FinTech in Focus
FinTech on Capitol Hill
A few developments from the halls of Congress that some of you may be interested in: first, the House of Representatives passed H.R. 1457, the Making Online Banking Initiation Legal and Easy (MOBILE) Act of 2017, by a vote of 397-8. The act would enable consumers to open up a deposit account online or from a mobile device without having to visit a branch office. Current laws in certain states prohibit financial institutions from using digital forms of identification (driversdrivers’ licenses or other state-issued identification cards) provided by a customer through mobile or online device to open accounts. Given the continued decline in branches, the increase in the number of so-called "banking deserts," and a financial services ecosystem increasingly reliant on mobile and online devices, the bill, sponsored by Rep. Scott Tipton (R-CO), passed the House with wide bipartisan support.
Second, the House Financial Services Subcommittee on Financial Institutions and Consumer Credit held a hearing titled, “Examining Opportunities and Challenges in the Financial Technology (“Fintech”) Marketplace.” While the title of the hearing was about FinTech, the discussion largely focused on marketplace lending issues, particularly ‘true lender’ and ‘valid when made’ litigation that threatens the bank-partnership model. Discussion also focused on the regulatory complexity in the U.S. at the state and federal levels, and the obstacles this presents for both mature FinTechs and startups. Personally, I thought the committee was quite bullish on partnerships between FinTechs and banks, and the vast majority of questions focused on what Congress should do to foster and maintain these relationships.
Also, developments in the cryptocurrency space have lawmakers on both sides extremely worried. Rep. Carolyn Maloney (D-NY) is apparently working on a bill “that would treat virtual currencies that are being used as investments as securities. So that investors will get basic investor protections like adequate disclosures and rules against market manipulation and market fraud .... My bill would also subject virtual currency exchanges to exchange-like regulation by the [U.S. Securities and Exchange Commission], including robust cybersecurity standards to ensure that these massive cyber heists stop happening.” Keep an eye out for that legislation to be introduced in the near future.
Millennials: Away with Avocado Toast, We’re into Saving
Hello FinTech in Focus readers! My apologies to all the millennials receiving this newsletter for lack of colorful visuals this week. Bank of America recently released its 2018 Better Money Habits Millennial Report, which shows that millennials are just dominating Tom Brokaw’s Greatest Generation and Generation X when it comes to money management habits. That’s right, even if it takes us two decades to save enough to put down a deposit on a home in New York, at least we’re saving. The best part of the report can be found in the introduction by Bank of America's Andrew Plepler. He states: "My takeaway? Millennials deserve more credit – both from themselves and from others – for their mindfulness when it comes to money and their lives. Let’s not forget, many millennials entered the workforce during the most severe economic downturn since the Great Depression. However, they seem to have weathered the storm quite admirably." Pop the champagne, this generation rocks!
Lots to Cover, So Let’s Dive into Some Headlines
InsurTech: Revolut launched a pay-per-day travel insurance product providing coverage for up to 40 days with policies underwritten by the Thomas Cook Group. Meanwhile, SoftBank Group is reportedly in talks to buy online insurance aggregator PolicyBazaar.
Blockchain: At the Digital Assets Investment Forum in New York, a group of cryptocurrency and blockchain thought leaders formed the Digital Asset Leadership Committee in collaboration with FinTech4Good. According to Xiaochen Zhang, chairman of the committee, the committee "aims to bring together institutions and global experts to provide thought leadership and implement impactful initiatives to scale up digital asset investing around the world."
Cryptocurrency: We’re moving on from hacking to physical robberies, unless of course you want to focus on Japanese-based cryptocurrency exchange Coincheck which lost $532 million worth of XEM tokens to hackers last week— the largest exchange hack to date. Whoever was behind the hack is already trying to move the funds, and Japanese authorities have launched an investigation into all cryptocurrency exchanges in the country to uncover any additional security gaps. At this time, given the massive amount of cryptocurrency lost to hacking, I’m not even sure it’s worth including trivial amounts lost to scams and hacking such as the $150,000 of ethereum obtained from a recent Experty ICO phishing scam. Separate from these developments, mobile trading application Robinhood announced that it will allow users to trade bitcoin and ethereum for zero-fees. Over 1 million people signed on to the waiting list four days after the announcement. Meanwhile, payments company Stripe will stop processing bitcoin transactions in late April. According to the company:
“Over the past year or two, as block size limits have been reached, Bitcoin has evolved to become better-suited to being an asset than being a means of exchange.... This has led to Bitcoin becoming less useful for payments, however. Transaction confirmation times have risen substantially; this, in turn, has led to an increase in the failure rate of transactions denominated in fiat currencies. Furthermore, fees have risen a great deal. For a regular Bitcoin transaction, a fee of tens of U.S. dollars is common, making Bitcoin transactions about as expensive as bank wires. Because of this, we’ve seen the desire from our customers to accept Bitcoin decrease.”
RegTech: Thomson Reuters released an infographic covering FinTech, RegTech and the role of compliance in 2018. According to the infographic, more than one-third of surveyed firms "expect their budget for RegTech solutions to increase in the next 12 months." In addition, roughly three-quarters of global systemically important financial institutions (G-SIFIs) believe the successful deployment of FinTech/RegTech services "will drive up efficiency and effectiveness" at the institution. Of course, RegTech adoption will not happen overnight. Back in December, Aite Group and Cordium released a survey finding that only 2 percent of capital markets firms have a "fully automated compliance support program." Also, the survey found that only 8 percent of respondents "use formal metrics to measure the impact of noncompliance and 43 percent don't currently measure it at all."
Payments: PayPal's Venmo unveiled its instant transfer service allowing users to pay $0.25 cents to deposit funds into an account in a matter of minutes using a MasterCard or Visa debit card. WeChat Pay has moved beyond Chinese bank accounts and credit cards by allowing international credit cards to be used on its platform. Brazil-based payments company, PagSeguro Digital LTD, raised nearly $2.3 billion in an IPO on the New York Stock Exchange marking the largest equity offering since Snap's IPO.
Alternative Finance: SoFi recently acquired the engineering and product teams of mortgage startup Clara Lending, while Lending Club filed an 8-K with the U.S. Securities and Exchange Commission regarding a $200 million warehouse agreement with certain lenders. In China, Ant Financial recently gained and then apparently lost approval to issue securities backed by consumer loans.
In the U.K., Zopa is now open for new investors, while the Cambridge Centre for Alternative Finance released its third European alternative finance industry report. The study, which gathered data from more than 340 crowdfunding, peer-to-peer, and other alternative finance platforms across 45 countries, found that Europe's online alternative finance market grew 41 percent last year. While the U.K. remains the largest individual market, the European online alternative finance industry grew 101 percent in 2016. On the institutional investment front, 45 percent of peer-to-peer consumer lending and 25 percent of peer-to-peer business lending was funded by various institutions (pension funds, mutual funds, asset management firms, banks). In addition, 13 percent of investment in equity-based crowdfunding platforms was funded by institutional investors.
IMF: International organizations are taking an interest in cryptocurrencies this week, and momentum seems to be building towards an international dialogue. A spokesperson for the International Monetary Fund (IMF) advocated for “greater international discussion and cooperation among regulators” regarding cryptocurrencies. Those who borrow money in order to buy cryptocurrencies are of particular concern.
EU: Similarly, an executive board member of the European Central Bank (ECB) predicted this week that the G20’s March meetings in Buenos Aires would feature a discussion on cryptocurrencies. This comes shortly after reports that France and Germany would be making a joint proposal for regulating cryptocurrencies at the meeting. Elsewhere, the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA) issued a joint opinion calling for financial institutions to consider using “high security features or biometric data” for identity verification on digital-only platforms.
Australia: Australia’s New Payments Platform (NPP) is expected to launch in early 2018. This industry-led effort to establish a faster, more efficient payments system to support the digital economy will likely affect 80 percent of Australian bank accounts upon its launch, with plans to reach even more over time.
Canada: A report from the Canadian Competition Bureau claims that FinTech innovation is being held back by high barriers to entry. Among the recommendations in the report are a regulatory regime in which an institution’s level of risk determines its level of oversight.
China: The country’s crackdown on cryptocurrency is gaining momentum with both the Ministry of Public Security and the People’s Bank of China (PBOC) taking action. The PBOC’s move has been seen as particularly strong, with many attributing bitcoin’s continued slide to the PBOC’s decision to prevent payment service providers from serving cryptocurrency traders.
India: Aadhaar continues to dominate headlines in India, with Edward Snowden making waves (again) by adding his own voice to the debate over the controversial initiative. Of more immediate significance, however, is a case before India’s Supreme Court challenging Aadhaar’s constitutionality.
In other news, a host of bitcoin exchange accounts have been frozen by Indian banks until they can be properly vetted for money laundering and other requirements.
Indonesia: The Financial Services Authority will issue guidelines for the registration and licensing of digital financial services and a planned regulatory sandbox.
South Korea: Mixed messages out of South Korea have been keeping cryptocurrency enthusiasts on their toes all month. Some of the highlights are as follows:
- Going forward, South Korean cryptocurrency exchanges will be required to share user data with banks in order to make transactions easier to keep track of.
- Anonymous bank accounts will no longer be permitted for cryptocurrency trading from the end of January.
- The South Korean Communications Commission (KCC) fined eight of the country’s ten cryptocurrency exchanges for falling short in their security procedures.
- An official from the Ministry of Strategy and Finance stated that virtual currency exchanges "should pay" corporate income tax and local income tax in the first-quarter of this year. The 24.2 percent tax (corporate and local) will apply to exchanges with income above $18.7 million, according to Yonhap News.
Philippines: Earlier this month, the Philippines Securities and Exchange Commission sent a cease-and-desist order to four cryptocurrency companies run by the same man, on the grounds that his ICOs constituted the unlicensed selling of securities.
Russia: Russia’s plans for a government-backed cryptocurrency are moving forward, with a draft bill introducing the “CryptoRuble” sent to parliament last week. There has been much talk of Russia using the CryptoRuble as a tool to dodge international sanctions, with an advisor to President Putin stating that it “suits us very well for sensitive activity on behalf of the state. We can settle accounts with our counterparties all over the world with no regard for sanctions.” In related news, the Russian Ministry of Finance has released cryptocurrency regulations but does not seem to have settled its differences on the matter with the central bank.
U.K.: A report by the House of Lords recommended that the government increase its support for FinTech in the wake of Brexit, as the FinTech sector will be losing valuable support systems such as the European Investment Bank (EIB) access to skilled European labor.
U.S.: The Office of the Comptroller of the Currency (OCC) released its Semiannual Risk Perspective for the fall of 2017, highlighting risks posed by the increasing use of third-party service providers by banks. The OCC is concerned that concentration among such third-party service providers could result in increased systemic risk, and that this concern merits increased attention from regulators. Elsewhere, the National Institute of Standards and Technology (NIST) published an overview of blockchain in order to cut through the hype and better educate organizations considering its adoption.
The Securities and Exchange Commission (SEC) quashed the idea of a bitcoin ETF, citing concerns about security, market manipulation, and the nascent nature of the market. In the letter issuing the SEC’s position, Dalia Blass, director of the SEC’s Division of Investment Management, stated that “… we have, at this time, significant outstanding questions concerning how funds holding substantial amounts of cryptocurrencies and related products would satisfy the requirements of the 1940 Act and its rules.”
Separately, SEC Commissioner Jay Clayton spoke to the Securities Regulation Institute about ICOs, taking the industry to task for what he views as a lack of responsible behavior and stating that the SEC would scrutinize publicly traded companies that change their names or business models in order to profit from the hype surrounding blockchain (*cough*—Long Island Blockchain). Clayton opened his speech by stating that “Market professionals, especially gatekeepers, need to act responsibly and hold themselves to high standards. To be blunt, from what I have seen recently, particularly in the initial coin offering ("ICO") space, they can do better.”
The Commodity Futures Trading Commission (CFTC) is suing the operators of three cryptocurrencies for fraud. The CFTC alleges that Entrepreneurs Headquarters Ltd. misappropriated funds from a sale of more than $1.1 million in bitcoin, while CabbageTech stands accused of simply stealing their customers’ digital assets. My Big Coin Pay Inc., a company based out of Nevada, is accused of running a Ponzi scheme.
In Arizona, Attorney General Mark Brnovich and State Representative Jeff Weninger announced the introduction of legislation creating the first regulatory sandbox administered by a state in the U.S. This comes several months after AG Brnovich wrote an op-ed in American Banker advocating for the creation of state sandboxes. In Massachusetts, the state filed administrative charges against ICO operator Caviar for the illegal sale of securities. Finally, Vermont became the first state to propose a tax on cryptocurrency exchanges.
Venezuela: Venezuela’s ill-conceived flirtation with cryptocurrency continues. For those who haven’t heard, Venezuelan President Nicholas Maduro’s government is planning to save the struggling economy by creating a cryptocurrency called the “petro,” backed by Venezuela’s oil reserves. Both regulators and legislators in the United States are speaking out, leaving no doubt that this falls squarely within the larger conversation around Venezuelan sanctions.