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: Dan Murphy
October 09, 2018

In this issue:

Industry Headlines »

Global Developments »

RegIndex Survey from Barefoot Innovation Group

Hello FinTech in Focus readers. This week, instead of reading my thoughts on the latest research and developments in FinTech, I ask that you help a member of our FinTech Advisory Committee with a survey on the state-level regulatory environment for FinTech firms in United States. In addition to being a member of the Milken Institute’s FinTech Advisory Committee, Jo Ann Barefoot is the CEO of Barefoot Innovation Group and a senior advisor to the Omidyar Network.

Jo Ann will be speaking at Money 20/20 this year and will be presenting the results of the survey during her remarks. If you are a FinTech innovator with experience obtaining state licenses in the U.S., she would greatly appreciate your input.


 Industry Headlines

AltFi: Last week, Square announced the launch of Square Installments, a point of sale consumer loan product offering Square’s customers loans of $250 to $10,000. This comes as Square attempts to increase the size of the transactions of its platform, as well as compete in an increasingly active market for point of sale consumer loans in FinTech. Some analysts view this move with trepidation, however. Mark Palmer from BTIG, an analyst who has long held a bearish position on Square, believes that the market is overlooking the danger of Square’s increasing credit risk. On Monday, the market seemed to take his views to heart, with Square’s share price closing down 8.5 percent.

Elsewhere, Petal launched its no-fee credit card for borrowers without a credit history last week. According to Petal Co-Founder and CEO Jason Gross, the firm uses “common sense metrics about your finances: how much you make save and spend every month” to determine creditworthiness.

Finally, the fallout continues in China over the collapse of the peer-to-peer lending industry. Bloomberg Businessweek’s story last week on the impact of the industry’s collapse serves as a poignant reminder of the importance of regulatory safeguards that protect consumers and investors alike. 

Big Tech: The big news in big tech this week is that one of the world’s leading firms exposed a great deal of user data and then decided not to tell anybody about it. For once, the firm in question was not Facebook, but Google. According to The Wall Street Journal, a glitch gave outside developers access to private profile data from Google+ between 2015 and March 2018. Google+ will (finally) be shut down, but the real kicker came from an internal Google memo warning executives that telling the public about the glitch might cause “immediate regulatory interest.” You know what else causes regulatory interest? Getting caught covering up a data breach only a month after standing up U.S. senators.

In other news, Tencent took a 5 percent stake in Nubank, a Brazilian digital bank. This is not the only digital banking investment that Tencent has made, as it also invested in N26 earlier this year.

Blockchain and Crypto: Ripple is in the news this week after signing Cuallix, MercuryFX, and Catalyst Corporate Federal Credit Union as clients on its xRapid platform for cross border payments. Elsewhere, a story that slipped under our radar the week before last is that a Ripple-led industry group called the “Securing America’s Internet of Value Coalition” will partially compensate its lobbyists in XRP, a move that Ripple Chairman Chris Larsen hopes will give them some skin in the game.

Meanwhile, a group of ex-UBS bankers has raised $104 million to launch a cryptocurrency bank in Switzerland, pending approval from Swiss regulators. The group has already been in contact with Swiss regulators and plans to submit their application by the end of October.

In blockchain news, ConsenSys invested $6.5 million in a startup founded by a former executive from R3.

Digital Banking: Digital banking continued to make headlines in Europe last week, with Bahrain’s Al Baraka Banking Group launching a digital bank in Germany. The launch comes from Al Baraka’s Turkish subsidiary, Albaraka Turk, and offers a preview of Al Baraka’s plans to offer interest free banking in other European countries. Elsewhere, RBS announced their digital bank will launch in 2019 under the name of “Bo.”


 Global Developments

Bahrain: A senior government official stated that another $100 million fund, raised by the private sector, will be announced shortly and focused on the FinTech sector.

EU: The European Parliament passed a resolution on October 3 titled, “Distributed Ledger Technologies and Blockchains: Building Trust with Disintermediation.” The resolution underscores the potential of DLT across energy, transport, health care, education, and finance. The resolution also underscores the importance of DLT for identity and trust-verification, and the enablement of smart contracts, among other areas. The resolution also urges the EU not to regulate DLT per se, but advocates for the removal of existing barriers to implementing blockchains. The resolution also welcomes the commission's approach "of following a use-case method in exploring the regulatory environment around the use of DLT and the actors using it by sector, and calls on the Commission and the Member States to foster the convergence and harmonization of regulatory approaches."

Separately, as part of its 2019 Annual Work Program, the European Securities and Markets Authority has budgeted more than €1 million to continue to monitor FinTech trends and crypto-assets.

Indonesia: Expect headlines to emerge out of Jakarta over the next few days as the government intends to hold a major discussion on FinTech at the 2018 International Monetary Fund - World Bank Group Annual Meetings in Bali. Agenda here.

Ireland: ADAPT Centre for Digital Content Technology and Ireland's government announced a new research program, FinTech Fusion, to encourage the development of payment technology, RegTech, InsurTech, and distributed ledger technology.

Lithuania: The central bank announced the launch date of its regulatory sandbox and invited interested firms to apply. The central bank is also assessing four applicants for its specialized bank license. "[W]e are maintaining close dialogue with potential entrants of the banking sector that applied for a specialized bank license. We hope that our efforts will bear fruit already this year,” said Renata Bagdonienė, director of the prudential supervision department at the Bank of Lithuania.

Mongolia: The central bank approved the first e-currency license to the country's largest telecoms operator. "Mobicom’s financial arm Mobifinance is now clear to issue the e-currency, dubbed “Candy,” to investors, Montsame confirms. The executives have received formal permission at a ceremonial event at the Bank of Mongolia’s headquarters Friday," according to CoinTelegraph.

Saudi Arabia: The Capital Market Authority's Financial Technology Experimental Permit announced an opening for the second batch of applicants for the FinTech ExPermits.

UAE: The Dubai Financial Services Authority entered into an exchange of letters with the Financial Services Agency of Japan to cooperate in the development of FinTech.

U.K.: Alex Brazier, the Bank of England's executive director for financial stability, strategy, and risk, gave prepared remarks on non-bank financial institutions and financial stability. According to Brazier, the proliferation of non-bank sources of finance "are driving new interconnections across a more diverse and genuinely distributed financial system, which, appropriately managed and regulated, is leading to real gains in resilience for the system as a whole."

U.S.: California's Department of Business Oversight (DBO) sent letters to 20 consumer installment lenders with high triple-digit APR levels "to submit data and other financial information related to their online lead generation activities." The DBO "is weighing whether to adopt rules that govern how licensees consider borrower's ability to repay when making loans." The move comes at the same time California Governor Jerry Brown reluctantly signed into law AB 237, which increases the maximum dollar amount of loans permissible under California's Pilot Program for Increased Access to Responsible Small Dollar Loans from $2,500 to $7,500. Governor Brown stated that he remains concerned that increasing the cap on such loans without stricter oversight "may create unintended consequences."

Speaking of states, state regulators released the first-ever data report on money services businesses (MSBs). According to the report, the industry handled $1.24 trillion in 2017, with the 10 largest companies moving 74 percent of the total. Virtual currency exchange and virtual currency transmission account for nearly 9.5 percent of the industry.

At the federal level, Nelnet withdrew its application to the Federal Deposit Insurance Corporation for an industrial loan charter with the company calling the withdrawal a “temporary step back.” Meanwhile, former Lending Club CEO Renaud Laplanche was banned from the securities industry as part of a settlement with the Securities and Exchange Commission.

The Commodity Futures Trading Commission (CFTC) held its FinTech Forward 2018 conference last week with a focus on tokenization, 21st-century regulatory approaches, RegTech, artificial intelligence, and machine learning. Of note, the president of Germany’s financial services regulator (BaFin), Felix Hufeld, gave prepared remarks which included four key observations: 1) The black box argument—“it wasn’t us, it was the machine”—is unacceptable. Hufeld said it was possible to ensure the explain-ability of such complex processes; 2) Algorithmic processes shouldn't be used without appropriate backstops and there are tools available to counteract; 3) If associated risks are no longer within the organizational structure of supervised firms, there is the danger that they can no longer be identified and subjected to appropriate regulatory oversight. Hufeld noted that the today’s definition of systemic importance should be revised to take into account new business models and market structures; 4) As it relates to customer protection and sovereignty, Hufeld stated that there is a thin line between acceptable price differentiation and price discrimination. The application of big data and artificial intelligence will blur this line even further. During the conference, the CFTC signed a FinTech agreement with the Australian Securities and Investments Commission.

The Bureau of Consumer Financial Protection announced advisory committee meetings for late September with several live-streamed sessions covering credit invisibles and alternative data, and utilizing technology to prevent and respond to elder financial abuse.

In Congress, the House of Representatives passed the Financial Technology Protection Act. Introduced by Rep. Ted Budd (R-NC), the bill, among other things, establishes a FinTech Leadership in Innovation and Financial Intelligence Program, which allows academia and the private sector to "experiment with ideas and programs to combat terrorist use of digital currencies." Rep. Budd was also a signatory to a bipartisan letter to the chairman of the SEC, Jay Clayton. The letter "asks for the SEC to clarify the criteria they use to determine when offers and sales of digital tokens should be classified as 'investment contracts' and therefore securities, and to also clarify what makes an offer a non-security, and most likely a commodity."


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