In This Newsletter
Big Tech Pivots to FinTech
Digital Asset Legislation Moves through Congress
Republic at the FinTech Advisory Council
Big Tech Pivots to FinTech
Over the past year, America’s largest technology firms have been jostling to secure new growth opportunities. The Economist reports that big tech companies like Alphabet, Amazon, Apple, Meta, and Microsoft have experienced average revenue growth of 16 percent and an average net profit growth of 13 percent over the past decade. To sustain that enormous growth rate at their current sizes, big tech firms need to add tens of billions to their bottom lines in the coming years. A pivot to financial services is a strategy to sustain the growth these tech giants have embraced over the past year. These firms are well capitalized, with trusted brands and billions of existing user bases being leveraged to break into the FinTech industry.
This year, Apple launched a high-yield savings account (HYSA) in partnership with Goldman Sachs. The two companies have previously partnered on Apple’s credit card. With over 2 billion active daily Apple users worldwide, the company has a large user base primed to integrate Apple’s suite of financial products into their daily lives. Apple reported that its HYSA had over $10 billion in deposits three months after launch.
Amazon has been experimenting with biometric payments technology inside its 500+ brick-and-mortar Whole Foods locations. TechCrunch reports that Amazon’s palm-scanning payment technology, Amazon One, is prepared to expand significantly across the US. The biometric system processes payments when customers hover their palms over the reader device. To complete the purchase, the devices can then verify the user’s identity with a palm print and credit card on file with the company. Amazon has rolled out its new tech in its Whole Foods and Amazon Go stores, stadiums, and some participating restaurants as it looks to build a payments processing network on top of its AWS cloud.
Another biometric FinTech project, Worldcoin, launched this July in 20 countries. The company was co-founded by OpenAI CEO Sam Altman and backed by Andreessen Horowitz, also known as a16z. According to the MIT Technology Review, the project is a layer two cryptocurrency that aspires to be a universal basic income (UBI) source for individuals whose jobs have been displaced by artificial intelligence. A key difference from other crypto UBI projects is its focus on digital identity. Worldcoin uses a global network of retinal scanners to create individual biometrically secure digital wallets tied to a single verifiable human. The goal is to establish “proof of personhood” so that tokens are not delivered to a user’s secondary wallet or artificial intelligence-operated wallets.
X, the app formerly known as Twitter, has embraced financial services as part of its months-long rebrand. After Elon Musk acquired the company, Twitter partnered with eToro to integrate real-time stock and digital asset data with Twitter $Cashtags. eToro CEO Yoni Asia spoke at this year’s Global Conference in the session, “The FinTech Movement: Social Economic Mobility Strategies,” about the emergence of “FinTwitter.” With the update of the brand, “FinX” may be more appropriate. Musk’s vision for X dates to his attempt to build one of the earliest online banks, archived at X.com, which later merged with PayPal. In reviving his X brand, Musk hopes to transform X into an American version of Asia’s “everything apps” like China’s WeChat, Japan’s Line, and South Korea’s KakaoTalk, where social media, internet search, personal finance, and even government services are all seamlessly blended. However, scaling to become an American “everything app” would be a challenge. While X has an influential user base, it is relatively small compared to the user count of WeChat or the platforms operated by Meta.
As Big Tech pushes into new finance frontiers, there is growing regulatory concern now considering the potential implications of Big Tech's involvement in finance on consumer privacy and competition. As these large technology companies secure a more significant share of the American financial system, policymakers want to understand better how sensitive personal, financial, and biometric data are stored and used, especially as these companies pivot to AI and search for new sources of proprietary training data. This March, the Milken Institute’s Tech Regulation Digest discussed the efforts of the Consumer Financial Protection Bureau and international regulators to encourage interoperability, fight anti-competitive behavior, and ensure data privacy among Big Tech's Fintech initiatives.
Digital Asset Legislation Moves through Congress
The House Financial Services Committee (HFSC) adopted the Financial Innovation and Technology for the 21st Century Act by a recorded vote of 35 ayes to 15 nays. Chairman Patrick McHenry noted in his opening remarks that the bill represented the first-ever legislative markup of digital asset legislation. He added that the comprehensive regulation of the digital assets industry would enable a more inclusive financial system. The market structure bill helps draw the line between digital assets that are commodities and securities. The legislation resulted from years of bipartisan efforts and numerous hearings, with collaboration from the House Agricultural Committee, which also passed the bill by voice vote.
Congressman French Hill, chair of the Subcommittee on Digital Assets and Financial Inclusion, commented that the legislation provides Commodities Futures Trading Commission (CFTC) jurisdiction over digital commodities and clarifies the Securities Exchange Commission’s (SEC) remit over digital assets offered as a part of an investment contract. He added that the bill builds on the SEC’s current exemption regime for the offer and sale of digital assets and creates a disclosure regime for the SEC to certify that a blockchain system is indeed decentralized. The act also requires digital asset intermediaries, like brokers, dealers, and exchanges, to come under regulation by registering with CFTC/SEC.
During the meeting, HFSC also passed the Clarity for Payment Stablecoins Act of 2023 by a recorded vote of 34 ayes to 16 nays. The act would enable state regulators to license companies to issue payment stablecoins. The act outlines a one-to-one reserve requirement for assets backing stablecoins, public disclosure of reserve composition and redemption processes, and a process for federal regulators to establish other capital, liquidity, and risk management rules.
The HFSC also passed the Blockchain Regulatory Certainty Act on a party-line vote. The bill would clarify that certain custodians of digital assets, such as miners or wallet providers, are not subject to certain registration and reporting requirements ordinarily applied to money transmitters and financial institutions. Also, the HFSC adopted the Keep Your Coins Act on a party-line vote. The bill explicitly protects self-hosted wallets, which some policymakers are concerned may offer a workaround for money laundering and illicit finance. Finally, HFSC unanimously adopted the Financial Technology Protection Act of 2023. The bill would establish a financial technology working group to study and develop recommendations for Congress and regulators to combat the use of new financial technologies, including digital assets, for illicit activity.
Even if the digital asset legislation passed by HFSC makes it to the floor, it faces an uphill battle in the Senate, where Senator Elizabeth Warren has voiced strong opposition to the market structure and stablecoin bills. Warren has reintroduced the Digital Assets Anti-Money Laundering Act in the Senate to improve anti-money-laundering and know-your-customer protections in the digital asset industry. Also, the bills face opposition from the White House and the Federal Reserve, who want to see an expanded regulatory role for the Fed over state-based stablecoin issuers, according to Politico.
Republic at the FinTech Advisory Council
This July, Ian Epstein, global head of distribution and capital markets at Republic and a founding member of the Young Leaders Circle, spoke to the FinTech Advisory Council. Republic is an investment platform that allows individuals to invest in startups, growth-stage pre-initial public offering companies, real estate, video games, and crypto companies. Epstein talked about the strategy behind Republic Crypto and its recent acquisition of INX. Epstein and the council discussed the potential of tokenization to make previously inaccessible or complex financial instruments available to a broader class of investors by opening new markets, enabling equity investment by more diverse communities, and fractionalizing ownership. On the topic of Web3 development, Epstein compared investment in layer one and two blockchain protocols to the early development of the electrical grid, which was well underway before many of the use cases for electrification were as obvious as they are today. The council also discussed the regulatory questions about the definition of some digital assets as securities or commodities.