In this Newsletter
FinTech at the Fed
The Future of Crypto Regulation
Check-In with the Milken Institute FinTech Advisory Council
Neobanking around the World
FinTech at the Fed
Milken Institute FinTech Director Nicole Valentine spoke with Braintrust about Michael Barr’s confirmation as the new vice chair of the Federal Reserve for supervision. Her comments called for swift action to restore confidence in the economy. Valentine cited a perfect storm brought about by the pandemic, the war in Ukraine, and inflation, increasing global economic fears. Since her comments, the Federal Reserve has moved to raise its federal funds rate by 75 basis points, continuing its trend of increasing borrowing costs to mitigate inflation.
Other thought leaders quoted called for regulatory clarity around bank–FinTech partnerships, modernization of the federal payments system, and exploration of innovative payments models that leverage digital assets such as stablecoins.
The Future of Crypto Regulation
Executive Vice President of Milken Institute Finance Mike Piwowar spoke at Brookings on “The Future of Crypto Regulation.” At the event, Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam announced the establishment of the Office of Technology Innovation. The new office will leverage LabCFTC’s experience and regulatory authority to bring more protections to crypto markets.
Following the chairman’s remarks, panelists highlighted the breadth of retail participation in crypto markets. They welcomed the CFTC’s focus on expanding its retail-facing consumer protections. Piwowar anticipated more interest from Congress to legislate in the crypto space as the number of Americans interacting with crypto grows. He also highlighted the ongoing challenges facing the Securities and Exchange Commission (SEC) as it defines which digital assets are and are not securities. As the SEC considers cases about Ripple’s XRP and Coinbase, Piwowar discussed the role of the Howey Test in crypto regulation, as explained by Business Insider.
Check-In with the Milken Institute FinTech Advisory Council
In June, the FinTech Advisory Council met with Olivia Albrecht of Aspiration. The council discussed Aspiration’s reforestation-based carbon programs, growth in the voluntary carbon offset market, and the climate impact of proof of work versus proof of stake blockchains.
In July, the council met with Jeff Bandman, architect of LabCFTC, and punk6529, a pseudonymous NFT investor and metaverse thought leader. The council discussed the open metaverse, the development of web3, and how to develop blockchain equitably. The discussion highlighted the potential for open, decentralized digital data ownership through blockchains.
Neobanking around the World
A neo—or—challenger—bank operates exclusively online without a traditional network of brick-and-mortar locations. In the United States, neobank deposits are held in partner banks that the Federal Deposit Insurance Corporation insures. Neobanks offer lower fees, convenient services, and fewer barriers to opening an account. As the FinTech team examines the global regulatory environment, we are tracking critical global regulation that enables financial innovation, access, and inclusion. This week, we are featuring global regulation of neo- and challenger banks in Mexico, Brazil, and Nigeria.
Over the past decade, several emerging economies have become hubs for neo- and challenger banks. These hubs grew to prominence because of regulatory clarity, the proliferation of mobile internet, and demand from populations underserved by traditional banks. EY anticipates the neobanking space to experience the most growth in Latin American, African, and Asian markets over the next decade. The banking ecosystems in Mexico, Brazil, and Nigeria stand out for their innovation and scale.
Latin America has emerged as a neobanking hub because traditional banks have historically excluded low-income earners. The arduous process of setting up accounts has limited access to the region’s financial system. FinTech Futures reports that acquiring expensive banking licenses in Latin America has been historically challenging, limiting innovation. However, recent deregulation in Brazil and Mexico has lowered the regulatory hurdle and created large neobanking sectors in these two countries. Neobanks are dramatically increasing accessibility and reducing costs for low-income earners in Latin America.
Mexico created regulatory clarity for neobanks in 2018 with the Law to Regulate Financial Technology Institutions. President Andrés Manuel López Obrador embraced digital banking to reduce cash in circulation as part of his campaign against corruption and organized crime. The FinTech law of 2018 allowed for “Novel Models” of financial institutions to receive official recognition for two-year periods subject to renewal. Since its adoption, Reuters reports this framework has created a surge of innovation in Mexican mobile payments, remittance processing, and merchant services.
In Brazil, regulatory clarity came early in the 2010s, prompting innovation in the neobanking space. The Central Bank of Brazil authorized neobanks to extend credit to consumers for the first time in 2018. Two years later, the government implemented open banking legislation, as reported by Business Insider. Econ Americas reports these policies have been game-changing for Brazil’s underbanked. The sector has become more inclusive, faster, and less bureaucratic than traditional banking.
Facing similar challenges to Latin America, African economies are also harnessing neobanks to improve financial access. The Nigerian government and the Central Bank of Nigeria have broadly supported neobanks with regulatory clarity. Under the Nigeria Startup Bill of 2021, Nigerian banks operate under a regulatory framework called a switching license, which enables neobanks to process payments and hold deposits digitally without requiring a partnership with a commercial bank. According to TechCabal, because of this regulatory clarity, startups like Opay have been able to enter the market and serve consumers previously excluded from the traditional financial system.