FU | February 25 – March 3, 2017

The Big Idea

In the world of financial innovation, DLT is a truly global phenomenon.

The story:  In the past two weeks, there have been a number of stories involving digital ledger technology (“DLT”) across several international jurisdictions. Last week, the U.S. Congress relaunched its “Blockchain Caucus,” a bipartisan group inside the House of Representatives dedicated to developing “sound public policy toward blockchain-based technologies and digital currencies.” This week, Federal Reserve Governor Jerome Powell spoke at a Yale University about DLT’s potential impact on the payments system and the need to balance “safety and security” with “payments system innovation.” Meanwhile, a group of 30 big banks and tech companies formed a new DLT consortium focused on developing enterprise products that rely on the Ethereum blockchain platform, which will compete with existing consortia like R3. Finally, a consortium of top Japanese banks announced plans to use blockchain to facilitate domestic and international payments, following a successful pilot test of its DLT-based payments platform.

Why we care:  We’ve written about distributed ledger technology (“DLT”) and blockchain before (e.g., here), and we’ll write about it again. There may not be more buzzy terms in finance these days, which is a reflection of both the industry’s interest in developing DLT-based products and regulators’ interest in making sure they do not pose a risk to the financial system. This week, we saw a little bit of both.

What we think:

If there’s one thing that unites big banks, tech firms, fintech startups, and regulators around the world, it might be DLT/blockchain.  Primers abound on the subject (or talk to us!), but it basically boils down to this: DLT is a (1) distributed, (2) immutable, (3) transparent, and (4) consensus-based system of verifying and preserving transactions on a network. It has the potential to upend and disintermediate a wide variety of services that currently involve trusted third-parties, and could well be the most transformative and longest-lasting innovation of the current moment fintech (IBM CEO Ginni Rometty has said that DLT will do for transactions “what the Internet did for information”). Or, not.

Regardless, DLT’s disruptive potential has caught the attention of nearly every large bank and tech firm in the world, all of which are working to develop their own products, services, and platforms, which they hope will gain traction in the market (see, e.g., the Linux Foundation’s Hyperledger project, the R3 consortium’s Corda project, or the new Ethereum Enterprise Alliance — between them, most of the world’s largest companies are represented). This attention has, as is to be expected, also pushed regulators into action. In the U.S., agencies including the SEC, CFTC, and FDIC have established internal working groups to understand DLT and its potential impact on the financial services industry; and these efforts have been mirrored or even outstripped by foreign regulators, including the U.K.’s FCA and Singapore’s MAS. It’s difficult to say with certainty where DLT is moving; but with each new pilot test, consortium, and regulatory initiative, it gets harder to ignore.

In Other News…

OCC’s Curry defends special-purpose charter.  Comptroller of the Currency Thomas Curry said he believes the OCC’s “fintech charter” stands on “very strong legal ground,” in response to questions from critics about the agency’s legal authority to grant uninsured special-purpose national bank charters.

New white paper on blockchain and securitization.  The Washington, D.C.-based Chamber of Digital Commerce published a paper with with the Structured Finance Industry Group [full text] on potential opportunities for DLT in securitization.

Bitcoin passes gold.  Given its notorious volatility, we rarely treat changes in the price of Bitcoin as news, but… On Thursday, “for the first time ever, the price of one bitcoin . . . surpassed the price of one ounce of gold.” Bitcoin’s value has roughly doubled in the past year.

‘…Till Simple do us part.’  Mobile banking service Simple launched Shared accounts, targeting users who would benefit from pooled funds but don’t want a traditional joint checking account.  Simple Shared will allow users in “every type of relationship from romantic to roommate” to “track combined expenses and transactions [and] set budgeting goals with others.”

The evolution of fintech in China…  The Economist explores how China’s fintech industry has changed over time, attributing its growth to three main trends: (1) mass consumer adoption of digital payments services; (2) willingness to serve consumers often ignored by state banks; and (3) increased demand for online investment services.

…and China’s shifting approach to fintech regulation.  After years of giving fintech firms “a free hand” in conducting their business, China’s government is taking a more active posture in overseeing innovative financial firms. The Economist suggests that “the era of benign neglect” of Chinese fintech “is over.”

On the development of AI.  The chair of artificial intelligence and robotics at Singularity University discussed recent advances in the ability of AI to “deal with incomplete information, and bluffing,” suggesting  that it may “be able to play . . . [a] role in business negotiation, strategy and . . . policy.”

Have a great weekend!
Joe Oehmke and Austin Tuell

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