FinTech in Focus
In this issue:
Believing in Blockchain
One of the unique things about blockchain is while it is a technology, it also represents a belief system about the way the world should work. Glen Weyl, a researcher at Microsoft Research and co-author of the popular economics book Radical Markets, has commented on this recently, stating, “blockchain is really something closer to a theory of justice than a technology.” This raises fundamental questions about the blockchain, and Weyl poses two of them. To paraphrase, they are:
- Can you imagine it running on some sort of a blockchain environment in the medium term?
- If so, can it avoid being taken over by some small oligarchy?
Whether you think of blockchain as a technology or a belief system, these are useful questions to ponder, and the answers remain unclear. To the former, the jury is still very much out on blockchain’s applicability to any given use case. Cryptocurrencies remain highly volatile and vulnerable to theft, some financial institutions are bullish on the technology, and others are more skeptical. Moreover, as discussed in a previous FinTech in Focus, blockchain’s immutability makes it difficult to reconcile with Europe’s new data protection laws. Should other regulators around the world follow the EU’s example, blockchain as a technology could face a formidable regulatory challenge.
If blockchain’s use cases do prove out and the regulatory road remains clear, competition concerns remain. As Mary Starks, director of competition at the Financial Conduct Authority (FCA), recently discussed, permissioned blockchains are cause for competition concerns since they establish the central intermediary as a gatekeeper to the blockchain. Permission-less blockchains are not immune from competition problems either, as demonstrated by the increasing concentration of cryptocurrency mining operations. Further, recent research suggests that Bitcoin’s blockchain would be majority attacked if it became sufficiently economically important.
The upshot is that for blockchain to succeed as a belief system, it must first succeed as a technology. In doing so, however, it might just lose its religion.
Source: Bank for International Settlements: Cryptocurrencies: looking beyond the hype
Big Tech: According to Capgemini’s World Wealth Report 2018, over 50 percent of high- net-worth individuals are interested in wealth management services provided by big tech firms. The report finds that the increasing popularity of hybrid advice (a combination of personal and automated advice) is helping drive the growing interest in these platforms.
Note: Question asked: “How soon would you be willing to begin a wealth management relationship with a large tech firm such as Google, Apple, Facebook, Amazon, Alibaba, or Tencent?
Source: Capgemini World Wealth Report 2018
Elsewhere, Dave McKay, Royal Bank of Canada’s CEO emphasized the importance of offering more than just financial services to better compete with big tech platforms.
Cryptocurrencies: Square was awarded a virtual currency license by New York State Department of Financial Services this week, causing its shares to rise on the news. The license will allow Square Cash users in New York to buy and sell Bitcoin. Another cryptocurrency exchange has fallen victim to theft in South Korea. Bithumb, which Coinmarketcap.com lists as the sixth busiest exchange in the world, lost $31.5 million worth of cryptocurrency.
Digital Banking: Challenger banks continue to consider the merits of banking licenses this week. First, Berlin’s N26 ultimately decided against acquiring a U.S. banking license, opting instead to partner with an existing bank in order to offer its services in the U.S. Still no word on who that partner might be, but N26 ultimately decided that the increased time to market demanded by acquiring a banking license was not worth the wait. Robinhood, however, is just at the start of their journey to acquire a banking license. Bloomberg reports that the digital wealth management platform has met with the Office of the Comptroller of the Currency to discuss their options for offering savings accounts and other financial products.
InsurTech: According to a report by Medici, investment in InsurTech outstripped investment in all other FinTech subverticals in May 2018. Investment in InsurTech totaled $422.6 million, with large InsurTech deals in India, the U.S., and Europe leading the charge.
Payments: Visa has provided more clarity into its services failure earlier this month. Charlotte Hogg, Visa’s European chief stated in a letter that their service was not fixed for more than 10 hours, and the failure was caused when a backup data canter failed to come online. This resulted in the failure of more than 5.2 million transactions in Europe. Meanwhile, in China, WorldFirst will become the first foreign payments company to receive a license to operate in China. This is a surprise to many industry observers, who expected PayPal to be the first to compete with Alipay and WeChat Pay on their home turf.
At its annual meeting last week, FinTech Australia announced that Alan Tsen, general manager of Stone & Chalk, was elected as chairman of the group. Five FinTech platforms—Society One, RateSetter, MoneyPlace, Harmoney, and WISR—submitted a letter to Chris Bowen, shadow treasurer, pushing back against further delay to mandating bank participation in the comprehensive credit reporting regime due to competition concerns, according to the Australian Financial Review.
Bank for International Settlements
In its annual economic report, the Bank for International Settlements (BIS) included a section titled, “Cryptocurrencies: looking beyond the hype.” In short, decentralized cryptocurrencies "suffer from a range of shortcomings." In addition to concerns related to trust and high energy use, cryptocurrencies "cannot scale with transaction demand, are prone to congestion and greatly fluctuate in value. Overall, the decentralised technology of cryptocurrencies, however sophisticated, is a poor substitute for the solid institutional backing of money."
The BIS also provides three considerations in implementing a regulatory approach: a redrawing of regulatory boundaries ("only globally coordinated regulation has the chance to be effective”); interoperability of cryptocurrencies with regulated financial entities; and regulations targeting institutions offering services specific to cryptocurrencies (focusing "on the point at which a cryptocurrency is exchanged into a sovereign currency" and application of existing laws and regulations related to payments services that could be applied to cryptocurrency infrastructure providers). On the issuance of central bank issued digital currencies (CBDCs), the BIS states that restricting CBDCs to wholesale transactions among financial institutions could enhance the operational efficiency of existing arrangements, but recent experiments "have not produced a strong case for immediate issuance."
Finance Montréal—an organization with a mission to make Montréal a world-class financial hub—announced the creation of Montréal FinTech Station to "support the development of new businesses in the financial technology sector as well as help major financial institutions with their digital transformation."
Separately the government launched a national consultation on digital and data transformation "in order to better understand how Canada can drive innovation, prepare Canadians for the future of work, and ensure they have trust and confidence in how their data is used." Roundtable discussions will take place across Canada over the summer with public feedback encouraged.
Around the time of the announcement of the consultation, the House of Commons Standing Committee on Access to Information, Privacy, and Ethics published the government's response to the committee report, “Towards Privacy by Design: Review of the Personal Information Protection and Electronic Documents Act.” The government, in particular, discussed the EU’s General Data Protection Regulation and how to ensure “equivalency” with the Personal Information Protection and Electronic Documents Act. The result? A caution against a single set of global rules.
The European Banking Authority announced the launch of a new series with the publication of two papers, one of which is titled, “Identification of EU banks' business models.” In that paper, you’ll find a proposal for "a standardized classification of business models of EU banks.
Separately, the EBA published its opinion on the implementation of the regulatory technical standards on strong customer authentication and common and secure communication, which will apply beginning September 14, 2019. "It is the EBA’s view, after discussing it with the [European] Commission, that, where [Account Information Services (AIS)] or [Payments Initiation Services (PIS)] are provided to a payment service user (PSU) following a contract that has been signed by both parties, [account servicing payment service providers (ASPSPs)] do not have to check consent. It suffices that AISPs and PISPs can rely on the authentication procedures provided by the ASPSPs to the [payment service user (PSU)], when it comes to the expression of explicit consent." The EBA also published a consultation paper on draft guidelines related to Article 33(6) of the regulatory technical standards on strong customer authentication and common and secure communication.
Under proposed regulations likely to be adopted by the end of July, digital currencies are set to be reclassified as 'digital rights.' According to Anatoly Aksakov, Head of State Duma Financial Market Committee, as reported in Bitcoinist, digital assets "will be considered not as property, but as a new type of property digital rights."
According to a report by Cointelegraph, Sberbank and Alfa-Bank "are testing cryptocurrency-based investment options for retail investors" through the Russian central bank's regulatory sandbox. In late May, Sberbank and the National Settlement Depository announced that they will pilot the first initial coin offering in the country using the sandbox.
Ong Ye Kung, a Monetary Authority of Singapore (MAS) board member and minister for education, discussed the e-payments market in the country. PayNow—a payments application that does not require the need to know a person's bank account number to make a fund transfer—currently has 1.4 million registrations and saw $900 million transferred via the service since its launch. Of note, MAS “will be introducing a new Payment Services Bill later this year, to enhance the payments regulatory regime and strengthen safeguards against risks. The Bill will identify all activities along the e-payment value chain, such as e-money issuance, domestic funds transfer and merchant acquisition by payment platforms, and will regulate them under a single framework. Many of these activities are currently either not regulated or lightly regulated…. The requirements will be calibrated to be proportionate to the risks posed by each activity, hence encouraging new ideas to flourish and engendering confidence in using e-payments.”
A new working paper from the country's central bank has thrown cold water on the idea of launching a central bank digital currency anytime soon. According to the bank (BOK), it is "desirable that the BOK is the only entity to entirely control issuing money." The report added, "Technology improvements don't mean private sectors will be allowed to have the rights for money issuance. If this happens, the BOK should regulate them but properly."
The Securities and Exchange Commission approved seven cryptocurrencies for use in initial coin offerings "and formulated regulations to supervise those transactions as part of reforms to promote but closely monitor the adoption of advances in global financial technologies in the local market," according to press release from the Thai Embassy in Washington, D.C.
The Dubai International Financial Center partnered with Startupbootcamp to promote FinTech development and a vibrant venture capital ecosystem in the Center and throughout the region. The partnership "will explore setting up multiple programmes for early stage startups within the fields of FinTech, InsurTech and RegTech, in collaboration with a broad range of stakeholders from various sectors – beyond the realm of financial services.”
Dr. Liam Fox, International Trade Secretary, announced the launch of a new effort to attract investment in the U.K.'s FinTech sector through the Department of International Trade (DIT). The DIT has created a FinTech steering board composed of FinTech firms, incumbents, government officials, regulators, and academics that will meet at least four times a year.
U.K. Chancellor of the Exchequer Philip Hammond gave prepared remarks at the annual Mansion House convening. On FinTech and the U.K.'s efforts to lead in this space, Hammond stated that the country must build on its core strengths, including greater cooperation and coordination between industry members, regulators, and government officials through efforts including the FCA's regulatory sandbox, open banking initiative, and between the Bank of England and the FCA regarding RegTech. Among the recent initiatives to support the FinTech sector, Hammond noted the launch of the British Patient Capital initiative—a £2.5 billion public investment—as part of an effort "to unlock £20 billion of new finance for UK growth companies over the next decade."
Big news out of the Federal Trade Commission (FTC). The FTC announced a series of hearings on competition and consumer protection in the 21st century, as well as the opportunity for the public to submit comments covering a range of topics. According to the press release, the hearings and public comment will focus on “whether broad-based changes in the economy, evolving business practices, new technologies, or international developments might require adjustments to competition and consumer protection enforcement law, enforcement priorities, and policy. The multi-day, multi-part hearings, which will take place this fall and winter, will be similar in form and structure to the FTC’s 1995 ‘Global Competition and Innovation Hearings’ under the leadership of then-Chairman Robert Pitofsky.”
If you recall, the Milken Institute held a panel discussion titled, “Big Tech and Antitrust: Rethinking Competition Policy for the Digital Era,” at its Global Conference this year. Participants included: Professor of Economics at George Mason University Tyler Cowen; Assistant Attorney General of the Antitrust Division at the U.S. Department of Justice Makan Delrahim; Senior Editor of Tech Antitrust Enforcement at The Capitol Forum Sally Hubbard; and Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business Luigi Zingales.
Meanwhile, for those interested in learning a bit more on what the Commodity Futures Trading Commission’s (CFTC) LabCFTC is all about, Jo Ann Barefoot interviewed Daniel Gorfine on the vision and work of LabCFTC, the CFTC Science Prize Competition Act challenge, and the legal and procedural obstacles facing regulators that want to embrace innovation.
At the state level, the New York State Department of Financial Services (DFS) announced the approval of Square's application for a virtual currency license (BitLicense). At this time, the DFS "has now approved nine firms for virtual currency charters or licenses, while denying those applications that did not meet DFS’s standards.