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Jackson Mueller
Associate Director, Center for Financial Markets
Jackson Mueller is an associate director at the Milken Institute's Center for Financial Markets. He focuses on fintech, capital formation policy and financial markets education initiatives. Prior to joining the Institute, Mueller was an assistant vice president at the Securities Industry and Financial Markets Association (SIFMA), where he focused on...
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FinTech in Focus

By: Jackson Mueller
January 12, 2018
   
   

Aadhaar Data: $8 Please

Many of you have heard of India’s efforts to assign more than 1 billion residents with a unique 12-digit random number for identification purposes. To register, residents must provide both demographic and biometric information. While there are various reasons and use cases behind India’s efforts to provide each resident with a unique identification number, concerns continue to mount regarding data security and the use of a centralized data retention model. The Unique Identification Authority of India (UIDAI)—the agency that issues the unique Aadhaar numbers—has stated multiple times that the information collected is fully safe and secure.

For some reason, I just keep thinking about the “unsinkable” Titanic when I hear this….

Turns out that the “unbreachable” database may, in fact, have sprung a leak or suffered a massive breach. According to Rachna Khaira, a reporter from The Tribune, "It took just Rs 500, paid through Paytm, and 10 minutes in which an ‘agent’ of the group running the racket created a ‘gateway’ for this correspondent and gave a login ID and password. Lo and behold, you could enter any Aadhaar number in the portal, and instantly get all particulars that an individual may have submitted to the UIDAI (Unique Identification Authority of India), including name, address, postal code (PIN), photo, phone number and email. What is more, The Tribune team paid another Rs 300, for which the agent provided ‘software’ that could facilitate the printing of the Aadhaar card after entering the Aadhaar number of any individual.” When The Tribune contacted UIDAI officials, they expressed “shock” and “admitted it seemed to be a major national security breach.”

However, roughly 24 hours after the story surfaced, UIDAI issued a press release calling claims of bypassing or duping the Aadhaar enrollment system as “totally unfounded” and assured “that there has not been any Aadhaar data breach.” The authority went even further by filing a police case against the reporter and all others involved. Not surprisingly, The Tribune called this “inexplicable,” and even Edward Snowden jumped into the debate adding that if the government “were truly concerned for justice, they would be reforming policies that destroyed the privacy of a billion Indians. Want to arrest those responsible? They are called UIDAI.” The UIDAI issued a further press release stating that the authority “is duty bound to disclose all the details of the case... and name everyone who is an active participant in the chain of events leading to commission of the crime, regardless of whether the person is a journalist or anyone else, so that police can conduct proper investigation and bring the real culprit to justice. It does not mean that all those who are named in the report are necessarily guilty or being targeted.” All of these developments come at the same time India's Supreme Court prepares for a final hearing on a petition challenging the validity of Aadhaar beginning January 17.

U.S. Financial Literacy: No Measurable Improvement?

The Center for Financial Literacy at Champlain College released its 2017 National Report Card on state efforts to improve financial literacy in high schools. The center graded all 50 states and Washington, D.C. on financial literacy education. According to the results, only five states received an "A" and more than half the states received grades C, D, or F. When the 2017 results are compared to past studies it looks like the U.S. is falling even further behind...

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Source: Champlain College Center for Financial Literacy 

Of course, what does this mean from a cost perspective? If, as the graphic above suggests, more U.S. states are falling into grades C, D, or F, what does this mean for the average American? Well, according to a study from the National Financial Educators Council, a lack of knowledge about personal finances costs the average American more than $1,100 in 2017. Even worse, nearly 20 percent of those surveyed believed they lost more than $2,500 last year due to financial illiteracy. Also, nearly one-quarter of respondents believe they have lost $30,000 or more over the course of their lifetime.

The Boston Fed Needs a Vacation

The Federal Reserve Bank of Boston was quite busy over the past week with the release of two reports focused on marketplace lending (MPL) and mobile banking. Retail mobile banking "is ubiquitous" at U.S. financial institutions with nearly 90 percent offering mobile banking services to customers. By the end of 2018, roughly 97 percent of financial institutions will offer such services. Also, more than two-thirds of the respondents “partner or plan to partner with third-party processors and more than half are considering partnerships with wallet providers that support near-field communication.” In regards to marketplace lending, the report focused on the demand side and found that only a quarter of U.S. consumers have heard of marketplace lending and less than 3 percent have applied for a marketplace loan. The report further states that “the use of marketplace loans primarily for debt consolidation implies that MPLs are mainly providing additional credit to existing borrowers and not expanding access to credit for new borrowers.”

Some Headlines

Oops: Ant Financial apologized after AliPay users were automatically opted into Ant Financial’s third-party credit scoring system, Sesame Credit. Meanwhile, Chinese consumer group, The Jiangsu Consumer Council, is suing Baidu for collecting users' personal information without permission.

By the Numbers: Robo-advice platform Wealthfront raised $75 million, led by Tiger Global Management. Wealthfront has $9 billion under management, far from Vanguard’s Personal Advisor Services which just crossed the $100 billion in assets under management milestone. Elsewhere, U.K.-based crowdfunding platform Seedrs published its year-end results for 2017 which showed that “£125 million was invested into campaigns and 168 deals funded across 8 countries and 17 different sectors”—the platform’s most successful year to date. On the cryptocurrency front, Founders Fund—Peter Thiel's venture capital arm—has amassed between $15 million to $20 million in bitcoin, while Overstock raised $100 million from the Quantum Fund, with a bulk of the investment slated for blockchain developments. Medici Ventures, a subsidiary of Overstock.com, also led a $2.2 million seed funding round for a blockchain voting startup. Meanwhile, the price of Ether surpassed $1,000 for the first time.

Of Interest: LendEDU published the findings from a survey of nearly 700 active bitcoin investors and found that roughly 20 percent of respondents purchased the cryptocurrency using credit cards. Roughly one-quarter of the respondents said they were unable to pay off their credit card balance after purchasing bitcoin, even though nearly 90 percent of respondents stated that they expect to pay off their credit card with the proceeds from the sale of bitcoin. 

Global Developments

Bahrain: The country entered into a FinTech cooperation agreement with Abu Dhabi, marking the first FinTech agreement between two MENA jurisdictions. Meanwhile, Al Baraka Banking Group, Kuwait Finance House Bahrain, and Bahrain Development Bank launched the first FinTech consortium specializing in Islamic Finance with eight more regional banks expected to join this year. Lastly, Bahrain’s central bank approved Malaysian-based Beflrics Group to run a cryptocurrency exchange in Bahrain. The approval marks “the first ever exchange in the Middle East to obtain a central bank issued Sandbox license, to run a cryptocurrency exchange.”

Canada: In mid-December (my apologies for not catching this earlier), the Competition Bureau released a study titled, “Technology-led Innovation in the Canadian Financial Services Sector.” The study focuses on retail payments and the retail payment system, investment advice, lending and equity crowdfunding, and the global response to FinTech. The recommendations include: regulation should be technology-neutral and device-agnostic; regulation should be principles-based to the extent it is possible; regulation should be based on the function an entity carries out; regulation should be proportional to risk; regulators should continue their efforts to seek harmonized regulations across geographic boundaries; policymakers should continue to review regulatory frameworks frequently; policymakers should identify a FinTech policy lead for Canada and embrace broader "open" access to systems and data through APIs, among other recommendations.

China: Alibaba, Tencent, and other Chinese-based internet firms have filed with the central bank to launch a new company called Baihang Credit Scoring. The new company “will provide personal credit information services for online lenders, supplementing the state-run credit platform,” according to a report from Xinhuanet. And speaking of China’s central bank, authorities have apparently quashed rumors that the bank would shut down all domestic bitcoin mining activity in the country.

Morgan Stanley, in a recent report, expects the credit balance of China's online lenders to decline 25 to 35 percent as a result of heightened regulatory scrutiny, with the number of lenders declining to a few hundred firms over time. Heightened regulatory scrutiny has also forced Chinese social media company Renren to cancel a potential initial coin offering.

India: The Parliamentary Standing Committee on Finance submitted a report to Parliament that urged the government to come up with data privacy legislation and create a coordination authority to deal with information infrastructure issues, among other issues. Separately, Indian banks are increasingly uncomfortable with virtual currency exchanges and have put in place measures that have affected a user’s ability to trade cryptocurrency using India’s major cryptocurrency exchanges. According to cryptocurrency exchange Koinex, “A tussle between our payment service partner and their bank has caused an indefinite delay in the settlement of a large portion of deposits to Koinex in the past 2 weeks. This created a bottleneck in the cash flow of user funds, thus hamstringing INR withdrawals on the platform. In these circumstances, we were constrained to temporarily suspend INR withdrawals, until the differences between the payment service provider and their bank are resolved.”

Indonesia: The conglomerateSalim Group and retailer MAP join more than 150 companies that have applied to the Bank of Indonesia for an e-money license after new rules came into effect for FinTech companies.

Philippines: The country's central bank is in talks with other Southeast Asian central banks on the adoption of regional standards to test FinTech products.

Singapore: The Monetary Authority of Singapore (MAS) responded to a question from Singapore’s Parliament regarding virtual currency transactions and anti-money laundering/counter-financing of terrorism enforcement. “[A]t some stage, fiat currency will have to be exchanged for virtual currency, or vice versa, at intermediaries that buy, sell or exchange virtual currency. MAS therefore intends to impose AML/CFT requirements on such intermediaries. MAS is currently conducting public consultation on a proposed Payment Services Bill that will empower us to do this.

South Korea: The Financial Intelligence Unit and the Financial Supervisory Service carried out joint inspections on six commercial banks that offer trading accounts to cryptocurrency exchanges in South Korea. “The inspectors will look into whether the banks comply with their anti-money laundering (AML) obligations in their transaction with cryptocurrency exchanges; and whether they have in place appropriate measures to verify their customers’ identification in regard with cryptocurrency trading," the release stated.

Switzerland: The government has launched a blockchain task force to look into the legal guidelines surrounding initial coin offerings and blockchain companies. Taskforce Blockchain will be led by Finance Minister Ueli Mausrer and Economics and Education Minister Johann Schneider-Ammann and will hold its first meeting on January 12.

Taiwan: Premier Lai Ching-te urged government agencies to encourage the use of mobile payments for in-store purchases by subsidizing transaction fees.

U.K.: London remained the top destination for technology funding in 2017. According to a London & Partners press release, “venture capital investment into the UK’s tech sector reached an all-time high in 2017 with UK firms attracting £2.99 billion – almost double the total amount invested in 2016 (£1.63bn).” Also, “UK firms attracted almost four times more funding in 2017 than Germany (£694m) and more than France, Ireland and Sweden combined. London tech companies also raised significantly more venture capital investment than any other European city, including Amsterdam, Berlin and Paris.”

Draft legislation was introduced in late December "to clarify that no business borrowing through a peer-to-peer platform needs to be regulated as a 'deposit taker' (often referred to as a 'banking license') unless that is their core business."

Separately, Charles Randell has been appointed as the Chair of the Financial Conduct Authority and the Payments Systems Regulator. Mr. Randell's term is effective beginning April 1.

Meanwhile, just four of the U.K.'s nine largest banks—AIB Group, Danske, Lloyds Banking Group, and Nationwide—are ready for the January 13 deadline for complying with open banking regulations. If you recall, the Competition and Markets Authority released directions back in December providing a timeline to the five banks to meet the remaining requirements.

U.S.: The North American Securities Administrators Association (NASAA) published a list of common cryptocurrency concerns and common signs of fraud. NASAA recently surveyed state and provincial regulators and found that regulators were nearly unanimous in their belief that there is a high risk of fraud involving cryptocurrencies and the need for heightened regulation.  

Separately, the Commodity Futures Trading Commission (CFTC) is holding two meetings (January 23 and January 31) focused, in part, on cryptocurrency market developments. CFTC Chairman Christopher Giancarlo released a statement on the two upcoming events and the CFTC also published material on the oversight of and approach to virtual currency futures markets. According to Giancarlo: “The responsible regulatory response to virtual currencies is consumer education, asserting CFTC authority, surveilling trading in derivative and spot markets, prosecuting fraud, abuse, manipulation and false solicitation and active coordination with fellow regulators. The CFTC has been following this course of action and will continue to do so.”

For those who may have missed it, Federal News Radio recently did a segment covering the Securities and Exchange Commission’s new Cyber Unit and how it functions. And speaking of the SEC, the agency's Fort Worth Office took to Twitter to comment on the growing number of companies inserting "blockchain" into their name: “We’re contemplating adding ‘Blockchain’ to our name so we’ll increase our followers by 70,000 percent.”

I’m looking forward to the SEC’s next tweet mentioning Eastman Kodak Co. and blockchain. Yes, somehow Kodak is still around…

At the state level, Delaware’s startup exchange is closer to launch after the Delaware Board of Trade announced the official launch of a blockchain-powered crowdfunding and secondary marketplace. The platform “is the first-of-its-kind alternative trading system (ATS) focused on over-the-counter securities to support cryptographic tokens for SEC registered securities.” Remaining in Delaware, the government’s blockchain director, Andrea Tinianow, has resigned. In Utah and Texas, officials have issued warnings about cryptocurrency investment scams and halted the sale of new cryptocurrency by U.K.-based firm BitConnect. “The [Texas] Securities Commissioner found that the BitConnect investments are securities, but were not registered as required by the Texas Securities Act and State Securities Board Rules and Regulations. In addition, the company is not registered to sell securities in Texas.” Texas became the first state to issue an administrative order on cryptocurrency investments back in December.