TFU | April 29 – May 5, 2017

Leading Off

Fed Governor Lael Brainard spoke about banks’ place in the fintech ecosystem; Juniper Research projected that the total value of digital payments will reach $3.9 trillion in 2017; the American credit unions are studying how to leverage DLT; the Center for a New American Security examined the risk that virtual currencies may be used to finance terrorism on a wide scale; and White & Case examined the ability of AI to improve bank compliance functions.

The Big Idea

The story:  Over the past few weeks, both Washington and West Virginia addressed digital currency in new or amended state laws: Washington amended its money transmission law to include the transmission of digital currency, while West Virginia defined “cryptocurrency” and included it in its new anti-money laundering bill.

Why we care:  These two states are only the latest to weigh in on the growing debate about how to classify and treat digital currency under the law. The lack of a central authority on the subject has produced a patchwork of regulatory, legislative, and judicial determinations that vary depending on the jurisdiction.* In short, if you use virtual currency, there is little predictability about how that instrument will be treated.  Moreover, the lack of clear approach has produced holes in policy and regulation that have exacerbated virtual currency’s reputation as a tool for illicit trade and terrorism.

[*For example: the federal Electronic Funds Transfer Act does not apply to virtual currencies, but FinCEN requirements do; the IRS considers virtual currencies as akin to investments, while the SEC sees it as money; and a Florida state judge has classified bitcoin as a commodity, not currency, while a New York judge decided the opposite.]

What we think:   What a mess. Good for the states for seeing a problem and working to solve it, but their myriad solutions come with challenges themselves. The uncertainty surrounding virtual currency creates difficulties for users and merchants, who must deal with volatility and changing regulations on a seemingly daily basis. Addressing the use of virtual currency for terrorist financing and money laundering through legislative amendments to those laws is particularly laudable, but piecemeal state efforts will not suffice forever. As the prevalence and use of virtual currency grows, a unified set of principles or approaches to its regulation will become increasingly important. New and amended legislation to address virtual currency is a good step, but it would benefit greatly from national collaboration and a cohesive approach.

In Other News…

Brainard discusses fintech.  Federal Reserve Governor Lael Brainard delivered a speech [full text] on banks and fintech innovation. She noted that the importance of the banking system demands an alternative to the “run fast and break things” model of innovation favored in some other sectors, and that the Fed is still determining how best to encourage responsible bank innovation.

Paul Hastings explains CSBS suit against OCC fintech charter.  The law firm produced a short paper describing and analyzing last week’s lawsuit by the Conference of State Bank Supervisors (CSBS) challenging the OCC’s authority to grant special-purpose national bank charters to fintech firms.

CNAS examines virtual currency use by terrorists.  The Center for a New American Security (CNAS) produced a paper exploring “the risk that virtual currencies may be used to finance terrorist activities “at a significant scale.” The paper concludes that current evidence of such use is “no more than anecdotal,” but that the potential for it remains “significant.”

Bank apps may have security vulnerabilities.  According to the American Banker, “researchers have found a glaring set of vulnerabilities” in the transport layer security (TLS) protocols that many banks use to secure mobile banking connections.

Digital payments projected to grow 14% in 2017.  A new study from Juniper Research projects that the total value of digital payments will reach $3.9 trillion in 2017, an increase of 14% over 2016. Juniper’s analysis highlighted “particularly strong growth” in the U.S. market.

What does AI mean for compliance?  In a new article [full text], attorneys from White & Case discuss the advent of AI in regulatory compliance. The authors note that AI-enabled compliance solutions have great potential to reduce bank costs, but that they still face significant legal and reputational hurdles to broader adoption. Meanwhile, IBM’s Alistair Rennie and Promontory CEO Gene Ludwig discuss the ability of IBM’s Watson technology to improve bank compliance functions.

Tencent increases investment in AI.  The Chinese social media giant is opening a lab in Seattle dedicated to AI research, the company’s latest foray into AI and machine learning. Some analysts have pointed out that Tencent, which owns China’s most popular mobile app WeChat, may have a significant advantage in the AI race thanks to the trove of WeChat user data at its disposal.

RevolutionCredit looks to upend credit scoring.  FastCompany profiles the startup, which uses “behavioral science to predict how [one] might behave in their personal finances” as a means of supplementing traditional credit scores.

Have a great weekend!
Joe Oehmke and Austin Tuell

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