applications that did not meet DFS’ standards,” according to a DFS press release on the announcement.

U.S.: The House Energy and Commerce committee held a hearing on the influence of algorithms on corporate decision-making and impact on consumers. The Electronic Privacy Information Center, in a letter to certain lawmakers, said it is “imperative that algorithmic process by open, provable, and accountable. Arguments that algorithmic transparency is impossible or 'too complex' are not reassuring. It is becoming increasingly clear that Congress must regulate AI to ensure accountability and transparency," adding that algorithmic transparency "must be a fundamental principle for consumer protection.” 

The Chicago Mercantile Exchange and the Chicago Board Options Exchange (CBOE) futures exchanges self-certified new contracts for bitcoin futures products, and the Cantor Exchange self-certified a new contract for bitcoin binary options, according to a press release from the Commodity Futures Trading Commission (CFTC). This news has been met with concern from the Futures Industry Association (FIA) about the lack of historical data on such products and the lack of public input. “A more thorough and considered process would have allowed for a robust public discussion among clearing member firms, exchanges and clearinghouses to ascertain the correct margin levels, trading limits, stress testing and related guarantee fund protections and other procedures needed in the event of excessive price movements. The recent volatility in these markets has underscored the importance of setting these levels and processes appropriately and conservatively,” the FIA stated.

Speaking of the CFTC, Daniel Gorfine, chief innovation officer and director of LabCFTC at the CFTC, published an Institute of International Economic Law Issue Brief titled, “FinTech Innovation: Building a 21st Century Regulator.” In the brief, Gorfine outlines the CFTC's thinking regarding FinTech innovation and the role of LabCFTC. In particular, Gorfine provides details on three core components to LabCFTC: Guide Point (dedicated point of contact for FinTech innovators to engage with CFTC staff and obtain feedback); CFTC 2.0 (fostering the understanding, testing, and potential adoption of new technology to make the CFTC a more effective regulator); and DigitalReg (supporting the CFTC's effort to build a 21st-century regulator and regulatory framework by serving as a CFTC-wide internal resource to educate staff on FinTech developments).

Nearly two months after being confirmed as Federal Reserve governor, Randal Quarles gave prepared remarks on prudent innovation in the payment system. On the potential use cases of distributed ledger technology Quarles stated that the financial services industry “is now moving cautiously from pilot projects in many of these areas to the use of these new technologies in limited production settings. This cautious approach to using new technology appears to reflect the weight of responsibility the financial industry bears for protecting both their customers and their reputations. Continued monitoring of developments is in order, and time will tell how these new technologies--and others--can contribute to a safe and secure payment system and broader financial system. The Federal Reserve has been actively monitoring these developments and will continue to do so.” On private digital currencies, Quarles noted that without the backing of a central bank, asset, and institutional support, “it is not clear how a private digital currency at the center of a large-scale payment system would behave, or whether the payment system would be able to function, in times of stress.” As for a central-bank-issued digital currency, Quarles said he was particularly concerned “that a central-bank-issued digital currency that's held widely around the globe could be the subject of serious cyberattacks and could be widely used in money laundering and terrorist financing.” In addition, the prospect of a government-sponsored digital currency “might even derail private-sector plans to enhance the payment services provided to their customers, thereby significantly disrupting the financial networks that exist today in ways that could create instability.” 

Podcasts continue to draw interest from regulators. The Federal Reserve Bank of San Francisco held a discussion on regulatory sandboxes in Asia with Kate Lauer, former senior policy advisor at the Consultative Group to Assist the Poor (CGAP), now head of global regulatory strategy at PayPal. Meanwhile, CFTC Talks presented a roundtable discussion covering bitcoin and the CFTC's role in regulating new derivatives contracts. Panelists included: LabCFTC’s Daniel Gorfine, the Division of Market Oversight’s Amir Zaidi, the Division of Clearing and Risk’s Brian Bussey, and the Division of Swap Dealer and Intermediary Oversight’s Matt Kulkin.

Lastly, Thomas Curry, former Comptroller of the U.S. Office of the Comptroller of the Currency, joined the private law firm of Nutter McClennen & Fish LLP as a partner in Nutter’s corporate and transactions department. Curry also co-leads the firm’s banking and financial services group. 

China: Regulators have cracked down on the loosely-regulated market for small, unsecured cash loans. According to a statement from multiple ministries: “Amid the rapid development of cash loans - while they have played a role in meeting the normal credit needs of some groups - problems such as over-lending, repeat borrowing, improper collection, abnormally high interest rates, and privacy violations have become prominent.” According to an article in BloombergView posted by Junheng Li, founder of JL Warren Capital LLC, there are three notable changes: “First, the issuance of new licenses to online micro-loan platforms is being suspended, suggesting that regulators are scrutinizing online lending practices. Second, banks and bank-holding companies are being told not to buy loans underwritten by online platforms because such assets are deemed too risky. Third, turning the loans into securities will be forbidden because regulators believe securitization amplifies risks and gives investors less of an incentive to perform due diligence on the underlying assets.”

Meanwhile, regulators are also looking to crack down on virtual currency exchanges facilitating over-the-counter transactions between virtual currencies and Chinese yuan. Headlines surfaced last month about the growing use of mobile messaging services for OTC bitcoin trading.

Lithuania: The country is becoming a go-to for FinTech firms, especially in the aftermath of the Brexit vote. The country “has seen a threefold increase in licence authorisations for fintech firms headquartered outside of Lithuania since 2015,” according to a report by Reuters. “Specialised banking licences, introduced in January, take up to six months to secure, while e-money and payment licences are promised in three. That’s two to three times faster than elsewhere,” the report notes. 

South Korea: Samsung SDS—an information technology sub-division of Samsung—signed an agreement with the Seoul Metropolitan Government to expand its blockchain business to the public sector. South Korea's Financial Services Commission is looking to develop measures to prevent the use of cryptocurrencies for money laundering purposes.

New Zealand: The Financial Markets Authority published a sector snapshot of the country's peer-to-peer and crowdfunding marketplaces. “The data shows $259.9 million is currently loaned to individuals and $29.5 million loaned to businesses through peer-to-peer lending in the year ending 30 June 2017. A total of $74.2 million was raised from investors through crowdfunding, including wholesale investors, in the same period,” according to the press release.

Mexico: Mexico's Senate approved legislation covering the regulation of the FinTech sector, including cryptocurrency firms and crowdfunding. The bill is expected to pass the lower house by December 15, with finer details "hashed out in so-called secondary laws," according to the report by Reuters.

Luxembourg: Luxembourg's House of Financial Technology Foundation announced a memorandum of understanding with the FinTech Association of Japan.

Panama: The Ministry of Economy and Finance is moving to put the country on the FinTech map (translated) with a financial services modernization bill expected to be introduced later this year.

Italy: The Sixth Standing Committee (Finance) of the Chamber of Deputies held a fact-finding inquiry with Fabio Panetta, deputy governor of the Bank of Italy, on the impact of FinTech on the financial, banking, and insurance sectors. 

U.K.: The Bank of England released its 2017 Financial Stability Report, which included a number of references to FinTech. While the report “did not find compelling current financial stability risks,” FinTech’s dynamic nature warrants further monitoring. In addition, the Financial Policy Committee and Prudential Regulation Committee found that competitive pressures from FinTech “may cause greater and faster disruption to banks' business models than banks project.” The report also mentions how the Bank is investing in technologies to provide more informed analysis on trade repository (TR) data. “The new data architecture will solve some of the existing technological impediments to analysing TR data, most notably by combining the data available from multiple TRs into one integrated dataset and automating the identification of duplicate copies of reported transactions. By improving data collection, processing and storage, the Bank will be able to analyse larger volumes of data, across multiple TRs and across time, significantly faster.”

Separately, HM Land Registry published its business strategy document to prepare the agency “to become the world’s leading land registry for speed, simplicity and an open approach to data.” Among the initiatives, Digital Street is an attempt to explore how land registration might work in 2030. Officials are launching a pilot digital register by the end of this year which is fully machine readable and can be updated instantly. HM Land Registry is also looking into efforts to support access to data and the potential for digital ledger technology, among other avenues.   

Speaking of blockchain technology, the House of Lords published a report titled, “Distributed Ledger Technologies for Public Good: leadership, collaboration and innovation.” In the foreword to the report, Lord Chris Holmes, who is also vice chair of the All-Party Parliamentary Group on FinTech, stated that distributed ledger technology “can play a valuable part in enhancing the delivery of government services to the citizens of the UK, in securing the UK's competitive position as a global leader in technology‐based innovation and in protecting the security of government and citizens’ data at a time when both are increasingly under threat.” Realizing that other countries are trying to capitalize on the technology, the report “seeks to re‐energise and refocus UK government attention on DLT's potential so that we can accelerate our own digital maturity, enhance the productive capacity of our businesses and benefit our citizens.”

Indonesia: The Bank of Indonesia released new sets of rules covering FinTech companies. Among them, the Bank will ban FinTech payments firms from transacting in virtual currencies, but the curbs will not apply to the trading of digital currencies. Meanwhile, Indonesian FinTech firms and regulators were welcomed by their Australian counterparts earlier this week in Sydney and Melbourne to discuss financial inclusion and efforts to develop a robust FinTech industry. 

Australia: Prime Minister Malcolm Turnbull announced a royal commission into the country's banking sector which will focus on the nation's banks, wealth managers, superannuation providers, and insurance companies. In response, some FinTechs announced their support for the commission. Separately, the Turnbull government will make a strong push early next year to legislate a national Consumer Data Right, allowing customers open access to their banking, energy, phone, and internet transactions. “The Consumer Data Right was one of 41 recommendations from the Productivity Commission’s Data Availability and Use Inquiry, tabled in parliament in May this year. The Government’s formal response to the inquiry will be published in coming weeks,” according to Australian MP Angus Taylor. And for all the talk about open banking, screen scraping firms have hit back at suggestions by Commonwealth Bank that screen scraping be banned under open-banking efforts.

Hong Kong: The Hong Kong Monetary Authority announced the FinTech Supervisory Chatroom as part of its FinTech Supervisory Sandbox 2.0. “It seeks to provide supervisory feedback to authorized institutions (AIs) and technology firms at an early stage when new technology applications are being contemplated, thereby reducing abortive work and expediting the rollout of new technology applications.” The regulatory authority also signed a FinTech cooperation agreement with the Dubai Financial Services Authority.

Vietnam: The State Bank of Vietnam has partnered with the Mekong Business Initiative to launch FinTech Challenge Vietnam, which aims at providing new growth and investment opportunities to local Vietnamese entrepreneurs by promoting innovation challenges. 


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