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FinTech in Focus—January 23, 2024

Newsletter
FinTech in Focus—January 23, 2024
FinTech Advisory Council, AI Policy Update, and Bitcoin ETFs

In This Newsletter

Welcoming New FinTech Advisory Council Members
Artificial Intelligence Policy
The Dawn of Spot Bitcoin ETFs

Welcoming New FinTech Advisory Council Members

We are happy to welcome four new members to our FinTech Advisory Council this year. Jeremy Allaire, CEO of Circle, will add to our work on digital assets and the future of the internet. He shared his perspective on the role of stablecoins in emerging economies at the Milken Institute 2023 Asia Summit on the session Driving FinTech Forward: The Power of Innovation and Impact.

Jeff Bandman, chief operating officer, 6529 NFT Fund and 6529 Capital, brings his expertise in innovative finance, NFTs, and the Metaverse. Bandman previously served as the founding director of LabCFTC and recently spoke at the Milken Institute 2023 MEA Summit on the session Borderless: The State of Digital Assets, Infrastructure, and Web3.

Michael Sonnenshein, CEO of Grayscale Investments, joins the council this year. Grayscale’s Bitcoin (BTC) exchange-traded fund (ETF) received its long-awaited approval from the Securities and Exchange Commission (SEC) this month. Grayscale was one of 11 spot Bitcoin ETFs approved by the SEC that will enable investors to have direct exposure to the price of Bitcoin without directly buying the digital asset.

Ivan Soto-Wright, co-founder and CEO of MoonPay, also will join the council. MoonPay is a financial technology company that builds Web3 infrastructure, providing consumers and businesses with end-to-end solutions for payments, authentication, wallets, minting, and more. MoonPay recently partnered with payments giant Mastercard, a collaboration that will see MoonPay embed Mastercard products and solutions to drive more trust, compliance, and efficiency across the Web3 industry.

Artificial Intelligence Policy

Artificial intelligence is becoming a critical policy issue in finance and in the technology sector more broadly. At the Milken Institute 2023 MEA Summit, Nicole Valentine led a discussion with leaders in the AI field to examine its potential impact on finance, the economy, and society at large in the session Artificial Intelligence Deep Dive: Risk and Rewards. The conversation reframed AI as bigger than a single technology but a field encompassing computer vision, natural language processing, large language models, and more. Panelists called for AI development that prioritizes transparency and accountability to avoid biases and ensures algorithmic explainability, and emphasized that AI can augment human capabilities rather than replace them.

Some of these same issues reached the forefront of AI policy conversations in December, when the European Parliament reached a preliminary deal to advance its AI Act. The deal puts forward legislation that would limit the use of AI in biometric identification systems by law enforcement and the private sector, building on data protection legislation like the General Data Privacy Regulation. The act would open the door to fines and litigation for companies applying AI algorithms that produce discriminatory results.

In the United States, federal regulators are approaching AI with an eye toward anticompetitive behavior. The December edition of Milken Institute's Tech Regulation Digest reported that the Federal Trade Commission (FTC) is concerned about early signs of market concentration in AI, as well as AI-enabled scams, citing a November speech at Stanford University by FTC Chair Lina Khan. Khan noted that the FTC is examining how Big Tech companies are consolidating AI market share as they provide tools to AI start-ups and developers. The speech came two weeks before OpenAI’s high profile firing and rehiring of Sam Altman, which resulted in a closer relationship between Microsoft and the industry’s leading start-up. OpenAI, which was initially founded as a nonprofit, accepted $10 billion of investment from Microsoft in 2023. The new relationship between the two firms has prompted inquiries from US, UK, and EU antitrust regulators, according to the Financial Times.

While comprehensive AI regulation remains elusive in the US, legislators are considering how this technology will be applied to the financial system. The House Financial Services Committee announced the formation of a new bipartisan Working Group on Artificial Intelligence, led by Digital Asset, Financial Technology and Inclusion Subcommittee Chairman French Hill and Subcommittee Ranking Member Stephen F. Lynch. The working group will explore AI’s use in financial services and housing finance, including AI in financial decision-making, the development of new products and services, fraud prevention, compliance efficiency, and the enhancement of supervisory and regulatory tools, as well as how AI may affect the financial services workforce.

The Dawn of Spot Bitcoin ETFs

This month, the SEC gave its long-anticipated approval of spot bitcoin ETFs. The value proposition of spot bitcoin ETFs is similar to that of the spot gold ETFs. According to CoinDesk, the 2003 approval of gold ETFs enabled investors who wanted exposure to gold to avoid the difficult and costly process of securely acquiring and storing physical gold while also circumventing the loosely regulated gold broker and custodian market. Spot bitcoin ETFs similarly allow investors to avoid the irregular process of acquiring and storing bitcoin either on a wallet or through a custodian and instead access the commodity wherever ETFs are listed.

The approval also opens the door to skeptical institutional investors who have long viewed bitcoin as a risky alternative asset. They can now participate in the bitcoin market as they would with any other commodity ETF. The newly broadened access to the bitcoin market through ETFs is expected to drive additional demand for bitcoin. Crypto News reports that in the 24 hours after the approval of the spot BTC ETFs, Coinbase saw $7.7 billion in over-the-counter bitcoin trading.

The SEC’s approval applied to 11 spot bitcoin ETFs: ARK 21 Shares Bitcoin ETF, Bitwise Bitcoin ETF, BlackRock’s iShares Bitcoin Trust, Franklin Bitcoin ETF, Fidelity Wise Origin Bitcoin Trust, Grayscale Bitcoin Trust, Hashdex Bitcoin ETF, Invesco Galaxy Bitcoin ETF, VanEck Bitcoin Trust, Valkyrie Bitcoin Fund, and the WisdomTree Bitcoin Fund. The companies represent established players in the ETF space, large asset allocators, and crypto-native funds, demonstrating the broad institutional interest in the bitcoin market across the financial system.

The launch of spot Bitcoin ETFs may also signal a broad shift in how capital interacts with the digital asset market as a whole. Cointelegraph reports that Blackrock has signaled interest in a spot ETF for Ethereum. Investors like Fidelity Digital Assets have hypothesized that Ethereum's broad utility in Web3 infrastructure and proof-of-stake model will soon make it, along with bitcoin, a “blue chip” digital asset. ETFs for alternative cryptocurrencies like Ethereum, baskets of cryptocurrencies, or even of NFTs could offer investors new exposure to the digital asset ecosystem.