GDPR vs PSD2 – Banks may abandon PSD2 due to conflicting policies

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About a year ago, Bernard had written a post on PSD2, and discussed different levels of maturity in regulations. He highlighted that PSD2 was a regulation meant to open up the market for innovative consumer banking use cases and solutions. However, the same regulator (EBA) have set a timeline for General Data Protection Regulation (GDPR) in 2018 alongside PSD2.

We have discussed PSD2 and its implications for banks, fintech firms and consumers at length in the past. So, let me focus on GDPR and what it means to firms and consumers. The purpose of GDPR is to ensure consumers give informed consent before companies can share their personal data with third parties. Pre-ticked check boxes and inactivity from consumers can no longer be assumed as their consent to data sharing post GDPR.

Unlike PSD2, GDPR applies to businesses in the EU processing consumer data, not just Financial services firms. Also, for non-EU businesses GDPR applies, if an EU resident’s personal data is processed in connection with goods/services offered.

The Data Protection Act (DPA) provided consumers with right of subject access – which meant consumers can request a company for data that the firm had collected about them. Currently many businesses charge a fee to provide this data to consumers, but post GDPR, firms can’t charge this fee.

As consumers, we can instruct firms when to collect our data and stay on top of it using the right of subject access. Now what does this have to do with PSD2? PSD2’s purpose is to enable consumer data sharing, where as GDPR’s purpose seems to be to try and cut down on data sharing.

GDPR

PSD2 is about financial services firms sharing customer data with third parties who they may not necessarily have a contractual agreement with. These third parties may then come up with innovative use cases by processing consumer data.

So, to be compliant with PSD2, banks should ask for customer’s consent to share their data with third parties. But to be compliant with GDPR, data processing by third parties will also need explicit customer consent. How is a bank supposed to be responsible for the processing of consumer data performed by a third party, it has no contractual agreement with?

While this hasn’t been explicitly mentioned as a process required to be GDPR compliant, my guess is, it would be upon the Banks to ensure third parties (that they share consumer data with) have consumers’ consent to process their data.

Unlike PSD2, that doesn’t have any punitive charges, violation of GDPR might result in a fine of upto €20 Million or 4% of Global turnover. And knowing the way banks deal with regulatory compliance, nothing motivates them more than a fine hanging over their heads.

This means, where there are conflicting regulations, and lack of clarity on a standard approach to data sharing, banks will focus completely on implementing the punitive GDPR. In someways, GDPR may also become an excuse for banks for not implementing PSD2 and avoid sharing what they feel is their asset – consumer data. Watch this space!!


Arunkumar Krishnakumar is a Fintech thought leader and an investor. 

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International Regtech Association Launch and IBM Watson announce Regtech Apps

Regtech has for long been an underdog subcluster of Fintech. Over the last year or so, the trend has been changing, and more stakeholders in the ecosystem are taking notice of how fundamentally important Regtech is to the industry. Over the last few weeks, Regtech has been in the press for all the right reasons. The International Regtech Association (IRTA) was launched with a mission to create an ecosystem for Regtech firms to thrive. IBM have announced the launch of Watson’s RegTech capabilities, thanks to its acquisition of the Promontory Financial Group (PFG) last year.

The top banks have been spending close to about $1 Billion per year on regulatory processes and controls. Regtech firms are focusing on bringing cutting edge technology like AI and Cloud computing and add efficiencies to achieving regulatory compliance. The FCA has been a pioneer in embracing innovation through the FCA regulatory sandbox, that allowed RegTech firms to test their value proposition without fear of a regulatory breach.

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The IRTA, a non-profit, was launched recently, with a goal to bring together technology firms, banks, regulators and academicians in developing international Regtech standards, and promoting research activities.

For Fintech firms to scale globally they need a consistent approach to regulation across nations. For instance, Fintech firms in Asia have serious challenges when navigating through different regulatory regimes while looking to expand beyond their home territory. For example, Cryptocurrency exchanges are treated as money changers and regulated by the customs authority in Hong Kong but they are licensed as online shopping malls in South Korea. In Singapore, the central bank has proposed regulating bitcoin exchanges as payment firms.

Every time they want to expand into a new country, Fintechs are having to start from scratch due to incompatible, and often conflicting regulatory approaches. This not only adds operational delays, but also sometimes needs business model tweaks. In my article last week, I discussed about similar challenges that US Fintechs have in expanding across different states.

The IRTA should help resolve these inconsistencies, over a period of time. It is chaired by Subas Roy who was most recently the Global Head of RegTech at EY. His vision for the IRTA is to set global Regtech standards, lead research and help Regtech firms develop solutions that can be used by banks for regulatory compliance.

The IRTA currently has about 250 members. They hope to work with the global Regtech market that has close to about 700 companies, while about five global banks are keen to join the initiative. This is a great start, however I believe it is essential for the IRTA to work closely with regulators, especially the FCA and the MAS, as they have created a good framework to groom innovation that other regulators could follow.

Earlier this week, IBM Watson announced the launch of its new anti-money laundering (AML) and know-your-customer (KYC) capability. This includes Financial Crimes Insight with Watson, which applies cognitive computing, intelligent robotic process automation, identity resolution, network analysis, machine learning, and other advanced analytics capabilities to help banks spot financial crime.

At the end of last year, IBM acquired Promontory Financial Group (PFG), a consultancy firm specialising in financial regulations. PFG have been training IBM Watson on regulatory compliance.

The aim of the new financial crime solution is to reduce the amount of false positives generated by today’s transaction monitoring systems. Banks have a false positive rate of 98% and spend about £2.7 Billion per year in chasing false leads. About 55% of these costs could be saved by Regtech solutions using AI, as per IBM. This would make the transaction monitoring process very efficient.

Its good to see that government agencies (FCA, MAS), non-profits (IRTA) and Technology firms are waking up to the fact that Regtech is no longer the underdog. Its a massively untapped market that might have just reached the tipping point and 2018 could be the year of Regtech.


Arunkumar Krishnakumar is a Fintech thought-leader and an investor. 

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.


 

InsurTech and the regulators

When disruptive technology and regulation meet, the world changes.

Pity the poor regulators faced with competing demands:

  • Protect citizens from losing money

 

  • Encourage innovation that drives jobs and GDP growth

 

  • Don’t upset the incumbents too much

 

Oh, and do all that when technology keeps changing the game. For example, think of Auto Insurance, IOT and Self Driving Cars.

 

Auto Insurance, IOT and Self Driving Cars

This is just one segment of Insurance, but think of these tough questions:

  • Who owns the data? If I let the telematics in my car tell my insurance company what sort of driver I am, do I own that data or does the insurance company? The issues are similar to those driving PSD2 regulation in banking.

 

  • Who is responsible? If I let the car drive while I catch up on Netflix binge watching and there is a crash, who is responsible, me or company I bought/leased/rented the computer on wheels?

Then we have the regulation that used to be simple – Capital Adequacy.

Capital Adequacy

In ye olden days, Capital Adequacy simply meant a Regulator telling the Insurance company how much capital they need to hold in reserve. Only big established firms could play this game. Now think of these tough questions:

  • An Insurtech startup is only insuring small items, the sort of stuff that was seldom insured in the past because it was too much hassle, but now a couple of swipes on a phone does it. How much capital do they need compared to a company insuring life, health, house or car?

 

  • A minimally capitalized Insurtech startup creates a digital experience on top of a Reinsurance company platform. Whose capital has to be adequate, the Insurtech startup or the Reinsurance company?

 

  • A group of Hedge Funds, acting like the Lloyds Names of old, offer to cover Insurance through some variant of Cat Bonds and lay off some of that risk into derivatives contracts in the capital markets. Where is the capital and how do we know it will be adequate when the time comes?

Smart Contract meets big legal bills

You sign up for an instant payout policy (real time settlement) where proof of event is recorded on an immutable blockchain. The payout should be automated and immediate, but it does not happen. Who ya gonna call?

You are from Switzerland, but you are visiting New York, the Insurtech startup is in London, but is regulated in Bermuda and the servers are Iceland. Your lawyer starts talking about jurisdictional issues while he plans for a long and expensive project.

Bernard Lunn is a Fintech thought-leader and deal-maker. 

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Crypto equity via ICO and the other innovation chasm

 

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Are you a bull or a bear on this question?

– Crypto equity via ICO is the secret to unlocking innovation capital and is the bridge across the chasm between crowdfunding and public market liquidity. This is the bull case.

Or:

– Crypto equity via ICO is a haven for scamsters and needs to be heavily regulated. This is the bear case.

Today we shine a light on that question. First we outline the bull and the bear case. Then we ask some experts to give their views. Bias disclosure: I am a bull, but having seen a few waves of disruptive change I know that change takes a LOT longer than people think and that the early unregulated wave of any disruptive change has a lot of what are politely referred to as “sketchy characters” and less politely as scamsters.

The other innovation chasm

The old saw is “if it ain’t broke, don’t fix it”.

The corollary, for entrepreneurs, is “if it is broke, find a way to fix it”.

The innovation capital business is broken.

Most entrepreneurs understand the chasm between MVP (Minimum Viable Product) and PMF (Product Market Fit). The low cost to build MVP increases supply, but real demand does not change that fast, so lots of MVP ventures fall into the chasm (i.e. they fail).

The next chasm is less well understood. This is the chasm between PMF and Liquidity (via an IPO on the Public Markets and failing that via trade sale).

Today, we don’t see this chasm so clearly because there is a very expensive bridge across it – in a few locations. The very expensive bridge is provided by the big PE/VC Funds. Uber has raised over $8 billion and is still supposedly not ready for an IPO. That is an expensive bridge a) for the Limited Partners (aka the LPs aka the real investors who pay the PE/VC Fund Manager their 2 and 20 cut) and b) for the entrepreneurs (faced with all those preferential equity terms that toss founder and management equity to the bottom of the stack).

Not only is the bridge very expensive, but it is only available in a few choice locations. If you are in Silicon Valley, no problem, there are lots of expensive bridges. If you are in New York, London, Singapore, you have a few bridges. Outside those centres you are scrambling and doing so in the knowledge that some entrepreneur in Silicon Valley just raised 10x what you raised and is planning on using that to crush you.

It gets worse. Unless you do your IPO on NASDAQ or NYSE, you will face a discount. Look at the valuation discount of great companies trading on reputable stock exchanges all around the world. So now you have a second very expensive bridge operated by the “bulge bracket” investment bankers (such as Goldman Sachs and Morgan Stanley) who you use to “take you out to IPO”.

So, yes it is broken. The innovation capital business does need fixing. Whether some variant of the ICO is the fix is what we now turn our attention to.

Crypto equity via ICO 101

ICO = Initial Currency Offering.

It makes you think of IPO. That means it also makes regulators think of IPO.

Yet it is C for Currency, not company shares. You buy a Crypto Currency Token that you can use on the network.

Some examples of ventures that have been funded in this way include:

  • Storj
  • Lykke
  • Ethereum
  • ZCash

In all cases, traditional VC were not in control. Sure they could invest alongside everybody else. But they had no information advantage.

The Howey test (from an SEC legal case from 1946) is basically – if it looks and acts like an equity it probably is. Many ICOs fail this test, putting them in the regulatory cross hairs.

Crypto Equity Bear Case

It is very simple to raise money via an ICO. This will bring out honest entrepreneurs who are fed up with the current way of raising capital. It will also bring out crooks. It already has. So far the losers have been people playing with found money. For example if you invested in Bitcoin in 2009, putting some of those profits into Ether in 2014 seems pretty easy, even if you follow it up by losing on the DAO in 2016. It is quite different when Joe Q Public is invested from earnings that took 40 years to accumulate and which he is banking on for a comfortable retirement. If ICO scales, more crooks and more Joe Q Public actors get involved.

Crypto Equity Bull Case

Crypto Equity – done right helps ventures get across both chasms:

  • Chasm 1 between MVP and PMF. The investors are often also the users. They use the tokens on the network. So they help get the venture to PMF.
  • Chasm 2 between PMF and Liquidity. The Crypto Currency Token is traded. Speculators provide liquidity.

The fat protocol thin app thesis

This thesis was articulated by Fred Wilson of Union Square Ventures in August 2016. I urge you to read the whole post and the very informed comments from the community. If you don’t have time, these two pictures paint a thousand words:

fat app layer

fat protocol layer

 

 

The original thinking, from 18 months earlier and, amazingly prescient being  a few months even before the Ethereum ICO, was from Naval Ravikant (founder of Angel List who we have written about here, here and here).

What do the experts say?

The experts we reached out to are in what I call the “Other BBC” space (Bitcoin Blockchain Crypto), so they will be inclined to a bullish case. If you have an alternative view, please let us know in comments.

My questions to them are:

  • Use Case Suitability. Is ICO only suitable to businesses at what USV call the fat protocol layer? This will be very few companies. Or could the ICO, with some modifications and regulations, be used for any company? If yes to the latter, what do you see as the essential modifications and regulations?
  • ICO Lessons. What key lessons should entrepreneurs, bankers and regulators draw from the ICOs that have happened so far?

Use Case Suitability

From Fabio Federici

“I think we need to distinguish between two types of tokens. On one hand, we have the tokenization of equity, where the token does not serve any specific purpose in the product/protocol but rather represents a digital form equity as we know it today. While this will improve liquidity and efficiency, I don’t believe this to be a paradigm shift.

On the other hand, we have decentralized blockchain-assets, ranging from currencies (BTC), over commodities (ETH) to application-specific tokens like Golem (a decentralized AWS) or Storj (a decentralized Dropbox) (see @ARKblockchain). These are just some examples blockchain-based assets, where the value of the network is captured by its users, rather than a centralized entity – and that is what will power the next phase of the Internet. I believe that the most exciting use-cases are yet to come. Just like it was hard to imagine Google, Snapchat or Uber in the early days of the Internet, it is impossible to predict the applications that decentralized blockchain protocols will enable.”

From Oscar Jofre  (see our review of his Korecox venture here).

“I am a bull/bear crossover on this subject because of the lack of oversight even by the industry to make sure proceeds are used in a manner that will not cause a domino affect of disgruntled coin holders in an empty network.

Not everything needs regulations but given that the retail market is just learning of the crypto currency, the industry needs to mature so this can be a very viable method for companies to utilize.  Unfortunately at the moment we are not seeing that and my bear comes out because I am seeing first hand, how companies are using ICO as a form of equity raise and not having a care if the person purchasing their coins makes any return on that investment.”

Richard Olsen of Lykke:

“In future, any company will be able to take advantage of the ICO route. No regulatory changes will be necessary, because Lykke will acquire the necessary legal licenses and future ICOs can happen under the Lykke umbrella, www.lykke.com

ICO Lessons

From Fabio Federici:

“I think it is important to distinguish between the tokens representing pure equity, and blockchain-based assets that serve a purpose in a protocol. While the first is just a digital version of what we know today, the latter represents a new type of asset class.

Also, one should always take a close look at each asset before making a decision, whether it’s building on it, investing in it or regulating it. Many factors play into the evaluation of these assets, from the aforementioned purpose to the fundamentals, the code, the team and many more. We are still in the early days – ontologies and (e)valuation methods have yet to be developed.

The main lesson for me is to keep an open mind and evaluate each token or asset individually. We are in the midst of the rise of a new asset class that will change the world.”

From Oscar Joffre

“ICO’s are here and need guidance. They are not used to harm but to really bridge the large funding gap we have globally for companies.  The industry can choose to be proactive and self-regulate, which in the end will be better than regulators injecting in.”

Richard Olsen of Lykke:

“The new future has started – entrepreneurs, bankers and regulators have understood that ICOs are a new reality and are essential funding tools. They combine cost efficient funding with building a motivated network of supporters.”

 Conclusion

Crypto Equity is a gamechanger – if done right.

Those three little words –  if done right – cover a lot of complex detail.

We can leave that to regulators in each jurisdiction to create their rule books. That can take a lot of time and will devalue the frictionless cross border nature of ICOs today. Or the community can create a self-regulatory code of conduct as Oscar Jofre suggests. We have opened a thread on Fintech Genome where this initiative can be crowdsourced.

http://genome.dailyfintech.com/t/crypto-equity-via-ico-self-regulation/965

 

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Bernard is a Fintech thought-leader & deal-maker.

Get fresh daily insights from our amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Fintech Regulatory competition heats up as governments calculate the economic return on innovation

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For a long time, entrepreneurs faced competition and regulators sent them the rule book. Regulators were government employees who thought about competition only in the abstract.

Today, the environment is more fluid as governments recognize the economic return on innovation in terms of jobs and GDP growth. The regulators now face real competition because their political masters have to keep citizens happy and citizens care about jobs and GDP growth.

With both Fintechs and global banks being increasingly mobile, jobs can disappear fast if regulators get it wrong. Plus, innovation is the primary driver of productivity which drives GDP per capita.

Pity the poor regulator who must balance that with protecting citizens from fraud and abuse.

In this post we review the Fintech regulatory initiatives in these countries:

USA

UK

Switzerland

Singapore

Shanghai

Hong Kong

India

Eurozone

Others

We end by looking at common themes across jurisdictions.

USA: Fintech Charter vs States Rights

America is the largest single market in the world, is home to the biggest banks and the biggest tech companies. So when the OCC (Office of the Comptroller of the Currency) issues a draft Fintech Charter, we pay attention.

The problem is that there is always a push & pull between central government initiatives such as this and States Rights.

In simple terms, more central power means less state power. One of the comments on the OCC Fintech Charter (which is still only a draft) is from the New York State Department of Financial Services and it is not positive.

A national Fintech charter would mean there will be no reason to have a state license. States do not have the authority to regulate national banks, even those located in the state. This will reduce fee income from granting charters and regulating banks. Looked at from the other side, this will reduce the cost of going national for Fintech ventures. Banks that are already national may lobby to keep it like it is.

Nor do States agree at the policy level. California, home of tech, tends to favor the Tech in FinTech and New York, home of Wall Street, tends to favor the Fin in FinTech.

The politics of this currently are really unclear. So this falls into the wait and see category.

UK: the Post Brexit Landscape

The UK pioneered using smart regulation to promote financial innovation. Initiatives by the FCA helped turn London into the Fintech Capital of Europe and  that sparked Fintech growth that was giving credence to the idea of London as the Fintech Capital of the World. Financial Regulators around the world studied how the FCA did it and how Government, Banks and Fintechs worked together. The ability to have a conversation with regulators and have them listen was pioneered by the FCA and was a major breakthrough.

Then Brexit happened.

There are two scenarios:

  • Scenario 1: UK is too small a market to matter on the global stage, business will flow to other centres in Europe (Dublin, Frankfurt, Berlin, Luxembourg etc) and globally to New York and Singapore.
  • Scenario 2: Freed from the bureaucratic constraints of Brussels, London can innovate away on the global stage and become the Fintech Capital of the World (and thus of Europe by default).

This is another fluid, wait and see situation where politics will be key.

Switzerland: This is mission critical for this tiny rich country

Financial Services accounts for 10% of GDP and 5% of employment in Switzerland and the country is a global leader in Wealth Management. So, what happens here really matters.

In November 2016, Switzerland announced a Fintech License. Like the US Fintech Charter, this is not yet law. These are the key features:

– No “maturity transformation” allowed. This is mandated Asset Liability Management and that eradicates systemic risk (no more bailouts) and favors Market Place Lending without any lending from their own balance sheet.

– Deposit Only License. You can provide deposit services, but not lend. You can accept up to SF100m once licensed. Separating Deposits from Lending is a bold and radical move in a world of ZIRP. Deposits is a nascent area of Fintech innovation.

– Up to CHF 1 million via sandbox innovation area. This allows a startup to build an MVP and get to PMF before investing in being regulated

– minimum of SFr300,000 in capital (vs SF10m for banks). If a startup has got to PMF that is a very manageable hurdle.

– not covered by deposit protection (read, no risk to taxpayers). It is a buyer beware free market.

–  crowdfunding grace period in settlement account. This defines when donors can withdraw the money. Today it is 7 days. The proposal is to raise it to a 60 days. which would give the company greater security.

– No limit to how many lenders or investors for crowdfunding services.

– You must abide by money laundering rules applied to banks.

Bitcoin is also legal currency in Switzerland and is home to some major crypto ventures. The Swiss Fintech License is a bold move, but it is not yet law. With so much employment at risk in traditional banks, the politics are still uncertain..

Singapore: Hub for the fastest growing region

Asia is where the growth is and Singapore is the hub for that growth, with people who are equally comfortable doing business in India and China and all other parts of Asia. The Singapore Monetary Authority is very open to innovation and the most proactive regulator at reaching out to the Fintech community. They have a Fintech Festival and a very approachable online presence and people who mingle with ease at tech oriented conferences.

Singapore itself is a small market and each country in Asia makes their own rules. There is no United States of Asia or Asian Union as yet, but we can be confident that Singapore will be central to any harmonization initiatives.

Shanghai: The Wild West gets a Sheriff

This data from KPMG shows the return on innovation. The line that matters is the P2P Composite Interest Rate that is falling like a stone in that chart. For China to transform from export led to a consumer economy, it must have low interest rates. If Fintechs and BAT can deliver that better than Banks, the regulation will deliver what is needed. This is the context for the news and plans we see in the Five Year Plan for 2016-2020.

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As always, the regulator must balance the risk from fraud as Market Place Lending (MPL) moves from the Wild West phase (with hundreds of marketplaces and lots of scams and very crude, violent debt collection practices) to the Settler phase, when the Sheriff rounds up the bad guys and the settlers move in and we get towns and cities and the big money is made.

These are the 12 commandments laid down in December 2015 by the China Banking Regulatory Commission (“CBRC”). Thou shalt not (my comments in italics):

1. Use the platform for self-financing or for financing of related parties. (This stops the most egregious scams).

2. Directly or indirectly accept and manage lender funds. (This is interesting. It prevents what in the West has become called Balance Sheet Alt Fi Lenders and it is unclear if that is a bad thing).

3. Provide guarantees to lenders or promise guaranteed returns on principal and interest.

4. Market or recommend loan investments to users that have not completed identification verification after registering on the platform

5. Directly make loans to borrowers, unless stated otherwise by applicable laws and regulations

6. Structure loans into investment products with liquidity timing that differs from the original loan term (“thou shalt not have have Asset Liability Mismatch” is another way of saying “thou shalt not have systemic risk”).

7. Sell bank wealth management products, mutual funds, insurance annuities and other financial products (Hmm, so MPL can only be an exchange, China is banning the 20th century strategy of vertical integration).

8. Unless stated otherwise by applicable laws and regulations, collaborate with other investment or brokerage businesses to bundle, sell or broker investment products (sounds like the sort of grey area that would make fortunes for lawyers and/or those with good connections).

9. Provide false loan information or create unrealistic return expectations.

10. Facilitate loans for the purpose of making investments in the stock market. (No borrower would offer this as a reason to get a loan, so this sounds like the Casablanca scene “I am shocked. Shocked!! to find that there is gambling going on”).

11. Provide equity crowdfunding or project crowdfunding platform services. (Separation of asset classes by statute sounds like a hindrance to innovation).

12. Other activities forbidden by applicable laws and regulations (legal catch all phrase).

In a single party system there is no political risk; what the Government says is law is the law.

Hong Kong: Competing with Singapore and Shanghai

This headline says it all about regulators facing competition

Outdated fintech regulations hurting Hong Kong, Jack Ma says

Ant Financial to pick Hong Kong for IPO only if city is ready for innovation, Alibaba’s founder says

Hong Kong now faces competition on the Mainland from Shanghai and as a regional hub from Singapore. In the latter case, most commentary (such as this one on Bloomberg) puts Singapore in the lead.

India: The Dark Elephant

Often overlooked with all the attention on the China dragon, the Indian elephant is making some smart moves in Fintech and like China benefits from a growing economy and lack of legacy processes. India has pioneered with the Payment License and may be the first major economy to move to a cashless society. For more about India, go to our India Week.

Eurozone: Pencil Pushers or Tech Smart Regulators

Despite Brexit, this 28-country marketplace is still very big and the regulators seem to understand the Fintech innovation imperative pretty well. We see 8 regulatory initiatives;

Basel 3

Why: make sure banks have adequate capital so that there is not a “run on the bank” during any future financial crisis.

What: Tier One Capital is increased from 4% to 6%. Plus, banks must maintain enough “Liquidity Coverage Ratio” (a new concept in Basel 3) for 30 days.

When: Gradual rollout from 2014 to 2019. Banks need time to adjust and their strategies are already aligned to this rollout.

Where: Basel 3 is global, but voluntary. It is a “good housekeeping seal of approval” that gives confidence to the Bank’s investors. The US version of Liquidity Coverage Ratio is a bit tougher.

Elevator: Banks will be lending less. Plus Banks will be cross selling more (to show they have an operational relationship as it relates to Liquidity Coverage Ratio). US banks generally have stronger balance sheets than European ones.

SEPA

Why: reduce the cost of payments within Europe.

What: Single Euro Payment Area. Making bank-to-bank transfers cheap and quick within the Eurozone.

When: Completed by 2010. These are the IBAN numbers that still baffle some paying into Europe.

Where: Specific to Europe, which was playing catch up with America on this front (now caught up).

Elevator: payments within the Eurozone are quick and cheap (cross border to and from Eurozone is still a pain point)

MiFID 2

Why: protect investors from misselling and fraud.

What: Markets in Financial Instruments Directive. There is a lot in MiFID 2 and this FT Video is a good 6 min explainer. In short, MiFID 2 will a) reduce use of dark pools in equities, b) push derivatives and fixed income trading away from Over The Counter (OTC) to centralized clearing and c) curb abuse of High Frequency Trading.

When: From summer 2015 to early 2016.

Where: This is a European initiative, but as it is a big market and big global Fund operations are in Europe (Luxembourg, Dublin, London), this could set the benchmark globally

Elevator: Trading will become cheaper and more transparent. Wealth/asset managers will have to follow more rules in how they report to investors.

Solvency 2

Why: Protect consumers from insolvency of an Insurance company (ie they cannot pay on an insurance claim because they went bankrupt).

What: Specific to Insurance. Defines how much capital they need. Like Basel 3 but specific to Insurance rather than Banks.

When: Jan 2016 was final deadline.

Where: Specific to Europe.

Elevator: European insurers will be more conservative which may make premiums go up but will lessen chances of them not being able to payout due to insolvency.

IFRS

Why: A global standard for accounting.

What: International Financial Reporting Standards.

When: Voluntary.

Where: The de facto standard is GAAP (Generally Accepted Accounting Principles) although this tends to be viewed as an American standard.

Elevator: Use both GAAP and IFRS (using automated translation tools) until it is clear which has become the global standard.

AMLD

Why: Reduce Money Laundering.

What: The European standard for Anti Money Laundering (AML).

When: Still being defined.

Where: America led the way on this, rules are already clear.

Elevator: Follow American rules but have some flexibility in case European rules end up being tougher.

PSD2. This is a game-changer that we have written about many times  before. It is an example of tech smart regulation and key to creating a level playing field between Banks and Fintechs.

Directive on electronic invoicing in public procurement. This will cover all B2G e-invoices by November 2018. If this moves Europe’s current e-invoicing adoption rate of 24% closer to 95%, which is the tipping point for AP and AR to go fully digital, then this will be a very big deal. When AP and AR go fully digital, two big things happen. First, companies take a lot of cost out of AP and AR processes. Second, even more significant, working capital finance will scale beyond its niche today into a mainstream asset class and financing tool. The theory is that mandating it when Government is the buyer will set the ball rolling for adoption by corporates.

Others

Three other countries making smart moves in Fintech regulation are Japan, Australia and Canada.

Common Themes

  • To be regulated or not to be regulated, that is the question. It is easier to get a  Bank License and Charter these days. The question for many Fintechs is do they provide a tech service to regulated entities or become regulated entities? There is no simple answer, but we can see that the number of banks is declining.
  • Unbundling. Startups focus in one service and usually don’t try to offer an all-encompassing service that compete directly with Banks. So we see the trend to unbundled regs (eg a Payment License and a Deposit License and a Current Account License).
  • More tech savvy regulators. PSD2 and Payment Bank Licenses in India are examples of regulation that moves from “throwing the paper rule book at your compliance team” to sending “standards docs to your tech team”.
  • Immigration and Talent question. No matter how smart your regulation, if the best talent is denied immigration, the innovation hub cannot thrive. This is clearly a political hot potato at the moment.

There is a great conversation happening on this subject over on Fintech Genome

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What would Gandhi have thought about Bitcoin?

 

Gandhi and His Spinning Wheel: the Story Behind an Iconic Photo

Bitcoin is anti-establishment. It is feared by most governments and banks. Yet Bitcoin is also a driver of innovation – which drives productivity and wealth creation which is what citizens want their governments to focus on.

That is why the relaxed attitude to Bitcoin in wealthy Switzerland, where the government is respected and the Swiss Franc is trusted, is such a game-changer.

Most other governments have reached phase 3 in Gandhi’s famous quote in their attitude to Bitcoin:

First they ignore you, then they laugh at you, then they fight you, then you win.

Switzerland skipped the “then they fight you” phase – the country sees a win/win scenario.

Paytm says thank you Mr. Modi

Lost in the US election news cycle, was a story from Mahatma Gandhi’s country that was quietly almost as earth shattering as Trump’s surprise victory.

In an effort to control the black economy (read, collect more tax revenue), the Modi government did something that shook faith in Fiat currency. The government simply declared that 500 and 1,000 Rupee notes were no longer legal tender. Why is a bank note worth money? The answer is because we all agree that it is because government backs it with some variant of “I promise to pay the bearer on demand the sum of…” The Modi government move, labelled demonetization, breaks that contract with the people.

Indian people have always loved gold as a reliable store of value. Unlike gold, Bitcoin does not look good with a sari and won’t be any fun at a wedding, but it is a controlled supply store of value that no institution can take from you.

So, the Modi government just gave a huge boost to digital cash – perhaps not what was intended.

Nearly two years ago we reported about India’s first Fintech Unicorn, Paytm.

Paytm is not Bitcoin but it is digital money that has reached mass scale in a huge market.

Unlike some wounded Unicorns, Paytm recently raised a lot more money – $300m at a $5 billion valuation – which is a massive round for India.

According to Hindustan Times, Paytm transactions exceed combined usage of credit, debit cards in India.

Paytm is seizing the day with a new ad targeting demonetization that has ignited controversy (read, free media).

For a while, India was making all the right moves to foster innovation such as:

Digital Identity for the Unbanked

Payment Bank Licenses

Now, India has lurched towards control. They are not alone.

America goes after Coinbase

The IRS in America “has demanded bitcoin trading site Coinbase to provide the identities of all of the firm’s US customers who made transactions over a three-year period, because there is a chance they are avoiding paying taxes on their bitcoin reserves.” As this excellent Motherboard article explains:

“In bitcoin-related investigations, authorities will often follow the digital trail of an illegal transaction or suspicious user back to a specific account at a bitcoin trading company. From here, investigators will likely subpoena the company for records about that particular user, so they can then properly identify the person suspected of a crime.

The Internal Revenue Service, however, has taken a different approach.”

In short, regulated Bitcoin businesses have to help the tax collectors – “if you want a license, this is your job”.

Tunisia = nearly but not quite

In December 2015, headlines declared Tunisia to Replace Its National Digital Currency, eDinar, With Blockchain-Driven Monetas Currency

The romantic in me really wanted this story to be true. The Arab Spring began in Tunisia. When Muhammed Al Bouazizi’s attempts to earn a living in the streets of Sidi Bouzid in central Tunisia were halted by a police officer who seized his goods, his rage and frustration led him to set himself on fire in front of a government building. He remained in hospital for 18 days with severe burns and died on January 4th 2011. Ten days later President Zine El Abidine Ben Ali fled to Saudi Arabia and within another 10 days on #Jan25 the Egyptian revolution began.

It would be epic if Tunisia embraced cryptocurrency and became a hotbed of Fintech innovation and wealth creation in a poor country. This story touches on two themes we cover on Daily Fintech:

– Financial inclusion through mobile money.

– The mainstreaming of the Blockchain revolution.

Sadly, we learned that the December 2015 Press Release jumped the gun. It has not yet happened as described.

Maybe it will happen further south in Africa.

Zimbabwe – and then you win?

At the polar opposite of Switzerland is Zimbabwe – the country synonymous with hyperinflation in the modern era. There the government has almost given up on Fiat currency – the people certainly have. This could be the “and then you win” ending.

If money printing leading to hyperinflation is your monster from the deep lagoon, Bitcoin’s controlled circulation  (“they ain’t making any more of it”) could be your savior.

 BitMari (a Pan-African Bitcoin wallet provider) raised money for the Zimbabwe Women Farmers Accelerator and used Bitcoin to fund the effort.

BitMari has the delicious hash tag – #decoloniseyourlife – which Gandhi would have approved of.

This story seems to come from our AfriCoin science fiction fantasy from the summer of 2015.

If Bitcoin can be used as a local currency, it enables remittances via Bitcoin, a long held dream that has been killed by the off ramp regulatory problem

So we reached out to William Nyamukoho, the Fintech Genome moderator who is based in Zimbabwe, to find out what he is seeing on the ground. This is what he told us:

“Zimbabwe last had its own currency in 2009. It then adopted a multi currency system which was dominated by the USD. In 2016 Zimbabwe finds itself with a cash shortage as demand grew larger than supply, mainly because the Reserve bank of Zimbawe was not allowed to print the USD to ease the cash crisis (no financial easing was possible). Recently Zimbabwe has been moving to a cashless society dominated by plastic money and something called “bond notes“. These bond notes are designed to ease the cash shortage, are legal tender only in  Zimbabwe and trade at parity with USD.

This history has paved way for Bitcoin to be adopted in Zimbabwe, even though people are sceptical about any new developments in financial engineering after the recent history of hyperinflation.

 Bitcoin seems to be a good way to protect wealth from the bond notes, which only work in Zimbabwe.”

Those who are moving in the same direction with the rest of the world, who  believe that autarky is not an option in this modern globalized era, are starting to store their wealth in Bitcoin” 

China and control

When it comes to control, the Chinese Communist Party wrote the manual.

Asian countries learned to love capital controls during the Asian Financial Crisis of 1998. Those without capital controls – such as Korea, Thailand and Indonesia – suffered deeply as hot money fled at the click of a mouse. Those with capital controls – such as China and India – escaped relatively unscathed.

Today the problem is the other way round. The boom and bust cycle in China has a simple explanation. Chinese people can only invest in China. So they ride investable assets up to crazy heights and sell fast and hard when it starts to go down. In a free economy we still have booms and busts – but we have options that smooth the cycles to some degree. If we think one market is overvalued we can move capital to a market that is undervalued. China arresting short sellers does not seem like a good solution.

The Chinese people, faced with this problem, have turned to Bitcoin as one way to get money out of China. The government is vehemently opposed to Bitcoin. China is still very much in the “then they fight you” phase (and governments do win sometimes despite Gandhi’s famous phrase).

Regulatory competition

Winning hearts and minds of entrepreneurs was not on the job description of regulators when they signed onto the job, but now they are getting mixed messages from their political masters:

A. Control the money supply and tax collection process and stop bad actors

And

B. Open up to innovation as that drives productivity and well paid jobs and that is what our citizens want.

Since this post in January 2015, we have seen many moves on the Fintech innovation front by regulators in UK, Singapore and Switzerland and we expect this trend to continue as governments seek the magic quadrant – enough control while also fostering innovation.

Bitcoin miner next to spinning wheel

Gandhi was into self sufficiency. While deeply spiritual, he was also very practical. So I suspect that a modern Gandhi would have a Bitcoin miner next to his spinning wheel (as long as mining does not become something only giant data centres can do, which is another story).

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Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

The radical change coming to Financial Services & Fintech in Switzerland 

Statue-Freddy-Mercury-a-Montreux.jpg

Financial Services accounts for 10% of GDP and 5% of employment in Switzerland and the country is a global leader in Wealth Management. So, what happens here really matters and what is happening is earth-shattering (and we normally avoid hyperbolic language on Daily Fintech). 

I mean radical in the positive sense of getting to the root of things (the word radical comes from the Latin word for root).  Switzerland recently got the World Economic Forum #1 rank as the most innovative country; you cannot be innovative without embracing change and doing things that seem radical, weird or outside the box to most people.

I am highlighting this because our usual image of Switzerland is so different – staid, conservative, resistant to change. 

At SIBOS in Geneva, where 8,000 bankers and their vendors gathered for the annual gathering of the Fintech faithful, the staid, conservative side was much in evidence, but we also hung out with some of those radical crypto valley guys (Innotribe has done a great job to attract them as part of its SIBOS rejuvenation).

Once you dig below the surface, Switzerland is a fascinating mix of contradictions.

On the surface, two stories resonate with people outside Switzerland. One is the Heidi mountains dressed up to entertain tourists. The other is evil bankers ready to launder money from all the bad actors around the world.

However consider these radicals who have called Switzerland home – Lenin, Einstein, Freddy Mercury (see this statue to this pioneer of gay liberation in Montreux). Look below the Heidi surface packaged for visitors and you see a deep strand of independent radical thinking.

In this post we look at three strands to this independent radical thinking as they affect financial services:

– Crypto Valley startups at the nascent stage of the Blockchain and Decentralization movement.

– The first country where Bitcoin may go mainstream.

– The first country where Fintechs will be able to compete with Banks on a level playing field.  

Put these three strands together and you get earth-shattering change.

Crypto Valley startups at the nascent stage of the Blockchain and Decentralization movement

Crypto Valley is a branding phenomenon, but it is also real. 

Paul Graham (Y Combinator) famously said that to build an innovation hub, all you need is “nerds and rich people”. The Zurich and Zug corridor (aka Crypto Valley) has plenty of both. However I add the coda to Paul Graham’s law  that the rich people should have made their money in something tech related; Paul Graham takes that for granted in Silicon Valley. Those decades of recycling big exits is Silicon Valley’s real “unfair advantage”. We are starting to see these second generation entrepreneurs emerging in Switzerland. For example there is Dorian Selz of Squirro (and Local.ch in past) and Richard Olsen of Lykke (and OANDA in the past). However, although these are great entrepreneurs and there are other examples, on this front Switzerland can only be playing catch up with Silicon Valley.

What is fascinating about the Blockchain and Decentralization movement (and it is a movement and not just a new technology or a new business model) is that it fundamentally changes the game in 3 ways:

you don’t need Wall Street East (the bulge bracket Investment Bankers clustered around NYSE and NASDAQ) or Wall Street West (the Momentum Capitalists in Silicon Valley fka as Venture Capitalists) to raise money. You do it using some decentralized token based crowdfunding approach (we explore the background to this trend here and a lot of money has already been raised this way).

Decentralization means you do NOT need to build giant server farms in order to scale. Your server farm is the machines owned by your users. So you don’t need to raise so much money (so you don’t need Wall Street East and West so much). This also means that you can undercut the incumbents by a big amount and still make plenty of money; that is the definition of disruptive.

the business models are so disruptive (such as a zero commission e-commerce system) that nobody with a stake in the current way of doing things will go there. True permissionless public blockchains, whether using Bitcoin, Ether, ZCash or any other crypto currency,  are totally different in one key respect – the incumbents do not dictate the pace of change, consumers do.

There are so many amazing companies in Crypto Valley that it is hard to make a list because I am sure I have missed some great ones (please tell me if I have, that is how we do our research):

Lykke (run by the aforementioned Richard Olsen, revolutionizing how assets are exchanged online).

– Monetas (the technology powering the Tunisian e-dinar and run by a visionary Founder CEO called Johann Gevers). For a broader take of Government thinking about Bitcoin read this

– Ethereum (Needs no intro, but just in case here is our coverage dating back to summer 2014 when I first learned about it) 

– Xapo. Last year we reported on an event that took the innovation business by surprise – the first Silicon Valley company (Xapo) moving to Switzerland (as opposed to the normal flow going the other way) because the laws in Switzerland are better for the protection of cyber assets (which is what Xapo is selling).

Shapeshift (enabling a multi-cryptocurrency world by making altcoin swaps easy).

Bitcoin Suisse (making it easy to buy/sell Bitcoin in Switzerland)

Sweepay (came to prominence as the technology behind the SBB Bitcoin launch)

Here is a list of some lesser known ones.

The first country where Bitcoin may go mainstream

Last year we reported on an obscure fact, but one that is critical to Bitcoin going mainstream in Switzerland. At a MeetUp in Geneva in March 2015, somebody mentioned Switzerland being officially a multi-currency country and that led me to understand the WIR. This is an obscure currency in Switzerland used by very few people that was created after the Great Depression. Despite its obscurity, it is legal tender in Switzerland. So other currencies can be legal tender. That includes the Euro; often prices are displayed in Euro as well as Swiss Francs. The WIR is pegged to the Swiss Franc, so it is not disruptive – it is a local currency like the Brixton Pound. More interesting for us Fintechers is that Bitcoin is also a legal currency in Switzerland because the WIR paved the way.

Adoption is NOT in countries with failing currencies

Many people were drawn to Bitcoin by dreams of stateless trust based on math replacing more authoritarian governance. So the meme got established that Bitcoin would first go mainstream in countries like Argentina; we debunked that theory here.

Then we indulged in science fiction fantasies around Greece or Scotland adopting Bitcoin in a breakaway from the Euro or the Pound.

None of this came to pass.

The use of Bitcoin in Switzerland could not be more different. The Swiss love the Swiss Franc, as do investors globally who are concerned with long term wealth preservation. The Swiss Franc is as far removed from being a problem currency as you can get.

Recent news from Switzerland indicate that exactly the opposite may come to pass – mainstream adoption happens first in a country where citizens have an unusually high amount of trust in their currency and the government that issues the currency.

Two news items show Bitcoin moving mainstream in Switzerland:

Swiss Railway ticket booths become Bitcoin ATMs. SBB (short hand for Swiss Railways) is a a beloved part of everyday life in Switzerland and is Government owned. Even rich people use public transport in Switzerland.  That background matters for American readers who might be tempted to dismiss this as Amtrak offering Bitcoin – that would be both unlikely and probably ineffective. So when SBB moves into Bitcoin it is a seriously big deal. It sends a signal that Bitcoin is respectable and accessible. This is not a pilot – it went live nationally on Friday 11 November.

Residents in Zug will be able to pay taxes and government services in Bitcoin.This still a pilot and limited to one area. If it gets extended and is copied by other regions it will be a game-changer. It sends a signal that using Bitcoin to pay is respectable and useful in day to day life. Load up at SBB train station and pay your parking or speeding fine (and make mental note to use the car less and the train more).

The first country where Fintechs will be able to compete with Banks on a level playing field thanks to the upcoming Fintech Licence.  

At a Press Conference on Wednesday 2nd November the Swiss Finance Minister, Ueli Maurer,  outlined the direction. This is not yet law, but it is clearly an officially approved direction. The plans include a consultation draft by the beginning of 2017 and draft legislation sent to the Swiss parliament by the middle of 2017.

These are the key features  that Fintechs and Banks need to understand:

 – No “maturity transformation” allowed. This is mandated Asset Liability Management and that eradicates systemic risk (no more bailouts) and favors Market Place Lending without any lending from their own balance sheet (for some background, please go here).

– Deposit Only License. You can provide deposit services, but not lend. You can accept up to SF100m once licensed. Separating Deposits from Lending is a bold and radical move in a world of NIRP (and with Vollgeld coming up as a referendum, see later). Deposits is a nascent area of Fintech innovation.

– Up to CHF 1 million via sandbox innovation area. This allows a startup to build an MVP and get to PMF before investing in being regulated

– minimum of SFr300,000 in capital (vs SF10m for banks). If a startup has got to PMF that is a very manageable hurdle.

– not covered by deposit protection (read, no risk to taxpayers). It is a buyer beware free market. I assume this leaves it up to Fintechs to create a Bankruptcy Remote Vehicle (US terminology) to reassure their customers.

–  crowdfunding grace period in settlement account. This defines when donors can withdraw the money. Today it is 7 days. The proposal is to raise it to a 60 days. which would give the company greater security.

– No limit to how many lenders or investors for crowdfunding services.

– You must abide by money laundering rules applied to banks. 

In background is an upcoming populist referendum called Vollgeld. The Fintech License is a bit like Vollgeld for Fintechs by separating Deposits from Lending.

Switzerland is taking steps that are very conducive to innovation and is looking like a leader in the regulatory realm – a prospect that few would have dreamed of a year ago.

You cannot make an omelette without breaking eggs

Banking has not changed for hundreds of years. This kind of transfer of power and money was never going to happen in an orderly fashion – eggs will be broken. I think the transfer of power and money will mostly be to the people. This will be Fintech4Us (the original name of Daily Fintech). I think this is true, but I could be wrong. But one thing I am confident of is that the pace of change can no longer be dictated by the incumbents.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.