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
February 21, 2018

The Rise of RegTech

A new report out from Burnmark and Alvarez & Marsal titled “RegTech 2.0” gives a fantastic overview of where RegTech has been and where it’s heading. The report surveyed 45 RegTech startups that are already working with banks to gain an understanding of their experience to date, as well as their offerings and technologies. Half of the firms surveyed claimed that cost savings were among the benefits RegTech offered to banks. Perhaps even more interestingly, over 60 percent of firms surveyed claimed that their solutions employed artificial intelligence, while only 20 percent claimed to use distributed ledger technology. 

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Source: Burnmark and Alvarez & Marsal 

Separately, the Russian Central Bank announced that they created a RegTech working group. The group plans to focus not only on how RegTech can help financial institutions with compliance but also on how “SupTech” - the use of emerging supervisory technology - can help regulators improve their own processes. Elsewhere, RegPac and Encognize announced the launch of the RegTech Academy. The initiative will serve as a RegTech exchange between Singapore and Japan and hopes to educate financial institutions in both countries on the promise of RegTech.

FinTech Investment

KPMG released its Pulse of FinTech report for Q4 of 2017, which looks back at investment trends in the space for the entire year and makes predictions for the year to come. The report finds that blockchain and InsurTech did particularly well on the investment front in 2017 ($512 million and $2.1 billion, respectively). The report predicts 2018 to be the year of RegTech, AI, and the Internet of Things (IoT). As FinTech matures, venture capital funding at the seed and angel levels has decreased, and investments have shifted to the B2B market.

Ian Pollari, KPMG’s global co-Leader for FinTech, stated that: “The FinTech sector has matured considerably over the past five years and we are now seeing investors shift their focus from experimentation and smaller investments to proven and sustainable FinTech business models. This has created a market characterized by larger average deal sizes, with growth likely to continue for the foreseeable future on a more sustainable trajectory.” 

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Financial Inclusion in China

The World Bank Group and the People’s Bank of China are out with a joint report on financial inclusion in China. The report cites the country’s leadership in FinTech as a key driver behind the remarkable progress China has made in financial inclusion “with new technology-driven providers transforming how Chinese consumers make payments, borrow, save, insure themselves against risk, and invest.” One key factor allowing for the rapid development of innovative FinTech models in China has been near-ubiquitous mobile phone ownership, which has allowed digital firms to scale despite a lack of home-internet access for many Chinese consumers.

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Some Headlines

Alternative Finance: Goldman Sachs’ Marcus platform may be getting a personal finance boost it seems, as Goldman is looking to acquire Clarity Money, a personal finance startup founded by Michael Dell’s brother, Adam. This comes not long after news that Marcus has now originated over $2 billion in loans. Elsewhere, Ant Financial’s credit rating arm, Zhima Credit, announced that they will stop working with unlicensed financial service providers

Challenger Banks: Monzo, the U.K.-based digital-only bank, announced that it is in the “very, very early stages” of talks with U.S. regulators about entering the U.S. market. CEO Tom Blomfield told CNBC, “I think there's a huge market opportunity there, because there haven't really been any new banks the last 10 years or so ... So I think there is a big opportunity to use modern technology to launch a real consumer facing bank that does the kinds of things consumers expect from a smartphone.” Starling Bank, another British challenger, announced the addition of several partners to its digital platform as well. This is in keeping with Starling’s vision of “marketplace banking,” whereby Starling’s app provides a platform for a number of third-party financial service providers.

Cryptocurrency: Digital Currency Group (DCG) CEO Barry Silbert got the crypto world’s attention, stating that other than a few of the more mainstream cryptocurrencies “most of the others are going to zero.” Silbert believes that, in the end, there will only be one widely accepted cryptocurrency, although it may take a long time to get there. And just how many cryptocurrencies are there, you ask? According to CoinMarketCap, there are now more than 1,500. If most go to zero… yikes. 

Whether or not cryptocurrencies go to zero is beside the point, however, if your own cryptocurrency was stolen. BitGrail, an Italian exchange, became the latest victim this week as hackers made off with $170 million in Nano. Meanwhile, a group of victims of last month’s $530 million theft from Coincheck’s Tokyo-based exchange is suing the exchange in Tokyo District Court. This comes as authorities are still grappling with the theft, and after South Korean intelligence officials apparently told a parliamentary committee that North Korea may have been behind the theft

Payments: WhatsApp has become the latest to throw its hat into the ring on peer-to-peer payments in India, entering an already crowded space that includes the likes of Paytm and Amazon Pay. Still, its entrance into the space is sure to make waves, as WhatsApp is the go-to messaging service for 96 percent of Indians. One of its competitors, Paytm, is also in the news this week after announcing a partnership with BigBasket, an Indian online grocer. In China, Apple announced that it would begin accepting AliPay in its stores. That makes Alibaba’s payment platform the first third-party platform to be accepted at any Apple stores.

Venture Capital: CB Insights is out with a report on bank investment in FinTech, revealing that since 2012, the ten largest U.S. banks have closed 81 FinTech deals worth $4.1 billion. The report also shows that Goldman Sachs is stepping up its FinTech game and that despite the headlines and hype, only one blockchain company received investment from the ten largest banks in 2017.

Global Developments 

Middle East: PwC is out with a report on the potential economic impact of AI in the Middle East. According to the report, AI is projected to contribute roughly $320 billion to the Middle East economy in 2030. Globally, the firm estimates that AI could contribute nearly $16 trillion to the global economy in 2030. The UAE and Saudi Arabia are expected to see the greatest economic gains from AI in the region.

Contribution of AI to GDP by Regions, 2030

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Source: PwC

Meanwhile, in the UAE, the Financial Services Regulatory Authority of Abu Dhabi Global Market is considering a regulatory regime for virtual currency exchanges and intermediaries. A separate article focused on the UAE and FinTech in more detail. In Dubai, the world's first deep cold storage for crypto-commodities launched. Regal RA DMCC, a subsidiary of Regal Assets, Inc., and the first company in the Middle East to receive a crypto trading license, launched the solution for investors and traders. In Bahrain, the Economic Development Board (EDB), in its Economic Quarterly, found that the country's non-oil sector grew nearly 5 percent in the first nine months of 2017. The report includes mention of FinTech (page 37) including the progress made in digital payments, e-wallets, and robo-advisory services. To date, six companies have joined the FinTech sandbox. Lastly, the EDB announced the first Fintastic Bahrain Week from February 19 to 21.

IMF: International Monetary Fund (IMF) Managing Director Christine Lagarde was interviewed by CNN regarding the cryptocurrency marketplace and regulation. Lagarde stated: “I think it tells us a bit about the herd mentality, number one. It tells us a lot about the fact that people are very much looking for these high yield products and there is an element of speculation about that. It also tells us that there is probably quite a bit of dog activities behind that particular scene and we are actively engaged in anti-money laundering and countering the financing of terrorism, and that reinforces our determination to work in those two directions.” On government regulation of the cryptocurrency market, “I believe that it is inevitable,” Lagarde said. “We have had entity-based regulation over the course of the last ten years after the financial crisis. We clearly have to move into activity-based regulation. Forget about the entities, work on the activities themselves and who does what and who is licensed to do what and who is properly regulated and supervised."

Europe: European regulators’ interest in cryptocurrencies continued to swell over the past week. Yves Mersch, an executive board member at the European Central Bank (ECB), stated that the bank agrees with Bank of International Settlements (BIS) General Manager Agustin Carstens’ previous criticisms of cryptocurrencies. Mersch said that “there is so much money flowing in that it’s like a gold rush - but there is no gold.” He also stated that the ECB is concerned about the use of cryptocurrencies for money laundering, as well as the wider “social and psychological effect” of cryptocurrency investment.

On distributed ledger technology, Mersch had this to say:

“TIPS is 10 seconds, 0.2 cents. DLT transactions are at best 30 euros and take at least one hour. We have a mandate for efficient payment systems, and we go for efficiency. We are not bound to a technology, we are bound to results. There are so many unsolved questions in terms of governance and legal certainty in DLT. We are looking to what extent we could overcome these legal barriers, but we are at a very early stage.” 

The ECB was not the only European regulator to weigh in, however. The European Securities and Markets Authority’s (ESMA’s) work program for 2018 announced that the ESMA is monitoring cryptocurrency developments.

Lastly, several documents were published this week. First, a draft of the European Commission’s FinTech Action Plan was leaked. The document states that there is limited scope for EU level regulatory or legislative action but indicates that the commission is working towards crowdfunding and peer-to-peer legislation. Second, the European Commission published several documents pertaining to the U.K.’s withdrawal from the EU and what that means for banking and finance. The documents cover: markets in financial instruments; banking and payment services; post-trade financial services; asset management; credit rating agencies; insurance and reinsurance; and statutory audits. Third, in a leaked draft obtained by Reuters, the EU is looking to remove barriers to data flows in future trade deals.

Singapore: Earlier this week, the Monetary Authority of Singapore launched a public consultation "on proposed guidelines to protect users of electronic payments." The deadline for comments is March 16. The central bank also issued “new guidance to financial institutions on the use of innovative technology solutions to facilitate safe, non-face-to-face customer on-boarding,” and signed a FinTech cooperation agreement with the Central Bank of Egypt.

Mauritius: The country’s Financial Services Commission released a communique on the first meeting of the Regulatory Committee on FinTech and Innovation-driven Financial Services. Discussions “were centered on positioning Mauritius as a regional hub of sound repute in the field of FinTech regulations.” Among the topics discussed included information exchange between regulatory authorities, an open and transparent regulatory regime that encourages innovation, regulating blockchain-related activities and also recognizing its benefits, incentives to attract FinTech investment, as well as “the possibility of establishing a sovereign fund in Mauritius to provide seed capital for the development of FinTech activities in the region.”

Gibraltar: The government and the Financial Services Commission “are developing legislation relating to tokenized digital assets (tokens), essentially those created and traded using distributed ledger technology.” Regulations are expected to be released later this month. Gibraltar will become the leader in “introduc[ing] the world's first regulations for initial coin offerings with dedicated rules for the cryptocurrency sector,” according to Reuters.

Hong Kong: The Hong Kong Monetary Authority published revised guidelines on the authorization of virtual banks. The regulator “considers that the basic principles contained in the guideline issued in 2000 remain applicable.” However, “some updates and refinements are nonetheless necessary” including allowing banks, financial institutions, and technology companies to own and operate a virtual bank in Hong Kong. Virtual banks will be subject to the same set of supervisory requirements applicable to conventional banks, though some requirements "will need to be adapted to suit the business models of virtual banks." In addition, authorized virtual banks "must maintain a physical presence in Hong Kong, which will be its principal place of business here." That said, virtual banks "are not expected to establish physical branches." 

Denmark: The Financial Supervisory Authority (FSA) launched the FT Lab–"a regulatory sandbox for FinTech initiatives." Because this is a new initiative, the FSA has limited admission to the Lab to a maximum of five companies. "Based on the experiences with the first cohort, the FSA will at a later date open for new applications."

Philippines: The Department of Finance is considering "tapping Alibaba’s FinTech (financial technology) solutions through its related company Ant Financial to lower remittance costs for the Philippines’ over 10 million migrant workers and offer them other online-based banking and financial management services."

South Korea: The government is considering the adoption of New York's BitLicense framework to regulate cryptocurrency firms. 

Thailand: FinNet Innovation Network, a subsidiary to the Stock Exchange of Thailand (SET), rolled out its payment system infrastructure "to enhance efficiency of the capital market's payment process, in line with the government's National e-Payment Roadmap." Initially, the service "will be provided to 30 securities companies and 12 commercial banks in the form of batch payments, transferring money between accounts in the same bank." The second phase will cover other payments types in the capital market. 

Canada: The Canadian Securities Administrators (CSA) signed a co-operation agreement with the French financial regulatory authority (AMF). The agreement "extends the work of the CSA Regulatory Sandbox Initiative and the French AMF FinTech, Innovation and Competitiveness division, and provides a sound environment for businesses to develop innovative solutions in the financial sector."

Serbia: The Belgrade Stock Exchange will launch a crowdfunding platform by the end of March, according to a report 

China: The National Internet Finance Association—a self-regulatory organization—expects to increase its oversight over cryptocurrencies and initial coin offerings this year. Separately, Ant Financial Services Group is seeking to raise $5 billion in equity in a move that would value the company at more than $100 million. Meanwhile, Alibaba bought a 38 percent stake in Shiji Retail Information Technology Co—a big data firm focused on hotels and retail. Lastly, China is implementing efforts to retain its tech talent and jumpstart home-grown startup formation.

Lithuania: Invest Lithuania published the Lithuanian FinTech Report 2017. According to the report, there are more than 100 FinTechs in the country with two-thirds of them having started within the last five years. B2B is the dominant business model in the country. 

U.S.: On the federal regulatory front, the U.S. Securities and Exchange Commission (SEC) said it could not release documents related to the cryptocurrency project Tezos due to potential interference with an ongoing investigation. Brian Quintenz, a commissioner at the Commodity Futures Trading Commission, called on the cryptocurrency community to develop a self-regulatory organization to regulate itself as the government continues to determine exactly how to approach this space. According to Quintenz, “I would like to use this opportunity right now to call on the investment community and the advocacy community around digital currencies to create some type of self-regulatory organization that can develop standards around cyber policies, data retention, record keeping, financial records obligations, insider trading, ethics, codes of conduct…. Self-regulation has a strong history in our markets.”

On the states’ side, Delaware Governor John Carney signed Executive Order 18—which expands the Delaware Open Data Council to include members from all executive branch agencies to promote data sharing. Meanwhile, Japan-based bitFlyer received a license to operate in Illinois. The cryptocurrency exchange has received approval from 43 other states and territories, not to mention its expansion into Europe. In New York, both the assembly and senate have introduced identical bills calling for the New York Department of Financial Services (DFS) to issue a report covering online lending by July 1. Speaking of the DFS, the agency issued guidance “reminding all virtual currency entities licensed by New York State, including those that hold a money transmitter license, that they are required to implement measures designed to effectively detect, prevent, and respond to fraud, attempted fraud, and similar wrongdoing.” Lastly, a bill introduced in the California Assembly would create a new agency to develop regulations covering Californians' personal data on the internet. According to The Mercury News, the bill “would form the [California Data Protection Authority] to develop regulations that ban social media websites from conducting potentially harmful psychological experiments on users, create ways for Californians to erase certain profiles and personal information, and standardize online user agreements.” 

U.K.: The Financial Conduct Authority (FCA) announced on Wednesday that it is exploring the creation of a global sandbox. According to the FCA, a global sandbox “could potentially allow firms to conduct tests in different jurisdictions at the same time and allow regulators to work together and identify and solve common cross-border regulatory problems, through tests. Under such a model, testing could span two or more jurisdictions.” Lastly, Christine Farnish will step down as chair of the Peer-to-Peer Finance Association. Paul Smee will head the association beginning March 1.

Australia: The Australian Treasury published the final report on its review of open banking. The report "makes 50 recommendations, on the regulatory framework, the type of banking data in scope, privacy and security safeguards for banking customers, the data transfer mechanism and implementation issues.” While “final,” the government is accepting detailed comments on the recommendations by March 23. Among the findings, the review “considers that the data required to be shared is customer-provided data, transaction data that is stored in a digital form for specific types of accounts held in Australia and product data. Data should be transferred free of charge. However, the following data should not be in scope: data supporting an identity verification check; any data that would materially increase the risk of customer identity theft; aggregated data; and transformed data.” In addition, “Accreditation for participants should create this trust by requiring data holders and data recipients to comply with a set of standards (including security standards) determined by the regulators of the system. This accreditation system should be tiered, based on the risk of the data set and the participant, and a list of accredited participants should be published in an address book.” With regards to setting standards behind the data being transmitted through APIs, the Review suggested the Australian Data Standards Setting Body should lead the design. On 'screenscraping,' Open Banking should not prohibit or endorse the practice, "but should aim to make this practice redundant by facilitating a more efficient data transfer mechanism." Lastly, the royal commission inquiry into banking began earlier this week. The commission will investigate wrongdoing in the Australian financial services sector. 

India: The Inter-Regulatory Working Group on FinTech and Digital Banking in India released its report covering regulatory issues related to FinTech and digital banking in the country. Key recommendations include: the establishment of innovation labs, including within insurance companies, to combine brand and product managers with technological and analytical resources; fostering collaboration between insurance companies and InsurTech entities to provide more effective and efficient services; fostering engagement between regulators and FinTech entities to "chalk out" appropriate regulatory responses with a view to re-align regulation and supervision; development of a dedicated organizational structure within each regulator; development of a regulatory sandbox framework; exploration of regulatory use of RegTech solutions; implementation of tax incentives to support digital payments; and the development of a self-regulatory body for FinTech companies.