Month: August 2020

Kiffmeister’s #Fintech Daily Digest (08/12/2020)

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Token- or Account-Based? A Digital Currency Can Be Both

Classifications can be a powerful tool to organize and communicate ideas. The main allure of distinguishing between account-based and token-based is to highlight a defining feature of certain new, emerging forms of digital currency. But if a digital currency can be both token-based and account-based, then the classification loses its power to meaningfully distinguish between new and existing methods of digital payments. Furthermore, it may slow down progress in understanding intrinsic differences between the growing set of digital payment options and technologies. Future classifications could modify the definitions of the terms account-based and token-based to more clearly distinguish them. In the meantime, perhaps these terms should be retired to avoid further confusion. 

Kiffmeister’s #Fintech Daily Digest (08/11/2020)

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Following OCC Letter, Some US Banks Appear Open to Providing Crypto Services

Multiple US national banks responded to the Office of the Comptroller of the Currency’s (OCC’s) June “Advance Notice of Proposed Rulemaking” (ANPR), which asked the general public to weigh in before Augist 3. on how crypto-assets and other fintech tools might be used in the financial sector. Several banks, including U.S. Bank and PNC, indicated they might be interested in actually providing crypto custody and other services to customers.   

Filling the Gap: Digital Credit and Financial Inclusion

This IMF paper focuses on marketplace lending using data for 109 countries from 2015 to 2017 to study the relationship between fintech credit to businesses and consumers and various aspects of financial development. Marketplace lending to consumers grows in countries where financial depth declines highlighting the role of fintech credit in filling the credit gap by traditional lenders. This result is particularly strong in low-income countries. In the business segment, marketplace lending expands where financial efficiency declines. The paper’s findings show that low-income countries take advantage of the fintech credit opportunity in the consumer segment but face important challenges in the business segment. 

Financial Intermediation and Technology: What’s Old, What’s New?

This IMF paper studies the effects of technological change on financial intermediation, distinguishing between innovations in information (data collection and processing) and communication (relationships and distribution). Both follow historic trends towards an increased use of hard information and less in-person interaction, which are accelerating rapidly. It points to more recent innovations, such as the combination of data abundance and artificial intelligence, and the rise of digital platforms. It argues that in particular the rise of new communication channels can lead to the vertical and horizontal disintegration of the traditional bank business model. Specialized providers of financial services can chip away activities that do not rely on access to balance sheets, while platforms can interject themselves between banks and customers. 

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Kiffmeister’s #Fintech Daily Digest (08/10/2020)

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Facebook Financial Formed to Pursue Company’s Payments Plans

Facebook is forming Facebook Financial (called F2 internally) to oversee the  all of the payment services Facebook has announced in the past year, including Novi and WhatsApp payments. Novi oversees the digital wallet for Facebook’s proposed Libra digital currency. Novi head David Marcus will be in charge of the initiative, and former PayPal executive Stephane Kasriel is being brought in to head Facebook Pay and serve as payments vice president of Facebook Financial. Facebook Pay, launched in November 2019, can be used for P2P payments on Messenger and purchases from select Pages and businesses on Facebook Marketplace. Facebook has plans to add it to Instagram and WhatsApp in the future.

BIS Innovation Hub update on the progress made in the G20 TechSprint initiative

The Bank for International Settlements Innovation Hub (BISIH) updated on progress made on the G20 TechSprint initiative launched in April 2020, following an August 6-7 event among 20 shortlisted teams (selected from a pool of 128 submissions from 35 countries). The teams were given an opportunity to demonstrate their solutions to a panel of independent judges and receive feedback before the final judging, scheduled for October 2020. The judging panel includes private and public sector experts in the field of financial sector data and technology. 

Design Choices for Central Bank Digital Currency: Policy and Technical Considerations

An NBER paper enumerates the fundamental technical design challenges facing CBDC designers, with a particular focus on performance, privacy, and security. Through a survey of relevant academic and industry research and deployed systems, it discusses the state of the art in technologies that can address the challenges involved in successful CBDC deployment. It also present a vision of the rich range of functionalities and use cases that a well-designed CBDC platform could ultimately offer users. [FYI this version looks to be identical to the Brookings paper published a few days ago.]

Kiffmeister’s #Fintech Daily Digest (08/09/2020)

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Cryptocurrency Cards: An Unnecessary Solution That Should Be Stopped

Crypto cards have become a must-have for many crypto services. Hoping to reduce the risk of blocking transactions, companies have been looking again and again for reason why their customers should use “plastic.” But a crypto card is a placebo that does not solve the problems of either users or fintech companies — its only goal is to bring profit to payment systems and intermediaries. All cards are serviced by payment systems that create a closed consumption ecosystem; banks and processor companies pay an annual fee or transaction fees to the credit card companies and payment system operators for the possibility of issuing cards, sellers transfer to banks on average 1%–4% of the transaction amount for acquiring servicing, and various intermediaries, aggregators, API providers, etc. also collect a commission. For crypto-asset transactions the fees are higher, since the traditional financial industry regards these transactions as high-risk. 

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Kiffmeister’s #Fintech Daily Digest (08/08/2020)

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 Prosecutors suspect Wirecard was looted before collapse

German prosecutors suspect Wirecard was looted before its collapse in June, with $1bn funnelled to opaque partner companies even as the payments group fought allegations of accounting fraud. The embezzlement is suspected to have taken the form of unsecured loans, which Wirecard claimed were for advance payments to merchants processing card transactions through its partners in Asia. These loans, made to partner companies in Dubai, Singapore and the Philippines, are a focus of the investigation against former chief executive Markus Braun and other senior ex-employees.

Mobile DeFi and the Shift Toward Self-Sovereignty

“Adoption of cryptocurrencies thus far has been in spite of — as opposed to because of — user experience. For example, hardware wallets like Ledger and Trezor were groundbreaking first steps in user custodianship, but they are intended for use with a desktop or laptop computer. In a world becoming rapidly more and more mobile, what good is a USB-like hardware wallet for storing private keys offline if users will be regularly transacting on a mobile device? Hardware wallets should be as simple as a card kept in a pocket, perhaps even resembling a familiar product like a credit card.” 

Decentralized Tech Will Be Ready for Humanity’s Next Crisis

“The global need for scalable, usable decentralized information technologies has never been more acute than right now, mid-pandemic. Forced digitalization is driving most of the world’s population further into the grip of big tech companies. As more of life goes online, more of the world’s data goes into their hands, and a higher percentage of human thoughts and behaviors are guided by their self-serving algorithms. We should have a global, decentralized system for collecting medical, movement, interaction and lifestyle data from everyone on the planet – and methods to analyze it in a secure, anonymous way. Statistical and AI analysis should be guided democratically by everyone contributing data. While policy could be set by sophisticated agent-based modeling leveraging this data, without sacrificing privacy.” 

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Kiffmeister’s #Fintech Daily Digest (08/07/2020)

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The Future of Retail Payments in the United States

The U.S. Fed announced the core features of its new FedNow end-to-end 24/7 fast payments service, set to go live in 2023 or 2024. It is seen as “a catalyst for innovation in the market by providing a neutral platform on which the private sector can build to offer safe, efficient instant payment services to users across the country.” It will operate alongside the private-sector Clearing House RTP instant payment service. The Fed will take a phased approach to service implementation, with the first one to provide the following core clearing and settlement features.

  • Banks will be able proactively to set parameters that limit transaction activity in FedNow Sbased on banks’ knowledge of their own customers. The Fed will also explore other anti-fraud tools, including centralized monitoring by FedNow.
  • The Fed will develop a liquidity management tool that allows a participant with excess funds in its FRB account to transfer funds to another participant who needs the funds on weekends, holidays, and after hours. Moreover, we will make the liquidity management tool available for instant payments broadly, including to banks that choose not to participate in the FedNow Service. Participants in a private-sector instant payments service will be able to use the tool to transfer funds from their Federal Reserve accounts to the joint account at a Reserve Bank that backs settlement in that service.
  • The FedNow Service will be interoperable with the RTP service to accomplish the goal of nationwide reach for instant payments. In part to facilitate interoperability, FedNow Service will use the widely accepted ISO 20022 message standard and other industry best practices. 

After launch the Fed will explore the best ways to support alias-based payments, whereby a payment can be sent to a recipient using an alias, such as an email address or phone number, rather than requiring an account number.

CBInsight’s State of Fintech report reveals some opportunities for crypto companies

Fintech providers have experienced a massive uptick in demand as the coronavirus sparks unprecedented levels of growth in the eCommerce sector, according to CBInsights. It estimates that eCommerce could represent 27% of U.S. retail sales in 2020, two-thirds higher than in 2019. One success story mentioned in the report is that of Shopify, which generated revenue of $714.3m in the second quarter of 2020, 97% higher than the same period in 2019. Over this three-month period, the number of new stores on Shopify rose by 71% as brick-and-mortar retailers aimed to speedily build an online presence. Interestingly, Shopify is one of the few eCommerce platforms that allows merchants to receive crypto payments. 

Singapore, Australia formalize digital economy pact

Singapore and Australia have formally signed off on a digital economy agreement following months of negotiation. It marks the second such pact, following a first with New Zealand and Chile, that the Singapore government has inked covering several areas of cooperation, including cross-border data flow, digital payments, and artificial intelligence (AI). 

Avalanche Consensus 101

Avalanche consensus, like Nakamoto consensus, is a probabilistic protocol. Just as Nakamoto traded off a small chance in probability for performance, Avalanche embraces probability to make the chance of error just as microscopic (and better yet, like all parts of Avalanche, configurable by validators on custom subnets). 

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Kiffmeister’s #Fintech Daily Digest (08/06/2020)

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The Central Bank of the Bahamas Sand Dollar is reportedly expected to be available nationwide in October. Governor Rolle reportedly said that the central bank is “currently working behind the scenes to complete the integration of the infrastructure with the rest of the banking system, in terms of connectivity with deposit accounts, and there is also focus on addressing the assessment of the security of the infrastructure in terms of the resilience of the infrastructure against cyber attacks and other mishaps.” Between money transmission businesses and entities licensed under the Payment System Act there are nine entities that can provide digital payment services. 
Fintech funding rebounded in Q2 2020 but deal activity continues to fall. Funding increased 17% quarter-over-quarter (QoQ) to $9.3B in Q2. However, monthly deal activity hit a fresh low of 127 deals in April before picking up the pace in June, which saw 141 deals. Quarterly deal activity continued its steady decline that began pre-pandemic in Q4 2019, potentially indicating the presence of other headwinds in addition to Covid-19. Fintech mega-rounds ($100M+) hit a new quarterly high of 28 as the largest companies in the space raised additional funding. M&A activity is concentrated within payments/banking infrastructure and wealthtech. Sofi’s acquisition of Galileo and Mastercard’s acquisition of Finicitydemonstrate the rush to own banking and payments infrastructure software. Wealthtechhad an especially active quarter with the acquisitions of Personal Capital by Empower Retirement, Folio by Goldman Sachs, and Advisor Engine by Franklin Templeton. 
The Reserve Bank of India (RBI) announced measures targeted to boost digital payments, enhance the scope of priority sector lending, and drive innovation in the broader financial ecosystem. The central bank will soon roll out several of these projects targeted primarily to overcome the impediments faced by a large part of the country in accessing financial services due to digital and technology disparity seen across districts. For example, In order to further promote and facilitate an environment that can accelerate innovation across the financial sector, Reserve Bank will set up an Innovation Hub in India. A scheme of retail payments in offline mode using cards and mobile devices, and a system of on online dispute resolution (ODR) mechanism for digital payments will also be introduced.  
This Bank of Canada study examines how the pandemic has influenced the demand for and use of cash using data from its Bank Note Distribution System. These data show that the value of notes in circulation grew sharply in March and April. Part of the increase reflects precautionary steps taken by financial institutions to increase their cash inventories during the pandemic, given concerns about possible disruptions to cash transportation services, and to reduce the risk of cash stockouts from potential customer demand. The flow of cash deposits from retailers to financial institutions, which would typically help replenish institutions’ note inventories, was disrupted during the pandemic. As a result, financial institutions compensated for this shortfall by drawing cash from the Bank of Canada.  

Kiffmeister’s #Fintech Daily Digest (08/05/2020)

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JP Morgan analysts see a divergence between the behaviour of the older cohorts of the US retail investors’ universe, and millennials in their preference for “alternative” currencies. The older cohorts prefer Gold while the younger cohorts prefer Bitcoin. Both Gold and Bitcoin ETFs have been experiencing strong inflows over the past five months, as both cohorts see the case for an “alternative” currency. This simultaneous flow support has caused a change in the correlation pattern between Bitcoin and other asset classes, with a more positive correlation between Bitcoin and Gold but also between Bitcoin and the Dollar as US millennials see Bitcoin as an “alternative” to the dollar. In addition, the simultaneous buying of US equities and Bitcoin by millennials since March has increased the correlation between Bitcoin and S&P 500 since March. 
The bitcoin derivatives market is fragmented and contract terms differ dramatically across exchanges. The quality of documentation in the space varies. Perpetual swaps approximate the price of its underlying asset in close to real time. They are shifting away from bitcoin-margined inverse contracts, which have traditionally been dominant, toward USDT-margined linear contracts. Exchanges also vary in how they calculate indexes and funding payments. Perpetual swap volumes have decreased since the start of the year, but have recently surged in line with bitcoin’s price activity. The lack of standardization in the derivatives market makes it difficult for traders to assess the degree of risk taken on indirectly via a position’s index. Poorly constructed indexes can negatively impact users, especially during market dislocations and periods of volatility. 
Most of the civilized world years ago shifted to requiring computer chips in payment cards that make it far more expensive and difficult for thieves to clone and use them for fraud. One notable exception is the United States, which is still lurching toward this goal. Here’s a look at the havoc that lag has wrought, as seen through the purchasing patterns at one of the underground’s biggest stolen card shops that was hacked last year. 
70% of U.S. consumers say that COVID-19 concerns have not caused them to avoid carrying or storing cash, according to a recent Fed survey. indicates that survey participants more than doubled the amount of cash they store at home and also increased the amount of cash they carry in their wallets. 

Kiffmeister’s FinTech Daily Digest (08/04/2020)

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Simon Potter and Julia Coronado have proposed the creation of recession insurance bonds (RIBs). RIBs would be zero-coupon bonds authorized by Congress and calibrated as a percentage of GDP sufficient to provide meaningful support in a downturn (e.g., $10,000). They would be distributed to households with payouts that are recession contingent – eg if policy rates reach the zero lower bound or there is a 0.5% increase in the unemployment rate. They propose operationalizing it as effectively a synthetic central bank digital currency (CBDC) – they would be issued by a regulated system of digital currency accounts for consumers managed by digital payment providers (DPPs) and fully backed by reserves at the Fed. Basically it’s narrow bank-type model that’s small and fit for purpose. Here are the two background papers:
  • Part 1: Securing macroeconomic and monetary stability with a Federal Reserve–backed digital currency
  • Part 2: Reviving the potency of monetary policy with recession insurance bonds
The goal of the newly-formed Swiss-based World Stablecoin Association (WSA) is to create a united front for the sector to tackle regulatory concerns and drive collaboration. A number of projects have already reportedly become members of the WSA, such as the Canadian dollar-pegged QCAD as well as decentralized finance protocol Ren, which is backed by Polychain Capital. Additionally, the Brazillian Digital Token (BRZ), Crypto BRL (CBRL), Peg Network, QCash (QC), Stably, USDK and Digitalbits (XDB) are also believed to have joined the initiative. https://www.worldstablecoin.org/ 
Singapore-based fintech firm Grab launched a micro-investment platform (Auto Invest) and a buy-now-pay-later payment plan for select e-commerce sites, and extended its consumer loan platform to third party providers. AutoInvest funds, which are invested in fixed-income funds, can be withdrawn any time with no penalties and can also be used to spend on Grab services or at any merchant accepting the GrabPay Card. The third party loan platform will start in Singapore before expanding to other Southeast Asia countries. 

Kiffmeister’s FinTech Daily Digest (08/03/2020)

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Darrell Duffie explains the meaning of an interoperable payment system and why interoperability is crucial for efficiency. He reviews some alternative approaches to interoperability, including central bank digital currencies (CBDCs), hybrid CBDCs, and two-ledger upgrades of bankbased payment systems. 
China’s State Council Information Office, prompted by the Peoples’s Bank of China (PBOC), is reportedly looking at whether to launch an anti-trust probe into Alipay and WeChat Pay, The State Council’s antitrust committee has been gathering information on them for more than a month. But authorities have been keen to whittle back their dominance. Also, in an effort to encourage smaller players to enter the market, the PBOC said last year that it planned to standardize the interoperability of QR code payments. The United States is also planning to take action “with respect to a broad array of national security risks” posed by other Chinese instant messaging platforms like WeChat.  
The BIS Innovation Hub (BISIH) and the Hong Kong Monetary Authority (HKMA) have launched a TechChallenge designed to showcase the potential for new innovative technologies to resolve problems in trade finance (TradeTech). It is supported by the Asian Development Bank, the International Chamber of Commerce, the International Institute of Finance, the People’s Bank of China and the Wolfsberg Group.The BISIH has published three problem statements and invites private firms to develop technology solutions: (i) connecting digital islands and increasing network size and effects, (ii) trade finance inclusion for SMEs, and (iii) TradeTech for emerging markets. 
While quantum machines are still a long way from being able to break modern encryption, US National Institute of Standards and Technology (NIST) launched a competition in 2016 to develop new standards for cryptography that will be more quantum-proof. The winners are set to be announced in 2022, but last week the organization announced that it had narrowed the initial field of 69 contenders down to just 15. And so far a single approach to “post-quantum cryptography” accounts for the majority of the finalists: lattice-based cryptography. Lattice-based cryptography instead uses enormous grids with billions of individual points across thousands of dimensions. Breaking the code means getting from one specific point to another—which is essentially impossible unless you know the route. NIST thinks is that lattice problems are really hard, but they seem quite efficient in terms of time to generate keys, time to construct signatures, and also efficient in terms of memory.