Regulation is a key dimension to analyze the Financial Technology (Fintech) arena, where start-ups and banks compete to keep/gain market share, while under the control of the all-powerful referees: public regulators.
Several stringent regulations have been imposed on Banks following the 2008 crisis. They have focused the major part of their resources on remediation programs and gave start-ups a free hand on innovation. But beyond that first observation, we see a dual trend at work in the market:
1) Fintech start-ups have taken advantage of some grey areas in the existing regulatory frameworks to grow rapidly
Unadapted standards: most existing standards are not adapted to the emerging technologies that bring new business models and new usages. For instance mobile-only financial services are often absent from consumer protection, privacy rules and even e-commerce regulations. Few countries have issued specific mobile payments / virtual currencies laws
Lack of cross-border standards: some start-ups offer cross-border services borders, especially in remittance and payments, without being bound to all the national laws
Multiplicity of regulators: in the USA, many regulatory agencies (FED, FFIEC, CFPB, FINRA, SEC, OCC, …) as well as state regulators can be involved in Fintech regulation, causing confusion
Illustration of the grey area in the Bitcoin regulation:
very different standards across the globe, from interdiction to acceptance
Bolivia, Ecuador, Bangladesh and Kyrgyzstan have explicitly forbidden the use of digital currencies
– Bitcoin ATMs are banned in Taiwan but bitcoins can be purchased at some convenience stores kiosks
– In Thailand bitcoin was declared illegal but bitcoin companies have been able to obtain business licenses
– Banks and payment institutions in China are prohibited from dealing in bitcoin, not private individuals. Some of the world’s largest miners are Chinese
– In Russia there is no explicit law, however some reports suggest bitcoin transactions could be illegal under the Russian law on administrative responsibility, and some bitcoin-related websites have been blocked
– In the USA, there is no global legal framework: digital currency administrators and exchangers must follow anti-money laundering controls – FinCEN Guidelines. Another regulator, the CFTC, found that virtual currencies are commodities in a ruling in 2015. State laws add even more complexity: The New York state has introduced a legal framework for businesses operating virtual currencies: a BitLicence including AML, cybersecurity and BCDR requirements. In North Carolina, the transmission of virtual currency is regulated under the Money Transmitters Act (no difference compared to fiat transmission), but miners, non-financial blockchain services, multi-signature and non-custodial wallet providers are excluded from the MTA
Some countries such as Brazil and Bulgaria have issued specific laws regulating mobile payments and digital currency. In Germany, bitcoins are legally binding financial instrument, considered as a foreign currency. Luxemburg is actively supporting bitcoin and issued a first BitLicence in October 2015
Most of the countries do not regulate bitcoin because they do not consider it as a legal money – it doesn’t fall under the jurisdiction of their Central Banks: Colombia, Chile, India, Indonesia, Japan, Turkey and most of the European countries. In Europe, digital currencies have remained out of the legislative scope such as the Second Payment Services Directive (PSD2) and Fourth Anti-Money Laundering Directive (AMLD4). However, in a recent memo, the EU announced its intention to set up a comprehensive analysis of digital currencies
2) At the same time, the increasing regulatory pressure creates some opportunities for Fintech start-ups
AML/KYC requirements: start-ups could provide innovative solutions for the implementation of systematic and consistent KYC solutions across the entire organization. For instance Tradle proposes such a service over Blockchain technology
Capital assessment / Stress testing (CCAR, AQR..): advanced analytics capabilities can be used to design models and evaluate how thousands of variables impact banks
Trading book risk management (Volcker, MiFID, …): algorithms could help control the margin requirements for each transaction and manage the market risk of the traders’ portfolio
Reporting (Basel, Dodd-Frank, …): more and more reporting are required, with more and more details. There is an opportunity for start-ups to provide near real-time data analysis and custom reporting leveraging new technologies
Regulation is necessary to control the risks in the financial ecosystem, but it shouldn’t develop at the expense of innovation and progress for the customer (benefit of cheaper and faster services). Regulators have different views on how to define the ‘sweet spot‘. In this regards, the FCA in the UK is one of the most active regulator supporting entrepreneurship and innovation in Finance. This attractive environment has allowed London to become the most active marketplace for start-ups in Finance.
Just as Fintech start-ups leverage new technologies to deliver more efficiently or to develop new financial services, Regulatory Technology (RegTech) start-ups are now emerging as an answer to compliance challenges. Some RegTech are already exploring the use of blockchain protocol for KYC purposes, others leverage analytic tools to deliver real-time risk analysis from large
data sets, produce custom reporting, detect fraud, etc. The sector is promising and growing quickly.
But beyond that, technologies are also challenging the need for traditional regulators at all. Fintech companies tend to self regulate in different ways: through rating systems in peer-to-peer lending, ‘social’ moderation of investment platforms, and of course decentralized systems for the exchange of value.
The evolution of regulation remains unclear, but we might not need to compromise: thanks to new technologies, we can target for more control/security and more innovation/efficiency.
What are your views about the future of Fintech Regulation? Email us, we would be happy to have your insight – The CH&Co. Editorial team
Highlights of the Month
The Chairman of the Financial Supervisory Commission (FSC) has declared Bitcoin to be illegal in Taiwan. Full article here
Japan likely to introduce Bitcoin regulatory system early next year, in order to cope with fraud and ensure that taxes are being paid on trading of Bitcoins. Full article here
Wall Street Blockchain Alliance puts together working groups to boost digital currency and blockchain technologies in the financial industry. More information here
Chase is launching Chase Pay – a payment platform based on QR codes with lower fees for retailers. Full article here
After Singapore and London, Startupbootcamp heads to New York to launch its FinTech Accelerator Program, backed by Mastercard, Thomson Reuters, Santander. Program infohere
BNY Mellon opens new EMEA Innovation Centre in London. More details here
WeChat and Western Union strike deal for global money transfers.Read article here.
Visa and Shift partner to launch first bitcoin debit card in the US. Read article here.
Google becomes an official mortgage loan broker. It is now possible to compare quotes for home mortgages on Google compare. Read article here.
BBVA has become the most recent Spanish bank to make an entry into the UK, buying a 29.5% stake in Atom digital bank. Read article here.
The FCA is planning to launch a ‘regulatory sandbox’ that will allow businesses in the UK to test out new products and services without ‘incurring the normal regulatory consequences’. Read article here.
Digital case of the Month
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CH&Co. was a sponsor, speaker and moderator of InPayCo International Payments Conference (Paris, 4-5 November). CH&Co. also animated the startup contest won by Antelop with Fluo as runner-up. Upcoming events.
CH&Co. has received a certificate of approval for its project Bliss from Finance Innovation in Paris on 24th November 2015.
CH&Co. was involved at the FinTech Connect conference which was held in London on the 8th and 9th December 2015. This event brought together more than 100 exhibitors and 2000 members of the financial innovation ecosystem.
CH&Co. presented the following subjects:
* Finance in the digital age – with Patrick Bucquet, Senior Partner
* What are the best ways for FinTechs and Financial Institutions to work together? – with Stéphane Eyraud, CEO, and Patrick Bucquet, Senior Partner
* What are the growth opportunities and limitations in trading technologies and how do they support other Fintech developments? – with Stephane Eyraud, CEO For more information
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Chappuis Halder & Co. is a consulting firm specialized in Financial Services with offices in North America, Europe and Asia. We help our clients in several industries: Corporate & Investment Banking, Commodity Trading, Insurance and Retail & Private Banking, with a permanent focus on expertise and research, especially in the Digital area.
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