In this issue:
What a Week It’s Been
Hello folks! Welcome back to another edition of Fintech in Focus. We’ve got a lot of headlines in this edition, so I will get right into it. Before I do so, however, I wanted to let you all know that I wrote a bit about the Federal Reserve’s decision to move forward on its own, separate, faster payments system, and that I will be releasing a US FinTech policy update next week. Enjoy!
(For those of you that don’t have access to LinkedIn, I’m happy to send you the Fed RTP piece via e-mail)
Bank Developments: Deutsche Bank is shifting strategies by creating a new technology division to transform legacy systems and lower costs. The division will be led by Bernd Leukert.
Capital Markets: According to research from WatersTechnology, and commissioned by MarkLogic, covering how capital markets firms are using research data to improve decision-making capabilities, roughly two-thirds of capital markets firms "struggle with research data that is poorly managed or difficult to access." In addition, "[r]espondents were asked to evaluate the tangible business benefits offered by a single investment research hub/location, with 64% reporting that it would enhance their ability to make better investment decisions, while 59% believed it would improve the client experience."
Cryptocurrency: The US Securities and Exchange Commission (SEC) filed an emergency action and temporary restraining order "against two offshore entities conducting an alleged unregistered, ongoing digital token offering in the U.S. and overseas that has raised more than $1.7 billion of investor funds." According to Stephanie Avakian, co-director of the SEC's Division of Enforcement, the emergency action "is intended to prevent Telegram from flooding the U.S. markets with digital tokens that we allege were unlawfully sold."
In a letter responding to Cipher Technologies Management LP's (Cipher) registration statement for a proposed closed-end interval fund, staff at the US SEC stated that Cipher's conclusion that bitcoin is a security "is incorrect under both the reasoning of SEC v. Howey and the framework that the staff applies in analyzing digital assets." Further, "because Cipher intends to invest substantially all of its assets in bitcoin as currently structured, it does not meet the definition of an ‘investment company’ under the Investment Company Act and it has inappropriately filed on Form N-2."
A report from cryptocurrency analytics firm LongHash finds that Initial Coin Offerings (ICOs) are no longer profitable. "We analyzed every ICO on tracking site ICO Watch that was listed as ending in 2018 or 2019 (circa the end of August). The results were pretty grim. In fact, ICO Watch itself, the site that was the source of this data, seems to have gone out of business in the time since we collected the data in late August."
Lastly, Tradeshift and Monerium settled the world's first invoice with smart contracts and licensed digital cash. According to the press release, "[u]sing Tradeshift’s platform and smart contracts on the Ethereum blockchain, Icelandic retailer Nordic Store purchased goods from IKEA Iceland and settled an e-invoice with Monerium’s programmable digital cash."
Data Access: US Attorney General William Barr signed on to an open letter to Facebook calling for the company not to go ahead with its plan to implement end-to-end encryption across its messaging services "without ensuring that there is no reduction to user safety and without including a means for lawful access to content of communications to protect our citizens." Representatives from the UK and Australia also signed the letter—two countries that have either concluded or just started discussions regarding data access for law enforcement purposes.
Facebook’s Libra: All eyes on Capitol Hill in late October as Facebook CEO Mark Zuckerberg will testify in front of the House Financial Services Committee during a hearing titled, “An Examination of Facebook and Its Impact on the Financial Services and Housing Sectors.” In last week’s edition of FinTech in Focus, we noted that several potential members of the Libra Association were getting “cold feet” about the project. Last week, PayPal became the first company to pull out of the project, followed by Mastercard, Visa, Stripe, and several other organizations, while the Head of Product at Libra Association, Simon Morris, has apparently left the group. The departure of several potential members of the Libra Association comes a few days after Senators Brian Schatz (D-HI) and Sherrod Brown (D-OH) sent letters to several payments platforms expressing concerns about their continued involvement with the project. "If you take this on, you can expect a high level of scrutiny from regulators not only on Libra-related payment activities, but on all payment activities."
Of note, minutes from an early September meeting between the Federal Advisory Council and Federal Reserve Board were published in late September. There is a good bit of discussion on Facebook’s Libra (see Item 4: Alternative Currencies), with members expressing significant concerns with the effort. According to the minutes:
“Facebook's announcement of Libra reinforces the need for thoughtful discussion among governing bodies and members of the financial community regarding the future of alternative currencies. Ultimately, the discussion should be followed by the creation of a dynamic regulatory framework, likely global in nature to avoid gaps, that is designed to safeguard consumers and governments and preserve the integrity of the global financial system.”
FinTech Expansion: Brex, a FinTech company that has developed a corporate card for technology companies, is planning to launch a business cash management account, Brex Cash. According to TechCrunch, Brex Cash users are protected by the US Securities Investor Protection Corporation, and the product "invests its customers’ money in a money market mutual fund of U.S. treasury bonds."
Speaking of cash management, Round 2 for Robinhood. The zero-fee stock trading app launched Cash Management, with user's funds covered by the Federal Deposit Insurance Corporation, up to $1.25 million. "To get around the $250,000 FDIC limit per bank, Robinhood is partnering with six banks that it will spread a user’s cash across as necessary to bundle up to that sum."
Meanwhile, FinTech company Affirm announced a new app that "allows customers to shop at virtually any store and split their payments." According to Bank Innovation, the new app "avails customers of the credit option even if the brand hasn’t formally entered into an arrangement with Affirm. The firm previously offered its product only in partnership with a network of retailers."
Separately, Credit Karma will roll out high-yield savings accounts later this month. "The FDIC-insured savings account is offered through custodian MVB Bank. The company, however, is partnering with a network of 800 banks, which will allow customers to get the most competitive interest rate among network banks’ offerings." Lastly, Square has become one of the first US payments platforms doing business with CBD. “The company this week started allowing U.S. businesses to sell cannabidiol products on its platform while keeping track of payment and inventory management.”
InsurTech: Capgemini and Efma published the World InsurTech Report 2019. Among some of the findings, 90 percent of InsurTechs and 70 percent of incumbents are interested in collaboration, not competition. However, "fewer than 40 percent of incumbent insurers want to build technology infrastructure ready for open collaboration with InsurTech firms, while more than 60 percent of InsurTechs wish to work with insurers to create such a foundation." Of interest, despite how nascent the usage-based insurance and on-demand coverage models are, more than one-third of respondents surveyed said they would consider using such models.
Prior research from the Milken Institute also found a strong preference for collaboration rather than competition.
Speaking of InsurTech, Next Insurance raised $250 million in financing from a single investor, Munich Re, while Unqork Inc., raised $80 million from CapitalG, an arm of Google parent company Alphabet, along with several other firms.
Payments: Samsung Pay teamed up with payments processor Finablr to allow US users the ability to send funds to consumers in 47 countries. "Both companies claimed the new feature was the first to offer foreign exchange in a native mobile wallet in the U.S."
Separately, The Pew Charitable Trusts released a survey on whether Americans are embracing mobile payments. According to the results, while age is the "best predictor" of mobile payment use, the study "also found that across generations, consumers remain skeptical of this financial technology, have persistent concerns about security, and are more likely to trust traditional methods, such as debit and credit cards." In particular, respondents "were more likely to say mobile payments are “poorly protected” (38 percent) than prepaid (28 percent), debit (22 percent), or credit cards (9 percent)."
Australia: The Australian Competition and Consumer Commission is moving forward with plans to open up a new banking inquiry, despite concerns raised that may include meetings with new digital upstarts such as Afterpay, Xinja, 86 400, and Volt Bank.
Meanwhile, the Australian Prudential Regulatory Authority's General Manager for Regulatory Affairs and Licensing, Melisande Waterford, gave prepared remarks on regulating challenger banks at the Future Banking Forum 2019. According to Waterford, “APRA has increasingly focused on the inter-related issues of product launch and capital raising. We believe that launching products should be a top priority for applicants. We believe that an applicant must have sufficient capital to get itself to product launch date, which in turn will provide the best prospects for raising the additional capital necessary for medium-term success. If we insist on high standards and ask challenging questions, then this is a manifestation of ‘tough love’... APRA would like to see a steady stream of serious ADI license applicants that enter the market and 10 years later are still there, large enough to be significant, competing hard and providing innovative solutions to Australia’s financial needs.”
Bahrain: Beehive, the Middle East, and North Africa region's first regulated peer-to-peer lending platform announced the funding of its first Bahrain-based SME.
Brazil: The country's insurance regulator, Susep, launched a public consultation process on the creation of an insurance-specific regulatory sandbox.
Cambodia: The country celebrated FinTech Day 2019 earlier this month with a focus, in particular, on the growth of digital payments. Mekong Strategic Partners predicts the Kingdom's digital market will be worth $2.2 billion this year and nearly $3.5 billion next year. In regards to FinTech, awareness remains limited, and adoption is largely concentrated around Phnom Penh. National Bank of Cambodia Deputy Governor Neav Chanthana attended the event and credited the Asian Development Bank for providing assistance to the NBC to promote FinTech in the country.
China: Last week, the US Department of Commerce added 28 Chinese organizations to its Entity List "for engaging in or enabling activities contrary to the foreign policy interests of the United States." Among those listed are several facial recognition and artificial intelligence companies.
European Union: At a European Parliament hearing, Europe Fit for the Digital Age, EU Commissioner for Competition, Margrethe Vestager, delivered prepared remarks before responding to questions posed by members of parliament. During the session, Vestager agreed that the fines against Silicon Valley tech giants, "are not doing the trick" and then proceeded to mention that she will look into "even stronger remedies for competition to pick up in these markets."
In response to the planned introduction of Libra, European Union finance commissioner, Valdis Dombrovski, told lawmakers that there is a need for a common approach to crypto-assets in the EU and that he intends to propose new legislation covering this.
Meanwhile, the European Association of Payment Service Providers for Merchants sent an open letter to regulators calling for an additional extension to the PSD2-SCA deadline. "From an operational point of view, 12 months will be too short and will lead to an unnecessary systemic, significant operational risk for the European cards payments market in e-commerce," the association said.
Germany: The finance minister is not a fan of Facebook's Libra, but does support the digitalization of the Euro. "Such a payment system would be good for the [European] financial center and its integration into the world financial system. We should not leave the field to China, Russia, the U.S., or any private providers."
Hong Kong: The Securities and Futures Commission published a set of guidelines that asset fund managers should comply with when managing a virtual asset fund.
Meanwhile, Eddie Yue, chief executive of the Hong Kong Monetary Authority (HKMA), outlined HKMA's priorities moving forward in his first day on the job. According to Yue, while HKMA “has done a great deal in the past few years in promoting Fintech, there is still room to further apply new technology in finance in the coming years. This includes, for example, fostering a better ecosystem for Regulatory Technology (or RegTech) and Supervisory Technology (or SupTech). We are also aware that any new risks associated with the increasing use of technology have to be managed. These include, for example, cyber and data security. We will work with the industry to address these risks.”
Last week, the Insurance Authority announced that it granted "the first authorization of a non-life insurer owning and operating solely through digital distribution channels under Fast Track. The first life virtual insurer under Fast Track was authorized in December 2018."
India: The Standing Committee on Information Technology announced (Oct. 3 release) the selection of several topics that it will examine in 2019 and 2020. They include: citizens' data security and privacy; digital payment and online security measures for data protection; and a review of the functioning of the Unique Identification Authority of India.
Early last week, the Reserve Bank of India issued a press release on developmental and regulatory policies, including a focus on the payment and settlement system. In particular, to expand and deepen the digital payments ecosystem, "it has been decided that State/UT Level Bankers Committees (SLBCs/ UTLBCs) shall identify one district in their respective States/UTs on a pilot basis in consultation with banks and stakeholders. The identified district may be allocated to a bank with significant footprint which will endeavor to make the district 100% digitally enabled."
Iran: The country's finance and economic affairs minister Farhad Dejpasand submitted a banking reform plan to President Rouhani. “The Economy Ministry’s Deputy for Banking, Insurance and Government Corporate Affairs is going to rank banks in terms of corporate governance and digital banking deployment," according to Dejpasand.
Ireland: The country's Data Protection Commission concluded investigations into Facebook's WhatsApp and Twitter over possible violations of EU data privacy rules. The investigation now moves onto the decision-making phase.
Netherlands: The Dutch central bank released a survey of 2,600 Dutch customers with their views on sharing bank data. According to the survey, only 11 percent of respondents "are willing to give consent for various forms of data usage," while 72 percent are not prepared to do so. "One in five respondents indicate that they would agree to their own bank using data to create an overview of all accounts, income, and expenditures. For non-banking companies, the percentage of respondents indicating that they will give permission to access the bank account for creating such overviews is even lower at 6%."
Northern Ireland: Andrew Jenkins, director of mobility data and analytics at Arity, was tapped as the government's new FinTech envoy for Northern Ireland.
Philippines: In Manila, the National Privacy Commission summoned 67 unlisted operators of online lending applications, "who were subject of data privacy complaints but whose identities and business addresses elude detection." Failure to comply "could result to a ban on their processing of personal data and the elevation of the complaints to the Commission for decision."
Southeast Asia: A new report from Google, Temasek, and Bain & Company, as part of the e-Conomy SEA research program, finds that the growth of the internet economy "has yet to spread evenly" across the region. Even so, digital payments are expected to cross $1 trillion by 2025, "accounting for almost one in every two dollars spent in the region." The internet economies in Malaysia, Thailand, Singapore, and the Philippines are growing between 20 percent to 30 percent annually, while Indonesia and Vietnam are leading the pack at growth rates in excess of 40 percent a year. Overall, the internet economy in the region eclipsed $100 billion for the first time in 2019—tripling in size from four years ago. "By 2025, the internet economy is expected to grow to $300 billion."
The Milken Institute has authored several reports that explore the growth of FinTech and the future of finance in several of the countries included in the above-mentioned study. The reports can be accessed here: Framing the Issues: Expanding Digital Financial Inclusion in the Philippines (July 2019); FinTech in the Philippines: Assessing the State of Play (May 2019); Framing the Issues: The Future of Finance in Thailand (July 2018)
South Africa: The country's central bank will host a FinTech Demo Day later this month. The bank will select two winning solutions from a list of 12 solutions shortlisted for the Global FinTech Hackcelerator @ Southern Africa.
Switzerland: The Swiss National Bank and the Bank for International Settlements signed an Operational Agreement on the BIS Innovation Hub Centre in Switzerland. The Hub will focus on two projects from the outset: 1) Examining the integration of digital central bank money into a distributed ledger technology infrastructure, and 2) Addressing "the rise in requirements placed on central banks to be able to effectively track and monitor fast-paced electronic markets."
Taiwan: The Ministry of Economic Affairs launched “a NT$440 million (US$14.24 million) nationwide mobile payments rewards program in cooperation with several mobile payment service firms to stimulate domestic commerce as mobile payment options continue to lure Taiwanese."
Thailand: The central bank announced last week that ten commercial banks and non-bank financial institutions are participating in its regulatory sandbox "to test-run the use of biometric technology known as e-kyc (electronic know your customer) to electronically verify the identity of customers." However, no participant has yet to successfully complete the project due to "minor" technical glitches that need to be resolved.
UAE: Dubai's Financial Services Authority opened the application window for international and local firms interested in joining its 2020 regulatory sandbox “Winter Cohort.”
Uganda: Authorities are urging residents to stay away from cryptocurrencies, with the country's finance minister saying that the government "will not be held responsible in case anyone loses money to organisations selling cryptocurrencies."
UK: Lord Mayor of the City of London, Peter Estlin, and City of London Corporation Policy Chair, Catherine McGuinness, were in the US last week to strengthen the future of the UK-US relationship in financial services. According to the press release, McGuinness met with the US Treasury, Federal Reserve, and the US Trade Representative, and apparently argued "for the development of a ‘regulatory highway’ for services, giving the UK and USA an opportunity to forge joint leadership at an international level."
Prior to his trip to the US, Estlin remarked that the UK's FinTech status is being threatened by emerging markets. "The speed in which we can open up a bank account for an inbound company coming into the UK. It is not fast enough," he remarked.
Staying in London, the UK Financial Conduct Authority recently wrote to 65 peer-to-peer lending platforms urging the industry to clean up its act. According to reports, the FCA warned that several platforms had made "significant changes to their business models without notifying us."
Lastly, in preparation for a debate on regulating the Internet of Things that took place on October 3, a new report was prepared titled, “Regulating the Internet of Things.”
United Nations: UNICEF has launched a cryptocurrency fund. The agency becomes the first UN organization to hold and make transactions in cryptocurrency. "UNICEF will now be able to receive, hold and disburse donations of cryptocurrencies ether and bitcoin, through its newly-established UNICEF Cryptocurrency Fund. In a first for United Nations organizations, UNICEF will use cryptocurrencies to fund open source technology benefiting children and young people around the world."
US: Ladies and gentlemen, it's finally here. After years of pressing the Internal Revenue Service for additional guidance as it relates to the tax treatment of virtual currency, industry stakeholders received additional guidance late last week from the agency. According to analysis from Coin Center, the additional guidance does address some questions, while raising several more.
And speaking of cryptocurrency, Heath Tarbert, commissioner at the Commodity Futures Trading Commission, said he believes Ether to be a commodity and anticipates ether futures trading on US markets shortly.
And speaking of the CFTC, we've got a new director of LabCFTC. Melissa Netram, formerly the director of global public policy and regulatory affairs for Intuit, will be responsible "for coordinating closely with international and U.S. regulators and Capitol Hill to facilitate market-enhancing innovation, inform public policy, and ensure the CFTC has the understanding to keep pace with the ever-changing financial services industry." Good luck, Melissa!
In late September, the Securities and Exchange Commission adopted a new rule that extends the “test-the-waters” provision under the Jumpstart Our Business Startups (JOBS) Act to all issuers, not just emerging growth companies, as a way to further encourage companies to access US public markets.
At the legislative level, more than a dozen US lawmakers signed a letter to the US Consumer Financial Protection Bureau urging the regulator to continue to allow insured depository institutions (IDI) to provide estimates "of third party fees and exchange rates in cases where exact disclosures are not possible." The letter comes as the statutory exemption allowing IDIs to provide estimated, rather than exact, disclosures for certain transfers is coming to an end.
Meanwhile, the chairman and ranking member of the US FinTech Task Force submitted a letter to Federal Reserve Chairman Jerome Powell expressing concern that the US Dollar "could be in long-term jeopardy from wide adoption of digital fiat currencies," before asking the Fed to respond to such concerns, including whether the Fed is exploring or actively developing a US dollar digital currency, and the risks from such developments. The letter comes two days before Philadelphia Fed President Patrick Harker stated that it was “inevitable” that central banks, including the Federal Reserve, will start issuing digital currency.
In the US presidential election race, Democratic presidential contender Andrew Yang released a policy titled, Data as a Property Right. According to the proposal, data generated by each individual "needs to be owned by them, with certain rights conveyed that will allow them to know how it’s used and protect it." The proposal includes a list of seven “rights” that individuals should have and companies should abide by. (In the 116th Congress, we have documented several bills focused on data privacy and access).
At the state level, data privacy rights in the California Consumer Privacy Act could be expanded under a new November 2020 California ballot initiative, California Privacy Rights and Enforcement Act. CCPA 2.0, as it is being called, is supported by Californians for Consumer Privacy, the same nonprofit group that successfully pushed through CCPA 1.0 through the state’s legislature. Speaking of CCPA 1.0, the state's Attorney General released a report on the impact of the privacy law. According to the report, the total cost of initial compliance with CCPA, "which constitutes the vast majority of compliance efforts, is approximately $55 billion. This is equivalent to approximately 1.8% of California Gross State Product in 2018."
In the State of Wisconsin, Governor Tony Evers is putting together a task force to improve data protection laws in the state. Lastly, in the State of New York, the NY Department of Financial Services is looking for a deputy superintendent for digital currency.
Zimbabwe: We continue to monitor the aftermath of the central bank’s decision to ban cash-in, cash-out transactions. According to one small business owner, banning cash-out “has worsened the situation, where I had to pay an extra 35% commission to get my cash via cash out, the agents are now requiring 100% (i.e., if I send him $100 into his Ecocash wallet or Zipit account he gives me $50 in hard cash...)