Treasury and Bitcoin

The U.S. Department of the Treasury issues its FinTech report as bitcoin gains institutional momentum.

Given all the attention to cryptoasset trading over the past two weeks, it's a bit strange that the U.S. Department of the Treasury makes no mention of it in its long-awaited FinTech report (PDF).

Yet bitcoin was designed and is used as a cryptocurrency, and Treasury and its Office of the Comptroller of the Currency would seem to have some interest in currency regulation, as economics consultant and writer Lyric Hughes Hale pointed out to me. (See Crypto Currents, below, for two announcements that increase the momentum of mainstream cryptoasset investing.)

Central bankers may not consider bitcoin and other cryptocurrencies to be money, but the business of using bitcoin as a means of payment seems to be picking up. CoinATMRadar.com shows more than 2,100 ATMs and tellers in the United States and more than 200 in the greater Chicago area.

I had a conversation with Marc Grens, co-founder of DigitalMint, a Chicago-based bitcoin developer and ATM operator, at the Aug. 1 Chicago Payments Forum meetup. The firm currently operates in 18 states in convenience stores and currency exchanges, serving as a low-cost way to transfer funds immediately.

I ate a bit of crow on this one. After all, I'm the guy who writes about payments and FinTech and has managed technical communications teams for advanced trading and securities processing systems, and I did not have a bitcoin wallet installed on my mobile. Truth be told, I even had a bit of difficulty with Venmo (that, at least, was installed). Marc helped me install a wallet and paid me faster in bitcoin than with Venmo or cash, even with the wallet installation time. (It's the Mycelium wallet, in case you are wondering.)

It seems, then, that Treasury is considering bitcoin strictly as an asset class, leaving all regulatory guidance to the U.S. Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC), without comment in its report. Or maybe it just considers bitcoin too rogue, as a Treasury comment on bitcoin came last week during a speech at a blockchain legal conference by the head of the department's Financial Crimes Enforcement Network (FinCEN). In short: laws must be complied with.

The two most notable sections of the Treasury report concern consumer data aggregation and the institution of a special-purpose banking charter for FinTech firms. Treasury issued the 222 page report on July 31.

On the data aggregation side, the Treasury report notes that financial institutions and aggregators generally agree that consumers have a right to secure and reliable access to their financial data. Treasury takes it a step further toward the "open banking" provisions in the United Kingdom and Europe by saying that consumer rights to data access are covered under Section 1033 of Dodd-Frank; a bank simply providing online access to consumers is not sufficient to meet the terms of the Act.

Bank consultancy Cornerstone Advisors summarizes the data-aggregation provisions and points out some the missing pieces in its GonzoBanker blog:

The Treasury’s report and recommendations go nowhere deep enough in addressing the complexities of how the data is used and how to deal with the issues of what data is stored and where it’s stored. The report’s consistent reference to “data aggregators and fintech applications” ignores the role of non-FinTech players like the big tech behemoths (Amazon, Google, Apple, e.g.) and even retailers (Starbucks, Walmart, etc.) who are increasingly offering funds storage and payment (i.e., financial) capabilities. Lastly, financial institutions should be concerned about the future costs of complying with any regulations concerning the standardization of consumers’ financial data elements. How those standards will even come about should be of some concern.

On the special-purpose bank charter, Treasury called on the OCC to accept applications for nonbanks to apply for a special-purpose, national charter. The office complied on the same day. Some states, notably New York, are incensed, especially after suing the OCC over the charter proposal late last year. The suit was dismissed in May because the claim of harm was speculative, given that the charter was not in effect.

For their part, bankers are "freaking out" over fears of a "FinTech Apocalypse," reports Steve Cocheo in The Financial Brand. "While many executives representing the legacy banking’s industry are freaking out about the potential fallout, some experts say the announcement isn’t all doom and gloom. In their view, the future looks more nuanced, and see these developments as holding promise for all players."

American Banker provides its top six take-aways from the report.

One thing to keep in mind is that though a document like this provides regulatory recommendations from Treasury, it also takes political positions, as Aaron Klein, policy director of the Center on Regulation and Markets for the Brookings Institution reminds us. The Wall Street Journal reported on the Treasury report from a purely political perspective, positioning Klein as the Democratic opposition. Klein's quote prompted me to email him and ask about the quote and how it ignored the report's generally positive tone in supporting financial innovation.

Klein's full analysis also points out strengths of Treasury's report from a consumer perspective and notes a number of important areas where it missed the mark on supporting consumer-centric innovation:

It was disappointing that Treasury used the potentially bipartisan, white board backdrop of FinTech and innovation to needlessly weigh into an already issued regulation on payday lending. What exactly is the connection between promoting financial technology and regulating store-front payday lenders? There are opportunities to promote innovation like alternative credit scoring, especially cash flow underwriting, and implementing real-time payment systems (a technology that other nations have had for years).

Treasury seized a bit of that opportunity with moderate language pushing the Federal Reserve to move faster and advocating that financial regulators provide clarity for new credit underwriting approaches. Treasury even advocated for itself by suggesting more funding for the IRS that could modernize government technology to better allow FinTech’s access to data. But in the end, Treasury’s decision to politicize a document that could have been broadly embraced in order to support more payday lending is an unfortunate mistake that will likely obfuscate some of the report's more interesting and broadly supported recommendations.

Overall investment in FinTech globally at mid-year surpasses 2017 results

"In the first 6 months of 2018, global investment in FinTech – across VC, PE and M&A — was exceptional, driven in part by two massive deals — the $12.9 billion acquisition of WorldPay by Vantiv and the $14 billion VC funding round raised by Ant Financial," reports KPMG in its "Pulse of Fintech 2018"(PDF). London-based research firm FinTech Global also reports record funding in the first half of 2018, putting investment so far at $41.7, including the Ant Financial and WorldPay deals.

Brexit has not has much effect on London's FinTech investment. As CityAM reports, "The UK has attracted more investment in FinTech than any other country worldwide for the first half of the year, raking in $16.1bn (£12.3bn). China came in second place with $15.1bn, followed by the US with $14.2bn."

In the U.S., VC investment reached a new high of more than $3 billion in Q2, with five of the top 10 deals in Q2 going to seed or early stage companies. "At the same time, the fintechs able to attract later-stage funding so far in 2018 likely reflect investor confidence in their ability to become US market leaders, if they are not leaders already," KPMG reports. For deal-by-deal breakdowns in U.S. FinTech sectors by San Francisco-based investment bank Financial Technology Partners, see its market analysis for August 2018 and its July 2018 IPO Infographic.

Which locations are drawing FinTech companies?

As interesting as the investment data may be, this report from commercial real-estate services and investment firm CBRE is even more so. "Irrespective of their size, the strongest markets for financial technology companies have a workforce that aligns to best serve all distinctive skill set and cost requirements." That may not be a starting conclusion but top locations on CBRE's list are not the ones that get the most publicity.

CRYPTO CURRENTS

Momentum to make crypto-assets safe for institutional investors grew with two announcements over the last two weeks. First, Northern Trust, one of the more conservative financial institutions and asset managers, told Forbes on July 31 that it plans to "pave the way for cryptocurrency hedge funds" and expand its blockchain initiatives.

"While Northern Trust Hedge Fund Services had $370 billion in assets under management as of March 31, 2018, the financial institution is not currently taking direct custody of cryptocurrency. Nor does (NT corporate and institutional services president Pete) Cherecwich expect the company will custody cryptocurrency in the near future. Instead, he says helping the company’s customers account for their cryptocurrency investments is part of a larger effort to prepare for the day when fiat currencies are also issued on a blockchain," writes Michael del Castillo.

New York Stock Exchange parent Intercontinental Exchange (ICE) said last week that it is building Bakkt, "which intends to leverage Microsoft cloud solutions to create an open and regulated, global ecosystem for digital assets," according to the announcement.

Fortune contributor, Wall Street veteran, and crypto expert Caitlin Long considers it a double-edged sword. "It's likely the beginning of Wall Street creating financial claims to bitcoin out of thin air (and not backed by actual bitcoins), which could offset some of Bitcoin’s algorithmically-enforced scarcity. Perhaps that's why bitcoin's price declined slightly after today's announcement by ICE," she writes in a cogent analysis of the crypto market.