In this FinTech in Focus
Industry Developments
Data Privacy
Despite pushback from other big tech firms, Apple is moving forward with its updated application privacy procedures. Last week, Apple launched its newest software update, including enhancements to privacy features that may disappoint advertisers, according to Mint. These new privacy features will require application developers to get user permission before collecting tracking data. As reported by Mint, these transparent notifications have been referred to as “privacy nutrition labels.” The technology behind the iOS software update has an “App Tracking Transparency framework” that immediately disables app tracking abilities until users provide renewed permission. In a message to developers, Apple stated, “Unless you receive permission from the user to enable tracking, the device’s advertising identifier value will be all zeros and you may not track them.” Given the legislative progress of data protection bills, it is unsurprising that tech companies are starting to implement security procedures ahead of likely mandates coming from Congress.
Florida is the latest state to advance data privacy legislation, with the Florida House of Representatives approving a bill that would offer broad protections to residents on how their personal data are collected by online businesses, according to StateScoop. The bill had overwhelming support in Florida’s House, with only one member of the 120-seat chamber voting against it. This legislation would apply to any company that conducts business in Florida and takes in at least $50 million in revenue. It also applies to any company that collects, shares, or sells information from at least 50,000 customers annually or derives at least half its revenue from data sales, as reported by StateScoop. Floridians will be empowered with the “private right of action,” which gives them the right to personally sue companies that violate their data privacy requests. Alfred Saikali, a Miami attorney whose firm represents businesses that may be impacted by this legislation, said the legislation is “going to have more teeth than any other privacy law because it’s so broad. You’re going to see a flood of lawsuits that are incentivized by these attorney fees.” With the growing FinTech community in Florida, it will be interesting to see how companies prepare to navigate data collection in light of this potential legislation.
Cryptocurrency and Blockchain
In an unprecedented move, LVMH Moët Hennessy Louis Vuitton group announced in a press release that it has joined forces with Prada and Cartier to develop the world’s first global luxury blockchain, which will be named Aura Blockchain Consortium. This blockchain solution will be used to enhance the brands’ information on authenticity, responsible sourcing, and sustainability in a secure format. The Aura Blockchain will also allow consumers to trace the history of their luxury products and access proof of authenticity at every step of the value chain, from raw materials to point of sale, according to the press release. The multi-nodal blockchain is secured by ConsenSys technology and Microsoft and will be opened to all luxury brands, not just its founders. Each brand will optimize the use of the Aura Blockchain according to its scale and individual needs. As digital tokens become a popular investment avenue for consumers, there may be room for luxury non-fungible tokens (NFTs) in the future.
While luxury art auction houses like Christie’s are seemingly optimistic about continuing to auction artwork using NFTs, the FBI and other federal officials are starting to raise questions about the security of these financial transactions, according to The Bulletin. The rise in activity and value of NFTs has made federal officials question whether these assets are susceptible to money laundering, manipulation, or tax evasion. Tim Carpenter, an official who oversees the FBI’s art crime team, said, “The scope of the money laundering problem in the art industry is enormous. Criminal enterprises have long looked at the art market as a useful place to hide their illicit proceeds,” largely due to the absence of regulation.
Digital Banking
Late last month, global analytics leader FICO released its second annual Consumer Digital Banking study, which includes promising insights about the future of digital banking and biometric identity proofing during the COVID-19 pandemic. The press release highlighted study findings that almost half (41 percent) of North American consumers are more likely to use digital means to open a financial account than a year ago, while almost a third (32 percent) are less likely to visit a branch to open a new account. Additionally, the study found that 23 million Americans (11 percent) believe their identity has been compromised to open a digital account, but three-fourths of consumers will still provide their biometric information to secure accounts digitally. Liz Lasher, vice president at FICO, said, “For financial service providers, this means tomorrow’s success will rely on having the right platform to deliver enhanced customer experiences, improved fraud protection, and financial crime compliance.” While the move towards banking digitization was on the horizon pre-pandemic, COVID-19 pandemic measures seem to have made a lasting impact on how we bank.
The digitization of financial institutions and investment firms may also have a lasting impact on the need for human capital, such as tellers and customer service professionals. Zor Gorelov, chief executive of financial AI company Kasisto, said in an interview that chatbots will be more proactive and will anticipate individuals’ needs before users even ask a question, as reported by the Wall Street Journal. Fidelity Investments has also suggested that virtual assistants will greatly reduce the need for clients to call and speak to a person. The proliferation of digital solutions will likely continue to change the way we communicate.
Investment Platforms
Although the IRS has extended the individual tax deadline for 2021 to May 17, filers have seemingly run into an unpleasant surprise. New retail investors and investors who have switched platforms during 2020 are beginning to realize that common tax-minimizing strategies are difficult to implement on trading platforms, such as Robinhood and SoFi, which saw an increase in users over the past year. Several brokerage platforms don’t allow trading within tax-favored retirement accounts such as IRAs and also make it difficult for traders to identify “wash sales'' that “reduce tax benefits if they buy a stock within 30 days of selling the same stock at a loss,” according to the Wall Street Journal. Robinhood’s webpage about tax lots clarifies that the platform uses the “First In, First Out '' method and sells the longest-held shares first when a user executes a sell order. To use specific-lot identification to minimize their tax liability, users must individually request information from Robinhood’s customer service. Chief executive of Webull Anthony Denier says the company is “looking to add more customization,” and a spokeswoman for Public says the company is “studying tax-minimizing options.” As quickly as retail investors flocked to these trendy investment platforms, they may soon leave if the tax disadvantages are large enough to sway them.
Legislative Developments
Though increasing sustainability is pertinent to tackling climate change and environmental issues, last year the National Advertising Division (NAD) of the BBB National Programs found a substantial increase in the number of greenwashing claims, including claims of biodegradability and questionable certifications on non-toxic products. Greenwashing is the practice of a business or organization creating the impression that its products and practices are environmentally friendly even if they are not, or not to the level implied. The practice of greenwashing has extended into investment products, which has led to the SEC creating the Climate and ESG Task Force in the Division of Enforcement, according to JDSupra. The Task Force “will develop initiatives to proactively identify ESG-related misconduct,” including analyzing disclosures “relating to investment advisers’ and funds’ ESG strategies.” As reported by JDSupra, securities law mandates that “if a company includes an affirmative statement in its disclosure, it has a duty to ensure that the statement is accurate and complete.” These rules also apply to less formal statements and can extend to instances of greenwashing.
In other legislative news, the US House of Representatives has passed several pieces of bipartisan legislation, including action on digital assets, according to a press release from the House Financial Services Committee late last month. H.R. 1602, known as the Eliminate Barriers to Innovation Act of 2021, was introduced by Reps. Patrick McHenry (R-NC) and Stephen Lynch (D-MA) in March and seeks to set up a digital asset working group. This working group will have representatives from the SEC and Commodity Futures Trading Commission (CFTC) and will work to “ensure collaboration between regulators and the private sector” to foster innovation, as reported by the press release. According to Coindesk, one of the overarching goals of this legislation is to clarify when the SEC has jurisdiction over digital assets in the case of securities and when the CFTC has the final say in the case of when digital assets are deemed commodities. Ultimately, gaining this clarity will allow FinTechs involved in digital asset management to better comply and collaborate with financial regulators.
International Developments
EU
While the use of biometric and facial recognition technology becomes more popular in the US due to the rise of digital banking, the European Data Protection Supervisor (EDPS) recently commented that facial recognition should be banned in Europe because of its “deep and non-democratic intrusion” into people’s private lives. According to Venture Beat, the regulator’s comment follows the European Commission’s proposed draft rule that would allow facial recognition to be used to search for missing children, criminals, and in cases of terrorist attacks. In a later statement, the EDPS declared that it “will focus in particular on setting precise boundaries for those tools and systems which may present risks for the fundamental rights to data protection and privacy.”
European regulatory officials are also examining the actions of Binance, one of the world’s biggest cryptocurrency exchanges, for its launch of trading in stock tokens, according to the Financial Times. In an initiative the company started late last month, Binance is allowing users outside the US, China, and Turkey to “trade equity shares through crypto coins,” with tokens that represent a share in a stock corporation, as reported by the Financial Times. The UK’s Financial Conduct Authority and other European regulators are seeking to determine whether the tokens comply with security laws regarding transparency and corporate disclosures. German regulator BaFin stated that “if tokens are transferable, can be traded at a crypto exchange and are equipped with economic entitlements like dividends or cash settlements, they represent securities and are subject to the obligation to publish a prospectus.”
United Kingdom
Similar to other central banks around the world, the Bank of England and the HM Treasury announced last month that they have created a joint task force to evaluate the creation of a central bank digital currency to proof sterling against cryptocurrencies and improve their payments system, according to the Financial Times. The reporting notes that one of the benefits of developing a central bank digital currency is to “ensure that central banks retain control over monetary policy against the remote possibility that payments might migrate into cryptocurrencies.” One of the risks the Bank of England would need to tackle before formally launching a digital currency is preventing the currency’s use for terrorist financing or money laundering, a pain point of using digital assets for transactions.
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