Authors
Jackson Mueller
In this Issue
COVID-19 & FinTech
We have witnessed several interesting developments since our last update as it relates to the FinTech industry’s response to the ongoing pandemic.
In our latest US FinTech policy update, we breakdown legislative activity over the past two months (February & March) and lawmakers’ responses to COVID-19 with particular attention paid to what this all means for FinTech. In short, we are now monitoring 124 FinTech-related bills (52 percent are bipartisan), and 225 legislative bills indirectly-related to FinTech (57 percent are bipartisan). Of course, the biggest piece of legislation to be introduced and signed into law is H.R.748, the CARES Act.
In this edition, we focus on the CARES Act, international efforts to include FinTechs in their COVID-19 relief schemes, several reports, and global developments.
As we noted in previous releases (newsletter and blog post), that legislation paved the way for approved FinTech lenders to partake in the Paycheck Protection Program (PPP). Within the past week the following FinTech firms were approved to partake in the PPP: Funding Circle, Bluevine, OnDeck, Intuit, Square, PayPal, (interview with Financial Innovation Now). Of course, there are also several FinTechs working with partner banks for PPP loans, as explained further by Peter Renton of LendAcademy.
But the green light was short-lived. On the morning of April 16, the Small Business Administration announced that the Payment Protection Program had closed. Nearly $350 billion was lent out between April 3 and April 16. There is discussion of adding a further $250 billion to the program, but that is dependent on US lawmakers reaching agreement, which, according to a recent article in Politico, is far from certain. (Hat tip to Zachary Warmbrodt from Politico for some fantastic coverage of the program over the past 2-3 weeks).
Of course, beyond several topline numbers covering the number of applicants, funding, and lenders participating in the program, it is not clear what types of small businesses are receiving funds and whether this funding is truly being allocated to help Main Street pull through this crisis. The closest information we have, at this time, is what the Small Business Administration released on April 16 covering loan approvals and amounts.
More on the program: The Fed comes to the rescue (again). On April 9, the Federal Reserve, in a bid to provide liquidity to banks participating in the PPP, issued guidance for banks wishing to participate in the Fed's Paycheck Protection Program Lending Facility. According to the guidance, each of the Federal Reserve Banks "will extend non-recourse loans to institutions that are eligible to make PPP-covered loans, including depository institutions subject to the agencies’ capital rules.” However, at this time, non-depository institutions are not eligible to participate in the Lending Facility. According to its FAQ page, the Fed notes it is “working to expand eligibility to PPP lenders that are not depository institutions in the near future.”
Meanwhile, international ramifications resulting from COVID-19 on FinTech developments are intensifying. For instance, we continue to see COVID-19 impact the rollout of virtual bank licensing schemes in the Asia-Pacific region. The Australian Prudential Regulation Authority (APRA) recently announced that it is temporarily suspending the issuance of new banking or insurance and superannuation licenses for at least six months due to economic uncertainty resulting from the pandemic. The Monetary Authority of Singapore extended its assessment period of applicants for its Digital Bank license until the second half of 2020 (approvals were originally expected by June 2020). In Hong Kong, five of eight virtual banks approved by the Hong Kong Monetary Authority (HKMA) will reportedly miss their target launch dates. (Recall that the HKMA, in its virtual bank licensing framework, expects applicants to launch within 6-to-9 months after approval). In Malaysia, the central bank, Bank Negara Malaysia, extended the consultation period for its Exposure Draft on the Licensing Framework for Digital Banks from April 30 to June 30.
We’re also seeing several regulators open up, and, like the SBA, include FinTechs as part of larger efforts to target relief to the sector and/or to those most in need. We spoke previously about the reluctance of the British Business Bank to approve more lenders to partake in the Coronavirus Business Interruption Loan Scheme (CBILS). On April 11, the BBB approved four new lenders to partake in the CBILS—The Co-operative Bank, Cynergy Bank, OakNorth Bank, and Starling Bank. Funding Circle UK also joined the growing list of accredited lenders. However, is that enough to satiate the tech community’s wishes?
Unlikely.
The Coalition for a Digital Economy (Coadec) noted its concerns with current government schemes in early April, while several other groups—such as the Association of Alternative Business Finance, InsurTechUK, Innovate Finance, Funding Options, among others—have urged the UK government to allow for greater participation in the various relief schemes.
We're also seeing greater clarity on the number of small businesses seeking relief. In late March, Funding Options said it has seen a massive increase in demand from SMEs for capital on its platform. That month alone, the platform received thousands of applications worth more than £1 billion. As reported by LearnBonds, the platform “said more than 10,000 businesses requested loans… totaling £1,015,843,585 under the government’s Coronavirus Business Interruption Loan Scheme (CBILS), aimed at keeping small firms afloat." The platform also struck an open banking partnership with 20 alternative lenders to allow small business borrowers a more streamlined, efficient process to obtain funds from lenders.
UK Finance, meanwhile, recently stated that the banking and finance sector “has lent over £1.1 billion to SMEs so far through the Coronavirus Business Interruption Loan Scheme (CBILS). Total lending under the scheme has grown by £700 million in the last week, an increase of 150 per cent.” Recall that the UK Government recently expanded its relief efforts related to COVID-19.
Like the US, exactly what types of SMEs are receiving these funds and how many have successfully navigated the process and obtained funding is largely unknown at this point. The British Chamber of Commerce (BCC) continues to provide updates through its Coronavirus Business Impact Tracker. As of April 15, only 2 percent of firms "had successfully accessed CBILS and 15 percent of those surveyed are now receiving grants." The BCC further states, "Of those who were unsuccessful, slow or no response from lenders was cited as the main reason. This suggests firms could still be having difficulty accessing the support through banks, despite the announcements on 2nd April designed to simplify and speed up the CBILS process."
In Canada, similar pressure is being exerted by FinTechs to partake in government relief programs and strategic plans. The Canadian Lenders Association announced the creation of a COVID-19 working group and petitioned the government to engage with FinTechs to direct needed capital to storefronts. In late March, Canada's Business Development Bank and Export Development Canada announced the launch of the Small and Medium-sized Enterprise Loan and Guarantee program, which will enable up to C$40 billion in additional lending.
In Australia, beyond the Senate Select Committee on FinTech and RegTech re-opening its inquiry to include responses on the impact of COVID-19 on the sector and how FinTech can play a role in providing relief, the government introduced an AUS$130 billion JobKeeper Payment scheme “to support businesses significantly affected by the coronavirus to help keep more Australians in jobs.” The government also announced the creation of the Structured Finance Support Fund (SFSF), consisting of AUS$20 billion, to "make targeted investments in structured finance markets used by smaller lenders that provide consumer and business finance, investing in rated term securitisations and in rated and unrated securitisation warehouses." The government also launched the Australian Business Securitisation Fund (ABSF), established on April 6, which "will invest up to $2 billion in warehousing and the securitisation market, providing significant additional funding to smaller banks and non-bank lenders to on-lend to small businesses on more competitive terms." That funding is now being directly invested into Australia's digital banking scene, with the government pumping AUS$500 million into Judo Bank—AUS$250 million coming from the SFSF and AUS$250 million coming from the ABSF.
Lastly, the government's SME Guarantee Scheme, which will support up to AUS $40 billion to SMEs has welcomed FinTech firms Moula and Prospa as non-bank participants in the Scheme. Under the Scheme, the government will guarantee 50 percent of new loans issued by Prospa and Moula to SMEs.
In Holland, the government has extended the type of accredited lenders to the SME credit guarantee scheme to include "financiers other than banks."
In Korea, the Financial Services Commission announced that the FinTech Innovation Fund, created in December 2019, will directly invest KRW85.5 billion in FinTech firms in April. The investments will seek to help startups and those companies looking to scale-up. “In order to speed up the investment process to help fintech firms having troubles finding investment amid the COVID-19 pandemic, the fund management companies will work to streamline the investment process,” the press release stated.
And in Singapore—beyond delays to the assessment of digital bank applicants—the central bank not only issued a press release urging individuals and businesses to use digital financial services and e-payments during the pandemic, but also launched an SGD$125 million support package, funded by the Financial Sector Development Fund, to strengthen the capabilities in the financial services and FinTech sectors amid the current economic slump. The package has three main components: Supporting workforce training and manpower costs, strengthening digitalization and operational resilience, and enhancing FinTech firms' access to digital platforms and tools.
If you know of other regulatory bodies or governments that have allowed or are seeking to incorporate FinTechs into their COVID-19 strategies, please do let me know. Thank You.
FinTech Headlines
Collaboration: The Linux Foundation announced that FinTech Open Source Foundation (FINOS) will become a Linux Foundation organization. "The Linux Foundation will position FINOS as its umbrella project through which to advance further development of open source and standards within the financial services industry. The FINOS team, led by Executive Director Gabriele Columbro, will join the Linux Foundation," according to the press release.
Cryptocurrency: Andreessen Horowitz is reportedly seeking to raise $450 million for its second cryptocurrency fund. According to the Financial Times, the effort comes two years after the firm raised $350 million for its first fund.
According to Chainanalysis, the COVID-19 crisis has reduced the number of cryptocurrency scams. "The total daily value sent to cryptocurrency scams dropped 61% between March 13 and March 31, though it has recovered some since then. Does that mean the concerns over scammers taking advantage of Covid-19 are overblown? Not quite. Nearly all of the scam revenue losses so far are concentrated to investment scams and Ponzi schemes, two scam sub-categories that together make up the vast majority of cryptocurrency scamming activity. But while Covid-19 has hurt that set of scammers, it’s giving others who favor email spamming tactics new stories they can use to try and fool their victims,” the blog post states.
Decentralized Finance (DeFi): Volt Capital—together with Jump Capital, Cumberland DRW, and CMT Digital—announced the Chicago DeFi Alliance "to provide entrepreneurs and start-ups in the decentralized finance (DeFi) space with meaningful support and guidance with respect to trading and applicable regulations."
Global Stablecoins: The Financial Stability Board published a consultation setting out 10 high-level recommendations to address the regulatory, supervisory, and oversight challenges raised by "global stablecoin" arrangements. As defined in the Glossary of the report, a GSC is "a stablecoin with a potential reach and adoption across multiple jurisdictions and the potential to achieve substantial volume." The document includes characteristics of stablecoins; identifies potential risks to financial stability, existing regulatory responses, and potential gaps in existing frameworks; cross-border challenges; and recommended actions regulators take to address GSCs.
As the FSB states, the significance of GSCs and their impact on financial stability “depend on how widely and for what purpose a GSC is used, and whether linkages to the financial system increase. For example, if a GSC were adopted as a widespread means of payment, but not as a store of value, its potential implications for financial stability may be narrower. If, however, a GSC was adopted as a significant store of value by some of its users, other channels—including those pertaining to confidence effects, interlinkages to financial institutions, and macroeconomic stability—may become more prominent." Table 2 (on page 14) provides a good breakdown of some of the oversight challenges to GSCs.
The recommendations contained in the report "focus on financial regulatory and supervisory issues relating to privately-issued GSCs predominately intended for retail use. Wider issues such as monetary policy, monetary sovereignty, currency substitution, data privacy, competition, and taxation issues are beyond scope." In short, the FSB finds "existing regulatory, supervisory and oversight regimes generally apply in whole or in part to stablecoin arrangements and address at least some of the risks they generate. Regulatory coverage is reported to be less comprehensive in many EMDEs."
As it relates to EMDE oversight of GSCs, which the FSB seemed particularly concerned about, the "cross-border challenges may be particularly significant for EMDEs. The use of stablecoins as a means of payment and/or store of value may be more widespread in EMDEs, for example due to the substitution of local currency, than in AEs with developed financial systems. At the same time, the activities of a stablecoin arrangement may typically be performed by entities that are located outside EMDE jurisdictions. Taken together, EMDEs may face a combination of relatively high systemic relevance of a stablecoin and constraints in regulating and supervising the arrangement.”
On the recommendations, FSB suggests regulators adopt and promote a technology-neutral approach "that enables comprehensive oversight of GSC’s multi-functional activities and mitigates regulatory arbitrage, authorities should focus on the functions performed by the GSC arrangement and risks posed and apply the appropriate regulatory framework in the same manner as they would apply it to entities performing the same functions or activities, and posing the same risks (‘same business, same risk, same rules’).”
Of note—and probably one of the more eye-opening parts contained within the recommendations—the FSB states that fully permission-less ledgers or similar mechanisms “could pose particular challenges to accountability and governance and may not be suitable if regulators cannot be assured that appropriate regulatory, supervisory, and oversight requirements are satisfied.”
Responses to the consultation are due by July 15, 2020, with final recommendations published in October 2020.
Payments: A new report by the Committee on Payments and Market Infrastructures and the World Bank, Payment aspects of financial inclusion in the fintech era, provides "a framework for incorporating and leveraging technological opportunities to promote access and use of transactions accounts, while also addressing potential challenges." According to the press release, the report builds on the guidance in “Payment aspects of financial inclusion” issued by CPMI and the World Bank in 2016. The report includes an overview of selected advances in technology considered to be relevant to payments, and critical enablers of payment systems and the provision of payment services.
Robo-Advisors: A joint venture between The Vanguard Group and Ant Financial Services is rolling out a new robo-advisor service to target the 900 million users of Ant Financial Services. The service, Bang Ni Tou, "will recommend a portfolio selected from 6,000 mutual funds, after assessing the user’s risk appetite and investment horizon," according to the South China Morning Post.
Global Developments
China: Screenshots of China's sovereign digital currency have emerged. According to CryptoCurrency Guide, the image “which has been shared extensively on Chinese social media, is purportedly from a test version of a mobile app developed by one of China’s largest state-owned banks, the Agricultural Bank of China, for a small group of internal users to experiment with the virtual currency.”
Meanwhile, China's Ministry of Industry and Information Technology has formed a National Blockchain and Distributed Accounting Technology Standardization Technical Committee with 71 companies and public entities as members, including JD.com, Tencent, Huawei, Baidu, Ant Financial, and others. In addition, the Ministry has called for public feedback on draft guidance for standardizing data security in blockchain and other emerging technologies. According to CoinTelegraph, the document "places a strong emphasis on the importance of development security standards in next-generation technologies such as blockchain, 5G, cloud computing and artificial intelligence."
Lastly, Ping An Consumer Finance Co received approval to operate by the Shanghai office of the China Banking and Insurance Regulatory Commission. The company will operate in the following areas, according to SHINE: "issuing personal consumer loans; accepting deposits from shareholders and its domestic subsidiaries; borrowing from domestic financial institutions; issuing financial bonds; conducting consulting and agency business related to consumer finance; selling insurance products related to consumer loans; and making fixed income securities investments."
European Union: The European Commission has requested feedback from the public on the EU's implementation of the General Data Protection Regulation (GDPR). The feedback period is from April 1 to April 29. "The Commission will summarise the input received in a synopsis report explaining how the input will be taken on board and, if applicable, why certain suggestions can't be taken up,” according to the release.
A new study, Crypto-assets: Key developments, regulatory concerns and responses, explores recent developments in the space and addresses key regulatory concerns. According to the executive summary, more than 5,100 crypto-assets exist, with a total market capitalization of more than $250 billion. As it relates to central bank digital currencies (CBDCs), the authors note "it is too early to tell whether CBDCs will indeed be(come) game changers for payments. More research needs to be done." However, the report did include this: "An interesting line of thought in this context, that links CBDCs with compliance with laws, is that replacing anonymous, untraceable cash with a public, traceable CBDC, could theoretically mark the end of many money laundering and criminal activities, although from a political perspective such scenario is probably unlikely."
As it relates to money laundering and terrorism finance risks, the study recommends regulators broaden the scope of the definition of virtual currencies to include tokens, among other things. The report also suggests the creation of a European AML watchdog and recommends the adoption of a "common view" of legal qualifications of crypto-assets as financial instruments. Of note, the study found there are currently "no specific laws that set-out minimum standards for cybersecurity to be complied with by intermediaries who offer custodial services for crypto-assets. The EU should consider introducing such standards for intermediaries operating within the EU."
France: On April 7, the country's financial services regulator, Autorité des marchés financiers (AMF), published its response to a European Commission consultation on the development of a European framework for crypto-assets markets. The AMF supports the development at the European level of a new regime for crypto-assets that are not financial instruments and supports the creation of an interbank settlement asset in central bank money to facilitate Delivery vs Payments process on chain, among other positions. In addition, the regulator recommended placing the European Securities Markets Authority as the head of the system for supervising market activities in crypto-assets that do not qualify as financial instruments. According to the report, the ESMA should have a coordinator role, as part of a European Digital Lab, for crypto-assets that are financial instruments.
Meanwhile, the Central Bank of France issued a call for applications on the bank’s approach to CBDC. "In view of the opportunities opened up by technological progress and in an effort to avoid excessive fragmentation in settlement procedures, the Banque de France is taking steps to review and adjust the conditions under which it provides financial intermediaries with central bank money. With this in mind, the Banque de France is launching a programme of experiments to test the integration of a CBDC in innovative procedures for the exchange and settlement of tokenised financial assets between financial intermediaries." The Central Bank will focus on payment in central bank money against delivery of listed or unlisted financial instruments, payment in central bank money against the digital currency of another central bank, and payment in central bank money against digital assets. Submissions are due by May 15, 2020.
Jamaica: The Financial Services Commission will expand its regulatory functions this year to include domestic and international trust service providers and virtual asset service providers, according to the Jamaica Information Service.
Kenya: The Capital Markets Authority announced the admission of the Central Depository and Settlement Corporation (CDSC) to its Regulatory Sandbox. The CDSC will test its proposed screen-based Securities Lending and Borrowing platform for a period of five months beginning on April 7.
Korea: The Financial Services Commission (FSC) announced that it has added nine more innovative financial services to its regulatory sandbox, "bringing the total number of 'innovative financial services' to 102 at the one-year anniversary" of the launch of the sandbox. The FSC also announced that it will "begin to make available to the public approximately 44 million counts of public financial data held by the FSC and nine other financial institutions through open API beginning in early April."
The FSC announced that it would lower the peer-to-peer lending cap from KRW50 million to KRW30 million per year. For real estate investment products, the lending cap "will be lowered to KRW10 million from KRW30 million," according to the press release.
Meanwhile, the Financial Supervisory Service said it would seek to incorporate innovative SupTech applications to better protect consumers. According to The Korea Times, the FSS is looking at "identifying mis-selling in telemarketing of insurance products and reviewing reports on private equity funds."
And, if that's not enough FinTech-related news, the Bank of Korea announced the launch of a CBDC pilot program that will run for 22 months.
South Africa: The Intergovernmental FinTech Working Group Innovation (IFWG) Hub launched. The IFWG, which "is intended to support the sector in introducing innovations that complement the core mandates of regulators, including financial stability and soundness; consumer protection; financial inclusion; and fair lending practices." IFWG members include the Financial Intelligence Centre, Financial Sector Conduct Authority, National Credit Regulator, National Treasury, South African Revenue Services, and the South African Reserve Bank.
The IFWG published a position paper covering crypto-assets. According to the paper, crypto-assets "and the various activities associated with this innovation can no longer remain outside of the regulatory perimeter." The paper goes on to explain crypto-assets and provides a list of recommendations to ensure sufficient oversight of the space.
Spain: The country's tax collection agency sent warning letters to 66,000 digital asset investors, according to CrowdfundInsider.
Sweden: The central bank, Sveriges Riksbank, and the European Central Bank concluded an agreement "on settlement of electronic payments in Swedish Krona on the Eurosystem's real-time infrastructure, TIPS." Under the agreement, payments will be cleared as of May 2022.
US: The Financial Action Task Force published an assessment of US efforts to prevent money laundering and terrorist financing activities. According to the analysis, the US has met most of the FATF standards regarding virtual assets and virtual asset service providers. The US was rated "largely compliant" with minor deficiencies, including coverage of investment advisers and no explicit requirements on financial institutions to address the risks presented by new technologies.
The Office of the Comptroller of the Currency held a series of Listening Sessions on the Paycheck Protection Program. Meanwhile, the Securities and Exchange Commission's Office of the Advocate for Small Business Capital Formation is holding virtual coffee breaks to discuss small business capital raising.
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