FinTech in Focus — May 24, 2021

In this FinTech in Focus

From the Hill 
Initial Public Offering (IPO)
Insurance Technology (InsurTech)
Cryptocurrency

Milken Institute FinTech Update

While we typically use this newsletter to highlight the work of other folks in the industry, I am excited to announce that the Milken Institute FinTech Program has come out with the FinTech Policy Landscape Initiative. This initiative includes two main features. The first is a dynamic legislative tracker that allows users to learn more about proposed legislation, including subject matter, sponsors and cosponsors, related bills, the status of the bill, and more. The second is a landscape analysis of a handful of the bills we are following in Congress. These examinations highlight trends, make connections among related pieces of legislation, and identify possible intended or unintended consequences. Both the tracker and the landscape will be updated regularly as more policy developments emerge from Congress. If you have any questions or thoughts about the tracker, please do not hesitate to reach out to me via email at [email protected].

From the Hill

Federal Deposit Insurance Corporation (FDIC) Chairman Jelena McWilliams appeared before the House Financial Services Committee last Wednesday morning for a hearing titled Oversight of Prudential Regulators: Ensuring the Safety, Soundness, Diversity, and Accountability of Depository Institutions. The chairman reinforced her longstanding belief in the power of technology and banking. The chairman stated to the committee that “innovation will continue to play a vital role for banks as they seek to meet consumer expectations for access to financial services and to improve the resilience of their operations.” On the topic of the FDIC’s 2020 updated broker deposit regulations, the chairman stated, “The new rule is intended to encourage innovation in how banks offer services and products to customers by removing regulatory hurdles to certain types of innovative partnerships between banks and FinTechs. The final rule accomplishes this by tailoring the scope of deposits captured to align more closely with the types of deposits Congress intended to capture when the restrictions were first put in place.”

Earlier this week, the FDIC posted a request for information (RFI) and comment regarding use cases of digital assets for insured depository institutions. The RFI came just two days before the explosive market volatility surrounding cryptocurrencies last Wednesday. Chairman McWilliams stated to the committee, “We have been closely following developments in the emerging digital asset ecosystem for some time. Banks have increasingly begun exploring a variety of potential roles, such as being custodians, reserve holders, issuers, and exchange or redemption agents; performing node functions; and holding digital asset issuers’ money deposits.” The RFI includes questions related to risk, compliance, supervision, depository insurance, and more. Comments are due by July 16, 2021.

The House Financial Service Committee’s Artificial Intelligence Task Force convened for the group’s first subcommittee hearing in the 117th Congress last week. The hearing, Equitable Algorithms: How Human-Centered AI Can Address Systemic Racism and Racial Justice in Housing and Financial Services, brought in a range of expert witnesses, including the Milken Institute's FinTech Advisory Council Co-chair Melissa Koide. Ranking Member Anthony Gonzalez of Ohio asked Koide to explain the industry obstacles to adopting AI models for credit underwriting and how Congress can help clear these obstacles. Koide responded that, for lenders, a lack of clarity around the treatment of consumer-permissioned information flow under 1033 of the Dodd-Frank Act and the need for greater transparency around “how adverse action notices are ultimately sufficiently responded to” for consumers and lenders.

Initial Public Offering (IPO)

Marqeta, the California-based card-issuing technology company, has filed to raise $100 million in its IPO this week. The company already has support from major players, including Discover, which owns a 5.4 percent stake in the company, and Mastercard and Visa, which have not disclosed their respective ownership percentages. Though the final value is subject to change as more information emerges, the company will be traded on Nasdaq under the ticker MQ. Like many FinTech companies, Marqeta saw considerable growth in its business throughout the pandemic. Barron’s reports, “The company said total processing volume rocketed 177 percent to $60.1 billion in 2020 from $21.7 billion in 2019. It had issued about 320 million cards as of March 31.” Still, Marqeta is not profitable. “Losses narrowed to $47.7 million in 2020 from $58.2 million in 2019. Revenue more than doubled to about $290.3 million in 2020. It employs 509 people.”

Insurance Technology (InsurTech)

West Virginia has embraced innovative financial technologies. Following the state’s recent FinTech Sandbox program, it has now made way for technology companies to support their insurance offerings with fewer regulatory hurdles. Yahoo Finance reports, “The new InsurTech process will allow businesses to offer innovative products and services in a controlled environment, under the supervision of regulators, that would not normally be permissible in the existing regulatory framework.” West Virginia House of Delegates Judiciary Committee Chair Shelley Moore Capito stated, "Now, West Virginia is providing a way for promising InsurTech companies to safely offer inventive new products and services to my constituents and West Virginians across the state, and bypass the outdated laws inhibiting innovation." Sandboxes and innovative regulatory programs have become increasingly popular at the state level. Initiatives like these have helped attract entrepreneurs and venture capital investments to the state while assisting consumers through stronger insurance offerings.

Cryptocurrency

I checked a stocks app early last Wednesday morning and was presented with a litany of red downturned arrows—not exactly what you want to see at 6 a.m. sans coffee. Bitcoin prices had fallen to about $38,000 that morning after reaching highs over $60,000 just a few weeks prior. This considerable drop in price came as a response to Chinese regulators announcing late Tuesday night that the country’s financial institutions would no longer be authorized to provide any services related to cryptocurrency transactions. While private citizens may keep any cryptocurrencies they already own, the new ban makes it significantly harder for them to purchase or complete transactions using Bitcoin or other virtual currencies they hold. Chinese financial regulators issued a joint statement expressing concern over the high volatility of the assets, saying that virtual currency has “no monetary properties such as legal compensation and compulsion, is not a real currency, and should not and cannot be used as currency in the market.”

Many loyal crypto-enthusiasts remain bullish, but there is heightened anxiety about a possible “crypto winter,” or the prolonged period of decline following a burst bubble in the market. Just two months earlier, Yahoo Finance wrote about the potential for an impending crypto winter, quoting Ran Neuner, CEO of blockchain investment fund Onchain Capital, “The crash will come when we least expect it.”

This crash, despite being significant, was not entirely unexpected. Chinese regulators have been incrementally increasing their crypto and digital asset regulations since 2013. On top of that, cryptocurrency prices were already on the decline when Tesla CEO Elon Musk announced the company would stop accepting Bitcoin to pay for its cars due to Bitcoin’s environmental impact. Musk took to Twitter last week, writing, "Cryptocurrency is a good idea on many levels and we believe it has a promising future, but this cannot come at great cost to the environment."

For more information on FinTech in Focus or the Milken Institute’s FinTech program, please contact Kate Goldman at [email protected].