In This Newsletter
MI Finance Joins CFTC’s Global Markets Advisory Committee
Mo Shaikh Presents at FinTech Advisory Council
Insider Trading and Crypto
2023 Cash Poor Report
MI Finance Joins CFTC’s Global Markets Advisory Committee
Nicole Valentine, MI Finance’s FinTech director, was appointed by Commissioner Caroline D. Pham to represent the Milken Institute on the US Commodity Futures Trading Commission’s (CFTC) Digital Asset Markets Subcommittee of the Global Market Advisory Committee (GMAC). The 36-member subcommittee, which comprises leading industry professionals from across financial services, is tasked with identifying and assessing key issues and policy proposals with respect to digital asset markets, including digital finance, tokenization of assets, Web3, and blockchain technology.
In her press release announcing the new appointments, Pham said, “I am thrilled to welcome the new GMAC and subcommittee members and thank them for their willingness to serve and support the GMAC’s work program as we develop consensus solutions to the most significant current and emerging issues in global markets. International collaboration and coordination are critical to promoting financial stability and access to markets. Our members' deep expertise and seasoned experience will be invaluable in proposing pragmatic recommendations for regulatory reform.”
The subcommittee met in a public session on July 17 to discuss regulatory and legislative issues relating to tokenization. Valentine looks forward to collaborating with the esteemed committee members and the CFTC team to work toward advancing the future of finance.
Mo Shaikh Presents at FinTech Advisory Council
Mo Shaikh presented to our FinTech Advisory Council about the Aptos Labs blockchain. The presentation informed the Council about the ongoing Web2–Web3 transition. The presentation featured discussions on the onramps and applications that may be built on layer-one blockchains like Aptos from accelerated payments settlement to video gaming. The conversation built on last November’s Middle East and Africa Summit session “Exploring the Great Migration of the Internet from Web2 to Web3,” which explored how a Web3 world could enable economic mobility and prosperity through digital property rights and tokenization.
Shaikh discussed the architecture of the Aptos network and how it has been built with Web3 applications at the center of its design. He shared the work Aptos is doing to encourage the development of Web3 applications on top of its layer one protocol through events like the Aptos World Tour Hackathon. Aptos hosted Holland and Seoul hackathons this year, and their next event will happen this September in Singapore.
Insider Trading and Crypto
In June, Solidus Labs published part one of its Crypto Market Manipulation Report series. The report focused on the issue of cryptocurrency insider trading and the techniques that can be employed to identify and trace illicit activity on blockchains.
The report featured findings from Solidus’ crypto market integrity platform, HALO, which detected evidence of insider trading via decentralized exchanges in connection with 56 percent of all Ethereum Request for Comments-20 token listing announcements on a number of major crypto exchanges since January 2021. Altogether, HALO flagged more than 100 suspected insiders that may have engaged in over 400 insider trading events.
Many of these flagged cryptocurrency wallets may have had access to material nonpublic information regarding the listing. The report identified four different types of crypto market participants that could have access to this information: token issuers, market makers working on behalf of token issuers, investment firms providing capital to token issuers, and crypto trading platforms.
The report’s approach to insider trading, following activity on decentralized exchanges before assets are listed on major centralized exchanges, identifies a key difference from insider trading in traditional finance. In traditional stock markets, insiders can trade correlated assets under their legal name, tip off friends or relatives, or sell information. In digital asset markets, insiders can buy a digital asset on a decentralized exchange using a pseudonymous cryptocurrency address, with the knowledge that the asset will soon be listed on another larger exchange.
While using the pseudonymity of blockchain wallets may seem ideal to avoid detection, blockchains are also permanent, public, and traceable. Law enforcement and the Justice Department have been leveraging permanent public traceability to track and trace illicit funds in anti-money laundering operations like the $3.6 billion Razzlekhan heist of 2022, as reported by The New York Times. As the private sector and regulators become more adept at tracing immutable public ledgers, the opportunities for undetected insider trading may soon dry up.
One of the pillars of the FinTech Program is the regulatory compliance and transparency of FinTech innovations. The uniform application of rules and regulations for insider trading is an essential component of any functional financial market. Combating the movement of illicit funds and the prevention of insider trading will continue to be key policy areas as the House of Representatives and Senate consider comprehensive digital asset legislation this year. The program published a letter of comment on the Digital Asset Market Structure Discussion Draft which lays out key principles for responsible digital asset legislation.
2023 Cash Poor Report
One of the FinTech program’s key focus areas is how innovations in financial technology drive further financial inclusion by bringing new people into the financial system and better serving those already participating in it. Those living paycheck to paycheck represent a key demographic segment of “working poor” Americans often underserved by traditional financial services. Understanding this group of people and the friction they experience as they live their financial lives is essential to businesses, innovators, regulators, and lawmakers. Many FinTech applications have sought to build solutions for this segment.
Solo Funds, a community-lending platform created to offer credit to the underbanked and those long shut out of the lending process due to pervasive discrimination, published its annual Cash Poor Report on the costs of living paycheck to paycheck. The report, by Melody Harvey from the University of Wisconsin, Madison, determines and derives the total cost of borrowing from various options used to cover unplanned expenses, including subprime credit cards, cash advance solutions, Buy Now Pay Later (BNPL) solutions, peer-to-peer lending, and payday loans.
This report looks at “cash-poor” households and includes a sample size of 2,000 US adults. The report found that the majority of Americans living paycheck to paycheck were prime working-age adults 25–55. Hispanic Americans and women were overrepresented in this group. Of those reporting living paycheck to paycheck, 50 percent reported participating in the gig economy for supplemental income, 40 percent reported having a chronic medical condition or being a caretaker, and 50 percent had $500 or less in their checking and savings accounts.
The report also assessed the impact of unplanned expenses on Americans living paycheck to paycheck. The report defined unplanned expenses as an emergency bill, fine, or other payment that exceeds the amount of cash an individual has readily available and as an expense that generally needs to be paid immediately or within a very short time frame. The study found that unplanned expenses cost the average American living paycheck to paycheck $1,900 per year. On average, respondents reported 2.5 unplanned expenses a year, averaging $760 each. Medical bills were among both the most common and expensive unplanned expenses reported. The report highlights how the issues of access to financial services and access to healthcare are often linked.
The report compared the average costs of several short-term lending solutions that respondents used to cover their unplanned expenses. It found that, on average, subprime credit cards are the most expensive and widely available form of credit for Americans living paycheck to paycheck, followed by payday lending. However, alternative financial solutions are emerging. The Global Conference session, “The FinTech Movement: Social Economic Mobility Strategies,” highlights the latest innovations that are empowering those living paycheck to paycheck with better access to credit, savings, and investment. The conversation features discussions about how FinTech solutions can help build savings for some of the communities the Cash Poor Report highlights including women, gig economy workers, and immigrants.