The Economist looked at the success of Pix, the instant-payments system operated by the central bank in Brazil.
Introduced to consumers in the country in late 2020, the platform “has transformed the way Brazilians make payments.”
Users and merchants exchange funds by way of a QR code and therefore do not have to share details about any financial accounts. It was used by more than two-thirds of Brazilian adults in April, and covered nearly $4 billion in payments in the last quarter of 2021.
“Already Pix has surpassed debit and credit cards as the most popular method of payment in Brazil,” the article said. “One in five transactions now takes place on the platform’s mobile app.”
“As an idea, Pix is not new or unique. India’s Unified Payments Interface (upi) began life in 2016. Other countries have established similar schemes. Nonetheless, Pix has been a remarkable success. For years the central bank sought to make Brazil’s financial system more competitive, digital and inclusive. Pix has helped achieve those aims. Its rapid adoption could also contain lessons for others.
The head of the Commodity Futures Trading Commission gave remarks indicating a tougher approach by the agency to those accused of cryptocurrency fraud and manipulation, the Wall Street Journal reported.
Chair Rostin Benham “said the CFTC looks to prioritize the use of its existing authority to deter and combat fraud and manipulation in the crypto markets and will continue to add resources in this area, including using tools to help its enforcement efforts.”
In a speech to a crypto industry conference, Benham said, “‘Recent global conflicts have highlighted the ability for digital assets to be a tool for those who present risks to the broader American economy, the public and our way of life.’”
“The derivatives markets regulator has filed more than 50 enforcement actions related to digital asset activity since 2015, and more than half of those cases involved allegations of fraud, Mr. Behnam said in the message to the conference hosted by blockchain data platform Chainalysis Inc. Twenty-three of those crypto-related cases were filed within the last fiscal year, he added.”
A story in American Banker weighed the policy implications of the recent collapse of TerraUSD and its affiliated cryptocurrency Luna.
Some observers were breathing a sigh of relief that the tumult in the digital assets market had not affected the regulated banking system.
“Still, the run on Terra is prompting policymakers to act with more urgency regarding the regulation of digital assets. Crypto companies have spent large sums trying to convince Washington that digital assets are a safe and growing place to put money, but last week’s turmoil could have shaken those efforts.”
A Biden administration report from the President’s Working Group on Financial Markets had recommended that Congress limit stablecoin issuance to FDIC-backed banking institutions. Yet skeptics have voiced “concerns about bringing the risk that stablecoins pose on bank balance sheets.”
“‘Dodd-Frank was about de-risking the big banks, and now the President’s Working Group contemplates that we’re going to add more risks to these institutions,’ Rep. Pat McHenry, R-N.C., said” during a House Financial Services Committee hearing.
Banking Dive published a profile on the founders of the neobank Stretch, a Dallas-based startup catering to the financial services needs of the formerly incarcerated.
The husband-and-wife team of Yasaman Hadjibashi and Keith Armstrong “are zeroing in on the specific struggles the formerly incarcerated and their family members face, pain points that are not adequately addressed in the mainstream banking system, Hadjibashi said.”
Hadjibashi formerly was an executive at Barclays and Citi, while Armstrong founded the conversational AI platform Abe.AI.
Stretch offers checking accounts with no balance requirements or monthly fees. The neobank also places emphasis on helping its users find jobs. Its digital app is integrated with Honest Jobs, a platform helping the formerly incarcerated find employment.
“On the surface, Stretch is not unlike other digital banks that tout free services, but what sets the platform apart is its emphasis on helping members land jobs, a hurdle many formerly incarcerated people face upon release, Hadjibashi said. ‘It is an emotional drain on individuals when they send dozens and dozens of resumes to employers and they don’t know if they hire former convicts or not,’ Hadjibashi said.”
A recent court filing involving a cryptocurrency platform, likely based in North Korea, may signal a shift in U.S. law enforcement policy and thereby make it harder for bad actors to use crypto transactions to evade sanctions screening.
A memorandum opinion by Magistrate Judge Zia Faruqui of the US District Court in Washington was recently unsealed, likely “because someone has been arrested for operating the crypto platform.”
“The platform, which was designed to sidestep financial bans aimed at crippling pariah countries, handled more than $10 million worth of bitcoin that was transferred between the United States and the sanctioned country using a US-based crypto exchange, which, the opinion implies, was not aware that it was helping users avoid sanctions,” the article said.
“‘Issue One: virtual currency is untraceable? WRONG. … Issue Two: sanctions do not apply to virtual currency? WRONG,’ Faruqui concludes in his opinion, directly citing two Saturday Night Live skits parodying TV host and political commentator John McLaughlin, who was known for his direct style.”
Various: Fallout from Terra collapse
There was no shortage of different takes about the impact of sharp volatility in the cryptocurrency markets stemming from the collapse of the stablecoin TerraUSD.
With fears of a potential market contagion, the value of Tether — the world’s largest stablecoin — dropped to 95 cents on Thursday following more than $3 billion in withdrawals. However, by Friday, it had recovered, according to reporting by CNBC.
“By Friday, tether was trading firmly at $1 again, soothing investors’ fears about a possible crypto market contagion from the collapse of embattled stablecoin project Terra,” the story said.
The turmoil stoked by a sharp drop in stablecoin values coincided with Treasury Secretary Janet Yellen’s scheduled testimony before the House Financial Services Committee.
According to American Banker’s coverage, Yellen “said that stablecoins don’t yet present a systemic financial risk, but cautioned that they’re a fast-growing asset class that could become more important to the financial system.”
Yellen said: “‘I wouldn’t characterize it at this scale as a real threat to financial stability, but they’re growing very rapidly and they present the same kind of risks we have known for centuries in connection to bank runs.’” she said.
The collapse of the TerraUSD stablecoin and its associated token, Luna, “dealt a blow” to the crypto ecosystem, but there is still reason to be hopeful about the ecosystem’s future, wrote George Kaloudis in an opinion piece for CoinDesk. (Kaloudis is a research analyst for CoinDesk Research.)
“What really matters is that an undercollateralized, algorithmic stablecoin will fail no matter how long it succeeds,” Kaloudis wrote. “The system failed. But if we’re honest, UST was a wild success up until the moment it wasn’t. History should serve as a lesson here, when we inevitably will see a successful UST copycat crop up in 2027 or whatever. We also are incredibly lucky that UST and LUNA aren’t big or intertwined enough to cause mass hysteria across all markets. I honestly believe we were lucky this happened in 2022 and not in 2030.”
Meanwhile, Bloomberg News on May 10 ran an interview with Rostin Behnam, chairman of the Commodity Futures Trading Commission, in which he said regulators should step up to set crypto guardrails without congressional action.
“‘In the absence of clear direction from Congress, which I know they’re working on, it’s our responsibility to work together and to come up with solutions to the extent that we’re able to within the authority that we currently have,’” said Behnam, according to the story.
The Wall Street Journal on May 9 published an interview with TS Anil, CEO of Monzo Bank, an online institution headquartered in London that opened U.S. operations earlier this year. Monzo has no physical locations and consolidates users’ financial information on a digital app.
Anil said within 10 years he hopes to see “money work for everyone, which means really giving people the tools to make great decisions for themselves, to help them understand and make sense of their money.”
“It’s still amazing and sad how little customers around the world are supported in all decisions related to their money,” he said. “It’s such a source of anxiety for customers, that I’m hoping that, in the next decade, as an industry, we’ve solved that problem.”
Another goal he wants providers to aspire to is that “across all of your financial needs—whether it’s spending, paying, transacting borrowing, saving, investing—all of that happens in a single place. So as an individual trying to make sense of my money, I can see it all in one place; I can visualize it, I can analyze it.”
A story by Bloomberg News on May 7 focused on “growing pains” in the cryptocurrency sector as it tries to navigate Washington D.C.
The industry has attempted to make an ally out of Sen. Kirsten Gillibrand, D-N.Y., who “isn’t an obvious choice to play crypto’s savior on Capitol Hill.” She has teamed up with Wyoming Republican Cynthia Lummis, a crypto advocate “who personally invests in Bitcoin” on legislation to overhaul policy for the sector that “is seen as having a better chance of becoming law than many other crypto bills that have been introduced.”
“Yet despite the involvement of the pro-crypto Lummis, the effort is making some coin enthusiasts nervous,” the article said.
“Many worry that the legislation may be so broad it’ll cause unanticipated problems for firms down the road, according to people familiar with the matter. Others thought early drafts of the bill would give too much power to Securities and Exchange Commission Chair Gary Gensler, who says many digital assets are securities and subject to his agency’s tough investor protection standards.”
The Washington Post’s Technology 202 newsletter looked at legislative efforts to create a new regulator for the biggest technology companies.
Sen. Michael F. Bennet, D-Colo., is preparing to introduce a bill establishing a five-person commission “tasked with protecting consumers in the age of Big Tech,” the article said.
“According to a copy of the bill that Bennet shared exclusively with The Technology 202, the commission would be able to interrogate the algorithms that power major tech platforms and set new rules to force greater transparency of social media.”
Even though the bill “has very low odds of passing in this Congress” with Republicans likely to oppose the effort, the story said tech firms “could get on board with this proposal.”
“Microsoft President Brad Smith said at an April privacy conference that such a commission would represent ‘a better future than asking a Congress or a legislature or a parliament to go on a piecemeal basis and change each and every law separately.’”
The Securities and Exchange Commission is more than doubling the size of the enforcement team in the new Crypto Assets and Cyber Unit, adding 20 staffers that include investigative staff attorneys, trial lawyers and fraud analysts, according to an SEC statement reported on by the Washington Post.
The new division will now be made up of 50 people, “beefing up its ability to police securities law violations involving new coin offerings, crypto exchanges, decentralized finance platforms, and non-fungible tokens, among other items, the agency said.”
“‘The U.S. has the greatest capital markets because investors have faith in them, and as more investors access the crypto markets, it is increasingly important to dedicate more resources to protecting them,’ SEC Chair Gary Gensler said in the statement.”
Since launching in 2017, the new office has imposed over $2 billion in enforcement action penalties. But the agency’s aggressive stance has drawn industry criticism.
“Many crypto leaders have turned sharply critical of Gensler’s approach to the industry since he took office a year ago,” the article said. “They say instead of developing clear rules for digital assets, he has pursued a policy of regulation by enforcement, defining wrongdoing after the fact and then seeking to punish it.”
A 43-page report by the Consumer Financial Protection Bureau reinforced the agency’s skepticism about artificial-intelligence algorithms and other predictive analytics in the lending process, according to American Banker.
“In the report, Patrice Ficklin, the CFPB’s fair lending director, said that while she is encouraged by programs that can expand access to credit, she is skeptical of claims that advanced algorithms are a ‘cure-all’ that can eliminate bias in credit underwriting and pricing,” according to the news site’s article.
CFPB Director Rohit Chopra “had previously warned companies about relying too heavily on AI and machine learning in making lending decisions.” the article said.
“The CFPB said it will be ‘sharpening its focus on digital redlining and algorithmic bias.’
Randal Quarles, the former vice chair for supervision at the Federal Reserve Board, continued to throw cold water on the idea of a central bank digital currency.
Echoing a speech he gave last year, Quarles said on the “Banking with Interest” podcast that it’s not a foregone conclusion that Congress would authorize a CBDC (which the Fed is exploring).
If “more analysis is given of the potential benefits of [a] central bank digital currency, they really seem to disappear,” Quarles said on the show. “And before you would have a law, before Congress had passed the law, … there would be a lot of public attention and public analysis on this question, which would increasingly make clear that the benefits of a central bank digital currency were extremely marginal if they exist at all.”
Quarles noted that moves by other countries like China to launch a CBDC should not be the rationale for the U.S. to follow suit.
“Increasingly, I’m hearing as like, one of the first arguments put forward, ‘Well, everyone’s doing it. So we’re going to have to.’ And so it’s like, I didn’t accept that argument from my son, and I’m not going to accept it from you.”
Aligning with a similar move by the Biden administration, California Gov. Gavin Newsom released an order on cryptocurrency policy that provides “a road map for regulatory and consumer protections and examining ways the state can take advantage of blockchain technologies and digital assets,” according to reporting by CNBC.
The order appears both to encourage using crypto technology for several purposes while ensuring safeguards.
The order calls on various state agencies — including the Business, Consumer Services and Housing Agency and the Department of Financial Protection and Innovation — to work in collaboration on recommending policy approaches.
“Newsom is sure to encounter skeptics, given concerns about the security of crypto and the speculative money that’s poured into digital assets. Criminals stole a record $14 billion worth of cryptocurrency last year, according to a report by data firm Chainalysis, and the SEC announced Tuesday that it will almost double its staff responsible for protecting investors in crypto markets.”
The United Kingdom on May 6 detailed the authorities that the government is planning to give the Digital Markets Unit, a new regulator established last year “to take on the dominance of tech giants.”
If the plan is finalized, the new watchdog would enforce rules to better enable consumers to switch social media accounts and smartphone platforms without losing personal data. Tech firms would have to alert small companies about changes in search algorithms, and the watchdog could get involved in “pricing disputes between online platforms and news publishers to ensure media companies get paid fairly for their content, the government said.”
Breaking rules enforced by the watchdog would result in fines of up to 10% of the tech giants’ annual global revenue, according to the Associated Press.
“Authorities in Britain and across Europe have been leading the global push to clamp down on tech companies amid rising concern about their outsized influence and harmful material proliferating on their platforms.”
Various: Plaid cofounder announces new Column bank venture
Several news outlets and commentators picked up on the April 21 announcement by William Hockey, co-founder and ex-CTO of Plaid, that he and his wife, Annie, launched Column. The new venture bills itself as “the only nationally chartered bank built to enable developers and builders to create financial products.”
The couple spent about $50 million last year to acquire “Northern California National Bank, a 15-year-old bank with one retail branch in Chico, California, and roughly $300 million in deposits,” according to Forbes’ writeup. “The purchase lets them offer a fuller set of services that fintechs usually get from multiple financial institutions and software providers.”
The Forbes article said: “The problem the Hockeys are trying to solve is that fintechs and large tech companies often need to cobble together a patchwork of financial services partners to offer basic products. They need a chartered bank that can hold deposits and a separate ‘middleware’ software provider to connect the chartered bank’s systems to their own tech. Then they need a banking ‘core processor’ to actually move money. ‘After working in this space for almost 10 years, this supply chain is kind of silly,’ William says. ‘All this should be consolidated into a chartered bank that is also a technology company.’
TechCrunch wrote that William Hockey had kept a “low profile” after stepping down from his executive positions at Plaid. “But he’s been anything but idle, quietly creating the platform for what he believes is the first bank of its kind: a ‘financial infrastructure’ bank.”
Chris Skinner said on his The Finanser blog that the new startup is “worth watching.”
“Finally a true BaaS (Banking-as-a-Service) company,” he wrote. “What William has spotted is that most banks are not offering a truly open platform to others.”
Hsu, who has expressed skepticism in the past about crypto, said the growth of the developer community, the discussion around crypto’s value toward financial inclusion and the public policy concerns among regulators make now a golden opportunity for government and the industry to ask: “What do we want the system to look like?”
“We should have that discussion now. Now is exactly when we should say, ‘Okay, what are the choices? What are the trade-offs that we want to make so that the system works for us instead of us working for the system.’”
Hsu pointed to pending legislative discussion about a potential licensing regime for stablecoin issuers and said stablecoins are “basically functioning like money in the blockchain system.”
“If you want to trade off innovation versus stability and predictability, for stablecoins, we may want to err on the side of stability and predictability.”
His agency, the Office of the Comptroller of the Currency, also issued a statement April 27 by Hsu in which he called for a “standard setting initiative” to ensure the openness and inclusiveness of stablecoins.
In the statement, which was released after Hsu’s appearance at a symposium, he pointed to the standard setting bodies IETF (Internet Engineering Task Force) and W3C (World Wide Web Consortium) that established technical foundations for the internet.
“Stablecoins lack shared standards and are not interoperable. To ensure that stablecoins are open and inclusive, I believe a standard setting initiative similar to that undertaken by IETF and W3C needs to be established, with representatives not just from crypto/Web3 firms, but also including academics and government,” Hsu said.
Adrienne Harris, the head of the New York State Department of Financial Services, issued guidance April 28 encouraging cryptocurrency firms to use blockchain analytics tools.
As reported by the Wall Street Journal (and other publications): “‘Blockchain analytics tools provide companies with an efficient, data-driven way to conduct customer due diligence, transaction monitoring and sanctions screening, among other things, which are all critical elements of our virtual currency regulation,’ Ms. Harris said in a statement. ‘We expect regulated entities to utilize best practices to uphold the safety and soundness of the virtual currency market and to protect consumers.’”
According to one expert, “the guidance marks the first time any state or federal regulator has set explicit expectations for cryptocurrency transaction monitoring and the use of blockchain analytics,” the WSJ reported.
In a letter to all virtual currency companies licensed in the state, Harris said blockchain analytics could help firms address anti-money laundering requirements and compliance controls such as Know Your Customer rules, transaction monitoring and sanctions screening.
The “unique characteristics of virtual currencies present compliance challenges,” but “they also present new possibilities for control measures that leverage these new technologies. For example, virtual currencies, by their nature, typically enable provenance tracing (i.e., review of previous transfers or ‘hops’ along the public blockchain ledger, or ‘on-chain’),” Harris said in the guidance.
“Put differently, the blockchain ledger’s immutability typically allows a historical view of a virtual currency transmission between wallet addresses, providing the opportunity for greater visibility into transaction lineage than is typically found with traditional, fiat funds transfers.”
A study released by FinRegLab provides the first independent empirical research on the performance of tools designed to help lenders explain and manage machine learning models in consumer credit.
The report, written by FinRegLab researchers as well as Laura Blattner and Jann Spiess of Stanford University, suggested cautious optimism that currently available tools can help lenders address concerns about transparency and assess compliance with certain consumer protection obligations. It also offers cautious optimism about the ability of automated machine learning approaches to help lenders find greater fairness in consumer credit underwriting, subject to performance tradeoffs.
“[T]he results … emphasize that responsible use of these tools adds an important dimension to the many consequential decisions that lenders must make—and will be accountable for—when they adopt machine learning to extend credit,” FinRegLab CEO Melissa Koide said in a press release accompanying the study.
This study suggests that responsible use of machine learning underwriting models requires careful consideration of a series of governance questions: what kind of machine learning model to use; how much complexity to enable; what tools to use to understand model behavior; what information produced by such tools means; and what actions, if any, are needed to mitigate aspects of model behavior.
The study, “Machine Learning Explainability & Fairness: Insights from Consumer Lending,” is focused on the capabilities, limitations, and performance of model diagnostic tools in generating individualized disclosures to explain why particular applicants were rejected or charged higher prices and analyzing what aspects of the model drive disparities in predictions among different demographic groups. The study relies on a set of underwriting models that use different types of machine learning and have various levels of complexity to illuminate the tools’ performance in specific regulatory contexts.
Later this year, FinRegLab will supplement this report with an evaluation of the tools in supporting firms’ efforts to comply with bank model risk management expectations.
Mastercard and Microsoft announced a joint venture on April 25 in which the software giant’s AI technology will help power Mastercard’s Digital Transaction Insights “to help financial institutions and credit issuers better detect fraud while approving genuine transactions,” ZDNet reported.
“According to the press release [issued by the two companies], the goal of the partnership is to facilitate safe and frictionless online transactions for consumers and business owners. The technology can better defend against fraudsters who get hold of consumer information and use it to dispute legitimate transactions,” the article said.
Digital Transaction Insights combats fraud by using Mastercard’s authentication tools to verify a consumer’s identity. The joint effort integrating Microsoft AI technology “will be used to facilitate online transactions, including ones made from smartwatches and digital wallets.”
“‘Shopping online should be simple, quick and secure. But that isn’t always the case. We’re committed to developing advanced identity and fraud technology to help enhance the real-time intelligence we provide to financial institutions around the globe,’” Ajay Bhalla, president of cyber and intelligence at Mastercard, said in the press release.
In an April 18 story, American Banker reported on efforts by the Federal Reserve to hire staff with technology backgrounds, including the addition of at least seven ex-employees from Circle and one former employee from Ripple.
The hirings came to light in a February report released by a watchdog known as the Tech Transparency Project, the news outlet reported.
“Though comprehensive, the list does not provide an exhaustive accounting of the Fed’s hiring to date. It also represents the beginning of what promises to be a bigger buildout as the central bank looks to meet digitization objectives with looming deadlines,” the article said. “The Fed is preparing to roll out its FedNow real-time payments system next year and, in accordance with a White House directive issued last month, is weighing the pros and cons of developing its own digital currency.”
One day earlier, the news site offered more insight behind the Office of the Comptroller of the Currency’s plans to designate a deputy comptroller to oversee newer innovative banking companies as well as technology service providers.
A senior OCC official said “the move will allow specialists ‘more of a bird’s-eye view’ of new developments in financial services and promote consistent treatment across the agency’s regions of national banks that partner with fintechs or have cutting-edge business models.”
It was widely reported that the payments giant Stripe is launching a crypto payouts feature as part of its Connect platform.
In the initial phase, the new service will enable Twitter to let certain creators receive freelance earnings via the stablecoin USDC.
“It’s Stripe’s first significant push into crypto since dropping support for bitcoin four years ago. The San Francisco-based start-up stopped accepting payments via bitcoin in January 2018, citing the digital coin’s notoriety for volatile price swings and a lack of efficiency in making everyday transactions,” according to CNBC.
The payouts will be facilitated over the Polygon network, which also offers integration with Ethereum. According to CoinDesk, “Stripe said it will add support for additional rails and payout currencies over time.”
A feature story in VentureBeat looked at how conversational AI tools are improving customer-service experiences years after chatbots first came on to the scene.
Innovations from tech leaders such as Google and Microsoft as well as conversational AI specialists are offering “more sophisticated conversational AI tools, from smarter chatbots and asynchronous messaging to voice and mobile assistants,” VentureBeat said.
“Now, machines can not only better understand the words being said, but the intent behind them, while also being more flexible with responses.”
Some providers have “platforms that have user interfaces tailored for both the technical and non-technical user; out-of-the-box integrations; and a wide variety of channels.” Giant cloud providers, meanwhile, offer services such as translation, natural language understanding and speech-to-text services.
A new report by Juniper Research says that regtech spending by private businesses will triple to $204 billion by 2026, making up more than half of regulatory compliance budgets worldwide, according to analysis of the research by FinTech Magazine.
The new research “predicts that BaaS models, which include outsourcing regtech services such as digital onboarding, will be key in accelerating AI-based automation for online document verification and KYC (Know Your Customer) processes.”
The report projects that 26% of digital onboarding systems in the banking sector will use AI by 2026, compared to just 8% this year. BaaS (Backend-as-a-Service) models will also be used to “expand the use of AI in banking for more comprehensive tasks, including fraud detection and mitigation,” according to the FinTech Magazine article.
A recent piece in Inc. Magazine focused on analysis by Louis Fischer of CB Insights about which “business opportunities [will be] ripe for the taking” in the metaverse.
According to the article, Fischer believes “it will be more than 10 years before any online metaverse-type experience reaches Ready Player One levels of immersion and interactivity.”
That’s not due to a lack of innovation by companies creating such experiences. It’s because, he says, the metaverse depends on six layers of technology — and each has a wide range of companies that are shaping it.”
Those layers include network and processing infrastructure; the interface determining how people will experience the metaverse; “Virtualization Tools,” or the “[tools] and game engines to help developers and designers build metaverse worlds and experiences, including avatar development and 3-D modeling and capture; virtual worlds; economic infrastructure; and “the activities in which individuals can actually immerse themselves within the metaverse.”
The last “layer is ‘where a lot of the fun stuff is coming up,’ Fischer says.”
A story in the New York Times Magazine profiles the excitement and skepticism about the “large language model” created by OpenAI known as Generative Pre-Trained Transformer 3, or GPT-3.
Rudimentary versions of AI-based neural nets that track language are well-known through the autocomplete features on everyday email or word processing software. But “with enough training data and sufficiently deep neural nets, large language models can display remarkable skill if you ask them not just to fill in the missing word, but also to continue on writing whole paragraphs in the style of the initial prompt,” the article said.
Some believe software like GPT-3 could revolutionize Internet searching and customer service. “Any company with a product that currently requires a human tech-support team might be able to train an L.L.M. to replace them,” the story said.
“But as GPT-3’s fluency has dazzled many observers, the large-language-model approach has also attracted significant criticism over the last few years. Some skeptics argue that the software is capable only of blind mimicry — that it’s imitating the syntactic patterns of human language but is incapable of generating its own ideas or making complex decisions, a fundamental limitation that will keep the L.L.M. approach from ever maturing into anything resembling human intelligence.”
The Depository Trust & Clearing Corporation, which provides clearing and settlement services for financial market participants, announced April 12 that it plans to launch a prototype “to explore how a [Central Bank Digital Currency] might operate in the U.S clearing and settlement infrastructure leveraging distributed ledger technology (DLT).”
The prototype, known as Project Lithium, is being developed in partnership with the Digital Dollar Project, which aims to promote discussion around the creation of a CBDC. U.S. policymakers are still examining whether to establish a digital dollar through the Federal Reserve System.
The pilot “aims to demonstrate the direct, bilateral settlement of cash tokens between participants in real-time delivery-versus-payment (DVP) settlement,” the company said in its announcement.
In its reporting on the plan, CoinDesk said that while “a CBDC can serve multiple purposes, Project Lithium is particularly focused on the needs of the financial services industry, such as how a CBDC could benefit the clearing and settlement of securities.”
Acting Comptroller of the Currency Michael Hsu joined the chorus of policy voices calling for stablecoin issuers to be regulated more like banks.
In a speech on April 8, Hsu “pushed back against suggestions that stablecoins could be regulated as money market funds” and said “‘a banking approach would be more effective,” according to American Banker’s writeup of his remarks.
The news website pointed out that the comments by the head of the Office of the Comptroller of the Currency echoed similar arguments made by other federal policymakers, including Treasury Secretary Janet Yellen and Under Secretary for Domestic Finance Nellie Liang. Last year, the President’s Working Group on Financial Markets urged Congress to limit stablecoin issuance to insured depository institutions.
American Banker quoted Hsu as saying: “‘Provided that the activities and risk profile of a stablecoin-issuing bank could be narrowly prescribed, a tailored set of bank regulatory and supervisory requirements could balance stability with efficiency.’”
WIRED Magazine published a detailed investigation into how the cryptocurrency tracing firm Chainalysis has played a crucial role in criminal probes.
The story centers on how the company’s founder, Jonathan Levin, partnered with law enforcement agencies in the U.S. and other countries to help bring down Welcome to Video, a Dark Web site that had distributed “child sexual abuse material” to over 1 million members in exchange for Bitcoin.
The story illustrates the misperception of cryptocurrencies as being anonymous. In reality, tracers like Chainalysis show how transactions that exist in a blockchain can be readily tracked.
“The counterintuitive truth about Bitcoin, the one upon which Chainalysis had built its business, was this: Every Bitcoin payment is captured in its blockchain, a permanent, unchangeable, and entirely public record of every transaction in the Bitcoin network,” the story said. “The blockchain ensures that coins can’t be forged or spent more than once. But it does so by making everyone in the Bitcoin economy a witness to every transaction. Every criminal payment is, in some sense, a smoking gun in broad daylight.”
The Washington Post recounted the story of an ex-cop from New Jersey who fell victim to a cryptocurrency “catfishing” scam, targeted by a woman he had met on an online dating app.
“Scams are rapidly multiplying in the lightly regulated province of crypto, experts say, each boosted wallet and disappeared dollar underscoring just how mainstream the thievery has become. The Federal Trade Commission estimates that Americans lost $750 million to crypto scams in 2021, and the number could rise this year,” the article said.
The woman encouraged him to try “liquidity mining,” and directed him to a seemingly legitimate website for depositing crypto that would handle the mining. He ultimately invested $15,000 and encouraged family members to invest too.
“And then one day in early December, he got a call from his nephew. The nephew’s money was gone. Had Jenkins heard anything? Jenkins said he hadn’t but went to check his own wallet. All $15,000 of his money had disappeared, too.”
The story paints a less-than-hopeful picture about law enforcement’s ability to stop such scams. “No one agency seems to have latched onto the scam that snatched Jenkins’s money, even though a Washington Post analysis of the blockchain records available suggests it is truly of staggering dimensions — with likely more than 5,000 victims in multiple states and $66.3 million stolen since August.”
It was a busy week in Washington on the crypto policy front. Treasury Secretary Janet Yellen spoke on April 7 offering an update on the administration’s approach to a central bank digital currency. According to the Wall Street Journal, Yellen said launching a CBDC “‘would require years of development, not months.’”
Following the Biden administration’s release of an executive on crypto regulations, Yellen “said that policy makers should approach the industry with a tech-neutral approach, crafting new policies based on how to best protect against risk, rather than necessarily targeting new forms of technology.”
Also on the agenda this past week was a bill unveiled by Sen. Pat Toomey, R-Pa. and ranking Republican on the Senate Banking Committee, “to create a three-pronged regulatory framework for stablecoin issuers in the U.S.,” as reported by CoinDesk. A draft of the bill “would define a ‘payment stablecoin,’ authorize the Office of the Comptroller of the Currency (OCC) to create a new license specific to stablecoin issuers, allow insured depository banks to issue payment stablecoins and address state regulatory oversight of this segment of the crypto industry.”
Finally, the Federal Deposit Insurance Corporation issued guidance April 7 instructing any bank under the FDIC’s watch “to check in with the agency if it’s currently or planning on pursuing any cryptocurrency-related activities,” according to American Banker.
These steps come on the heels of U.K. regulators sending “red alert” warnings in March, warning crypto companies about potentially misleading advertisements.
American Banker waded further into the debate over whether AI-based tech companies or traditional credit scorers such as FICO are better at assessing the creditworthiness of loan applicants.
Software companies have been accused of bias in their lending algorithms, but firms that use AI counter that their models are more objective than human underwriters.
In fact, FICO’s CEO told the news outlet that “his company is evolving the FICO score by making use of some of the same alternative data fintechs use.”
“‘All the lenders and all the fintechs and FICO share the same desire, which is to get as much credit into responsible hands as we possibly can,’ [Will] Lansing said.”
Fintech lenders argue that the FICO score is too opaque, the article said. “‘The biggest black box out there is FICO,’ said Teddy Flo, chief legal officer at Zest AI, an AI lending software provider.”
Following the release of a Citi report estimating a Metaverse market value of as high as $13 trillion, U.K. commentator Chris Skinner argued on his Finanser blog that “the metaverse is nothing new” and still poses risks for money management.
“Virtual worlds can be fun but, when it comes to money, it’s not fun,” he wrote.
Skinner recounted when Linden Labs’ Second Life platform began to lose popularity in 2007 after a crackdown on virtual gambling facilities and the collapse of the platform’s banking system. The closure of the game’s virtual Ginko Bank left users with massive real losses.
“The main issue is that the virtual world was unregulated. When Ginko Bank disappeared, Linden Labs – the creator of the Second Life platform – had demonstrators outside their offices for months, asking for their money back,” Skinner wrote. “Initially, Linden Labs said it’s not our problem. Eventually, they changed tack and said if you want to be a bank in the virtual world, you have to be a bank in the real world, and that is the main message and lesson.”
At the end of March, Darrell West of the Brookings Institution published a report entitled, “Six Steps to Responsible AI in the Federal Government.”
“There is widespread agreement that responsible artificial intelligence requires principles such as fairness, transparency, privacy, human safety, and explainability. Nearly all ethicists and tech policy advocates stress these factors and push for algorithms that are fair, transparent, safe, and understandable,” West wrote. “But it is not always clear how to operationalize these broad principles or how to handle situations where there are conflicts between competing goals. It is not easy to move from the abstract to the concrete in developing algorithms and sometimes a focus on one goal comes at the detriment of alternative objectives.”
His six recommendations for how to operationalize AI across the federal government include establishing “concrete codes of conduct”; using tools that promote ethical values and fight bias; setting “clear evaluation benchmarks and metrics”; using technical standards to help solve common problems; experimentation through pilot projects; and combining technical and nontechnical skills in the workforce.
The Harvard Business Review published an article March 21 in which management development researchers studied “what makes a company ‘future ready.’”
The paper, authored by Director Howard Yu and four research associates at the Center for Future Readiness at the International Institute for Management Development, in Switzerland, analyzed leading companies in four industries to determine “who is ready for the many changes the near future will bring — and who is not.”
“Becoming future ready means scaling up capabilities relevant to future competition. In previous research, we found that a company must make regular shifts in its know-how in order to stay ahead of competitors over the long run. If a company’s know-how stagnates, it will face competition from copycats, fall behind in advancements, and eventually fail,” they wrote.
The IMD Center’s “future-readiness indicator” assessed companies on seven factors: financial fundamentals, growth prospects, management diversity, productivity based on factors such as revenue per employee, and “the trajectory of new product rollouts.”
The article stated that 2021 “was a year for fintech innovation” as the dramatic move toward online shopping and financial management “permanently shifted consumer behavior.” While newer fintech firms such as Block “were near the head of the pack,” the highest-ranked financial services firms based on future readiness were the incumbent credit card payment networks Mastercard and Visa.
“How did these companies prosper when Apple Pay and Google Wallet seemed poised to make plastic cards obsolete? Instead of trying to outrun fintech disruptors and tech giants, Mastercard and Visa partnered with their rivals, to the benefit of all involved. Specifically, they invested heavily in a wide range of application programming interfaces (APIs),” the article said.
An op-ed published in CoinDesk on March 31 said perceptions of the cryptocurrency sector could improve as a result of two developments: a Biden administration directive that federal agencies craft a joint approach to crypto, and a Ukrainian government policy to accept donations via crypto for the country’s defense against Russia’s invasion.
“If the crypto industry builds off both events, it can help correct misguided thinking about digital assets and help lawmakers create intelligent, long-lasting regulation that protects investors without compromising the innovation that has fueled the industry’s growth,” wrote Katherine Flocken and Rachael McWhirter, both of FS Vector. “The opportunity is historic,” they said.
Since the Biden executive order welcomed industry engagement on future crypto policies, they wrote, “it created openings for crypto companies and industry organizations to gently educate agencies, which have struggled to understand how crypto works and why it improves on fiat monetary systems.”
Numerous publications picked up on a report released by Citi on March 31 estimating that the market “for the Metaverse economy could grow to between $8 trillion and $13 trillion by 2030.”
“Gaming is viewed as a key Metaverse use case for the next several years due to the immersive and multi-player experience of the space currently,” the banking giant said in the report. “But we believe that the Metaverse will eventually help us find new enhanced ways to do all of our current activities, including commerce, entertainment and media, education and training, manufacturing and enterprise in general.”
In its story about the report, Fortune magazine noted that “Citi’s not alone in its bullish predictions. Earlier this year, Goldman Sachs’ Eric Sheridan called the metaverse an ‘$8 trillion market opportunity’.”
Fast Company magazine reported on April 1 that the Chinese tech giant Tencent froze accounts using the company’s WeChat app because they were linked to NFTs.
“According to a statement from the company, this was to ‘rectify’ public profiles in order to ‘combat speculation in virtual currency transactions.’”
But the move could be tied to China’s general crackdown on crypto. At least a dozen accounts were reportedly frozen, but “the one for Tencent’s own NFT trading venture, Magic Core, was left alone,” the article said.
“As crypto has barreled into the mainstream worldwide, China has fought to keep the movement under control, arguing that virtual money is volatile and risky, and branding it the currency of fugitives and scammers. It has banned government-unsanctioned digital assets from banks and vendors, and criminalized Bitcoin mining in coal-rich regions under threat of stiff punishment.”
Some of the frozen accounts “were reportedly accused of fraud. Others must now submit certificates of cooperation with state-approved blockchain enterprises, which could presumably lift their suspension—although further regulation is surely on the horizon.”
WIRED Magazine ran a story April 4 on how AI algorithms are being utilized by intelligence analysts to monitor intercepted messages from Russian soldiers in Ukraine. The story opened with a dialogue among Russian soldiers that had been captured from an unencrypted radio channel.
“As the soldiers spoke, an AI was listening. Their words were automatically captured, transcribed, translated, and analyzed using several artificial intelligence algorithms developed by Primer, a US company that provides AI services for intelligence analysts,” the article said.
The story pointed out how certain AI tools like natural language processing (used by financial firms and regulators to analyze things such as consumer complaints) could soon become instrumental in military efforts.
“Gathering and analyzing data using AI could eventually become central to battlefield operations. The US military is investing millions to develop AI software capable of ingesting and analyzing different signals in the field.”
While unencrypted Russian transmissions have already been shared on social media, the article said, “it’s the use of natural language processing technology to analyze Russian military communications that is especially novel.”
TIME magazine ran a long profile on March 23 of Ethereum creator Vitaly Buterin, whom the article referred to as the “Prince of Crypto.”
The feature, which focuses on how “Buterin has watched the world he created evolve with a mixture of pride and dread,” was the cover story in a special issue of the magazine released as an NFT on the blockchain. The magazine partnered on the project with LIT, a web3 cultural currency; Circle; and Transient Labs. “The magazine will live on the blockchain but is hosted through a decentralized protocol allowing holders to read the magazine in its entirety through an interactive NFT,” TIME said in a March 18 press release.
The story discussed Buterin’s early childhood in Russia and his being introduced to computer coding and Bitcoin at a young age. It also delves into Buterin’s concerns about some of the effects of Ethereum’s soaring growth, and his hope for cryptocurrency platforms to have socioeconomic benefit. “Buterin worries about the dangers to overeager investors, the soaring transaction fees, and the shameless displays of wealth that have come to dominate public perception of crypto.”
“‘There definitely are lots of people that are just buying yachts and Lambos,’” he told the magazine.
Several publications focused on the details of the Securities and Exchange Commission’s proposed climate-disclosure rule. A March 23 story published by CNBC looking at winners and losers said software “companies that can automate the carbon accounting and reporting processes” for firms subject to the rule stand to benefit.
The news outlet interviewed Kentaro Kawamori, the CEO of Persefoni, which provides software for carbon footprint reporting.
“‘Just like Salesforce created the system of record for the customer record, companies like us — you will have one or two big winners — will create a system of record for the carbon accounting piece,’ Kawamori said.”
Reena Aggarwal, a Georgetown professor, said there will be a mix of AI and human judgment involved in the process.
“Certainly, financial services companies will use artificial intelligence and data analytics in carbon accounting as it has been in financial accounting, but ‘they’ll always be some role for human beings,’ Aggarwal told CNBC.”
American Banker spotlighted financial services companies that are “experimenting in the metaverse.”
The piece noted that in the early 2000s some banks established branches in Linden Lab’s Second Life virtual world. “This time around, banks are setting up lobbies, games and methods of letting users buy and sell game tokens and turn them into cash.”
For example, JPMorgan Chase created a lounge in Decentraland, “a virtual world in which users can buy digital plots of land,” the trade publication said.
“When your avatar walks into the Onyx by J.P. Morgan lounge in Decentraland, you find yourself in a room with an illuminated portrait of Jamie Dimon, a pacing tiger, and a couple of wall-mounted displays. Clicking on one of the displays starts a video ‘demo’ of how payments could be made in space using smart contracts. Another shows a timeline of the bank’s blockchain projects.”
HSBC plans to acquire a virtual land plot in The Sandbox, a virtual gaming environment. “HSBC will use its plot to connect with sports, esports and gaming enthusiasts,” the article said. American Express has hinted at metaverse-related plans by filing various trademark applications, including one “for e-commerce software that lets consumers perform electronic business transactions in the metaverse.”
CoinDesk published a feature story on March 21 about the “hot-and-cold relationship between local communities and crypto mining operations.”
The article focused on Plattsburgh, a city in Upstate New York that is a popular draw for cryptocurrency mining because of “dirt-cheap electricity.” But in 2018, Plattsburgh issued an 18-month moratorium on mining to address concerns about a strain on the local power supply. The concerns arose partly because “there’s less [power] to go around” in the winter when heating costs rise.
“For several months in a row, Plattsburgh’s miners, in combination with high residential power usage, pushed the city to the brink of its power quota, forcing the municipal power authority to buy expensive power on the spot market to keep the lights on,” the article said.
The moratorium was lifted early after the city worked out an arrangement to pass on electricity costs to miners instead of residents. But one mining firm, Coinmint, “pushed back against the new rules.”
“Plattsburgh answers a question that more and more lawmakers will soon be asking themselves: What happens when you ban crypto mining?”
Commentators and legal experts have continued to weigh in about a significant expansion of authority by the Consumer Financial Protection Bureau to crack down on “unfair, deceptive, or abusive acts and practices,” known as UDAAPs.
The CFPB revised its exam manual on March 16, defining “any discrimination involving a consumer financial product or service as ‘unfair,’” as noted in a March 22 opinion post by Catherine Brown and Paul Marker of Klaros in LendIt Fintech News.
Brown and Marker wrote that CFPB Director Rohit Chopra has already been clear that the agency “will use its UDAAP authority to address discrimination, even when traditional fair lending laws do not apply.” They said the agency may also expand its use of Bayesian Improved Surname Geocoding (BISG) to identify cases of discrimination, including under the “disparate impact” doctrine.
“With the revised manual, the CFPB is poised to use its broad UDAAP authority as an enforcement tool to combat discrimination throughout the entire product life cycle of every consumer financial product and service, with a particular focus on those areas that existing regulations do not specifically cover, and those that have been relatively untouched by regulators historically,” they wrote.
American Banker reported on the CFPB news March 18. (Subscription required.)
Welcome to the inaugural launch of Seen & Heard. This online feature from AIR — Alliance for Innovative Regulation, will on a regular basis compile and share recent news stories and online posts highlighting key issues, pressure points and developments in digital finance and regulatory innovation.
American Banker’s John Adams interviewed Yevhen Matasar, a Ukraine-based web developer for the Lithuanian digital payments company Paysera, about the horrors of living under Russian bombardment in the war between the two countries.
The article reads: “‘This is a very difficult situation,’ said Matasar from his car, parked in the dark outside a home in a small Ukrainian village as night fell. ‘You can hear the bombs and the fighter planes.’”
Paysera, which supports mobile POS payments, NFC cards and other services, is among “financial technology companies that are active in the region… working to evacuate some staff from Ukraine while protecting the employees who stay behind,” according to the news site.
The developer moved to a rural area about 20 miles away from Kyiv when Russia invaded.
“For Matasar, the weeks since Russia’s invasion began have been a dance between two lives. With one foot in the world before Feb. 24, Matasar still programs for Paysera when he can. But all the while, he’s dealing with the reality of a deadly military assault nearby. ‘It’s helpful to be able to continue to work,’ said Matasar, who is living with his parents and other relatives.”
The FIDO Alliance released a new white paper this month to advance its concept of a passwordless future. “This work is dedicated to eliminating passwords and securing the simple act of logging on within the enterprise,” said the authentication-focused group made up of leading tech firms and large financial institutions.
The paper drew the attention of WIRED Magazine that wrote about the alliance’s “Big Bet to Kill the Password for Good” on March 17.
FIDO’s executive director and chief marketing officer told the magazine that the usability of passwordless authentication solutions will determine their success.
“‘The key to being successful for FIDO is being readily available—we need to be as ubiquitous as passwords,’ says Andrew Shikiar, executive director of the FIDO Alliance. ‘Passwords are part of the DNA of the web itself, and we’re trying [to] supplant that. Not using a password should be easier than using a password.’”
The paper discusses the features of various FIDO Authenticator types. “Roaming Authenticators” attach to a client device via USB, Bluetooth or NFC. “This means that even smartphones can act as authenticators for a separate client device,” according to the white paper. Meanwhile, “Platform Authenticators” are “implemented in a computing device playing the role of the client in the FIDO standard.”
POLITICO published a story on March 15 about “a rift” among progressives in the Democratic party over how they view the cryptocurrency sector.
The article said Senator Elizabeth Warren of Massachusetts leads a segment of the party “warning that … [crypto] exposes consumers to danger, is ripe for financial crimes and is an environmental threat because of its electricity usage.” Another vocal critic is Senator Sherrod Brown of Ohio, the chairman of the Senate Banking Committee.
But some lawmakers on the left “are embracing the startup industry” and are “arguing against regulations that could stifle what proponents say is a new avenue for financial inclusion and a breakthrough alternative to traditional banks.”
They include freshman House member Ritchie Torres of New York, a member of the Congressional Progressive Caucus, who “said New York City … should embrace crypto if it wants to remain the financial capital of the world.”
Other Democrats taking positions that suggest support for crypto include Senate Finance Chair Ron Wyden of Oregon, Rep. Josh Gottheimer (D-N.J.), Rep. Jim Himes (D-Conn.), and Sen. Cory Booker of New Jersey.
Chinese regulators are continuing to show more teeth when it comes to regulating fintech platforms, according to reporting by the Wall Street Journal.
Citing unnamed sources, WSJ reported March 14 that China’s central bank could impose a record fine on the parent company of WeChat Pay — a mobile digital payment and wallet service based in China — for alleged violations of anti-money-laundering and “Know Your Customer” rules.
Among the allegations against the company Tencent, the article said, are that “its ubiquitous mobile payments network was … found to have allowed the transfer and laundering of funds with illicit transactions such as gambling, the people added.”
As first reported by Bloomberg and on the company’s blog, the crypto firm Gauntlet — which describes itself as a “financial modeling and simulation platform for blockchains” — announced Series B financing of $23.8 million, bringing the company’s total valuation to $1 billion. The financing round was led by the global investment firm Ribbit Capital.
The company says $38 billion of assets “now depend on Gauntlet’s financial modeling framework.”
“As the decentralized finance ecosystem develops and grows in complexity, the importance of strong risk management infrastructure becomes even more apparent,” said Nick Shalek, General Partner at Ribbit Capital, on the blog. “Gauntlet’s expertise in risk management and capital optimization will ensure that the company continues to play a key role in facilitating broader adoption of DeFi — ultimately driving institutional capital inflows towards protocols that adopt Gauntlet’s risk frameworks and products.”
Stay informed by joining our mailing list