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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
February 09, 2018
   
   

Milken Institute in MENA

The Milken Institute’s inaugural MENA Summit occurred this week in Abu Dhabi. The summit brought together a curated group of high-profile senior executives, influential investors, government officials, sovereign wealth fund directors, and philanthropists to discuss, confront, and create solutions to the region’s most pressing issues. It featured several FinTech-related panels that are sure to grab your interest. For instance, Cameron and Tyler Winklevoss spoke on Digital Disruption and Cryptocurrencies. Cameron Winklevoss stated that despite the recent fall in the price of bitcoin he and his brother believe that “there's a potential appreciation of 30 to 40 times because you look at the gold market today, it's a $7 trillion market.” Tyler Winklevoss described an investment in bitcoin as a “call option on the entire bitcoin ecosystem… the ultimate bitcoin bet is bitcoin.” Other FinTech-related panels this week included a panel on Navigating Investments from Crypto to the Blockchain, and a panel on Making AI and Next Gen Tech Work for Everyone. Visit www.milkeninstitute.org for more MENA Summit coverage.

Identity and Authentication

IBM released its Future of Identity Study last week, with important findings on the changing attitudes toward digital identity authentication and biometrics. Perhaps unsurprisingly, millennials appear to be very relaxed about passwords with 41 percent admitting that they re-use passwords (is that bad?). Europeans were very strict with their passwords by comparison, with 52 percent reporting that they use complex passwords. When it came to biometrics, respondents in the APAC region demonstrated the most knowledge of and comfort using biometric authentication.

Trading Off Security for Time or Convenience (Global Perspective) 

2 9 18

 Source: IBM

Post-Crisis Small Business Lending
Krähenbühl Global Consulting is out with a report commissioned by the Small Business Administration (SBA) to evaluate the state of small business lending following the financial crisis. Among the findings of the report is that in 2015, the number of outstanding small-business loans was more than 17 percent below the pre-crisis high. This was a sharp contrast to large business loans, which had already exceeded their pre-crisis peak by more than 35 percent in 2015. The report also found that small banks lend a larger share of their assets to small businesses than large banks and that large banks cut back on their small business lending activity far more following the crisis. In light of these findings, the report recommends that regulators utilize the Community Reinvestment Act (CRA) to encourage more small business lending and that lawmakers consider measures to limit the extent of concentration in banking by amending the Riegle-Neal Act of 1994, or re-enact the Glass-Steagall Act of 1993. 

Some Headlines

Payments: eBay announced that it is divorcing PayPal. Adyen, a young Dutch firm already working with Spotify and Netflix, is the homewrecker here and is expected to complete the transition by 2021. On another front, PayPal’s popular payment app Venmo will have to fend off a strong challenge from Zelle, the banking industry’s joint venture to compete in the payments space. Despite the low brand recognition, the banks are betting that convenient access to Zelle through pre-existing bank accounts will allow them to take market share. They claim that there are already 100,000 customers per day signing up for the service, and banks are investing heavily in advertising. Finally, Square’s addition of bitcoin to its Square Cash platform has coincided with the cryptocurrency’s decline (not that we’re pointing any fingers).

InsurTech: Willis Towers Watson P.L.C., Willis Re, and CB Insights are out with their quarterly InsurTech briefing for Q4, 2017. The theme of the report, “The Sobering of InsurTech,” signals that insurers and reinsurers are seeking to exert a certain level of control over the development of InsurTech. According to the report, 83 percent of InsurTech firms have accepted investments from insurers and reinsurers. Still, not every InsurTech’s ambition to conquer the world can be checked. European insurers are starting to eye InsurTech firms like Lemonade a little more warily, and China’s Ping An Insurance (Group) Co. just announced a $400 million pre-IPO funding round from SoftBank’s Vision Fund, among others.

Robo-Advising: This week’s stock market tumble proved to be a challenge for the robo-advising world, with Fidelity, TD Ameritrade, Betterment, and Wealthfront all experiencing service delays or interruptions during the selloff. The industry had never experienced a market downturn quite like Monday’s 1,175 point fall, and service interruptions such as these raise questions about their preparedness. Elsewhere, Overstock.com became the latest entrant to the robo-advising world last week, with the announcement that their FinanceHub platform would offer investors a choice of portfolios for a $9.95 monthly fee. The platform is run by tZERO Advisors and FusionIQ.

AltFi: Kabbage announced last week that they would begin offering $250,000 lines of credit to small businesses, a move widely seen as a further push into territory previously dominated by banks. Kabbage’s President Kathryn Petralia said the firm’s latest move “helps us close the capital gap that businesses encounter today,” noting that there was a strong demand for such a product from their existing customers. Over at SoFi, the latest news is that around 65 employees in the company’s mortgage division were let go, as the company seeks to automate more of its mortgage underwriting processes. 

In the crowdfunding space, Israel’s OurCrowd announced that it expects to surpass the $1 billion assets under management mark this year, while Seedrs announced that they are launching a secondary market to allow users to buy and trade shares of firms that have raised funds on its platform. Finally, in totally-not-fake news, the Onion has published a helpful guide for those of you who might be considering launching a crowdfunding campaign of your very own. We would just like to add that it’s always helpful to include as many buzzwords as possible, especially if you don’t fully understand them.

GLOBAL DEVELOPMENTS

Australia: Innovation and Science Australia (ISA) released a report titled, Australia 2030: Prosperity Through Innovation. Noting the government's work toward developing a Digital Economy Strategy, the report calls on the government "to position Australia as a leading nation in the research, development and exploitation of AI and machine learning across the digital economy." The report also calls for the government to lead efforts with states and territories “to create a more flexible regulatory environment within Australia to foster innovation, including exploring specific areas for cross-jurisdictional collaborative regulatory reform.”

BIS: Bank for International Settlements General Manager Agustin Carstens took a dig at cryptocurrencies during a press conference last week. "In fact at a major cryptocurrency conference, the registration fee could not be paid with Bitcoins because it was too costly and slow. Only conventional money was accepted." Carstens also mentioned that "there is a strong case for policy intervention." While authorities should welcome innovation, "they have a duty to make sure technological advances are not used to legitimize profits from illegal activities."

Canada: The country has welcomed its first blockchain ETF with open arms. Harvest Portfolios Group Inc. announced "that a final prospectus has been filed with the Canadian securities regulators for Canada's first blockchain ETF, Blockchain Technologies ETF (HBLK).” Harvest “will act as promoter, trustee, manager and portfolio manager of HBLK and will be responsible for the administration of HBLK.”

China: The struggles will continue for smaller financial institutions in the country as regulators grow increasingly concerned about rising debt levels and short-term lending. According to a Reuters interview with Zhou Guannan, a senior analyst at Huachuang Securities in Beijing, the government “has issued 46 ‘major’ regulations, statements and other documents aimed at reducing financial leverage since March 2016. No fewer than 14 of those have been issued since December.” Meanwhile, China's State Administration of Foreign Exchange (SAFE) has partnered with the public security ministry "to fight forex-related irregularities, with nearly a hundred cases of underground bank trading cracked in 2017,” according to Xinhuanet.

Authorities are also putting pressure on tech companies’ efforts to launch alternative credit scoring regimes beyond the central bank’s efforts. Last week, Tencent launched Tencent Credit to Chinese nationals who use mobile chat apps WeChat or QQ. The company then pulled the credit scoring system less than a day later due to regulatory pressure. This development is interesting given the fact that the People's Bank of China (PBoC) back in 2015 allowed Tencent and seven other companies to develop credit scoring pilots. According to a Financial Times article, “None of the eight companies selected by the PBoC in 2015 for the initial pilots — including Tencent and Alibaba’s Sesame Credit — has received licences to launch credit-scoring services using social data. Meanwhile, the government-backed Baihang Credit Scoring, also known as ‘Xinlian’, is not yet operational.” The recent crackdowns in mainland China have resulted in peer-to-peer companies looking elsewhere, particularly Southeast Asia.

EU: European Central Bank (ECB) President Mario Draghi gave prepared remarks on the ECB's annual report for 2016. Towards the end of his remarks, Draghi touched on cryptocurrencies. “However, we should understand that Bitcoin and other digital currencies are in the unregulated space and should be regarded as very risky assets…. Right now, digital currencies are not subject to a specific supervisory approach. Work is under way in the Single Supervisory Mechanism to identify potential prudential risks that these digital assets could pose to supervised institutions.”

While the ECB takes a look at risks, the European Commission and European Parliament launched the EU Blockchain Observatory and Forum. The observatory and forum "will highlight key developments of the blockchain technology, promote European actors and reinforce European engagement with multiple stakeholders involved in blockchain activities."

France: Financial regulators announced that they wish to enhance crowdfunding protections in the country. According to the release, regulators “have decided to publish a position on the procedure for default rates calculation, a recommendation on the platforms run-off management and a position on the marketing of crowdfunding offers. These documents target several types of professionals, namely crowdlending intermediaries, crowdfunding investment advisors and investment services providers.”

Meanwhile, the French Crowdfunding Association (Financement Participatif Fance, FPF) published a report which found that the country's alternative finance market grew 50 percent in 2017. The top five platforms in France represented 80 percent of total loans originated. Consumer lending and equity crowdfunding grew at a slower pace or declined, respectively, compared to 2016. All of this comes at a time when Paris welcomes both incumbents and startups to its annual FinTech Forum.

Germany: Europe’s largest economy is continuing to hold back from adopting digital payments. “Cash is still the means of payment in some 80 percent of point-of-sale transactions, compared with only 45 percent—and falling fast—next door in the Netherlands,” according to a Bloomberg report.

Hong Kong: In late January, the CSI Alliance was formed and composed of IBM China/Hong Kong Ltd, Cyberport, and the Smart City Consortium (SCC) "to foster collaboration between technology, academic and commercial stakeholders to address issues faced by FinTech start-ups and help accelerate their growth," according to OpenGov Asia.

India: The Supreme Court is hearing challenges to the country's Aadhaar scheme. The Firstpost has provided some good coverage on the latest developments from the hearings. Separately, India's finance minister Arun Jaitley presented the Union budget 2018 to Parliament last week. Jaitley mentioned that non-bank finance companies have "stepped up" financing of MSMEs after demonetization and that the Ministry of Finance "is examining the policy and institutional development measures needed for creating the right environment for FinTech companies to grow in India." India has also sought to strengthen venture capital and angel investment in the country through initiatives such as "Start Up India" and favorable tax treatment for investors. In addition, the National Institution for Transforming India (NITI) "will initiate a national program to direct our efforts in the area of artificial intelligence, including research and development of its applications." Also, while the government "does not consider cryptocurrencies legal tender or coin and will take all measures to eliminate the use of these cryptoassets in financing illegitimate activities as part of the payment system," the government will, however, “explore the use of blockchain technology proactively" for ushering in the digital economy.

Indonesia: Peer-to-peer (P2P) lenders are beginning to gain traction in the country, even if total lending volumes remain low. The growth of P2P platforms and lending offers the opportunity to address the $73 billion financing shortfall in the country. According to the country's financial regulator, roughly 30 platforms have extended credit with nearly 40 more awaiting approval. The country's central bank is studying the possibility of issuing a digital rupiah currency, with the study expected to be completed in 2020.

Israel: The Bank of Israel issued a press release warning about recent attempts to defraud investors through digital means. “Several attempts to defraud bank customers through technological means occurred. The total financial damage of the fraud is minimal, and customers did not suffer financial losses. Against this background, we find it proper to warn banks' customers and clarify the recommendations regarding dealing with fraud attempts of this type, in order to enhance customers’ awareness and attention, and to reduce the chances of successful fraud attempts. This is in addition to the risk mitigation activities that the banks carry out continuously.”

Japan: Victims of the largest cryptocurrency theft formed an association last week "to jointly negotiate reimbursement and consider filing a lawsuit" against Tokyo-based exchange Coincheck, according to The Japan Times.

Kenya: The government’s digital payments platform eCitizen was down for some time resulting in substantial delays in attempts to access public services or make payments.

Korea: Have we seen an end to the confusion coming out of the South Korean government regarding regulatory treatment of the cryptocurrency marketplace? The South Korean finance minister stated last week that the government has "no intention to ban or suppress cryptocurrency (market)." Still, Korea's customs service announced it had uncovered roughly $600 million in "illegal cryptocurrency foreign exchange trading," according to Reuters.

Kuwait: The Legal and Legislative Committee of Kuwait's parliament rejected a proposal to tax remittances of foreign workers. The decision is not final, however, with the Financial and Economic Affairs Committee expected to review the proposal.

Lithuania: In a recent interview with Bloomberg, Lithuanian Finance Minister Vilius Sapoka discussed the country's rise to becoming a FinTech hub, including a recent collaboration with the Hyperledger Project and views on the regulation of cryptocurrencies. "I'm happy that policymakers have started to discuss this issue and I do believe this solution should be at the global level."

Netherlands: Efforts to defend against FinTech encroachment by leading Dutch banks is off to a rocky start. ABN Amro announced that it would pull out of the mobile payments system Payconiq, backed by large retail banks in the country.

Nigeria: In mid-January, the National Insurance Commission (NAICOM) unveiled revised guidelines for micro-insurance operators, including a N600 million minimum capital base to receive a national micro-insurance license. The revised guidelines mean that 17 firms currently complying with existing regulations will now have to acquire new microinsurance licenses within the next 18 months.

Philippines: The Philippines' Securities and Exchange Commission has engaged with U.S. and Australian regulators to come up with regulations on virtual currencies which are expected to be released by the end of this year. The country's central bank announced in late January a basic deposit account framework for banks to promote account ownership among the unbanked. "These features meet the need of the unbanked for a low-cost, no-frills deposit account which they can open even if they do not have the standard identification documents," the press release states.

Singapore: Diners Club, EZi Wallet, EZ-Link, Liquid Pay, Mastercard, UnionPay International, and Wirecard have joined together in an effort to push the adoption of a single QR code-based payment system in the country.

South Africa: The South African Reserve Bank "has confirmed that it plans to unveil a new unit which will deal exclusively with the monitoring of FinTech" in the country, according to BusinessTech. Keep an eye out for a press release later this week covering the new unit.

Switzerland: The annual Swiss Venture Capital Report was published by StartupTicker and the Swiss Private Equity and Corporate Finance Association (SECA). In 2017, investment in the Swiss FinTech sector grew nearly 62 percent. “Slightly more than every third round of financing came from ICT start-ups in
2017. If fintech start-ups are included, it was more than half of all 175 financing rounds….  Among the more important sectors, the fintech sector achieved the largest increase in number of rounds – more than twice as many were completed in 2017 than in 2016 (from 14 to 30). ICT and fintech together achieved an increase of 12% (from 81 to 91).”

UAE: Innovation Month kicked off in Abu Dhabi last week. 

U.K.: So much for Brexit. According to Innovate Finance's 2017 VC FinTech Investment Landscape report, the country "experienced its best year on record" with nearly $2 billion in VC investment, up more than 150 percent from 2016. The U.K. ranked second, behind the U.S., in total capital invested and deal volume. Meanwhile, global VC investment in FinTech topped $14 billion across more than 1,800 deals—an 18 percent decrease from 2016.

U.K. FinTech VC Investment: 2017 Vertical Analysis 

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 Source: Innovate Finance

Also notable, the All Party Parliamentary Group (APPG) on FinTech and APPG on Alternative Lending met on January 31 for an invite-only roundtable session on open banking.

U.S.: Last week, the Securities and Exchange Commission (SEC) halted "an allegedly fraudulent initial coin offering that targeted retail investors to fund what it claimed to be the world’s first 'decentralized bank.'" In its announcement, the SEC “alleges that AriseBank falsely stated that it purchased an FDIC-insured bank which enabled it to offer customers FDIC-insured accounts and that it also offered customers the ability to obtain an AriseBank-branded VISA card to spend any of the 700-plus cryptocurrencies. AriseBank also allegedly omitted to disclose the criminal background of key executives.” According to Steven Peikin, co-director of the SEC’s Enforcement Division, “this is the first time the Commission has sought the appointment of a receiver in connection with an ICO fraud.” The State of Texas previously issued a cease and desist order relating to AriseBank on January 26. Both the SEC and the Commodity Futures Trading Commission sat before the Senate Banking Committee on Tuesday to discuss their oversight of the virtual currency space.

At the state level, both Hawaii and Nebraska have introduced Uniform Law Commission’s (ULC) Model Virtual Currency regulation, according to Coin Center, while one Arizona lawmaker has introduced legislation to make it easier to pay taxes using cryptocurrency and protect cryptocurrency trading from capital gains tax treatment. Elsewhere, the State of Illinois published its first official report on the blockchain.

Lastly, several states–Texas, Georgia, Illinois, Kansas, Massachusetts, Tennessee, and Washington State–are participating in a program to streamline the way FinTech companies are licensed. According to the Texas Department of Banking, the multi-state compact will standardize "key elements" of the licensing process for money service businesses (MSB). “The agreement: If one participating state reviews major elements of state licensing for a money services business – such as business plans, IT, cybersecurity, background checks, and compliance with the federal Bank Secrecy Act – then other participating states agree to accept the findings. As a result, MSBs should experience faster license processing times.”

Venezuela: The country set the initial value of its “digital currency,” the Petro, at $60. The currency will be backed by the country's oil reserves with the price subject to change based on the oil market. A pre-sale of nearly 40 million out of the 100 million Petro units will take place in late February. For a closer look at the Petro, Martin Chorzempa and Monica de Bolle from the Peterson Institute for International Economics (PIIE) write that the so-called "cryptocurrency" is not, in fact, a cryptocurrency and that the government documents outlining the Petro "reveals misunderstandings about how blockchains work."


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