FinTech in Focus—September 8, 2020



FinTech in Focus—September 8, 2020

Kate Goldman
Kate Goldman
FinTech Associate, Center for Financial Markets

In this Issue

Industry Headlines»

International Developments»

While this summer definitely won’t go down in history for being anyone’s favorite, a few good things did come of it. First of all, compliance officers rejoice—the “valid when made” rule has finally been addressed in Colorado courts. Secondly, for the first time, the Financial Conduct Authority has registered two companies as fully-compliant digital securities exchanges. This is a timely decision for the UK, as a growing number of young investors have expressed interest in working with digital assets, and even more digital security exchanges are popping up around the world. And lastly, additional research has come out in support of Real Time Payments. As the pandemic has changed nearly everything about how we live our lives, it has also dramatically underscored the true value of digital payment systems—more on all of this below. 

Important Research

Deloitte recently published its 2020 Global Blockchain Survey, calling on over 1,500 executives to gauge changing attitudes and skepticisms towards blockchain technology. Some key findings of the report include:

  • A considerable number of respondents (83 percent to be exact) see digital assets as an alternative to or complete replacement for fiat currency sometime in the near future.    

  • Cybersecurity threats remain an omnipresent storm cloud looming over digital asset integration. It’s difficult to garner excitement over digitization when data-security frameworks are still sorely lacking on the US regulatory front. Even still, Deloitte’s survey found that “70% of respondents believed regulatory developments around digital assets and blockchain solutions were very or somewhat fast.” Go figure. 

  • Ninety percent of survey respondents cite digital identities as playing a significant role in upcoming strategies. Digital identities can improve a litany of industry challenges, including issues with compliance and cross-border payments. Still, respondents expressed apprehension about trusting digital systems with their personal data.

To read Deloitte’s full report, click here.

 Industry Headlines

Blockchain: Crowdfund Insider reports “Blockchain platforms Ontology, Neo, and Switcheo have announced the launch of Poly Network, a ‘heterogeneous’ distributed ledger technology (DLT) interoperability protocol alliance. The Poly Network will enable cross-platform interoperability, which should significantly increase transparency and accessibility.” Andy Ji, co-founder of Ontology, wrote in a recent blog post, “By combining the highest standards of expertise and platform capabilities, Poly Network will have unprecedented benefits for blockchain developers, propelling the building of the decentralized ecosystem through a range of platform offerings that make the user experience easier.” 

Cryptocurrency: Swiss financial intermediaries Mt. Pelerin and Crypto Finance AG were able to successfully execute an automated bitcoin transaction that was compliant with Swiss financial regulator, FINMA. Arnaud Salomon, CEO of Mt Pelerin, commented on the landmark transaction, stating, “This live demonstration shows once again that crypto assets and regulatory compliance are compatible through practical solutions, which a key focus of our tokenisation technology.”

In other international crypto news, Russia Briefing reports that “Russia’s Expobank has become the first lender in the country to issue a loan secured by cryptocurrency tokens, saying that it issued an individual loan to a Moscow businessman earlier this week, with the customer putting up Waves crypto tokens as collateral for the agreement.” Currently, Russian law prohibits cryptocurrencies from being used as legal tender. 

Lending: Colorado’s Attorney General reached a settlement in a 2017 suit against Avant and Merlette, two non-bank lenders who were alleged to have illegally partnered with out-of-state banks for the purpose of lending at interest rates above Colorado’s 36 percent limit. FinExtra reports that “Avant and Marlette Funding can qualify for safe harbor in Colorado if, among other things, they do not offer loans with annual percentage rates of more than 36%.” 

Colorado’s decision that the “valid when made” rule doesn’t apply to non-bank lenders is grounds for a sigh of relief among industry leaders, who had been operating under a great deal of uncertainty despite the OCC’s recent rulemaking. Previously, “true lender” questions were highly contentious among stakeholders who debated whether a loan is valid when made (in this case by the partner banks) or when it is subsequently transferred to the non-bank lender (Avant and Merlette). This landmark ruling will hopefully provide much needed regulatory clarity for future FinTech-bank partnerships while upholding consumer protections against predatory loans.

IPOs: FTAC Olympus Acquisition Corp. a blank-check company formed by Betsy Z. Cohen as chairman of the board and Ryan M. Gilbert as president and chief executive officer—raised $750 million during its initial public offering (IPO) on August 28. Globe Newswire reports the company “formed for the purpose of acquiring or merging with one or more technology and financial services technology companies.”

Payments: Cairo based FinTech Paymob has acquired an additional $3.5 million in investments. Paymob’s platform allows e-commerce merchants to accept payment across various digital wallets. Paymob is hoping to expand across other markets, offering their service to more companies struggling because of COVID-19. Paymob co-founder and COO Alain El-Hajj stated, “Paymob’s merchants and partners will benefit directly from this funding round as Paymob will ramp up investments in its core payments offering to better serve our existing base and better cater to the increasing demand.” 

Discussions of real-time payments (RTP) feel all but inescapable lately—and it may be for good reason. Rhode Island-based Citizen’s Financial Group has released the details of their recent survey, and their report indicates that, of the 252 corporate leaders surveyed, “only 9 percent currently have no plans to implement RTP, which is the biggest upgrade to the US payments system since the Automated Clearing House (ACH) in 1974.” Additionally, “81% of respondents expect RTP to dramatically transform the way business is done.” Matt Richardson, head of product solutions at Citizens, notes, “I’m encouraged to see the level of interest in real-time payments because it offers such tremendous advantages to businesses in terms of speed and certainty of payments.” Whether RTPs emerge from the public or private sector, they seemingly represent the future of payments.

In other payment news, FinTech stocks—particularly in the payment space—have seen massive success this year. CNBC reports, “Digital payment darlings Square and PayPal are up 149% and 89% year to date while credit card giants Mastercard and Visa are up 19% and 12%, respectively. Fidelity National Information Services is up about 9%. Global Payments, Fleetcor, Fiserv and WEX are all down for the year.” 

Virtual Banking: As COVID-19 continues to challenge brick-and-mortar banking, virtual banking solutions have found growing support among stakeholders. Crowdfund Insider reports that Singapore, where nearly 40 percent of its 6 million residents are underbanked, has recently awarded “two full digital bank licenses and three digital wholesale bank licenses,” allowing more challenger banks to sit at the table with incumbents.    

JP Morgan Chase is reportedly opening a challenger bank of their own. The bank will be housed in the UK, and is expected to open sometime during Q1 of 2021. Global FinTech Series reports, “The new digital bank is expected to be chaired by Clive Adamson, former U.K. financial regulator. JP Morgan Chase will not be the first Wall Street name to enter the UK digital banking marketplace, another Wall Street giant – Goldman Sachs launched its digital bank, Marcus, in 2018.” If JP Morgan Chase moves forward with their plans, they will be joining several other fully digital banks native to the UK.

Digital Assets: PR Newswire reports, “Blockchange, the digital asset investing platform for professional wealth managers, and Gemini Trust, a cryptocurrency exchange and custodian, today announced a partnership to provide registered investment advisors (RIAs) a secure one-stop-shop for buying, selling and storing digital assets.” This platform will be the first of its kind, appealing to younger investors, many of whom have expressed a growing interest in working with digital assets.

In Hong Kong, OSL—Asia's leading digital asset platform—received an approval-in-principle for its application to operate as a virtual asset trading platform. PR Newswire reports, “Once the conditions for final approval are satisfied, the license will permit OSL to operate a brokerage and automated trading service for digital assets, including security tokens. The company is on track to become the world's only publicly listed, licensed, insured and Big-4 audited digital asset platform.”

Sandboxes: After announcing plans to launch a regulatory sandbox program earlier this year, the State of Hawaii’s Digital Currency Innovation Lab (DCIL) has welcomed 12 companies into its first cohort. In a recent press release by the Hawaii Technology Development Corporation (HTDC), Iris Ikeda, Commissioner of Financial Institutions, states, “Hawaii-based consumers can look forward to a variety of options for services offered by digital currency companies in the state. I anticipate leveraging this opportunity for our state to develop a robust understanding of one of the most exciting areas in fintech.” Hawaii follows states like Wyoming, Utah, and Arizona, each of which introduced their own sandbox programs last year.

 International Developments

Indonesia: Indonesia kicked off their 2020 Blockchain Week, held entirely virtually for the first time. Tokocrypto hosted the event across numerous online platforms, including Twitter, YouTube, and Facebook. Tokocrypto’s Founder and CEO, Pang Xue Kai, said, “Indonesia Blockchain Week series was created with the intention of bringing about greater awareness and education on Blockchain Technology and its potential to the people of Indonesia. This year’s theme on Decentralized Finance was chosen because of the overwhelming interests coming from the people of Indonesia and DeFi’s potential to enhance Indonesia’s financial industry. Through IBW 2020, we hope to create an open and transparent conversation on DeFi where all Indonesians can participate in and share their thoughts on how Indonesia can benefit from this new application of Blockchain technology.” 

On August 21, Tokocrypto announced the launch of Indonesia’s DeFi initiative, Toko Token (TKO). Per Tokocrypto’s website, TKO “will initially be distributed as a reward system for customers who join Tokocrypto and share their referral code. More DeFi utilities will be announced and introduced to the Toko Token (TKO) ecosystem.”

Saudi Arabia: Following key developments this year in the FinTech landscape, Saudi Arabia has announced “FinTech Saudi,” with hopes of positioning themselves competitively in a global market. According to The FinTech Times, “Fintech Saudi is an initiative launched by the Saudi Arabian Monetary Authority (SAMA) in partnership with the Capital Markets Authority (CMA) to support the development of the Fintech Industry in Saudi Arabia. Fintech Saudi’s ambition is to transform Saudi Arabia into an innovative fintech hub with a thriving and responsible fintech ecosystem.”

United Kingdom: The UK’s Financial Conduct Authority (FCA) has authorized Archax as the UK’s first regulated digital securities exchange, as well as the first fully registered Virtual Asset Service Provider (VASP). As listed on the FCA’s website, the following day, the FCA also granted authorization to Gemini Europe as a compliant digital security exchange. CIO reports that “Archax has a pipeline of 35 digital issuances in place, and said it is signing up global brokers and market makers. The company is using matching engine technology and market surveillance from Aquis Technologies, and enterprise blockchain software firm R3’s private, permissioned Corda blockchain for post-trade.”

United States: Following the OCC’s recent clarifying letter stating that banks could provide custody services to cryptocurrencies, acting Comptroller of the Currency Brian Brooks pushes forward in his decision to issue bank charters to non-depository institutions. POLITICO reports, “Brooks told POLITICO the agency will be ready as soon as Tuesday to start processing applications for charters from payments companies, just three months after he took over the agency. These could include financial technology firms like PayPal or cryptocurrency exchanges like Coinbase, his former employer.” The article adds, “A charter would give these companies the ability to operate across state borders with a single set of rules, as well as to expand the suite of financial services they offer.”

In other US regulator news, the Consumer Financial Protection Bureau’s Tech Sprint landing page has officially gone live. On October 5, the Bureau will virtually host a Tech Sprint, calling upon innovators to solve problems concerning electronic disclosure of adverse action notices. Participants have until midnight on Friday, September 11, to sign up for the sprint. 

Published September 8, 2020