DeFi is DeFi until Washington says it’s not; What is the regulatory timeline for Open Finance?; The opportunities for banks in embedded finance;
In this edition:
1️⃣ Fintech and the Future of Finance: Regulatory Implications
2️⃣ China’s Ant Group partners with Malaysian investment bank Kenanga Group to launch ‘SuperApp’
3️⃣ Digital Wallets Will Dominate Global Ecommerce Payments by 2025
4️⃣ What could be the most disruptive issue around the Merge of Ethereum?
5️⃣ The opportunities for banks in embedded finance
6️⃣ What are payments wearables?
7️⃣ DeFi is DeFi until Washington says it’s not
8️⃣ Top blockchain use cases in Banking: KYC and ID fraud protection
9️⃣ What is the regulatory timeline for Open Finance?
🔟 The Federal Reserve is readying its new instant payments service for launch between May and July of next year
Fintech and the Future of Finance: Regulatory Implications
- The implications of the cross-sectoral nature of fintech for regulation are profound.
- The growing diversity of financial services providers and business models may require an expansion of the regulatory perimeter.
- This blending of commercial and financial activity is not permitted under some financial regulation, resulting in an un-level playing field.
- The policy response chosen by each country will depend on the type of activity and country-specific factors such as the stage of development of the financial sector, the size of the market, and the scale and type of fintech activity.
- Where the legal and regulatory changes to bring fintech entities and activities inside the regulatory perimeter may take time and not be feasible, some fintech entities and activities may remain outside the regulatory perimeter.
- In the absence of a competition mandate, financial sector regulators have several levers they can use to mitigate competition barriers and risks.
- Addressing consumer protection risks would require bringing fintech under existing consumer protection frameworks and addressing any gaps with respect to specific risks that fintech can pose.
- Policy makers have taken a cautious stance regarding crypto-assets.
- Some types of crypto-assets, notably global stablecoins, have the potential to attract broad public usage as a means of payments including in the De-Fi ecosystems. In this context, public authorities are actively exploring issuing central bank digital currencies (CBDCs).
Source The World Bank
China’s Ant Group partners with Malaysian investment bank Kenanga Group to launch ‘SuperApp’
Malaysia’s largest independent investment bank Kenanga announced today that it is partnering with China’s technology powerhouse, Ant Group, to launch a wealth generation and management “SuperApp.”
The “SuperApp” will feature a suite of financial solutions, such as stock trading, digital investment management, foreign currency exchange and crypto trading, according to a release published on Wednesday.
“Having spent the year conceptualising and designing the SuperApp, we are thrilled to partner with Ant Group, a globally recognised and experienced infrastructure and platform provider, to develop this platform and bring it to life,” said Datuk Chay Wai Leong, group managing director at Kenanga, in the release.
Ant Group is the technology firm behind the development of Alipay, which is now China’s largest digital payment platforms. The investment bank will leverage Ant Group’s mobile development platform, MPAAS, for the app, according to the release.
“With almost 50 years of retail experience serving over half a million customers, we believe the Kenanga Wealth SuperApp will leapfrog our growth to the next level,” Datuk Chay said.
The investment bank, founded in 1973, started its digital journey five years ago, per the release. It also recently partnered with Tokyo-based e-commerce company Rakuten to launch Rakuten Trade , a fast-growing stock trading app.
Kenanga also launched a robo-advisor that has amassed over $55 million in assets under management in six months, per the release.
Source The Block
Digital Wallets Will Dominate Global Ecommerce Payments by 2025
By 2025 digital wallet use will account for just over half (52.5%) of ecommerce transaction value worldwide, versus 48.6% in 2021, according to the FIS Global Payments Report. At the physical point of sale, the report states, digital wallet use will rise to nearly 39%, an increase of about ten percentage points from 2021 levels.
Globally FIS projects that 12% of global consumer spending will be conducted via ecommerce by 2025, a level already exceeded in some markets. Growth rates will slow in some markets like Asia-Pacific where it is already a major factor, but in other markets like Latin America, and the Middle East it will continue growing at an accelerating rate.
While buy now, pay later remains a small portion of overall transactions by global volume, the study projected significant growth between 2021 and 2025. The study forecast a share of total ecommerce transaction value of over 5% by 2025 for BNPL. The study attributes much of the appeal of BNPL to the common interest-free form made popular by nonbanks, some of which have been experiencing difficulties.
Regarding ecommerce payment preferences, the report noted a continuing shift away from use of cash and credit cards towards wallets and BNPL. However, one factor to consider is that much of the volume paid through wallets draws on credit and debit cards linked to the wallet — essentially, the same account going through a different channel. (FIS considers “digital” and “mobile” wallets the same thing.)
Regarding the use of digital wallets in online and mobile commerce, the report states that “growth will be driven by digital wallets offering superior checkout solutions, flexibility in underlying payment methods, their anchor role in e-com marketplace ecosystems, and local wallets consolidating into regional and global super apps.”
By 2025 about 60% of ecommerce will be conducted via mobile devices globally, versus online, according to the report.
Source The Financial Brand
What could be the most disruptive issue around the Merge of Ethereum?
There are varying opinions around the web.
The Ethereum network undergoes a major software upgrade in September. The revamp, known as the Merge, is being billed as a seamless transition that shouldn’t be noticeable to users of the most commercially important blockchain. Not everyone is convinced!
Observers just need to look back to Ethereum’s 2016 upgrade, when the network was besieged for weeks by so-called replay attacks, where hackers replayed users’ transactions to steal tokens. The Yunbi exchange reportedly lost 40,000 Ethereum Classic coins. Developers have since implemented network-based protection measures. Even so, attacks could still take place if any of the self-executing software programs called smart contracts that run the myriad of apps on the network haven’t been built correctly, according to Josselin Feist, engineering director for blockchain assurance at Trail of Bits, a security firm that audits the self-executing contracts.
Industry participants are already announcing safeguards. Coinbase, the largest US crypto exchange, said it will pause withdrawals and deposits of all Ethereum-based tokens “briefly” around the time of the Merge.
The protective measures by the likes of Coinbase are being taken after some glitches took place during the final test of the upgrade. Some of the validators got out of sync with others, resulting in some changes to block ordering. That sort of issue can result in the need for the network to be paused, said Pedro Herrera, head of research at DappRadar. In such a scenario, a user facing liquidation, for instance, may be powerless to stop it on time.
The most disruptive issues could actually come from the emergence, around the time of the Merge, of offshoots of Ethereum. A fork in the chain would generate an almost exact replica of the Ethereum ecosystem, with copies of all its coins, nonfungible tokens and apps. People who hold an Ether token on the Ethereum blockchain will receive an additional EtherPOW token representing a forked blockchain. Some users may then try to offload POW coins — and that’s where scammers can come in and execute replay attacks.
“Replaying attacks are possible during the Merge as the network becomes less secure and more vulnerable to attacks when forks happen,” Justin Sun, who is an investor in the Poloniex crypto exchange and the founder of Tron blockchain, said in a message.
For their part, Ethereum core developers are downplaying the risk, as opposed to the dire circumstances that many pundits warned of back in the 1990s that could result from the inability of many computers to interpret the date change at the millennium correctly.
Source Bloomberg LP
What are payments wearables?
One reality of physical wallets? They take up physical space. Now, the digital wallets of the future aren’t only moving to our phones — they’re increasingly available on even smaller and more convenient wearable devices, from watches to key rings.
Wearables made their debut in the health and fitness category over a decade ago, where products like Fitbit smartwatches, ŌURA wellness rings, and Ivy tracker bracelets revolutionized health monitoring for individuals.
Today, the wearables industry is quickly expanding into payments, facilitating transactions without requiring users to touch their wallets or smartphones. There are plenty of untapped opportunities here: the global wearable payment device market was valued at $285B at the end of 2019 and is expected to soar to $1.3T by 2028.
Tech giants Apple, Google, and Samsung Electronics are some of the first movers in this category. All 3 players already pair their mobile wallet offerings with smartwatches that enable contactless transactions (including in-house devices such as the Samsung Galaxy and Apple Watch). While Google doesn’t have a selfbranded smartwatch yet, the company completed its Fitbit acquisition (along with Fitbit Pay) in 2021, and is rumored to be launching its own smartwatch, Pixel Watch, in 2022.
But the shift to wearable payments goes far beyond big tech and already spans across the globe. Bulgaria-based iCard offers digital wallets paired with NFC key fobs that can be attached to house keys. The company also offers its cards on Garmin Watch. USbased Bee claims to offer the world’s smallest wearable wallet, a 0.9-inch device that can be attached to watches, bracelets, bags, or keychains. Bee’s wearable device is activated via a fingerprint scan to add a layer of security and avoid accidental charges. Coil and PureWrist are two other examples of US-based companies that offer wearable wallets as watches or wristbands
• One key challenge for wearable wallets will be shifting their value proposition from nice-to-have to must-have. Mobile phones can already function as digital wallets, so wearables makers will need to convince consumers that they offer a differentiated — and more seamless — experience.
• The price point of wearable devices will be one of the deciding factors in gaining widespread adoption.
• The wearable wallet market will also need to address users’ privacy and security concerns, heightened by the limited history of the industry.
• Biometric payment tools will emerge as a strong alternative to wearable wallets by reducing individuals’ need to carry any type of device. Amazon’s palm scanning tool, Amazon One, is one such example.
Source CB Insights
DeFi is DeFi until Washington says it’s not
Crypto evangelists will tell you decentralised finance (DeFi) is a window into a utopian future that replaces the prying eyes of government and regulators with privacy and financial freedom.
It turns out that worldview collapses once the US government — or more specifically, the Office of Foreign Assets Control — says so. After Ofac added Tornado Cash — a crypto mixing service accused of acting as a conduit for billions of dollars worth of laundered crypto — to its sanctions list, DeFi platforms have been rushing to comply with Uncle Sam.
TRM Labs has witnessed a five-times increase in inbound interest via its website from DeFi projects between July and August — aligning with Ofac’s sanctions against Blender and Tornado Cash, two “mixers” that can be used to obscure the trail of crypto funds. Both platforms, the US Treasury claims, were used by North Korean hackers.
Chainalysis Inc. , another well-established blockchain analytics firm, has seen a roughly 570 per cent increase in page views about the company’s oracle — a computer program called a smart contract that screens crypto wallet addresses for sanctions risk — since the Tornado Cash designation.
It’s not just decentralised finance that’s taking notice, either. Changpeng Zhao, chief executive of crypto exchange Binance , spoke to Financial Times in March, just days after Russia’s full-scale invasion of Ukraine sparked widespread concern about crypto being used to evade western sanctions.
“The Ofac sanctions are not a joke . . . if you don’t do this well, you end up in jail,” Zhao said at the time.
While crypto sanctions evasion has been in the limelight for months, there has been a renewed sense of urgency on behalf of the DeFi community to comply. Earlier this month, Tron founder and general crypto big name Justin Sun was temporarily blocked from popular DeFi platform Aave after someone sent him “0.1 ETH randomly from Tornado Cash”.
On a call discussing all things Tornado Cash, Paige Berges, anti-corruption and international risk group counsel for Ropes and Gray told FT Ofac’s behaviour was nothing new.
“This is the way the US regulators have always operated, I think Ofac in particular, which is ‘well, tough, you want to use the US financial system? These are the conditions.’ And as long as they continue to have the leverage that they do, or the US financial system continues to have the leverage and the influence that it does, then that’s continued to work,” Berges said.
Yet, for those truly faithful to the DeFi utopia, all is not lost. Matthew Green, who teaches cryptography at Johns Hopkins University, archived a version of the Tornado Cash source code online.
DeFi privacy defenders even have an ally — you might be surprised to hear — in Congress. US congressman Tom Emmer published a letter this week saying “technology is neutral, and the expectation of privacy is neutral”.
Source Financial Times
Top blockchain use cases in Banking: KYC and ID fraud protection
Identity fraud is a growing problem for banks — even more so in the post-covid world. The pandemic has driven many banks to modify their business models to include a higher degree of remote interactions with customers. The 2021 Identity Fraud Study found that criminals have latched on the vulnerabilities presented by this shift. The EU’s General Data Protection Regulation (GDPR), in effect since May 2018, has also brought heightened responsibilities on companies to protect the data rights of citizens.
While sophisticated KYC and ID fraud protection tools and systems exist, their underlying technologies aren’t as secure as those in a blockchain because, first, they don’t have cryptography-level security and, second, their centralized nature presents a single point of failure. Blockchain fixes this through the concept of decentralized identity (DID) While its technical details can be overwhelming, the simple idea behind DID is to take a person’s ID information (photo, biometrics, etc.) and store it on a decentralized blockchain in such a way that it cannot be stolen by third parties. Technology behemoth Microsoft and blockchain startup Spring Labs are separately building a raft of DID solutions.
Case study: ION by Microsoft
Four years after it started exploring DIDs, Microsoft, in March, announced the first version of ION, a decentralized identifier network that runs on the Bitcoin blockchain.
And since ION is an open, permissionless system, anyone can operate an ION node. Running a node essentially means deploying computing resources toward making the network more robust.
In a consumer-facing scenario, an individual would upload their ID information (biometric, photo ID, etc) to the blockchain through a digital wallet. The consumer can then use the wallet to securely supply their ID information to service providers. In this case, service providers don’t need to store customers’ ID information on their own server, which, by
Case study: KYC solutions by Spring Labs
Spring Labs is a blockchain startup that builds and oversees decentralized data networks.
Spring Labs claimed to have successfully helped clean energy lenders reduce loan frauds relating to the Property Assessed Clean Energy (PACE) program.
So in a basic PACE loan fraud, the contractor would apply for loans simultaneously with several lenders. Unfortunately, the existing transaction opacity among lenders makes it hard to spot potential lien stacking in real-time. These issues could go undetected until a year later when the property owner received their tax bill, which would be higher than expected.
Spring Lab’s DLT solution allows participating lenders to learn from each other in the approval process, without revealing sensitive business data in the process.
Treasury Management: A Guide to Navigating Downturns
Treasury management is a core function of any organization, but it is particularly relevant today given the uncertainty of present market conditions. From decentralized autonomous organizations, or “DAOs,” to traditional startups, teams are reckoning with a market environment featuring high inflation, low yields, and a tightening of financing options across both public and private markets.
Here is a basic framework by Andreessen Horowitz that teams can follow to do so.
1. Calculate monthly cash burn
The first step is to develop a realistic financial model. In accounting terms, that means tracking projected inflows and outflows on a monthly basis (e.g., “net burn”). More plainly, it means calculating how much cash a given project is expected to spend each month, relative to how much it is expected to earn. This analysis should specify the component parts that drive both earning and spending. For example, the expense side should break out the cash-spend across key operating functions (engineering, business development, legal, etc.), as well as any expected non-operating outflows (financing costs, taxes, other one time payments, etc.). The revenue side should similarly break the inflows down into operating and non-operating categories. This will help determine their relative predictability over time.
2. Maintain operating expenses in cash
Priority number one is to cover near-term operating expenses. It’s critical to optimize for the safety and accessibility of capital before exploring opportunities for yield. This typically means maintaining at least 12 months — ideally, 18 months — of operating expenses in a basic cash account (e.g., bank deposit or money market account) or, in the case of a DAO, in high-quality stablecoins. This capital will earn relatively little yield, but it will be available to meet near-term liabilities as they come due. Be conservative.
3. Develop plan for additional capital
For companies holding cash in excess of their 12-to-18-month operating budget, it may make sense to explore opportunities for incremental yield. As with the working capital budget discussed in the previous section, this exercise should be informed by the project’s liquidity needs over time. In general, products offering greater yield become more appropriate as a project moves from operating cash (for meeting day-to-day needs) towards strategic cash (for pursuing growth and other opportunities).
4. Build out operational capacity
With a strategy in place, it’s time to build out the various operational pieces needed to put the plan into action. For companies with more traditional treasury management plans, this includes finding a banking partner and an investment advisor, and putting in place internal processes to ensure proper custody, reporting, valuation, controls, tax, and audit requirements.
Source Andreessen Horowitz
What is the regulatory timeline for Open Finance?
The FCA and the UK Government have committed to introducing a legislative and regulatory framework to mandate and oversee Open Finance and clarify which types of entities, accounts and datasets would be in scope. We expect the initial proposals for such a framework to emerge in late 2022 or early 2023. This will pave the way for a phased Open Finance implementation in late 2023 or 2024, likely starting from use cases with the best cost/benefits balance.
Some Open Banking requirements will read across to the future Open Finance framework, but we also expect important differences. For example, Open Banking requires that a TPP’s access to payments accounts data be equivalent to that of a customer via online banking. Such an approach could probably work for savings or investment accounts, but it is unlikely to be suitable for insurance data.
The regulatory framework will also address the risks arising from Open Finance, such as security and fraud, financial exclusion, poor consumer outcomes, and operational resilience. Heeding the lessons from Open Banking, UK authorities acknowledge they need to ensure coherence between Open Finance rules and other FS and cross-sector rules, such as consumer and data protection or the developing UK Digital ID trust framework. We believe this will be crucial to Open Finance’s success. For example, in our experience, the real or perceived tensions between Open Banking and the General Data Protection Regulation (GDPR) have kept many firms from making better use of payments data.
Authorities will also have to clarify the next steps and timings concerning the other key building blocks necessary for Open Finance to become a reality. These include an Open Finance Implementation Entity, common APIs and user experience standards, and a fair liability model between different ecosystem participants.
The Federal Reserve is readying its new instant payments service for launch between May and July of next year
The Federal Reserve is getting closer to delivering its much-anticipated instant payments system, FedNow.
In a virtual speech on August 29, Fed Vice Chair Lael Brainard announced: “We will be ready to launch the FedNow Service between May and July of 2023, bringing this innovative core instant payment infrastructure to financial institutions of every size across America.”
As currently envisioned, the FedNow service will provide real-time, 24/7 access to payments for financial insitutions of any size.
The initial FedNow Service launch will include:
- Core clearing and settlement capabilities to support a range of transaction types and use cases
- Use of the widely accepted ISO® 20022 standard and other industry best practices to support interoperability
- Features that will support flexible adoption, including support for the use of service providers and correspondents and an option to enroll as a “receive-only” participant
- Value-added features including request-for-payment capability and tools to support participants in their handling of payment inquiries, reconcilements and certain exceptions
- Features to enhance experience for financial institutions by broadcasting participant availability to support their transition to 24x7x365 operations, a user interface to support data needs and the ability to have access to balance information on weekends
- Features to support payment integrity and data security and tools to help financial institutions combat fraud, such as a transaction value limit and reporting features
- A liquidity-management tool that will allow participants and others to transfer funds to each other to support the liquidity needs of instant payments
FedNow appears in many conversations alongside a potential Fed central bank digital currency or CBDC. A Fed governor recently came out in support of FedNow as opposed to a US-centric CBDC.
In her first appearance before Congress, Brainard herself fielded a barrage of questions about a potential CBDC from concerned Republicans looking to establish that the Fed lacked statutory authority to issue a digital dollar without congressional approval. It’s a subject about which several agencies, including the Fed, the Treasury, and the Department of Justice are supposed to report to President Biden by next week, per the executive order earlier this year.
What are other industries that should be included in this list?
Source Finch Capital