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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Murphy Dan
Dan Murphy
Senior Associate, FinTech Program, Center for Financial Markets
Capital Access and Europe and Finance and FinTech and U.S. Economy
Dan Murphy is a senior associate at the Milken Institute’s Center for Financial Markets. He focuses on FinTech and access to capital issues. Prior to joining the Institute, Murphy was a policy fellow at the Democratic Senatorial Campaign Committee.
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FinTech in Focus

By: Jackson Mueller and Dan Murphy
June 15, 2018

Nationalize the Banking?

Back in March, we highlighted a report by the Bank for International Settlements (BIS) on central bank digital currencies (CBDCs). While the report acknowledged some potential benefits of CBDCs, the BIS rightly pointed out that introducing CBDCs into our current banking system might create “digital runs” on banks, since CBDCs would be seen as less risky than deposits at private banks. This would deal a considerable blow to the credibility of deposit insurance, as an even safer alternative suddenly became available.

This does not sound like a desirable outcome at first blush, but a new paper by Morgan Ricks, John Crawford, and Lev Menand takes the argument one step further to show that while CBDCs may not be the correct framework, a public option for bank accounts could be beneficial. They propose that the Federal Reserve offer bank accounts to the general public, which they call “FedAccount.” Rather than trying to maintain our deposit insurance-backed banking system, the authors believe we should abandon it entirely in favor of a system that they believe would be safer, more inclusive, and more efficient.

FedAccount would function just like a normal bank account, except it would not offer overdraft protection or the provision of credit. As the authors point out, there is no apparent reason to think of them as a CBDC, which just seems to foster confusion. As an example, former FDIC Chair Sheila Bair’s recent op-ed seems to be calling for something similar, but calls it a CBDC or “FedCoin.” From what we can tell, there is little reason for the Federal Reserve to start issuing something called FedCoin, since it already issues something called the dollar.

But what are the drawbacks? One objection could be that the FedAccount, by out-competing private banks for deposits and not offering credit itself, could increase the cost of credit. However, Ricks, Crawford, and Menand argue that even given the generous assumption that banks pass on their low cost of capital to borrowers, there are far more direct ways to subsidize credit where it is warranted. Other objections are sure to come forward, but the biggest hole in this plan may be political rather than economic. Following the botched rollout of the Affordable Care Act, convincing people to log onto might be a taller order than the authors anticipate.


Industry Headlines

AltFi: Two alternative lending industry reports worth taking a look at are out this week. First, a report from Funding Circle and Oxford Economics finds that Funding Circle enabled 75,000 jobs in 2017 in the United States, the United Kingdom, Germany, and the Netherlands. Second, a report sponsored by the Electronic Transactions Association, the Innovative Lending Platform Association, and the Small Business Finance Association found that online lending created almost 360,000 jobs in the United States from 2015 to 2017.

Big Tech: Ant Financial’s market cap is now greater than that of Goldman Sachs, after a $14 billion funding round. This new milestone came despite increasing competition from domestic rival Tencent, and a widely anticipated regulatory crackdown. Meanwhile, Amazon launched its own multi-lender marketplace for sellers in India, the first such service offered by Amazon.

Blockchain/Crypto: A paper by University of Texas at Austin Professors John Griffin and Amin Shams this week shook the crypto world to its core. Or at least it would have, in a sane universe. Griffin and Shams found that Tether, a cryptocurrency that purports to be tied to the value of the dollar, is being used to prop up the value of Bitcoin following market downturns. The authors statethat:

“To illustrate the potential magnitude and predictive effect of Tether issuances on Bitcoin prices, we focus on the hours with the largest lagged combined Bitcoin and Tether flows on the two blockchains. These 87 hours have large negative returns before the flows but are followed by large return reversals. These 87 events account for less than 1% of our time series (over the period from the beginning of March 2017 to the end of March 2018), yet are associated with 50% of Bitcoin’s compounded return, and 64% of the returns on six other large cryptocurrencies (Dash, Ethereum Classic, Ethereum, Litecoin, Monero, and Zcash). A bootstrap analysis with 10,000 simulations demonstrates that this behavior never occurs randomly.

Digital Banking: A recent presentation by Goldman Sachs hints at their digital banking ambitions for Marcus, which started as their online lending platform but has since widened its offerings. Currently, Marcus has access to over $20 billion in deposits. Goldman President David Solomon stated, “We don’t have to be one of the big leading consumer banks … we can have a narrow slice of share and have a very big, very profitable, very differentiated business over a period of time. We’re building it as a platform for Goldman Sachs over the next 50 years.”

Payments: Adyen’s stock shot up over 90 percent following its IPO this week. This put Adyen’s value at $15.8 billion, making it the largest European tech IPO this year. This, combined with GreenSky’s successful $800 million IPO a few weeks ago, shows that the IPO fears that have haunted FinTech since LendingClub and On Deck may be disappearing. 

Elsewhere, Paytm faced the ire of its users when its service went down, forcing customers to take to Twitter or (perhaps more constructively) switch to another payments platform. Also in India, Visa announced that it is lowering its fees on debit card transactions in the country. Visa currently has more than 40 percent of the market share in India, but faces stiff competition from digital payments firms clamoring for a foothold in the Indian market.

Finally, WorldRemit announced that it now has licenses to offer its services in each of the 50 states, acquiring its 50th license from Louisiana almost four years after receiving its first license in Iowa.


Global Developments

Palmex, a digital asset exchange powered by Dubai-based blockchain startup ArabianChain Technology, has become the first cryptocurrency exchange in the Middle East and North Africa to receive a regulatory sandbox license from the Central Bank of Bahrain. The license goes into effect on July 15.

Premier David Burt announced the country will have an InsurTech regulatory sandbox regime in place by the end of July.

The government also signed a Memorandum of Understanding (MOU) with South Korea to drive the development of FinTech. The MOU "involves B-Seed Partners, FinHigh Capital and B.F.S. Holdings Ltd. as partners, in a new Bermuda venture, Bermuda FinTech Accelerator (BFA). This could lead to a potential investment of up to $10 million." The MOU with South Korea comes roughly a week after the Premier signed four MOUs with Binance Holdings Ltd, Medici Ventures, Omega One, and Shyft Network. "Our commitment is to work with these partners in the implementation of these undertakings as we develop Bermuda’s Fintech industry. This Government is determined to diversify this economy, and it is becoming clear that the FinTech industry can become another source of economic growth for Bermuda’s economy. Bermuda is a global leader in digital asset regulation, and we are creating an environment in this country where legitimate companies can establish a presence to provide services to the world," Premier Burt stated.

In regards to the MOUs, Diallo Rabain, MP and Minister of Education and Workforce Development provided an update "on the opportunities to be provided to our fellow Bermudians in the areas of Fintech Development and Regulatory Compliance." In particular, the government has "re-opened discussions with the Regulatory Compliance Association about its programmes that stalled in 2017. Two new concentrations—Virtual Currency and Cybersecurity—have been added to the former offerings. Other compliance certifications by other providers are also being considered."

The Canadian Securities Administrators published a staff notice titled, “Securities Law Implications for Offerings of Tokens,” which clarifies how securities laws apply to coins and tokens. The notice "outlines specific situations that may have an implication on the presence of one or more of the elements of an investment contract in the context of an offering of coins or tokens."

Separately, the Bank of Canada announced it will partner with the Creative Destruction Lab (CDL) to deepen its knowledge of leading technologies, according to the press release. "In particular, the Bank’s partnership agreement with CDL will enable it to stay abreast of developments in the fields of artificial intelligence (AI), machine learning, crypto-asset technologies and quantum computing. The Bank of Canada will be an AI Stream partner and participate in both the CDL-Toronto and CDL-Montreal programs for a three-year period. The partnership will allow Bank staff to better understand these technologies and their applications. In addition, the Bank plans to leverage the CDL program by inviting participating experts to share their knowledge with staff."

Hong Kong
Standard Chartered Bank (Hong Kong) has announced its intent to apply for a virtual banking license in an effort to advance financial inclusion, FinTech innovation, and client experience in Hong Kong. According to the press release, the bank has established a virtual banking task force that is working closely with the Hong Kong Monetary Authority for the purposes of authorization.

The Reserve Bank of India, in a statement on developmental and regulatory policies, announced it will seek "to encourage more players to participate in and promote pan-India payment platforms so as to give a fillip to innovation and competition in the sector. A public consultation on this will be released by the end of September. Currently, HDFC Bank, State Bank of India, ICICI Bank, Axis Bank, and Citibank manage nearly 29 million credit cards out of 37.4 million in circulation, according to Quartz India.

Meanwhile, the RBI has asked payment services firms in India to provide an update on efforts to store transaction data in the country every fortnight. According to the New Indian Express, "all payment system providers including payments bank, payment gateways are required to ensure that full end-to-end transaction details relating to payment systems operated by them are stored in a system only in India within a period of six months from the date the order was issued [(April 6)]."

The Deputy Governor of the Bank of Italy, Fabio Panetta, spoke on central banking in the context of technological innovation and digital currencies. Panetta briefly discussed the difference between CBDCs and crypto-assets, as well as the pros and cons of digital cash and CBDCs as forms of payment. Panetta noted the supply of payment services is already high and the advantages of a CBDC "are at best unclear." Namely, "its potential benefits in terms of improving the ease of transactions are probably insufficient to justify the involvement of central banks in an activity that is well served by private suppliers." However, like all issued related to technological innovation, the costs, benefits and risks of digital currencies are likely to change rapidly in the future," and central banks "should continue to examine the potential effects of digital currencies."

LendInvest—the U.K.'s largest online property investing and lending business—expanded its presence in Luxembourg after becoming a fellow of the Luxembourg House of Financial Technology.

The Malta Digital Innovation Bill, which was presented to Parliament on April 24, is now on its second reading as of June 6. The legislation includes the creation of the Malta Digital Innovation Authority, as well as legal certainty regarding blockchain technology and virtual assets in the country.

The country's central bank published a blog post covering the outcomes of recent experiments utilizing distributed ledger technology. According to the bank, blockchain technology at present "fails to meet the very high demands of a financial market infrastructure." Principle limitations include: capacity shortages, inefficiency due to high energy consumption, and a lack of full certainty that a payment is completed. That being said, blockchain technology "could improve a financial market infrastructure's resilience to external attacks, at the expense of its capacity and efficiency."

President Vladimir Putin discussed the government's approach to cryptocurrencies. Putin downplayed whether the country would adopt its own cryptocurrency since cryptocurrencies "by definition are beyond national borders," as reported by CoinDesk.

Concerns continue to be raised about the country's turn towards a cashless society. According to a report, a government-appointed committee has expressed concern that reliance on corporate operators for payments could lead to problems during economic uncertainty.

Meanwhile, the central bank recently issued a consultation on instant payments and the bank's role in the payment infrastructure. The questions focus on future changes to the payments landscape, instant settlement and clearing, whether participants agree that, in the future, instant payment settlements should be in central bank money, and the importance of lowering costs for all parties in the transaction chain, among other areas of focus.

In prepared remarks, the governor of the Bank of Thailand, Dr. Veerathai Santiprabhob, focused on the country's transition to a "new era of digital payment system and financial technology in which the Bank of Thailand is fully committed to foster." Dr. Santiprabhob highlighted the various, ongoing initiatives at the bank, including the launch of PromptPay, standardized QR codes for facilitating payments, and blockchain technology. On blockchain, in particular, Dr. Santiprabhob highlighted the role being played by the Thailand Blockchain Community Initiative, including the expected launch of a pilot project offering blockchain-based letters of guarantee during the second half of this year.

As it relates to the role of CBDCs, Dr. Santiprabhob stated: “Like other central banks, our goal is not to immediately bring CBDC into use, but rather to explore its potential and implications for back-office operations. These efforts should pave way for faster and cheaper transaction and validation due to less intermediation needed compared to the current systems.”

Two years after the Title III of the Jumpstart Our Business Startups (JOBS) Act went into effect, there are now 41 FINRA-approved Regulation Crowdfunding portals

On the cryptocurrency front, the FinTech legal experts at WilmerHale published an article entitled, "U.S. Regulation of Cryptocurrency as a Type of Financial Technology." The bulk of the article, according to the press release, "focuses on the application of anti-money laundering ("AML") and U.S. economic sanctions laws and regulations to cryptocurrency."


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