The U.S. Fed’s Lael Brainard discussed the role of banks and consumers in the “fintech stack”; Synchrony Financial announced that it is buying $6B worth of loans from PayPal; several leading U.S. financial institutions set up a third-party vendor management joint venture; The Clearing House launched its real-time payments system; Coinbase now offers digital asset custodial services; and Kabbage received a $200M credit facility from Credit Suisse, the largest ever given by the bank to an online lender.
The Big Idea
A quick run-down of the current global regulatory opinions on ICOs.
We’ve written before about initial coin offerings (ICOs) and the global regulatory kerfuffle they’ve sparked; and with two more regulators commenting last week on the controversial form of fundraising, this is a good opportunity to highlight some of the voices in a growing chorus of regulators with official ICO opinions. Below, we’ve outlined global regulatory responses to ICOs, roughly ordered by severity:
Australia: The Australian Securities and Investments Commission (ASIC) has issued formal regulatory guidance on ICOs, noting that their legal treatment depends on their structure. However, ASIC also has been more upbeat about them than some other regulators, recognizing the potential of ICOs “to make an important contribution to the options available to businesses to raise funds and to investment options available to investors.”
Japan: Japan’s Financial Services Authority (FSA) appears more friendly to digital currencies than many regulators, recently approving the launch of a national digital currency (the “J Coin”) and approving licenses for 11 new digital currency exchanges. However, the FSA has followed most other regulators in issuing a formal warning about ICOs; and a full ban may still be forthcoming.
Singapore: In September, the Monetary Authority of Singapore (MAS) became one of the first countries to follow the U.S. SEC in raising a red flag about ICOs, declaring that they are subject to regulation when they qualify as securities. But this week, MAS’s managing director took a notably friendlier tone, saying he is “very keen” to explore “good” initial coin offerings (ICOs) by supporting their safe and sound development through Singapore’s regulatory sandbox.
Europe: In September, the U.K. Financial Conduct Authority (FCA) became the first European regulator to issue a formal warning about ICOs, saying that “ICOs are [a] very high-risk, speculative investment” that could leave investors with nothing. Since then, Germany’s Federal Financial Supervisory Authority (BaFin) has followed suit; and last week, the EU’s Securities and Markets Authority (ESMA) also issued a warning to investors and firms that ICOs “may fall outside . . . of the existing rules and hence outside of the regulated space.”
United States: The U.S. Securities and Exchange Commission (SEC) shifted global ICO opinion into gear in July by announcing that most ICOs in the U.S. would be regulated as securities offerings. Since then, the SEC has kept its foot on the pedal: The agency has filed two ICO-related actions, it warned celebrity ICO endorsers that they may be running afoul of securities laws, and Chairman Jay Clayton recently affirmed that he has “yet to see an ICO that doesn’t have a sufficient number of hallmarks of a security.” The U.S. has not banned ICOs, but it has been the most vocal and vigilant about applying existing securities laws to them.
South Korea: In late September, South Korea followed its neighbor China (see below) in outlawing ICOs. South Korea’s Financial Services Commission (FSC) declared that ICOs were “a situation where money has been flooded into an unproductive and speculative direction.”
China: In late August, China surprised many by taking the significant step of banning ICOs altogether, declaring that digital token-based offerings were an illegal form of fundraising. The following week, it banned domestic cryptocurrency exchanges, prompting investors to move millions of dollars of digital currency assets to friendlier jurisdictions. So far, China has proven to be among the most skeptical countries when it comes to digital currencies, a stance that seems unlikely to change in the near-term.
The Week in Review…
Brainard discusses fintech, banks, and consumer impact. Federal Reserve governor Lael Brainard delivered a speech on the roles that banks and consumers play “in the fintech stack” [full text]. Brainard notably placed some responsibility on banks to “[ensure] that their [fintech partners] act appropriately [and] that consumers are protected and treated fairly.”
Synchrony Financial buys $6B in PayPal loans. The card issuer bought a $6 billion portfolio of loans made by the payments firm, giving PayPal $5.8 billion in cash. PayPal CFO John Rainey noted that the “$6 billion can be reinvested in higher-returning alternatives”; while Synchrony’s CEO highlighted that the deal will help Synchrony “grow in the digital payments space.”
Bank consortium launches vendor management firm. Several financial institutions, including Bank of America, JPMorgan, and Wells Fargo, established TruSight, a firm that will “store and share data from vendors,” “conduct remote and on-site vendor assessments,” and “help identify and promote best practices . . . at a fraction of the cost of each bank acting on its own.”
The Clearing House launches RTP system. The automated clearing house went live with its new real-time payments (RTP) system – the “first payments system to be built in the US since the birth of the internet” – reducing the clearing time for domestic payments to seconds from days. BNY Mellon and US Bank carried out the first transaction on the system.
Coinbase launches custodian service. The digital currency firm announced the creation of Coinbase Custody, a new offering “designed to safeguard digital assets for hedge funds, sovereign wealth funds and other institutions.” Coinbase Custody will offer clients physical and cyber protections, dedicated account representatives, and potentially insurance on their funds.
AmEx, Ripple, Santander partner on DLT B2B payments. The three companies worked together to introduce blockchain-based cross-border business-to-business (B2B) payments. The partnership allows American Express business customers to make “instant and traceable payments to Santander bank accounts in the UK” through Ripple’s real-time payments network.
Visa launches transit consulting program. The global payments giant is hoping to facilitate the adoption of contactless payments in urban transit systems by offering cities “consulting services from a team of specialists . . . in London and regional experts.” Since going contactless in 2014, 40% of London’s tube and bus trips are paid for using contactless cards or mobile devices.
Kabbage receives $200M revolving credit facility. The Atlanta-based online lender accepted the $200 million facility from Credit Suisse and will use it to increase its loan pool to small and medium-sized businesses. $200 million is the largest-ever credit facility provided by Credit Suisse to an online lender.
Ripple CEO predicts central bank adoption of blockchain. At a Bloomberg event in Singapore, Ripple CEO Brad Garlinghouse said it is “only a matter of time” before central banks adopt blockchain for interbank payment settlement. He added that once blockchain is used by one central bank, it will likely be adopted by other global central banks.
What does Hyperledger mean for the future of blockchain? Brian Behlendorf, executive director of the Hyperledger Project, touted Hyperledger’s open source ecosystem, which makes possible for “lots of other [blockchain] activities that might not have been anticipated.”