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FinTech in Focus—October 10, 2023

Newsletter
FinTech in Focus—October 10, 2023

In This Newsletter

AI Policy Update
The Race for a Bitcoin ETF
FinTech at the Asia Summit
Pew at the FinTech Advisory Council

AI Policy Update

Recently, there has been a flurry of activity on AI policy on Capitol Hill. In mid-September, Senate Majority Leader Chuck Schumer hosted the first-ever AI Insight Forum. The convening brought together key leaders in the artificial intelligence and broader technology sectors, including X's Elon Musk, Meta's Mark Zuckerberg, Google's Sundar Pichai, Microsoft’s co-founder Bill Gates, and OpenAI's Sam Altman to participate in a roundtable conversation with more than 60 US senators in attendance. 

The event sought to strengthen the consensus that government must have an active role in regulating AI. The industry leaders who addressed the convening called on the federal government to act as a referee for the emerging AI industry. Politico reports that Senator Schumer envisions AI legislation following the same model as the CHIPS and Science Act, with committees relying on scientific and technical information from forums and dialogues with the private sector and civil society stakeholders. Axios reports that the next AI forum is expected to come this October.

The Senate Banking Committee held a hearing on Artificial Intelligence in Financial Services this September. The hearing featured testimony from Melissa Koide, director and CEO of FinRegLab; Daniel Gorfine, founder and CEO of Gattaca Horizons LLC; and Michael Wellman, professor of computer science and engineering at the University of Michigan. The testimony outlined key use cases for AI in the financial system, such as fraud detection, investing, marketing, credit decisions, insurance, and customer service. The witnesses also discussed the risks of an AI-powered financial system, like algorithmic transparency, data privacy, and the dangers of perpetuating systemic inequities through biased training data. To combat these risks, the witnesses called for federal regulators to monitor new AI applications actively, reevaluate existing financial regulatory frameworks, and review risk management and consumer protection frameworks that apply to automated financial decision-making.

The Race for a Bitcoin ETF

Franklin Templeton, BlackRock, Fidelity, Ark Invest, Greyscale, and more are all in a race to get the first spot Bitcoin Exchange Traded Fund (ETF) off the ground, Fortune reports. The surge in institutional interest in the Bitcoin ETF comes after a unanimous federal appeals court ruling in August found that the Securities and Exchange Commission (SEC) had wrongly denied Greyscale’s application in June 2022 to launch a spot Bitcoin ETF. The court said that the SEC's decision was inconsistent with the agency's prior approvals of ETFs for Bitcoin futures. This ruling has created an opening for many institutional heavyweights that have, up to now, been waiting on the sidelines to submit their bids to launch Bitcoin ETFs. The decision on the ETFs highlights a recent trend in American digital asset policy where the judiciary is taking a central role in mediating regulatory disputes as a legislative framework works its way through Congress. 

While investors have long been able to access Bitcoin futures ETFs, for the past 10 years, the SEC has denied applications for a spot Bitcoin ETF. A spot ETF offers several benefits over a futures ETF for investors who want to follow the price of Bitcoin more accurately. A spot Bitcoin ETF would be able to issue and redeem shares to track the current price of Bitcoin while also offering investors robust protections under the Investment Company Act of 1940. A Bitcoin ETF may also benefit the underlying asset's market structure. Forbes reports that a Bitcoin ETF may offer the Bitcoin market enhanced volume and liquidity like the gold market experienced after gold ETFs were introduced.

FinTech at the Asia Summit

At the recent Milken Institute Asia Summit in Singapore, Nicole Valentine moderated the session FX, Digital Assets and the Asia Opportunity with LMAX Group CEO David Mercer, who recently expanded LMAX Group’s global exchange infrastructure in Asia-Pacific with a Singapore-based matching engine in SG1. During the session, Valentine and Mercer discussed spot Bitcoin ETFs that have taken center stage in US digital asset policy conversations. Mercer expects that approval of a spot Bitcoin ETF would democratize access to the nascent crypto asset class, providing a catalyst for institutional adoption. However, before digital asset markets see broader institutional participation, Mercer said there is a need for clear regulation, including rules on the segregation of customer funds and the separation of market functions.
 
Mercer told the growth story of LMAX Digital, the institutional crypto currency exchange, operated by LMAX Group, and shared how he sees the digital asset market as a natural extension of the forex market. LMAX Digital will play a vital role in the future that Mercer envisions, where capital markets are nearly universally tokenized and blockchain-powered.

Nicole Valentine also moderated the session Driving FinTech Forward: The Power of Innovation and Impact. The conversation featured insights from Jeremy Allaire, CEO of Circle; Monica Long, president of Ripple; Sopnendu Mohanty, chief FinTech officer at the Monetary Authority of Singapore; and Arjun Sethi, co-founder and CEO of Tribe Capital. The conversation focused on the transformation of the world's modern payments infrastructure over the past two decades and the role emerging technologies like distributed ledgers and stablecoins are playing in that change. Speakers discussed how digital identity is a prerequisite to broad financial inclusion, how clear regulatory frameworks drive FinTech adoption and growth in Southeast Asia, and how strides in computing power and artificial intelligence will continue to shape the global payments ecosystem.

Pew at the FinTech Advisory Council

Monica Anderson, director of internet and technology research at Pew Research Center, presented at the Milken Institute’s FinTech Advisory Council meeting this September and led a discussion about the changing participation and perceptions of the American public in the digital economy. The discussion highlighted recent research by Anderson about cryptocurrency, payment apps, the cashless economy, and online commerce. Anderson shared recent insights from Pew’s survey of US adults March 13–19, 2023, which asked questions about the demographics and confidence of American cryptocurrency users. The study found that 17 percent of American adults have reported investing in, trading, or using a cryptocurrency, with users skewing male, younger, upper middle income, and more diverse. The council also discussed how Americans are adapting to the digital economy, looking at data from Pew’s survey of US adults July 5–17, 2022.

Since 2015, when Pew began tracking the use of cash, more Americans than ever have gone totally cashless. In 2022, 41 percent of Americans surveyed reported that they make no cash purchases in a week, up from 24 percent in 2015. The shift to a cashless economy in the US has been driven over the past decade by rising mobile internet use, modernization in point-of-sale technology, and the adoption of digital wallets.