FU | February 4-10, 2017

Leading Off

The SEC has a March 11 deadline to decide on a potential rule change that could allow for a bitcoin ETF; the EU’s securities regulator said it would be “premature” to create new DLT regulations; Citibank partnered with IBM to launch a public sector-focused fintech initiative; Ant Financial is reportedly raising $3 billion to help finance new acquisitions and global expansion efforts; and Scotiabank partnered with a Toronto-based AI startup in a pilot project to identify high-risk credit card customers.

The Big Idea

The U.S. and China are taking closer looks at how they treat digital currency platforms.

The story:  In the U.S., the Securities and Exchange Commission (SEC) is considering adopting a rule change that would allow for a bitcoin exchange-traded fund (ETF). The proposed amendment, in the works for nearly four years, could allow several U.S. bitcoin entities (including the Bitcoin Trust ETF, run by erstwhile Facebook antagonists the Winklevoss twins) to list on the Bats Global Market Exchange and the New York Stock Exchange. Meanwhile, The People’s Bank of China called out nine digital currency trading firms this week, saying that they “risk being shut down if they skirt rules on money laundering and foreign exchange.” This is the central bank’s latest rebuke of Chinese virtual currency traders, suggesting the country is turning more attention to them.

Why we care:  According to industry analysis by CoinDesk, the daily average volume of bitcoins traded in the U.S. is about $30 million; but far more is traded in China, the world’s largest market for the virtual currency. However, many are concerned that China “is becoming a venue for overly risky speculation and capital flight,” suggesting that there might be an opportunity for other countries to gain ground in the area of digital currency transactions. If the SEC approves its rule change and paves the way for bitcoin-based ETFs, the new permissiveness — along with the regulatory certainties and reputational benefits of compliance with SEC rules — could help draw increased trading flows to the U.S. market.

What we think:  While it may open the door to unexpected negative externalities, the possibilities presented by a well regulated digital currency ETF on U.S. soil (er, in U.S. data rooms?) are worth exploring. Bitcoin trading volume in China already far outstrips that of the U.S., and the yuan’s depreciation in recent months has only increased bitcoin’s attractiveness there. The increased attention has heightened global regulators’ concern that the virtual currency may help Chinese firms circumvent the state’s internal capital controls, a concern that even the country’s central bank is now highlighting. The high degree of interest in bitcoin trading, coupled with the relatively low levels of controls over it, presents an opportunity for the U.S. to take a leadership position in this important area of financial innovation. By encouraging the advancement of a global virtual currency exchange in an open, transparent, and well regulated marketplace, the SEC could help usher in a new era of digital trading in a safe and sound manner.

In Other News…
Scotiabank uses AI startup to improve credit card collections. The global bank is partnering with DeepLearni.ng, a Toronto-based artificial intelligence firm, to map non-linear relationships that can identify high-risk or delinquent customers among its five million credit card holders.  Scotiabank plans to use machine learning across the firm to gain greater customer data insights.
Citi launches public sector fintech initiative. Partnering with IBM, Facebook, Microsoft, and other tech firms, Citi launched the “Citi Tech For Integrity Challenge,” a global innovation competition in which participants submit fintech solutions to help governments “detect and block illicit payments, protect financial data, [and] deliver aid to poor or crisis-hit regions.”

ESMA says it’s too soon for new blockchain rules.  The European Securities and Markets Authority (ESMA), the EU’s securities regulator, announced that it will not promulgate new blockchain rules for now, stating that blockchain is “still evolving” and that it would be “premature” to assess its potential impact and the degree of regulatory response it warrants.  

Ant Financial is raising $3 billion.  China’s Ant Financial is raising nearly $3 billion in debt, which it intends to use to finance future acquisitions (“a possible M&A spree”) and global growth. The company recently purchased U.S. money transfer service Moneygram and reportedly intends to use “payments as a ‘trojan horse’ to further its e-commerce presence globally.”

Lessons from BBVA’s Simple purchase?  Three years after the Spanish banking giant purchased U.S.-based Simple for $117 million, BBVA is still assigning goodwill impairment charges to it. The $60 million charge, disclosed in BBVA’s Q4 results, is evidence for many industry analysts of the difficulties associated with accurately valuing targets for potential acquisition.

 

Have a great weekend!
Joe Oehmke and Austin Tuell

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