Authors
Jackson Mueller
In this Issue
Updating an Update
So here I was on Thursday afternoon putting together some final thoughts covering COVID-19 and FinTech. Of course, one of my chief concerns expressed in that piece was the startling lack of guidance provided to "additional" lenders as included in the CARES Act legislation (Section 1102) and in subsequent documents published by Treasury. Around 6:30 p.m. EST, roughly 12 hours before the program opened to small businesses and sole proprietorships through existing SBA lenders, the US Small Business Administration provided clarity on the types of "additional" lenders that would be allowed to participate in the Paycheck Protection Program (PPP). Under the CARES Act, Congress allocated $349 billion to provide guaranteed loans under this new 7(a) program to provide relief to small businesses throughout the country. While I was able to post my thoughts thirty minutes prior to when the interim final guidance was posted, I will share a few highlights from the latest guidance:
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SBA will not require lenders to comply with Section 120.150, "What are SBA's lending criteria;”
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Lenders will be allowed to rely on certifications from the borrower to determine eligibility;
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Lenders, while required to comply with applicable lender obligations set forth in the rule, will be held harmless for borrowers' failure to comply with the program criteria;
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The program operates on a "first-come, first-served;"
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Interest rate on PPP loans will be 100 basis points, or 1 percent;
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Maturity date on a PPP loan is two years (despite the CARES Act calling for a maximum maturity date of 10 years). Both SBA and Treasury viewed a maturity date of two years as "sufficient;"
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Small businesses will not be required to make any payments for six months after disbursement of the loan (the Act called for one year). However, interest will accrue during this period;
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Loan forgiveness can be up to the full principal amount of the loan and any accrued interest. Of note, "not more than 25 percent of the loan forgiveness amount may be attributable to non-payroll costs;”
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On eligible lenders (and this is where FinTechs come into play), the SBA states:
"Any depository or non-depository financing provider that originates, maintains, and services business loans or other commercial financial receivables and participation interests; has a formalized compliance program; applies the requirements under the BSA as a federally regulated financial institution, or the BSA requirements of an equivalent federally regulated financial institution; has been operating since at least February 15, 2019, and has originated, maintained, and serviced more than $50 million in business loans or other commercial financial receivables during a consecutive 12 month period in the past 36 months, or is a service provider to any insured depository institution that has a contract to support such institution’s lending activities in accordance with 12 U.S.C. § 1867(c) and is in good standing with the appropriate Federal banking agency.” -
PPP loans for existing customers will not require verification under applicable BSA requirements, unless otherwise indicated by the institution’s risk-based approach to BSA compliance;
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Entities not presently subject to BSA requirements "should... establish an anti-money laundering (AML) compliance program equivalent to that of a comparable federally regulated institution;"
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Alternatively, entities may rely on the customer identification program (CIP) of a federally insured depository institution or credit union that has an established CIP as part of its AML program;
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Lenders will not be required to apply the "credit elsewhere test;"
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For agents assisting a borrower, the total amount an agent may collect from the lender is the following: 1 percent for loans of not more than $350,000; 0.5 percent for loans of $350,000 and less than $2 million; and 0.25 percent for loans of at least $2 million;
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A PPP loan may be sold on the secondary market after the loan is fully dispersed. PPP loans can be sold at a premium or a discount to par value (SBA will issue further guidance on this in the near future);
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Importantly, a lender may request that the SBA purchase the expected forgiveness amount of a PPP loan or pool of PPP loans at the end of week seven of the covered period. "The expected forgiveness amount is the amount of loan principal the lender reasonably expects the borrower to expend on payroll costs, covered mortgage interest, covered rent, and covered utility payments during the eight week period after loan disbursement."
There is a lot more within this guidance, so please do take a look at the document in its entirety.
And finally, hats off to all of you who have been working through the night to get this guidance out. A lot of moving parts to this and it will take some time to get funds out to those in need, but a big “thank you” to those working behind the scenes on this.
Industry Headlines
CBDC: According to the Global Times, the People’s Bank of China is getting closer to launching its digital currency. “Alipay, the financial arm of Chinese tech firm Alibaba, reportedly publicized five patents related to China’s official digital currency from January 21 to March 17,” the report stated. Alipay is not the only private company collaborating with the central bank—Tencent, Huawei, and China Merchants Bank have also participated in its development.
In a keynote address delivered in February to the London School of Economics (and posted online in March), International Monetary Fund (IMF) Deputy Managing Director Tao Zhang focused on central bank digital currency. “[O]ne potential way for the central bank to mitigate some of these costs and risks while offering a safe alternative to cash would be to enter into a partnership with the private sector to provide a synthetic version of CBDC (or “sCBDC”). The private sector would issue coins fully backed with central bank reserves under the supervision of the central bank. Advantages relative to full-fledged CBDC include preserving comparative advantages, with the private sector to innovate and interface with customers and the public sector to regulate and provide settlement services and trust. This would be a two-tiered system not unlike current arrangements whereby banks provide payment services to customers but settle in central bank money.”
Lastly, the Digital Dollar Project announced the formation of an Advisory Group composed of more than 20 members. The group “will explore design options and approaches for creating a digital dollar through a deliberative process, including stakeholder meetings, roundtable discussions, and open forums.”
Challenger/Digital/Virtual/Neo/Internet/[Insert Your Preferred Name Here] Bank: In late March, ZA Bank—backed by ZhongAn Online P&C Insurance Co., Ltd.—became the first of eight newly licensed virtual banks to formally launch after concluding its pilot trial in the HKMA’s FinTech Supervisory Sandbox on December 18, 2019. The Bank also unveiled ZA Savings Go, a brand new savings product with no minimum balance requirement. Users “can enjoy an annual savings deposit rate of 1% for an amount up to HKD 500,000, above which basic savings rate will apply…. This will be 1000 times the market rate, as most banks are offering 0.001% interest rate for savings deposit,” according to the press release.
Separately, Airstar Bank—a joint venture between Xiaomi Corporation and AMTD Group—announced the launch of a pilot trial through the HKMA’s FinTech Supervisory Sandbox.
UK-based Revolut also made headlines after launching its services in the US. Of note, Revolut has partnered with Metropolitan Commercial Bank.
MatchMove—a Singapore-based payments firm—became the latest company to announce the formation of a consortium and submission of an application for a digital full bank license from the Monetary Authority of Singapore. The consortium includes Singapura Finance, Lightnet, and OpenPayd.
Speaking of Singapore, in a study by Visa, nearly two-thirds of the 511 respondents polled would adopt a digital-only bank. However, a larger majority—84 percent of respondents—said they were keen to use digital banking services provided by an existing bank. Even so, 20 percent of respondents said they would move all their services to a neobank without hesitation.
In Australia, Xinja Bank is set to receive AUS$433 million in funding from Dubai World Investments. According to CrowdfundInsider and subject to regulatory approvals, Xinja bank “will be able to access $160 million in capital immediately. The remaining $273 million will be allocated in different stages as required by the company to expand its operations over the next two years.”
Cryptocurrency: Chainanalysis has partnered with Paxful to create new compliance standards for peer-to-peer exchanges. As stated in the press release, Paxful “uses Chainalysis KYT (Know Your Transaction) to monitor its platform’s cryptocurrency transactions in real-time and Chainalysis Reactor to build investigations when it detects suspicious activity. Together, these tools amplify Paxful’s compliance expertise and sets a new compliance benchmark for P2P cryptocurrency exchanges globally.”
In other news, Starbucks is currently conducting a limited test of the cryptocurrency Bakkt Cash for use in its stores. Starbucks is also the launch partner for Bakkt’s dollar-denominated digital wallet, according to CoinDesk.
Lastly, Singapore-based cryptocurrency exchange Bitget obtained regulatory approval from the US Financial Crimes Enforcement Network, a first step to entering the US market.
Data Privacy and Security: Research from the Harvard Kennedy School of Government’s Mossavar-Rahmani Center proposes a Comprehensive Consumer Financial Data Act (CCFDA)— holistic federal legislation “that establishes the Consumer Financial Data Bill of Rights, simplifies the existing web of regulations to reduce business frictions, and fosters innovation for privacy- and security-focused technologies and financial products.” The report explores the various financial data and privacy regimes currently in existence in the US, while proposing a federal legislative approach. Overall, the authors “expect that the impact of the CCFDA will be greater long-run stability for businesses, stronger consumer rights and protections regarding financial data privacy and security, and increased innovation to build business models and systems with these concerns in mind from the ground up.”
ICOs: The Tezos Foundation plans to pay $25 million to settle a class-action lawsuit brought by investors claiming the Tezos initial coin offering violated US securities laws. However, according to one report, the settlement “leaves unanswered the underlying legal questions of whether the ICO qualified as a securities offering requiring the Tezos backers to file a registration statement with the U.S. Securities and Exchange Commission, and whether the Breitmans were ‘controlling persons’ under the Securities Act of 1933.”
In late March, US District Judge Kevin Castel of Manhattan issued a preliminary injunction barring the launch of the Telegram Open Network blockchain. “The Court finds the [US Securities and Exchange Commission] has shown a substantial likelihood of success in proving that the contracts and understandings at issue, including the sale of 2.9 billion Grams to 175 purchasers in exchange for $1.7 billion, are part of a larger scheme to distribute those Grams into a secondary public market, which would be supported by Telegram’s ongoing efforts. Considering the economic realities under the Howey test, the Court finds that, in the context of that scheme, the resale of Grams into the secondary public market would be an integral part of the sale of securities without a required registration statement.” Further, [f]or reasons that will be more fully explained, the Court finds that the SEC has shown a substantial likelihood of success in proving that Telegram’s present plan to distribute Grams is an offering of securities under the Howey test to which no exemption applies. The motion for a preliminary injunction will be granted.”
In response to Telegram’s request for clarity as to the scope of the preliminary injunction, Judge Kevin Castel said the injunction extends to all entities in the US and overseas. According to Coin Telegraph, nearly $1.3 billion of funds raised to finance the development of the Telegram Open Network came from investors based overseas.
Lastly, ICO funding in 2019 collapsed 95 percent from $7.8 billion raised in 2018 to just $371 million raised in 2019, according to a report by CBInsights.
InsurTech: AMTD Digital, part of AMTD Group, announced it will acquire a controlling stake in PolicyPal, the first graduate of the Monetary Authority of Singapore’s regulatory sandbox. “After the acquisition, PolicyPal will become a member company under AMTD Digital, and using its digital insurance broker license granted by the Monetary Authority of Singapore, as well as acting as AMTD Digital’s operating vehicle to develop and expand in the Southeast Asia insurtech sector.”
Payments: Ant Financial and the Industrial and Commercial Bank of China announced a new collaboration that will allow merchants “to collect payments via Alipay or the ICBC e-banking app, without the need for users to replace their existing payment collection QR codes.”
Partnerships: Microsoft announced the launch of Money in Excel powered by Plaid. “Money in Excel features a Plaid integration and the new capabilities essentially turn the spreadsheet software into a fintech app. It allows users to securely connect their financial accounts, import the data within them, sync balances and transactions over time, and, ultimately, gain greater insights into their financial health,” the press release states.
Rakuten Developments: Rakuten, the giant e-commerce platform based in Japan, has joined the Open Invention Network (OIN) in the company’s pursuit to become “the world’s first end-to-end fully virtualized, cloud native mobile network, using open source mobile carrier architecture to drive its $600 billion investment. By joining OIN, Rakuten is demonstrating its commitment to open source software (OSS) as a foundation for its platforms.”
Separately, Rakuten withdrew its application for an industrial loan charter in the US, though the company plans to refile in the future. According to a spokesperson quoted in American Banker, the move “gives Rakuten an opportunity to incorporate feedback received from the FDIC, which will enhance and strengthen certain areas of our application. Rakuten will continue to work constructively with the FDIC and the State of Utah to move forward with our applications.”
Robo-Advisors: A Freedom of Information (FOI) request has revealed that the UK Financial Conduct Authority’s (FCA) Advice Unit received 119 applications since its establishment back in 2016. The Unit has also rejected 30 of those applicants for failing to meet eligibility criteria. Of note, the Advice Unit “cost the FCA £1m ($1.1m, €1m), which includes salaries, flexible benefits, pensions and national insurance contributions between 31 May 2016 and January 2020,” according to International Adviser.
Wealthfront cash accounts will soon provide account numbers, routing numbers, and debit cards allowing clients to “use the company’s platform to automatically direct deposit paychecks, make purchases, settle utility bill payments, withdraw cash from ATMs, and perform peer-to-peer fund transfers,” according to CrowdfundInsider.
Meanwhile, Vanguard has soft-launched Vanguard Digital Advisor. The service is aimed at investors with more than $3,000 in investable assets and 401(k) plan participants.
In Singapore, intense competition for digital wealth management solutions has resulted in one robo-advisor calling it quits. Smartly, which launched in 2015, ultimately decided to shut down operations due to competition from startups, large tech players, and incumbent financial institutions.
Screen Scraping: Commonwealth Bank of Australia published a risk assessment to refute claims that the use of screen scraping does not lead to increases in banking fraud and cybersecurity risks. If you recall, our March 9 edition contained highlights from the Australian Senate Select Committee on FinTech and RegTech hearings in late February, which touched on the screen scraping debate. One of the eye-catching remarks from the Australian Securities & Investments Commission (ASIC): “[T]here’s no evidence of which we’re aware of any consumer loss from screen scraping.” As reported in ITnews, CBA’s latest evidence “essentially contests that assertion.” In its report, the CBA found “that customers with logins via an aggregator are two or more times more likely to experience fraud, a statistically significant result at a 95 per cent confidence interval.”
Of note, the Senate Select Committee reopened its inquiry “to enable submitters to provide further input to the committee on what the critical needs of the sector are at this time” in response to the COVID-19 pandemic. In particular, the committee “would like to hear what support is necessary in the short, medium and long term, including post-recovery, focusing on solutions that can be delivered swiftly by government and the private sector.”
Global Developments
Asia-Pacific: In a recent post, EY’s James Lloyd and Sharon Chen explored FinTech adoption in the region and the “diverse mix of attitudes, awareness and appetites.” For example, consumers in Australia, Hong Kong, Japan, and Singapore choose to engage with FinTechs because of their competitive fees and rates. In China, customers cite a better experience and more access to innovative products as the predominant reasons for choosing a FinTech. In South Korea, consumers view both price and ease of onboarding as equally important.
European Union: In a press release from the European Central Securities Depositories Association in response to the EU consultation on crypto-assets, the ECSDA stated that incorporating crypto-assets into the existing financial regulatory framework could inject trust and legal certainty into the marketplace and speed up adoption. However, in cases where fitting crypto-assets into the existing financial regulatory framework would not be appropriate (e.g. stablecoins) “[i]t might be considered whether the Principles for Financial Market Infrastructures would provide the right basis for its regulation.”
France: The central bank has issued a call for applications to experiment with a central bank digital currency for interbank settlements. Applications are due by May 15, and selected applicants will be notified in July. From the paper, the experiments “have a threefold objective. The aim is: (a) to show how conventional use cases for central bank money can be achieved through a CBDC based on different technologies; (b) identify the benefits of introducing a CBDC for the current ecosystem and understand how a CBDC might foster financial innovation; (c) conduct a detailed analysis of the potential effects of introducing a CBDC on financial stability, monetary policy and the regulatory environment.”
India: Paytm Payments Bank announced the issuance of Visa Debit Cards to customers. “Our Visa virtual debit cards will enable you to transact at all merchants accepting payments through cards. Now you can make international transactions using your Visa debit cards. Soon, you will also have an option to request for a physical card. This will enable you to make contactless payment through the chip-inserted cards,” according to the press release. Paytm Payments Bank’s target is to issue 10 million new digital debit cards in FY 20-21.
Meanwhile, the Joint Parliamentary Committee studying the Personal Data Protection bill has sought an extension to submit a final report on the legislation, according to The Economic Times.
India: The Insurance Regulatory and Development Authority of India approved the second tranche of proposals (16) related to Non-Life, Life, and Intermediaries. The period of approval is from May 1, 2020 to October 31, 2020.
International: The International Organization of Securities Commissions (IOSCO) published a report covering global stablecoin initiatives. The report “identifies possible implications that global stablecoin proposals could have for securities market regulators.” The paper is IOSCO’s “first published contribution to the ongoing public debate” and the organization has established a Stablecoin Working Group within its FinTech Network to evaluate global stablecoin proposals.
The paper includes a hypothetical case study. The analysis “concludes that the [IOSCO Principles for Financial Market Infrastructures (FMI)] apply to global stablecoin arrangements where such arrangements perform systemically important payment system functions or other FMI functions that are systemically important.”
Jamaica: The central bank announced FinTech Regulatory Sandbox Guidelines in mid-March. The objectives “are to provide a platform to encourage innovations in financial services, promote competition and promote financial inclusion. In the initial phase, Regulated Entities and Fintech companies in partnership with Deposit Taking Institutions (DTIs) for delivery of payment services or such other financial services will be allowed to operate in the Sandbox to promote innovation.”
Nigeria: The Securities and Exchange Commission unveiled an exposure draft of its regulatory framework for crowdfunding. “All MSMEs incorporated as a company in Nigeria with a minimum of two-years operating track record shall be eligible to raise funds through a Crowdfunding Portal registered by the Commission,” according to the proposal.
Qatar: The country’s central bank launched the Qatar Mobile Payment System, which “aims to enable the user to use the electronic wallet on his or her mobile phone to carry out electronic payments from one person to another and pay the purchase price in addition to conducting withdrawals and cash feeds for electronic wallets in an instant, round the clock (24 hours a day), seven days a week, as well the system enables the opening of electronic wallets for all users alike, which contributes to enhancing financial inclusion in the State.”
Russia: On March 17, Prime Minister Mikhail Mishustin introduced a new bill allowing for the creation of regulatory sandboxes. The sandboxes would be overseen by the country’s central bank.
South Korea: After the National Assembly passed an amendment in early March allowing for possession and trading of cryptocurrencies, the country’s largest bank filed a trademark application for a planned crypto custody platform, KB Digital Asset Custody.
US: At the federal level, the Commodity Futures Trading Commission (CFTC) issued final interpretive guidance on “actual delivery” for digital assets. Specifically, the guidance clarifies the CFTC’s views regarding the “actual delivery” exception to Section 2(c)(2)(D) of the Commodity Exchange Act (CEA) in the context of digital assets. On defining “virtual currency”, the Commission “notes that it does not intend to create a bright line definition given the evolving nature of the commodity and, in some instances, its underlying public distributed ledger technology (‘DLT' or 'blockchain')."
According to CFTC Chairman Heath Tarbert, the guidance "reflects my belief that the U.S. must be a leader in the digital asset space... Under my leadership, the CFTC will continue to do its part to encourage responsible fintech innovation through sound regulation."
At the state level, Hawaii announced the launch of the first pilot program for digital currency. As stated in a press release, the Digital Currency Innovation Lab “is a two-year initiative that aims to achieve a more in-depth perspective of digital currency and allows digital currency issuers to do business in Hawaii without obtaining a state money transmitter license during the effective period of the pilot program. The insights attained will be used to guide legislation and determine the future of digital
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