TFU | Aug. 27 – Sept. 10

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Leading Off

The Basel Committee published a new paper discussing fintech’s impact on the global financial services industry; Square applied for an ILC charter; the U.S. adopted a T+2 settlement and clearing standard for stock and bond trades; China banned ICOs as a form of illegal fundraising; Equifax reported a cyber breach that exposed the data of 143 million customers; and PayPal rolled out a new cashback credit card.

The Big Idea

As ICOs blow up, regulators crack down.

The story: Last week, China banned initial coin offerings (ICO), declaring that digital token-based offerings are an illegal form of fundraising. The decision followed the Securities and Exchange Commission’s (SEC) recent announcement that most ICOs in the U.S. will be regulated as securities offerings, which itself was followed by similar announcements in other jurisdictions, including Singapore and Hong Kong.

Why we care: For at least the better part of the past year, ICOs have been *the* hot thing in the world of alternative fundings. Dozens of firms around the world have jumped on the fad, raising the total funding raised via ICO to well over $2 billion in 2017 alone. [For the uninitiated, ICOs can be likened to crowdfunding’s crypto cousin; investors buy an ownership stake in a company or project, receiving in return proprietary digital coins or tokens – perhaps thought of as a “digital stock certificate” – that they hope will appreciate in value over time.] The concern, of course, is that significant amounts of money are changing hands through an unregulated medium, which has already raised concerns about bubbles, fraud, and avoidance of securities laws.

What we think: For now, we’ve gotta side with Uncle Sam on this one. One of the most basic tests in U.S. securities law is the Howey Test, which says that securities regulations apply where there is (i) the investment of money (ii) with an expectation of profits (iii) arising from a “common enterprise” (iv) depending solely on the efforts of another. The SEC’s case appears strong that all four factors are met in the case of ICOs — which are, after all, a way to raise significant funding without going through the rigorous IPO process. (Here, consider the Duck test: if it looks like a duck, and it quacks like a duck…) The fascinating thing is that the China has taken the SEC’s determination one step further by banning ICOs altogether, rather than allowing them on a regulated basis. We’ll be very interested to see whether other differences emerge among global regulators on this issue, perhaps leading to inconsistent policing of ICOs and, inevitably, regulatory arbitrage.

The Week in Review…

BCBS releases paper on fintech implications for banks. The Basel Committee on Banking Supervision (BCBS) published a white paper discussing the existing and potential impact of fintech innovation in financial services [full text]. Notably, the paper highlights 10 “observations and related recommendations . . . for consideration by banks and bank supervisors.”

Square applies for ILC. The San Francisco-based payments and finance company applied to establish a wholly owned, Utah-based industrial loan company (ILC) called Square Financial Services. Square intends to use the new bank to “offer loans and deposit accounts to small businesses,” replacing its long-standing lending relationship with Celtic Bank.

U.S. adopts T+2 standard for stock and bond trades. The U.S. adopted a two-day standard for settling and clearing stock and bond trades, “the most significant change to the . . . settlement cycle in over 20 years.” The Depository Trust & Clearing Corporation expects T+2 to “reduce the average daily capital requirements for clearing trades [by about] 25%, or $1.36 billion.”

Zelle set to launch mobile app. The big bank-backed peer-to-peer (P2P) payments service will launch a standalone mobile app on Tuesday, putting additional pressure on incumbents like PayPal, Circle, and Apple Pay. Zelle allows users of any supported bank to send and request money from their contacts, using only their phone number or e-mail address.

Report forecasts $1T in cryptocurrency deals in 2017. In a new report, Juniper Research estimated that the value of global digital currency transactions will pass $1 trillion by the end of the year. The firm partly derived its estimates from the $325 billion in crypto transactions in the first quarter of the year, which saw a dramatic increase in the value of Ethereum and Bitcoin.

Equifax reports massive hack affecting 143 million. The credit referencing firm reported a cyber breach that exposed the personal details of approximately 143 million U.S. consumers, including names, Social Security numbers, birth dates, addresses, and driver’s license numbers. The FBI is investigating the breach, which impacts about 55% of Americans over age 18.

PayPal offers new cashback credit card. The global payments firm partnered with Mastercard and Synchrony Financial to offer the new card, which will give users 2% cash back on all purchases, “with no annual limit, no minimum redemption amount, no restriction on how to spend rewards and no expiration.”

Can AI-based lenders avoid running afoul of fair lending regs? The American Banker’s Penny Crosman discusses whether firms that use AI-based credit scoring “are capable of making credit decisions without inadvertently lending in affluent sections and not in minority neighborhoods.”

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