FinTech in Focus
Bitcoin Reaches $10,000 or $72 billion
Those of you who took out home equity lines of credit or maxed out your credit cards to buy bitcoin will be disappointed to hear that the price of bitcoin fell below $10,000 for the first time since early December. Bitcoin has lost nearly half its value from its December 17 record ($19,783). Of course, the decline in price might also be affecting bitcoin’s use in the “black e-commerce market.” A recent study by Sean Foley of the University of Sydney, Jonathan Karlsen of the University of Technology Sydney, and Tālis Putniņš of the Stockholm School of Economics in Riga found that “approximately one-quarter of all users (25%) and close to one-half of bitcoin transactions (44%) are associated with illegal activity. Furthermore, approximately one-fifth (20%) of the total dollar value of transactions and approximately one-half of bitcoin holdings (51%) through time are associated with illegal activity. Our estimates suggest that in the most recent part of our sample (April 2017), there are an estimated 24 million bitcoin market participants that use bitcoin primarily for illegal purposes. These users annually conduct around 36 million transactions, with a value of around $72 billion, and collectively hold around $8 billion worth of bitcoin.” Back in August, we profiled a Chainanalysis study covering the rise of cybercrime related to initial coin offerings on the Ethereum network.
Dan, Meet Everybody. Everybody, meet Dan.
Hello, FinTech in Focus readers. FinTech has won the battle. The sheer amount of activity on a daily basis is too much for me to handle. As such, I’ve called for reinforcements. Dan Murphy has joined the Milken Institute as an associate who will be working with me to build out our FinTech program and continue to publish high-quality work. For those who may not know, Dan is a huge fan of Japan’s newest musical group, the Virtual Currency Girls. For those interested in knowing what it’s like to work with me, please drop Dan an e-mail (email@example.com) or send a carrier pigeon to @_MurphysLaw_. Yes that is his real Twitter handle.
Financial Inclusion: $200 Billion Opportunity for Banks
A new report by EY quantifies how efforts in support of greater financial inclusion could boost global bank revenues by $200 billion in 60 countries. According to the report, financial inclusion can boost GDP by up to 14 percent in large developing economies and up to 30 percent in frontier markets. “Banks’ financial inclusion growth opportunities will be the greatest in markets that embrace technology-led innovation, and which have a clear and supportive policy framework for financial stability.”
Financial Inclusion Heat Map
The Banks Are Open
The long-awaited arrival of open banking in the United Kingdom and the second Payments Services Directive (PSD2) in the European Union (EU) is finally here. For those who, like me, constantly need to remind themselves of the overlap between the two, check out the handy explainer and Venn diagram below, both by the folks at Payments UK. Essentially though, the arrival of open banking and PSD2 signal the end of fees for credit and debit card purchases in the EU and the U.K., the opening of EU payments data to companies offering payments services, and the beginning of an era in which U.K. bank customers can choose to share their banking data with authorized third parties (such as FinTechs).
For many FinTechs, this is a major opportunity to improve their services or offer new product lines to their customers. Initiatives such as the Nesta Open Up Challenge have seized on this opportunity to channel FinTech startups’ energy into innovative solutions for small businesses. Funding Options, a firm that allows small businesses to compare loans across providers, will use the opportunity to improve their service, for example. Zopa, an online lender, will use the opportunity to allow its customers to verify their income with bank account transaction data.
CMA Open Banking and PSD2 Scope
Not everyone is excited about the dawn of open banking and PSD2, however. Many have raised concerns that this might open the door to firms like Amazon, Facebook, and Google. Still, others have noted security concerns and doubt whether a truly open banking system can also be a truly secure banking system.
A Position on FinTech
The World Federation of Exchanges—a 200+ member organization composed of exchanges, central clearing parties, and infrastructure providers—published its views on FinTech and the regulatory environment surrounding it. According to the organization, “We believe the scope of existing regulations should generally be sufficient to extend to many or most potential FinTech initiatives; this is because initiatives tend typically to be based around new technologies as opposed to new activities.” In regards to outsourcing, the organization sees “no reason why regulated entities’ use of new FinTech applications and solutions in and of itself should be any different in principle to the outsourcing of any other function.” Lastly, regulatory guidelines or principles about FinTech innovations should be developed at the global level and any such framework must ensure that “appropriate consistency” exists between FinTech firms and traditional regulated entities.
Party Like It’s 1999
I know some of you still own Will Smith’s Willennium album which is, without a doubt, possibly one of the greatest pieces of music since Mozart’s Symphony No. 40. Anyway, congrats to you venture capitalists out there for the strongest year in global venture capital funding since the dot-com era. PwC released its MoneyTree Report which found global venture capital funding hit $164 billion. Financing activity in Asia and Europe saw increases in both deal value ($70.8 billion and $32.7 billion) and number of deals (2,847 and 1,950 deals) in 2017. U.S. VC-backed companies saw nearly $72 billion invested in 2017 across more than 5,000 deals. Even so, the number of deals fell to its lowest annual total since 2012. Separately, PitchBook and the National Venture Capital Association (NVCA) published the Venture Monitor report which found that U.S. VCs deployed more than $84 billion in capital invested across roughly 8,100 completed financings. While the number of deals dropped 6 percent, total deal value eclipsed 16 percent year over year. U.S. FinTech investment posted its strongest year since the 2015 peak, with aggregate FinTech investments reaching approximately $6.5 billion in 2017.
Movers and Shakers
InsurTech: MetLife is in the process of setting up a $100 million MetLife Digital Ventures fund and an accelerator program in conjunction with Techstars.
Blockchain Developments: Chinese-based search giant Baidu has followed the path of Tencent by launching its own blockchain-as-a-service (BaaS) platform—Baidu Trust—which "allows the conducting and tracing of transactions, and can be applied in various use cases, including digital currency, digital billing, bank credit management, insurance management financial auditing, and more," according to an article in Coindesk. Separately, IBM is launching a joint venture with Maersk to create a blockchain-based platform for global trade. According to IBM, the aim of the new company "will be to offer a jointly developed global trade digitization platform built on open standards and designed for use by the entire global shipping ecosystem. It will address the need to provide more transparency and simplicity in the movement of goods across borders and trading zones."
Initial Coin Offerings: The Crypto Valley Association (CVA)—a Swiss-based nonprofit organization—published a code of conduct for initial coin offerings (ICO). The code of conduct “calls on all organizations running an ICO to be fully transparent about all details pertaining to the process. Importantly, these details should be disclosed in a manner that can be easily understood even by those that are not technologically sophisticated. This includes being clear about how funds raised are intended to be used and how the token will function, as well as providing a clear risk assessment for the underlying technology,” the release states.
Payments: Ant Financial received approval from Malaysia's central bank to launch its e-wallet service in the country. Meanwhile, Paytm is moving into investment and wealth management with the launch of advisory firm Paytm Money. In the U.S., Same Day ACH debit and credit transactions grew 51 percent between November and December to 15.2 million. In 2017, Same Day ACH transactions breached 75 million, totaling $87.1 million dollars transferred, according to a press release from NACHA. NACHA also released a request for comment on expanding Same Day ACH. Feedback is requested on four proposals: adding a third daily Same Day ACH processing window, providing faster funds availability to receivers of both Same Day and non-Same Day ACH credits, raising the per-transaction dollar limit on Same Day transactions to $100,000, and exploring the industry's interest in ACH processing on weekends and holidays. Comments on the first three proposals are due on January 26, while comments on the fourth proposal are due February 23. Lastly, numbers from Zelle and PayPal's Venmo are in and are looking bright. Venmo processed $9.4 billion worth of transactions in the third quarter (+93 percent year over year), while the Zelle network processed $17.5 billion of payments in the third quarter.
The State of Digital Lending: The American Bankers Association (ABA) released a report covering digital lending and found “that only half of banks with assets over $1 billion and 38 percent of those under $1 billion in assets currently use a digital origination channel.” Also, “31 percent of banks indicated they would be interested in forming a partnership with a third-party provider to originate and service consumer loans; 80 percent indicated they would be interested in using technology to support their small business loans business.”
Alternative Finance: India’s peer-to-peer lending platforms have formed a trade association—the Association of P2P Lending Platforms. Speaking of India, German lender Kreditech has partnered with banking platform Mambu to provide short-term lending products in India according to Bank Innovation. Separately, Kroll Bond Rating Agency (KBRA) released its 2017 Consumer Loan Marketplace Lending Year In Review and 2018 Outlook. According to KBRA, total asset-backed securitizations (ABS) “topped $7.8 billion in 2017, up from $4.6 billion in 2016, a year-over-year increase of 71 percent.” SoFi led the way followed by Prosper, LendingClub, Marlette, and Avant. Compared to 2015 and 2016, there were few ABS performance triggers breached in 2017 “partially due to trigger levels being set higher than in previous deals and at multiples wider than expectations.” While KBRA does not believe the Madden decision applies to marketplace loans originated by the MPLs' funding banks, the rating agency “has been cautious about rating securitizations containing loans originated to Second Circuit borrowers with interest rates above the respective states' usury caps.” Securitizations rated by KBRA that have included loans to borrowers residing in the Second Circuit states with interest rates above the states' respective usury limits “have limited these loans to no more than 10 percent of the collateral pool and have required an opinion from issuer’s counsel stating that a court should respect the exportation of the usury laws in effect in the governing law of the loan contract no matter where the borrower reside.” Lastly, on the crowdfunding front, Regulation Crowdfunding (Reg CF) new issuances increased nearly 200 percent year over year, while the amount of capital commitments increased by nearly 225 percent.
Australia: The Australian Securities and Investments Commission licensed the first crowd-sourced funding intermediaries under the new crowd-sourced funding regime. “With the grant of these new authorisations eligible public companies will now be able to use the CSF regime to raise capital by making offers of ordinary shares to investors via the on-line platform of one of these intermediaries,” the press release states. Meanwhile, the country's financial intelligence agency, AUSTRAC, released draft AML/CTF rules that would regulate digital currency exchanges. The public consultation on the draft rules will close February 13.
Bahrain: The Central Bank of Bahrain (CBB) authorized three regulatory sandbox applicants—Wahed Inc., BitArabia, and Belfrics—allowing the companies to test their FinTech solutions in the kingdom. The three companies follow in the footsteps of three previously approved participants—Tramonex Limited UK, Nowex WLL, and Rain Financial. Lastly, Bahrain FinTech Bay named Khalid Esam Saad as CEO.
China: Authorities are escalating their crackdown on cryptocurrency trading by targeting online and mobile platforms offering exchange-like services.
EU: The European Commission issued a press release on the eve of the launch of the revised Payment Services Directive (PSD2). Valdis Dombrovskis, vice-president responsible for financial stability, financial services and capital markets union, commented that the ban on surcharges for consumer debit and credit card payments, alone, "could save more than €550 million per year for EU consumers."
France: The French government has indicated that officials will vet proposed foreign takeovers of French companies involved in data protection and artificial intelligence among others.
Hong Kong: The Hong Kong Monetary Authority (HKMA) launched an industry consultation on Open API framework. “The proposed Open API framework set out in the consultation paper comprises a selection of Open API functions and deployment timeframe, technical standards, third-party service provider governance, facilitation measures and the maintenance models,” the press release states.
India: In last week’s release, we profiled allegations made by an Indian reporter that Aadhar data could be accessed for as little as $8. Despite repeated denials by officials at the Unique Identification Authority of India, the authority added an extra layer of privacy to the Aadhaar system—marking the biggest overhaul of the system since its introduction in 2010. Separately, the Reserve Bank of India (RBI) stated that existing nonbank financial companies cannot operate as peer-to-peer lenders. The clarification was included in a list of FAQs regarding the RBIs peer-to-peer lending guidelines.
Korea: There has been a lot of confusion from government officials over the last week concerning whether or not the government intends to shutdown Korean-based virtual currency exchanges. Jung Ki-joon, head of the Office for Government Policy Coordination's Economic Policy Coordination Office, tried to clarify past remarks made by Justice Minister Park Sang-Ki, by stating that the government will make a decision after sufficient consultations have taken place among relevant agencies.
Lithuania: The Bank of Lithuania announced the creation of LBChain—a regulatory sandbox focused on blockchain-based solutions. “The Bank of Lithuania would provide LBChain participants a technical platform and consultations on applicable regulations. It is planned that this platform’s facilities will only be available to innovative companies selected according to certain criteria that devise and develop blockchain technology based services and solutions. Upon confirmation of the project’s co-financing with EU funds and completion of preparations, the LBChain platform/service could be launched already in 2019.”
Qatar: Qatar's central bank governor gave prepared remarks titled, "Fintech as a core of the strategy: Challenges and Opportunities." The governor, Sheikh Abdullah bin Saud al-Thani, focused on virtual currencies and efforts to build a FinTech hub.
U.K.: The Federation of Small Businesses (FSB)—a U.K. trade group representing small and mid-size businesses—launched the FSB Funding Platform, developed by Finpoint, that "uses artificial intelligence matching technology to match applicants with finance providers." The platform is regulated by the Financial Conduct Authority and offers free access to over 100 lenders. Lastly, Stephen Ingledew has been tapped to head FinTech Scotland—an organization established by the Scottish government, the University of Edinburgh, and the Scottish Financial Enterprise.
U.S.: Money laundering has been the topic du jour for the past week. Senator Elizabeth Warren (D-MA) called for a review of outdated anti-money laundering (AML) laws, while U.S. officials are increasingly concerned and “aggressively” pursuing overseas virtual currency platforms that do not have appropriate safeguards in place to protect against money laundering.
Roughly a week after Texas officials halted the sale of new cryptocurrency by U.K.-based firm BitConnect, North Carolina officials filed a cease and desist order after finding that BitConnect “was not registered as a dealer or salesman of securities in North Carolina and offered investments called the BitConnect Lending Program and the BitConnect Staking Program.” In response, BitConnect shuttered its BitConnect lending and exchange platform. “In short, we are closing lending service and exchange service while BitConnect.co website will operate for wallet service, news and educational purposes,” a company release stated. BitConnect’s token, BCC, which had a market value of roughly $1 billion, plunged 96 percent after the announcement. (TheNextWeb has a great article on the rise and fall of BitConnect for those interested in reading further.) Lastly, and speaking of digital currency, Illinois lawmakers have formed a digital currency subcommittee.