FinTech in Focus
Digital Financial Services: Sub-Saharan Africa
A report released in December by the MasterCard Foundation, the International Finance Corporation, and African Studies Centre Leiden finds that some users of digital financial services find it difficult "to escape unwanted solicitations for financial aid from distant family members," while in other markets, researchers "found that some users are uncomfortable using agents close by for lack of privacy in financial matters." The report contains a summary of roughly 400 interviews that were conducted in Cameroon, the Democratic Republic of the Congo, Senegal, and Zambia.
A Cryptastic Holiday Dinner Party
Did you get the invite to the cryptocurrency holiday party? On one side of the table, guests were talking about how simple changes to their company names resulted in inflated stock price valuations. For instance, Longfin—a small FinTech company that just recently went public—saw its shares rise nearly 2000 percent over a two-day period after acquiring blockchain-based company Ziddu. Longfin’s CEO called the ramp-up insane and that the company did not deserve such a market cap. Other attendees included Chinese-based company SkyPeople Fruit Juice, which saw its share price increase more than 200 percent after it changed its name to Future Fintech Group—a change that occurred back in May, but no one seems to have noticed until now. Sitting next to SkyPeople Fruit Juice, I mean Future FinTech Group, is Long Island Iced Tea Corp., which recently rebranded to Long Blockchain Corp. because apparently selling non-alcoholic beverages just isn’t cool anymore. Oh, and the company’s stock price shot up nearly 300 percent on the news. Lest I forget, UBI Blockchain Internet, Ltd.—a Hong Kong-based company formerly known as JA Energy—is now worth $1.2 billion despite no revenue nor “any significant operations,” according to Bitcoin.com.
But all was not calm at the table. Some participants were trying to figure out why it costs $30 on average to transact bitcoin between two addresses. As Shapeshift's CEO Erik Voorhees commented, "when it's cheaper (and sometimes faster!) to FedEx private keys to someone than to send a digital payment, Bitcoin is no longer a P2P electronic cash system." Even BitPay stated that Bitcoin payments under $100 are impractical for users, before going on to raise the minimum BitPay invoice amount to $100, only to retract the policy 48 hours later. "Many invoice payments under $100 may still be uneconomical for bitcoin purchasers due to high bitcoin network fees. However, they again have the option to send these smaller payments if they choose," according to a recent blog post.
The table was also joined by a few regulators who put a real damper on the festivities. Maureen Jensen, chair of the Ontario Securities Commission, said she is "quite concerned" with the level of initial coin offering (ICO) activity that took place last year (ICOs topped $4 billion in 2017). India’s Securities and Exchange Board will reportedly apply pressure on ICOs, but it remains to be seen if they will become (or want to become) the primary regulator. Denmark's central bank—Danmarks Nationalbank—released a report finding that the potential benefits of introducing a central bank digital currency in Denmark "would not match the challenges resulting from such a decision." Furthermore, in a Danish context, “it is unclear what central bank digital currency would be able to contribute that is not already covered by the current payment solutions.” The central bank of Malaysia released a paper for public comment on "the invocation of reporting obligations on digital currency exchange business as reporting institutions" under the country's anti-money laundering and anti-terrorism financing laws. Separately, the Secretary of the Commonwealth of Massachusetts, William Galvin, issued a warning to investors not to get caught up on Bitcoin speculation, adding that Bitcoin investing “is generally considered to be speculation, since the value is not related to any economic or financial parameters. Never speculate with money that you cannot afford to lose.” Lastly, Israel seeks to go even further than most by proposing to ban companies from trading on the Tel Aviv Stock Exchange whose main business pertains to digital currencies.
So Much for PINs
Researchers at Nanyang Technological University published a paper titled, "There Goes Your PIN: Exploiting Smartphone Sensor Fusion Under Single and Cross User Setting." Researchers were able to combine the leakage of private user data from zero-permission sensors embedded in smartphones to reconstruct a user's secret PIN. According to the study, “By harvesting the power of machine learning algorithms, we show a practical attack on the full four-digit PIN space. Able to classify all 10,000 PIN combinations, results show up to 83.7% success within 20 tries in a single user setting. Latest previous work demonstrated 74% success on a reduced space of 50 chosen PINs, where we report 99.5% success with a single try in a similar setting.”
Movers and Shakers Over the Holidays
Chinese-based Ant Financial, along with several other companies, was named a “technical associate” of the international secure payments consortium EMVCo. Meanwhile, the company faced a setback after the U.S. blocked the sale of MoneyGram over national security concerns. Despite the setback, the company has also signed a Memorandum of Understanding with Standard Chartered Bank, combining banking expertise and insights in emerging markets with Ant Financial technology capabilities “to increase access to financial services for clients based in countries along the ‘Belt & Road Initiative’ route.”
Separately, Goldman Sachs is reportedly establishing a digital currency trading desk, while the market cap of Ripple’s XRP surpassed the market cap of Ether by $15 billion, becoming the second largest cryptocurrency by market cap. And speaking of Ethereum, the Enterprise Ethereum Alliance announced three new working groups covering digital identity, energy, and multiplatform interoperability.
On the InsurTech front, Chinese insurance giant Ping An is investing billions in technology to better compete against its rivals. The company anticipates generating half its revenues from technology in the future. Speaking of investment, InsurTech startup Lemonade raised $120 million led by SoftBank, while Allianz poured nearly $100 million into microinsurance startup firm Bima.
Meanwhile, the American Insurance Association unveiled model legislation that would allow for the creation of a sandbox to allow insurers to test digital innovations. According to the press release, the model bill “would enable regulators to play an active role in overseeing the testing and implementation of the innovative insurance technologies, products, and services that consumers are demanding, without sacrificing prudent consumer protections. Equally important, AIA’s proposal would preserve a level, competitive playing field and begin the process of identifying regulatory hurdles to innovation.”
In the alternative finance space, Funding Circle is looking to go public. The UK’s largest peer-to-peer lender is reportedly planning an initial public offering that would value the firm at £2 billion.
The Asian Development Bank (ADB) published a report that “assesses the practical implementation for distributed ledger (or blockchain) technology in improving the process of financing, deploying, tracking, and evaluating development finance assistance in key sectors.” The report explores five potential use cases: digital identity, trade finance, project aid monitoring, smart energy, and supply chain management. According to the report, while there are benefits to each use case, they “face a great deal of challenges and limitations, which in many cases will require further technical, infrastructural, or regulatory developments before they can be put to work in support of development across Asia and elsewhere.” Based on its analysis, the ADB “recommends that development lenders such as itself take into consideration underlying infrastructure requirements, such as electrification and connectivity, before embarking on overly ambitious DLT proof of concepts.”
Political agreement was reached between the European Council and Parliament on a proposal to strengthen EU anti-money laundering and counter-terrorist financing rules. According to the fact sheet, the rules “will now apply to entities which provide services that are in charge of holding, storing and transferring virtual currencies, to persons who provide similar kinds of services to those provided by auditors, external accountants and tax advisors which are already subject to the 4th Anti-Money Laundering directive and to persons trading in works of art. These new actors will have to identify their customers and report any suspicious activity to the Financial Intelligence Units.” Even so, Pierre Moscovici, EU commissioner for financial affairs, stated in a recent interview that the Commission does not consider Bitcoin an alternative currency. He noted that there is quite a lot of speculation, but that the Commission does not, at this time, need to react as a political and technical body. Moscovici also noted that the Commission is not holding conversations with regulators on Bitcoin at the moment.
Separately, draft legislation is expected early this year from the European Commission that would propose pan-EU licenses for certain FinTech companies engaged in crowdfunding and peer-to-peer financing, enabling them to operate across the bloc.
The European Banking Authority published its opinion covering the transition from the existing Payment Services Directive (PSD) to the revised directive, otherwise known as PSD2, which will apply beginning January 13, 2018. According to the opinion, “Either because of a delay in adoption or because PSD2 intended it to be so, not all the provisions of PSD2 or EBA technical standards and guidelines will be applicable on 13 January 2018. This misalignment, whether explicitly foreseen in PSD2 or a result of the delayed entry into force of EBA guidelines and technical standards, has led to a number of additional transitional issues that both market participants and competent authorities (CAs) have approached the EBA about. Clarification on those issues would help to ensure a transition from PSD1 to PSD2 that is orderly and consistent across the 28 Member States of the EU.”
During a recent interview, French Finance Minister Bruno Le Maire said that France would propose that G20 members discuss the regulation of virtual currency this year. “There is evidently a risk of speculation. We need to consider and examine this and see how (...) with all the other G20 members we can regulate bitcoin.”
The UK Chancellor of the Exchequer, Philip Hammond, released documents covering the UK-China 9th Economic and Financial Dialogue held in mid-December. The FinTech portion of the policy outcomes begins on page 27. According to the outcomes, "both sides welcome deeper cooperation and exchange on the FCA’s Sandbox approach to regulation of FinTech and will explore opportunities to develop a similar approach in China to ensure safe market access and effective regulation of domestic and foreign firms." Both sides also welcomed the agreement between Shanghai Clearing House and R5–a London-based FinTech capital markets firm, and the Shanghai Clearing House "to create a Cross Border FX Clearing Solution." Both sides also agreed “to further improve the communication mechanism on FinTech and RegTech innovation under the framework of China-UK Financial Services Summit.”
The UK Department for Exiting the European Union released 58 sectoral impact assessment reports, including one on the UK FinTech sector. The analysis covers investment advice platforms, neo-banks, RegTech, payments and distributed ledger technologies, alternative finance, and the EU and UK regulatory frameworks applicable to FinTech innovations. Of note, the analysis does not include the government’s view on the sector as it was not published by the Committee.
The Federal Cartel Office released its preliminary legal ass1essment "in the abuse of dominance proceeding which the authority is conducting against Facebook.” According to the assessment, “A private use of the network is dependent, among other things, on the fact that Facebook can unrestrictedly collect every kind of user data from third sources, attribute it to the user's Facebook account and use it for numerous data processing activities. According to the Bundeskartellamt's preliminary assessment, Facebook's terms of service are at least in this aspect inappropriate and violate data protection provisions to the disadvantage of its users. “In view of the company's dominant position, it can also not be assumed that users effectively consent to this form of data collection and processing.”
Canadian securities regulators have signed a FinTech cooperation agreement with the France Autorité des Marchés Financiers. Canadian regulators also signed a FinTech cooperation agreement with the Australian Securities and Investments Commission (ASIC).
The Australian Securities and Investments Commission (ASIC) released its second survey covering the country’s marketplace lending industry. “During the 2016–2017 financial year the marketplace lending industry continued to grow with survey results identifying $300 million in loans written to consumers and SMEs, nearly double the figure for 2015–16. Respondents reported a total of 7768 investors and 18,746 borrowers as at 30 June 2017, which is more than double the figure for 2015–16,” the press release states.
ASIC also released a consultation paper seeking feedback on the FinTech licensing exemption on the anniversary of the launch of the regulatory sandbox. Comments are due February 27, 2018. “By introducing the FinTech licensing exemption, we consider that we have gone as far as we can in balancing facilitation and consumer protection within our regulatory remit,” the consultation states. At present, four firms have used the licensing exemption and over two-dozen companies have contacted ASIC about using the exemption. In addition, ASIC, through the work of its Innovation Hub, has granted 38 new licenses to FinTech businesses and provided variations to 11 licenses.
FinTech Australia–a trade association representing more than 100 FinTech companies– submitted comments to the Australian Prudential Regulation Authority's (ARPA) recent discussion paper, Licensing: A phased approach to authorising new entrants to the banking industry. Among the organization’s recommendations: “[W]e recommend that APRA provide further clarification and guidance regarding activities that they view as being ‘low risk’ as opposed to ‘high risk’. This is of particular note given some FinTech startups may wish to also use this pathway to obtain an ADI license for low-risk activities, for example gaining access to Payments infrastructure to provide payments, without intending to offer riskier lending products…. Furthermore, FinTech Australia also stands by its original recommendation that APRA also create an Innovation Hub within their Licensing team that will help companies with new, innovative business models - some which may not yet have even been considered - to find the right person at APRA with which to discuss their plans, and obtain further direction.” FinTech Australia also recently signed a FinTech cooperation agreement with FinTech Indonesia.
The country's central bank released data showing that card payments fell nearly 1 percent in the nine months to September, while the frequency in the use of mobile money rose nearly 20 percent to 1.1 billion transactions. Meanwhile, Africa's first multinational blockchain land registry will debut in Kenya and Ghana.
The Singapore FinTech Association and the Israeli City TLV have signed a MoU to foster greater FinTech cooperation.
The country’s central bank will reportedly create "a digital identification system for relations between banks and customers based on blockchain technology."
The Dutch Authority for Consumers and Markets published a report stating its concern regarding the exclusion of FinTech companies, particularly front-end FinTech companies, from being able to access customer account information from banks. According to a release from Loyens Loeff, the authority "is of the opinion that it is likely that individual banks possess a dominant position in respect of bank account information of their customers. Banks may abuse that dominant position by refusing to supply this bank account information to front-end FinTech companies."
The Commodity Futures Trading Commission (CFTC) launched a dedicated virtual currency resource page. The regulator also released a podcast featuring Coin Center's Director of Research, Peter Van Valkenburgh, and announced an upcoming Technology Advisory Committee meeting (January 23) that will focus, in part, on FinTech in CFTC regulated markets. The CFTC also issued a proposed interpretation on virtual currency "actual delivery" in retail transactions. The proposed interpretation is currently open for comments.
The Federal Housing Finance Agency (FHFA) published a request for input on Fannie Mae and Freddie Mac credit score requirements. “While FHFA believes that it would be desirable to update the Enterprises’ credit score requirement from the current Classic FICO standard, FHFA has not determined which credit score option should be adopted as a replacement. This Request for Input (RFI) is intended to gather feedback on the options from interested parties that could be impacted by a change in the Enterprises’ credit score requirements, including industry and consumer group stakeholders.”
Lawmakers passed the Act on Financial Technology Innovations and Experiments, reportedly inspired by the UK FCA's regulatory sandbox.
The Securities Commission of Malaysia announced “that parties interested in establishing and operating an Alternative Trading System (ATS) in Malaysia can apply to participate in regulatory sandbox sessions under the SC’s FinTech Innovation Lab (aFINity – alliance of FinTech community). This follows the Budget 2018 announcement on the introduction of ATS in the Malaysian capital market.”
Huang Wei, chairman of the China Securities Regulatory Commission, called for improvements to current legal systems to keep up with technological advances at a recent forum. Meanwhile, authorities are investigating the head of online finance platform, Qbao.com, that handled $8 billion worth of transactions. Regulators are also tightening Know Your Customer requirements on QR code payments by limiting payments made by a single user to less than $80 a day, among other requirements. Lastly, authorities in Guangzhou are moving forward with plans to allow residents to link their national identity cards to WeChat using facial recognition.