Authors
Jackson Mueller
In this Issue
That's All Folks
What a wild ride it has been over the past few weeks. The Mueller family welcomed Lochlan to the world, and now, after six years with the Milken Institute, I am moving on to join Securrency as director of policy and government relations. I am looking forward to working closely with Dan Doney, John Hensel, Patrick Campos, and the rest of the Securrency team in the near future.
Importantly, this newsletter and the FinTech program will continue, and the Institute will continue to publish in-depth research and put together well-attended, highly influential public and private convenings covering FinTech-related issues.
When I think back on the origins of this newsletter, I was putting internal emails together back in 2014 that would include select articles covering FinTech-related issues and global developments. As I now joke with others, at that time, “FinTech” wasn’t even a buzzword in Washington, DC, and there was really only one country—the UK—in the early stages of moving forward on FinTech policy. Putting together what has now become a bi-weekly newsletter was a heck of a lot easier back then.
When we decided to turn this internal email into a newsletter for public consumption, we did it with little promotion or fanfare and simply created a webpage for users to sign up. Since the launch of FinTech in Focus in January 2016, we have added roughly 4,500 subscribers and have an email open rate of nearly 30 percent.
So, it has been quite a ride, and it has been fascinating to watch developments in the FinTech space and what all of you have been up to over the last several years. There would be no FinTech in Focus newsletter without all of you and your contributions.
This is all a long way of saying: thank you. It has been great to connect with so many of you over the past several years to discuss FinTech-related matters. Your insights have been incredibly influential and contributed to several large FinTech reports that we have published.
I also wanted to quickly give a shout-out to several former and current colleagues at the Milken Institute who have provided a ton of guidance and support for the FinTech program over the years. They are Daniel Gorfine and Brian Knight—two former heads of the FinTech program—and Aron Betru and Mike Piwowar—two colleagues at the Milken Institute who have been instrumental in helping me shape the program to where it is today.
I will still be located in the Washington, DC area, and I am really looking forward to continuing to engage with all of you moving forward. For those interested in staying connected, please feel free to reach out to me at the following address: [email protected].
All the best to everyone, keep working hard, and talk soon!
Best,
Jackson
COVID-19 & FinTech
In the US, two COVID-19 privacy bills have been introduced in the Senate that include an explicit opt-in requirement for the collection and use of COVID-19-related personal data. Democrats in the Senate unveiled the Public Health Emergency Privacy Act, while Republicans offered their own legislation, the COVID-19 Consumer Data Protection Act of 2020. While there are differences between the bills, lawmakers are concerned about data privacy given the types of data that could be collected to track and monitor COVID-19 outbreaks (e.g., geolocation data, proximity data, demographic data, etc.)
In the House, lawmakers are continuing to work on several legislative changes to the Paycheck Protection Program (PPP). A new version of H.R.7010, Paycheck Protection Program Flexibility Act, was released yesterday. Among other provisions, the bill would ease loan forgiveness rules by reducing the current 75 percent threshold for payroll spending to 60 percent and extend the time businesses can use the funds from eight weeks to 24 weeks.
At the EU-level, the pandemic has had a major impact on the issuance of E-money and Payment Institution licenses. Advapay compared the number of E-money and Payment Institution licenses issued between January-May 2019 and 2020. According to the data, PI licenses have declined 75 percent in 2020 compared to 2019. For E-money licenses, a decrease of 45 percent was recorded.
In Canada, Quebec's financial regulator, Autorité des marchés financiers (AMF), has confirmed it will award grants to researchers studying the impact of COVID-19 on the FinTech ecosystem. According to CrowdfundInsider, there are "reportedly eight different research grants that will be awarded to academics and graduate students, so that they can look into the impact that the Coronavirus has had on the Fintech ecosystem. The researchers will be expected to examine how Fintech companies should cope with a potential second wave of the deadly virus."
From the industry-side, Kabbage recently announced that more than 110,000 small businesses were approved to receive PPP applications, surpassing $3.5 billion. According to the press release, "independent contractors, sole proprietors and single-member LLCs represent approximately 40 percent of all PPP applications approved through Kabbage, for over $500 million. The average loan size of Kabbage’s approved applications is $31,500 with a median of $14,000.”
While we provided several numbers from Square Capital and its involvement in PPP in our last newsletter, Jack Dorsey, CEO of Square, said during a May 6 conference call that Square Capital received approval for PPP loans totaling $520 million.
Beyond participation in the PPP, PayPal recently rolled out QR Code payments for buying and selling goods across 28 markets around the world. The company is also waiving its standard seller transaction fees incurred on sales conducted using a QR Code.
Across the pond, Starling Bank and Funding Circle—both allowed to participate in the CBILS—formed a partnership "to provide £300 million of lending to small businesses under the Coronavirus Business Interruption Loan Scheme (CBILS). Starling will lend through Funding Circle alongside other institutional investors, and will help more than 4,000 small businesses to access finance across the UK."
In the UAE, Dubai SME has allocated AED20 million "for the capital guarantee scheme launched by its financial arm, The Mohammed Bin Rashid Fund (The Fund), in partnership with Beehive, the first regulated peer-to-peer (P2P) lending platform in the Middle East & North Africa (MENA) region."
Beyond partnerships, we are also seeing demand for digital options, which is putting pressure on governments and companies alike. In Jamaica, COVID-19 is putting pressure on digital forms of payment. Bank of Jamaica Deputy Governor Natalie Haynes recently stated that while the use of technology to facilitate mobile payments is on the rise, only one company—the National Commercial Bank Jamaica Limited's Quisk mobile money product—has received authorization from the central bank to use the technology.
In China, Ant Financial Services Group has seen a surge in banks interested in its digital technology. According to Bloomberg, "[t]he number of customers paying for Ant to help them build mobile apps and provide cloud computing power jumped by 175% in the two months through April, and it’s now working with more than 200 lenders, according to the company. Inquiries to collaborate with the tech giant increased by 400% over the period."
In Hong Kong, WeLab Group CEO Simon Loong talked about the firm's recent launch of the HKCashDrop Program to support the economy during the pandemic. One of the motivations behind the effort is to get HK$10,000 to people earlier (interest-free at the outset) to stimulate the economy before the government officially launches the initiative in July. Loong expects 5,000 to 10,000 people will benefit from this initiative. On how the pandemic has impacted WeLab, the firm has reported an uptick in delinquencies in China and Indonesia. However, credit performance is starting to improve in China. In Hong Kong, WeLab has seen a 36 percent increase (March 2020 vs. March 2019) in individuals applying for more loans.
In the Philippines, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno urged FinTech firms to take part in the "new economy" resulting from the pandemic. "I wish it were under better circumstances that I will say this, but the fintech community has a lot to look forward to and even more to contribute in the shaping of the new economy—one defined by shared and sustainable prosperity."
Valuations are also suffering. For instance, UK-based FinTech unicorn Monzo is looking at a 40 percent drop in valuation if the firm closes a new funding round (£70-£80 million). That would put Monzo's valuation at £1.25 billion, down from a previous valuation of £2 billion. Meanwhile, Australia-based Volt Bank, which was the first entity to receive the Australian Prudential Regulatory Authority’s restricted ADI license, has reportedly scrapped plans to IPO in 2020 and raise AUD$50 million in funding.
Industry Headlines
#TeamCalibra or #TeamNovi? In late April, the Libra Association published a revised white paper including four key changes to address regulatory concerns: Offering single-currency stablecoins in addition to the multi-currency coin, enhancing the safety of the Libra payment system with a robust compliance framework, forgoing the future transition to a permission-less system while maintaining its key economic properties, and building strong protections into the design of the Libra Reserve. Barry Eichengreen and Ganesh Viswanath-Natraj provide a good overview of White Paper v2.0 and find the Association has "done nothing to address worries about currency substitution. A new proposed capital buffer is underspecified. A key market in Libra futures or forwards is missing, as is a Libra lender of last resort."
Of course, despite incorporating changes meant to assuage policymakers’ and regulators’ concerns, Version 2.0 is not free from political scrutiny. In an April 16 press release, Congresswoman Sylvia Garcia stated the changes do not "address the concerns I raised when Mr. Zuckerberg testified before the Financial Services Committee, and for which I introduced legislation to address said concerns. Facebook and the Libra Association had an opportunity to address the concerns I and my other colleagues raised with their initial whitepaper. Unfortunately, they chose not to listen to the bipartisan concerns raised about Libra. I will continue to work to make sure that the SEC regulates any such asset as the security that it is under current securities laws.”
Meanwhile, the Association’s membership has expanded, as has its executive leadership (CEO and General Counsel).
Even more notable, Facebook’s Calibra recently rebranded to Novi. According to the press release, Novi “was inspired by the Latin words ‘novus’ for ‘new’ and ‘via’ for ‘way.’ It’s a new way to send money, and Novi’s new visual identity and design represent the fluid movement of digital currencies. We’ve also included a nod to the Libra icon in the brand logo to underscore our commitment to the Libra network.”
Cambridge Center for Alternative Finance: Two significant reports were recently published covering the global alternative finance market and Bitcoin mining map. The global alternative finance market report found that in 2018, “online alternative business funding for start-ups and SMEs accounted for $82 billion, which fell by almost half from the high of $153 billion recorded in 2017. Much like the global total market volume, this significant reduction in alternative business funding was largely due to the sharp decline in business focused funding activity in China. Excluding China, global business funding through alternative channels increased from the $21 billion in 2017 to $31 billion in 2018. This represented a 47 per cent annual increase against the previous year.”
According to the Bitcoin mining map, more than 65 percent of mining occurs in China, with the majority of BTC mining taking place in the Xinjiang region. The US and Russia trail China, representing 7.24 percent and 6.9 percent of global mining activity, respectively.
Crypto: Telegram has given up on the TON platform due to challenges stemming from a lengthy court battle in the US. As Silicon Angle writes, the withdrawal of Telegram’s appeal against the US Securities Exchange Commission leaves Telegram in a tricky situation. “Where things become somewhat messy is with Telegram’s refund process now that the project has been abandoned. Telegram is offering U.S. investors two options to have their funds returned: Take 72% of their original investment immediately or loan the money back to Telegram with a guarantee of getting back 110% of the total invested funds in April 2021.”
Meanwhile, ABTCoin is struggling to pay a $250,000 settlement agreement with plaintiffs after the startup was found guilty of violating federal securities laws. In 2017, ABTCoin raised more than $20 million in its initial coin offering.
Data Aggregation: On May 20, Plaid launched Plaid Exchange which "gives financial institutions, from banks to wealth management firms, an open finance platform that includes critical tools required to manage the secure and reliable data connectivity their customers’ financial lives demand, today and for years to come." By using the exchange, "financial institutions can bring an API solution to market in as little as 12 weeks."
Digital Banking: Major wireless broadband provider Packet One Networks is reportedly seeking to obtain a digital banking license from regulatory authorities in Malaysia.
Digitizing Assets: The Association for Digital Asset Markets announced the appointment of Jeffrey Blockinger as its first CEO.
The Depository Trust & Clearing Corporation announced two new case studies—Project Ion and Project Whitney—examining the potential use of distributed ledger technology, asset digitization, and other technologies. "Project Ion seeks to build on DTCC’s successful efforts over the past several years to further optimize the settlement process in the public markets, while Project Whitney considers opportunities to provide increased levels of digitalization throughout the private market asset lifecycle."
Regarding Project Whitney, DTCC “identified an opportunity to leverage the tokenization of traditional assets to create a standard, modern, operationally efficient and secure approach to Issuer Services across primary and secondary private markets, including compliance enforcement of eligible tokenized securities, an authoritative stock record and asset lifecycle management.
Project Whitney, led by DTCC’s Innovation Team, is a multi-phase project designed to evaluate the practical and commercial viability and value of a digital infrastructure supporting private market securities. The three phases include: Phase 1: Whitney Prototype Build; Phase 2: Participant Testing; and Phase 3: Prototype Expansion.”
Regarding Project Ion, it “was formed through partnership between DTCC’s Clearing & Settlement Product Management and the Business Innovation Group, to evaluate the impact and benefits of DLT on accelerated settlement for the U.S. equities market, and namely to explore a hypothesis: Can the digitization of assets on DLT reduce cost and risk for the industry while paving a path to modernizing the capital markets infrastructure and facilitating accelerated settlement? The proposed design of a Digital Accelerated Settlement Service at DTC was inspired by key concepts from the Settlement Optimization and Accelerated Settlement initiatives but modelled around a T+0 settlement cycle. Underpinned by DTCC’s years of settlement experience, a potential Digital Accelerated Settlement Service has the promise of offering the industry an accelerated settlement option that does not compromise on the core benefits of DTCC’s centralized netting and risk management.”
Partnerships: Wave Money—a leading mobile financial services provider in Myanmar that runs a network of more than 57,000 agents across the country—announced a strategic partnership with Ant Financial Services Group "to promote financial inclusion for the unbanked and underbanked communities in Myanmar." Since its launch in late 2018, more than 21 million people have used Wave Money's platform.
JPMorgan announced that the firm extended banking services to two Bitcoin exchanges, Gemini and Coinbase. According to the Wall Street Journal, the accounts "were approved in April, and transactions are just starting to be processed."
Visa on the Move: Visa's Token Service—originally launched in September 2014 with the aim of replacing "sensitive payment account information found on plastic cards with a digital account number or 'token'"—will add 28 new partners as credential-on-file token requestors. According to the press release, "Since the launch of the Visa Token Service in 2014, Visa has added more than 150 global token requestors—including mobile and wearable manufactures, issuer wallets, online merchants, payment service providers and acquirers—from 137 markets onto the token platform. Visa recently announced participants in Visa Token Service (VTS) are estimated to process a combined digital payment volume of $1 trillion3, marking a significant opportunity in its efforts to make digital payments more secure."
Separately, the US Patent and Trademark Office published a patent for a digital fiat currency filed by Visa. According to the patent: "The central entity computer generates the digital currency for the denomination and linked to the serial number. The generating includes recording the digital currency on a blockchain. The central entity computer transmits a notification of the generation of the digital currency. The central entity computer causes removal of the physical currency from circulation in a fiat currency system.”
In late May, Visa entered into a partnership with GoodData to develop products that provide better customer insights and entered into a partnership with Zaggle to launch payment solutions for SMEs.
Global Developments
Brazil: The Securities and Exchange Commission (CVM) issued rules to create a regulatory sandbox. "CVM Instruction 626 marks the beginning of a new stage in the development of the Brazilian capital market, in which the CVM will have tools to enable and foster innovative business models in activities regulated by the Autarchy."
In the Senate, lawmakers overturned a postponement of data protection regulations, meaning the new rules will take effect in August 2020, with non-compliance enforced beginning in August 2021.
Lastly, Brazil's antitrust regulator CADE has reopened its investigation covering big banks' closure of crypto exchange accounts in the country. The investigation first began in 2018.
Cayman Islands: In late May, lawmakers passed a package of five bills to regulate virtual asset services providers. “The Virtual Asset Service Provider Law, the central piece of legislation in the regulatory framework, demands that digital asset businesses must be registered with the Cayman Islands Monetary Authority.” As reported by Cayman Compass, the new framework “further includes a regulatory sandbox regime, which allows new innovative services to be offered with certain restrictions without the need for a full licence."
China: According to a statement from the China Banking and Insurance Regulatory Commission, the country's "shadow banking" sector has shrunk by 16 trillion yuan ($2.26 trillion) within the past three years.
Separately, the People’s Bank of China, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission, and the State Administration of Foreign Exchange published a plan to turn the Greater Bay Area into a financial powerhouse. "The guidelines include measures to promote cross-border trade, boost innovation in the financial sector, mitigate cross-border financial risks and facilitate overseas investment and project financing," according to Global Trade Review.
Lastly, according to a report, a political proposal was unveiled in China that calls for the creation of a “Cross-Border Digital Stable Currency in Hong Kong." According to LedgerInsights, the digital currency will be made up of the Chinese renminbi, Japanese yen, Korean won, and Hong Kong dollar. "The purpose would be for cross border trade, initially in a Hong Kong regulatory sandbox. An indirect effect would be the reduction in the use of the US dollar."
EU: In prepared remarks at Consensus 2020, Vice-Chair of the Supervisory Board of the European Central Bank (ECB) Yves Mersch noted that while electronic payments "are already crowding out the use of cash in some countries, whose currencies seem less attractive than the euro, there is no such trend away from cash in the euro area. Some 76% of all transactions in the euro area are carried out in cash, amounting to more than half of the total value of all payments." As such, the ECB's debate on [central bank digital currency (CBDC)] "is therefore mainly analytical. Whether and when it becomes more of a policy debate will largely depend on the preferences of households....The lack of a concrete “business case” for a CBDC at present should and does not stop us from seriously exploring the optimal design of a CBDC so that we will be well prepared should we ever take a policy decision to issue a digital currency." On potential mitigations to the impact of CBDC on the financial system, Mersch focused on two options: 1) remunerate CBDC at below-market rates in order to create incentives for non-banks to rely more on market-based alternatives rather than on central bank deposits; 2) a tiered remuneration system—with the first tier serving as a means of payment—while the second tier could serve as a store of value. Of course, Mersch questioned the feasibility of these options as well.
France: In late April, the French data protection authority CNIL published guidance covering "commercial prospecting" or, according to The National Law Review, "scraping publicly available website data to obtain individuals’ contact info for purposes of selling such data to third parties for direct marketing purposes."
In mid-May, Societe Generale announced the bank had performed the first financial transaction settled with Central Bank Digital Currency (CBDC). "Societe Generale SFH, the covered bond vehicle of Societe Generale, issued €40 million of covered bonds as security tokens directly registered on a public blockchain. Rated Aaa by Moody's and AAA by Fitch, these OFH Tokens were fully subscribed by Societe Generale which simultaneously paid the issuer in a digital form of euros issued by Banque de France through a blockchain platform."
Ghana: Global payments solutions provider HPS joined with Ghana Interbank Payment and Settlement Systems, a subsidiary of the Bank of Ghana, to announce "the launch of the Universal QR Code and Proxy Pay platforms in a step towards a cashless society." The solution "allows customers to make Instant payments for goods and services from different funding sources (mobile wallets, cards, bank accounts) by scanning a quick response code on a smartphone. It also allows feature phone users to make payments using a USSD Code provided by their payment service provider. GhQR rides on Instant Payment rails allowing merchants to receive payments instantly into their chosen accounts via a static or dynamic QR Code."
Russia: State Parliament is planning to adopt a new law covering the use of biometrics in the provision of financial services in June.
South Korea: The Central Bank is speeding up its efforts to roll out a digital version of the country's won fiat. As reported in Crypto News, citing a report by Chosun, the Central bank is "paying particular attention to the IT solutions proposed by central banks in 14 nations, including the United Kingdom, Norway, Sweden, Switzerland, Japan and China.” Additionally, the model may focus on micro-financial solutions than macro-financial payments.
UAE: Dubai Financial Services Authority will host a virtual event, “RegTech Live: Compliance Through Innovation,” on June 2-3.
In Abu Dhabi, ADQ launched a new AED1.1 billion venture fund—Alpha Wave Incubation Fund—located in Abu Dhabi Global Market. The fund will focus on early-stage businesses in India and Southeast Asia.
Ukraine: The Ministry of Digital Transformation proposed a bill that would determine "the legal status of virtual assets, their use and circulation on the Ukrainian market, sets legal relations on the virtual asset market and regulates the rules of their issue."
UK: A joint report by Qadre and techUK finds that even before the COVID-19 pandemic, the FinTech industry has been plagued by inefficiencies and equity mismanagement in particular. The report states that significant amounts of investment “are potentially missed because of complicated cap table management to the tune of £2.6bn in total. Across the industry 4,640 days are lost because of the amount of time invested in cap table management, which equates to almost thirteen years! Further investment has been lost due to the COVID-19 pandemic, 68% of founders say they have missed out on up to £500k in funding. Extrapolating that by the number of fintech businesses in the UK, it is estimated that over £1bn of UK fintech investment could be lost because of COVID-19."
Separately, businesses are spending £1.59 million and 24 person-years annually on processing Data Subject Access Requests (DSARs) in compliance with Article 15 of the EU's GDPR regime, according to a survey from Guardum and Sapio Research. The study found that "just over half of DSARs are completed within 30 days, with an average cost of £4884.53. Almost half said if given the opportunity, they would invest to automate the process to reduce time and effort, 40% would increase the 30 day timeframe for standard compliance." The study also found that, on average, 28 DSAR requests are received a month by organizations with 250 employees or more
US: In prepared remarks at the Consensus Blockchain Conference, Financial Crimes Enforcement (FinCEN) Director Kenneth Blanco discussed the Financial Action Task Force's (FATF) Travel Rule. "Any asset that allows the instant, anonymized transmission of value around the world with no diligence or recordkeeping is a magnet for criminals, including terrorists, money launderers, rogue states, and sanctions evaders. As a result, we applaud steps taken by the Financial Action Task Force (FATF) last June to establish a consistent approach to the position we have taken.... We are encouraged that so many creative solutions are being developed by industry to address these Travel Rule obligations. In particular, FinCEN is optimistic about the growth of various cross-sector organizations and working groups focusing on developing international standards and solutions addressing the Travel Rule.” As it relates to filing Suspicious Activity Reports (SARs), Blanco stated that FinCEN "has received nearly 70,000 Suspicious Activity Reports (SARs) involving virtual currency exploitation. Just over half of these reports come from virtual currency industry filers...." Blanco also noted several issues that remain a concern in the virtual currency space, including risks associated with anonymity-enhanced cryptocurrencies, and concerns related to businesses located outside the US that "continue to try to do business with US persons without complying with our rules."
Speaking of Consensus, Brian Brooks, who was recently tapped as acting comptroller of the currency, put forward the idea of a non-depository payments charter. According to BCLP, Brooks said one of his missions at the OCC "is to investigate the extent to which over time it makes sense to think of crypto companies like banks and to think of charter types that might be appropriate for crypto companies.”
In May, the Consumer Financial Protection Bureau published its final remittance rule. Of note, entities "making 500 or fewer transfers annually in the current and prior calendar years would not be subject to the Rule. This will reduce the burden on over 400 banks and almost 250 credit unions that send a relatively small number of remittances—less than .06 percent of all remittances." Further, with respect to covered third-party fees, the Bureau "is adopting a new, permanent exception that will permit insured institutions to estimate covered third-party fees for a remittance transfer to a designated recipient’s institution if, among other things, the insured institution made 500 or fewer remittance transfers to that designated recipient’s institution in the prior calendar year.”
The CFPB had this to say in its final rule:
“To the degree banks and credit unions increase their reliance on closed network payment systems for sending remittance transfers and other cross-border money transfers, the Bureau notes that this could result in greater standardization and ease by which sending institutions can know exact covered third-party fees and exchange rates. The Bureau also believes that expanded adoption of SWIFT’s gpi product or Ripple’s suite of products could similarly allow banks and credit unions to know the exact final amount that recipients of remittance transfers will receive before they are sent.”
Meanwhile, in mid-May, the Internal Revenue Service released a Statement of Work calling on private contractors to help the agency audit crypto tax returns. CryptoTrader.Tax has included the Statement of Work in a blog post.
At the state level, California tapped Udaya Patnaik, a former business management consultant, to lead the Office of Digital Innovation.
Vietnam: The Ministry of Finance has formed a research group to look into conducive policies to manage digital currencies and assets.
Authors