report | Biz Builder Mike

DeFi and Eth2 are whole new convos for regulators, says SEC’s Hester Peirce

December 4, 2020 by bizbuildermike

Hester Peirce, commissioner for the United States Securities and Exchange Commission, explained during an exclusive interview with Cointelegraph that decentralized finance, also known as DeFi, has created new challenges for the SEC.

Peirce, nicknamed “Crypto Mom” for her interest in digital-asset innovation, mentioned that the quickly rising DeFi sector has resulted in a number of unresolved legal issues:

“DeFi has posed a challenge for the SEC in a similar way that the ICO boom did in 2017. What is different here is that the pace of DeFi has actually been much faster. I also think that the legal issues are more difficult to sort out on the DeFi side.”

Although Peirce shared that regulations around DeFi projects may fall outside of the SEC’s purview, some of these projects will likely touch on securities laws. To Peirce’s point, John Whelan — managing director of Santander Bank and chair of the Enterprise Ethereum Alliance — told Cointelegraph that from a financial perspective, DeFi has the potential to enable autonomous programmable digital securities in the future.

However, this remains a long-term goal, as most DeFi offerings consist of tokens that lack liquidity and are used to fund blockchain projects. Still, Peirce advised caution to those involved in the DeFi space. During a fireside chat with Whelan for the “Ethereum in the Enterprise — Asia Pacific” online conference, Peirce mentioned that the crypto community must be cautious when building DeFi projects:

“I caution people to think about what they’re building, and to think about whether it looks like the traditional security. If it does, talk to the SEC because individuals can really get in trouble if they develop one of these things. That would be my advice.”

DeFi challenges SEC by taking away intermediaries

In addition to legal hurdles, Peirce pointed out that the goal behind decentralized finance is removing third-party intermediaries, such as banks and exchanges.

However, Peirce mentioned that the SEC depends on these intermediaries. “Our whole rulebook is built around the notion that you’ve got these intermediaries. So when you take them out of the picture our job as regulators becomes very difficult,” she said.

Not only does this pose a challenge for the SEC, but the lack of intermediaries in DeFi may be to blame for the numerous hacks and fraudulent activities in the space. A report published by blockchain intelligence firm CipherTrace shows that 45% of all cryptocurrency-related hacks during the first half of 2020 targeted DeFi projects. Moreover, intermediaries must be present in order for DeFi applications to be leveraged by institutions and businesses.

Yet Peirce touched on the notion that the financial industry’s lack of innovation is partly due to regulatory barriers. In her fireside chat with Whelan, Peirce explained that regulatory barriers protect traditional financial institutions from competition, something that she is trying to change. “I want to see what happens when you have a really truly competitive playing field,” Peirce said.

Eth 2.0 brings back case for Safe Harbor Framework

DeFi concerns aside, Pierce seems optimistic about the recent launch of the Ethereum 2.0 Beacon Chain, which will surely bring about new projects within the Ethereum community.

Given new developments in the Ethereum network, Peirce explained that her proposed Safe Harbor framework for blockchain projects will likely develop further. She first announced the proposal in August 2019 and outlined it further in February at the International Blockchain Congress in Chicago. In a nutshell, the Safe Harbor proposal would grant network developers a three-year grace period to build decentralized projects without worrying about SEC legal action, provided they meet a basic reporting standard at the beginning of that time.

According to Pierce, she is currently working on version 2.0 of the Safe Harbor framework, yet she doesn’t expect the proposal to be ready anytime soon. The commissioner noted that “it may be slower to come out than the launch of Ethereum 2.0.”

Although this is the case, Pierce recognized that Ethereum 2.0 is evidence that there is still indeed a case for the Safe Harbor framework. She further shared hopes that the new SEC chairman will want to work on issues related to digital asset innovation.

Of course, Ethereum 2.0 could present new challenges for the SEC as well. Whelan pointed out that from a technical perspective, the move away from the probabilistic settlement of a proof-of-work consensus mechanism to the deterministic settlement of proof-of-stake might solve technical challenges while prompting new legal questions for the SEC. Whelan said:

“Ethereum 2.0 has settlement finality built in, meaning after some time the update in the blockchain is final and cannot be revisited. This speaks to questions that come up in legal terms, though.”

Peirce said that she hadn’t considered this before. “I think this is a great point. We want that moment when things are done of course, but I have to think more about what this could mean,” she remarked.

Moving forward with an exchange-traded product based on Bitcoin or Ether

With the rise of DeFi quickly taking over the crypto space, Peirce mentioned that moving forward, the SEC should provide guidance around decentralized finance:

“We have brought enforcement actions and I think we’ll continue to bring enforcement actions. The bigger concern, from my perspective, is we have to go after fraud that’s clear. We have to go after people who violate the rules but I think that until we develop a framework that provides guidance, it’s, it’s really problematic to take an enforcement-first approach.”

Another “pressing issue” Peirce pointed out is the need to provide relief around custody for broker dealers and investment advisers. This is important, as the SEC and the Financial Industry Regulatory Authority outlined a claim in July 2019 saying that a crypto custody service may not be able to sufficiently demonstrate that it actually controls the assets it purports to hold.

Even more interesting is that the SEC may eventually move forward on an exchange-traded product based on Bitcoin (BTC) or Ether (ETH). While Peirce mentioned this, she also noted that progress has been disappointing.

DeFi and Eth2 are whole new convos for regulators, says SEC\’s Hester Peirce

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Cambridge Centre for Alternative Finance, World Bank and World Economic Forum Present Global Study on COVID-19 Impact on Fintech

December 1, 2020 by bizbuildermike

The Cambridge Centre for Alternative Finance (CCAF), along with its partners the World Bank and the World Economic Forum, hosted a presentation this week outlining its findings in a study reviewing the COVID-19 pandemic and its impact on the Fintech industry.

The survey was launched several months back when it became clear that COVID-19 was quickly becoming a global health crisis compelling lockdowns and remote work in an attempt to slow the spread of the highly infectious disease. Fintech platforms have been dramatically impacted by the coronavirus with many experiencing accelerated growth as part of the overall digital transformation occurring in financial services. The Global Covid-19 Fintech Market Rapid Assessment Study surveyed approximately 1400 Fintechs operating in a diverse range of financial services to gauge how the pandemic has impacted digital financial services firms. The CCAF survey held three specific goals:

First, the research looked at the impact of the global pandemic on Fintech markets – understanding how Fintechs are performing financially based on their operating model and jurisdiction among other criteria
Second, they studied the responses of these organizations in shifting their products and operations throughout the pandemic – seeking to understand how these companies are dealing with remote working measures and a more digitized economy
Finally, to identify issues Fintechs are facing on a regulatory front

As one may anticipate, the Fintech industry is performing pretty well during the health crisis with the singular exception of online lending that saw an 8% decline in activity when comparing H1 2020 to H1 2019. CCAF reports that this sector experienced an approximate 10% increase in defaults as borrowers struggled as the coronavirus spread – understandable in light of the economic challenges.

According to the report, the top sectors of Fintech in regards to percentage growth in transactions are as follows:

Digital custody – 36%
Digital asset exchange – 33%
Digital savings – 26%
Wealthtech – 24%
Digital payments – 21%

Anecdotally, there have been some prominent examples of the rapid rise in Fintech services as consumers and businesses were forced to adapt to a new way of existence. Digital payments that are contactless is a clear winner. The Robinhood phenomenon has enticed a new generation of investors to trade online.

Regarding how the various regions are performing the UK was the only sector that saw a transaction volume decline – perhaps due to the oversized impact of digital lending. Otherwise, all other reviewed regions experienced an increase led by the MENA region (Middle East North Africa) rising by 40% and followed by North America and South America (both increasing by 21%).

It is interesting to note that jurisdictions that experienced more stringent COVID protocols such as remote work requirements and business closures, saw higher digital finance transactions. CCAF said that “the higher the COVID-19 stringency, the higher the adoption of Fintech services. The increased adoption is not necessarily caused by the pandemic, but there is a direct correlation between strict lockdowns and increased adoption of Fintech services.”

Many Fintechs launched new products or adjusted services due to the pandemic, adjusting product supply as demand increased or changed.

Regulatory challenges remain a hurdle as many Fintechs indicated they are in need of more regulatory support and faster approvals for financial services.

CCAF said that retail facing Fintechs, in particular Digital Payments, Lending, and Banking, were among the most agile verticals to implement changes to their offerings with a vast majority making changes.

Regarding capital formation, CCAF reported that approximately 40% of “Digital Capital Raising Platforms” indicated that they had been hosting COVID-specific offerings – something Crowdfund Insider has reported on in the past.

One area that may be viewed in a disappointing light is that government entities have been slow to leverage the agility of Fintechs to deliver services during COVID as some governments instituted business support programs to backstop the sliding economy.

A panel followed the presentation of the data generated by the survey with some interesting comments emerging.

Blythe Masters, the former CEO of Digital Asset – now at Motive Partners, noted that while the US is a highly developed country there are still 55 million people or 22% of the population that are unbanked or underbanked. A pretty astounding number. Regardless, Masters said that COVID has accelerated digital transformation in financial services by at least 5 years and perhaps up to 10.

Jon Frost, Senior Economist, Innovation & the Digital Economy, Bank of International Settlements, added that there is a risk of a digital divide and there is some work that needs to be done – alluding to the fact that certain demographics or regions lack access to digital financial products.

Fragmentation in products, more specifically Regtech, is inhibiting growth, said Robert Wardrop, co-founder and Director at CCAF.

Ana Fiorella Carvajal, Lead Financial Sector Expert at the World Bank Group, said please streamline the regulation and provide faster authorization – especially in emerging markets.

And what about the growth in digital assets and digital custody? Masters believes that a maturing industry with more institutional involvement is aiding sector growth. She said that over 8% of Americans own or have owned Bitcoin – a percentage that is increasing.

What is obvious is that Fintech adoption is accelerating and the digitization of finance is inevitable. COVID is acting as an accelerant fueling this digital transformation that bodes well for consumers as well as business – beyond some avoidable hurdles.

The full report will be released later this month. Stay tuned.

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Bahrain and Saudi Capital of Riyadh Named as Top Fintech Ecosystems to Watch Closely: Report

November 27, 2020 by bizbuildermike

The Kingdom of Bahrain and Saudi Arabia’s capital city Riyadh were recently chosen as the top Fintech ecosystems to watch closely, according to a report from research organization Startup Genome.

The researchers at Startup Genome analyzed the economies and deal activities of several different countries. The research team has prepared their report after carefully looking at factors such as funding, exits, talent, focus, and key ecosystem participants such as company founders and policymakers.

Bahrain and Riyadh were notably the only two GCC members that were named in the report as Fintech markets to keep an eye on, along with Japanese capital city Tokyo, Melbourne in Australia, Frankfurt in Germany, and Cairo in Egypt.

Some of the main benefits offered by these fast-growing Fintech hubs included wage subsidy programs from Bahrain’s Labor Fund (Tamkeen). This fund offers a liberal 0% corporate and personal tax scheme along with the Bahrain government’s $11.3 billion Coronavirus stimulus relief package to support local business during these unprecedented times.

As mentioned in the report, the Saudi capital of Riyadh has been focused on the fast-growing digital commerce space. It’s supported by a tech savvy population and a rapidly evolving logistics industry, which has resulted in Riyadh being listed as a Fintech ecosystem to watch closely in the coming years.

The report states:

“Bahrain ranks first in the MENA region and second globally in terms of Islamic finance regulation according to the Global Islamic Finance Report thanks to its standards on crowdfunding and Open Banking. The Bahraini government has reduced capital startup requirements from $50,000 to $100 for some businesses and introduced a regulatory ‘sandbox’ for Fintech.”

The report from Startup Genome also mentioned that Bahrain, Riyadh, Abu Dhabi and Dubai were named as the top Fintech markets in the Middle East region.

Dr. Ebrahim Janahi, CEO at Labor Fund Tamkeen, stated that Bahrain has managed to establish itself as a fast-growing Fintech hub. He added that within a short period of time, the country has built on its track record as a financial centre, and has adopted progressive regulations. Dr. Janahi also said that Bahrain remains committed to “nurturing new talent for this innovative sector.”

Dalal Buhejji, Director of Business Development for Financial Services at Bahrain Economic Development Board, remarked:

“Our ranking as one of the top Fintech ecosystems to watch is testament to Team Bahrain’s years of hard work building an environment that empowers firms of all sizes to rapidly bring new ideas to market. Our financial services sector is one of the most established in the Gulf region, and we have capitalized on that expertise to enable a shift towards digitalisation – something that has been of particular interest among traditional financial institutions during the global pandemic.”

Bahrain’s Labor Fund Tamkeen is a key source of government funding, which includes financial grants and subsidies. Tamkeen is an important part of Bahrain’s support structure for early-stage firms and includes Startup Bahrain, a community-backed project, local angel networks such as Tenmou, accelerators like Flat6Labs and BRINC, VCs such as Middle East Venture Partners and 500 Start-ups. There’s also a $100 million Fund of Funds, called Al Waha.

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