Hello Fintech Friends,

Welcome to another exciting week of fintech updates. In this edition, we will continue our coverage of key topics such as crypto regulation, enforcement, central bank digital currencies (CBDCs), and payments, not only in the U.S. but also across various countries. We are also thrilled to introduce a special contribution on open banking from the Policy Edition’s friend, Phil Chang, which is the first in a series of contributions on open banking that Phil will be sharing with us over the next three weeks.

As always, if you are not yet subscribed to the Policy Edition of This Week in Fintech, make sure to subscribe below! Additionally, if you are interested in contributing to the Policy Edition as a guest writer to cover ongoing events or dive deep into fintech policy issues, please feel free to reach out to me on Twitter or LinkedIn.

1. Crypto Regulation

In the U.S., Rep. Maxine Waters (D-CA), the ranking member of the House Financial Services Committee, made an unconventional request to Janet Yellen, the Secretary of the United States Treasury, and Gary Gensler, Chair of the Securities and Exchange Commission (SEC), regarding the draft digital assets market structure legislation, which we covered in previous weeks. Waters asked Yellen and Gensler to not only share their views on the bill but also suggest any desired changes. The bill, released by Committee Republicans in June, is scheduled for a committee vote in the upcoming weeks.

Internationally, several countries have made significant progress in crypto regulation. In South Korea, the Virtual Asset User Protection Act was passed, marking the country's first legislation specifically addressing digital assets. This act outlines regulations that virtual asset operators must adhere to in order to ensure the security of user assets. Meanwhile, in New Zealand, the central bank recently concluded that immediate regulatory action on stablecoins and crypto is not required, although it emphasized the need for increased vigilance. In the UK, the Financial Services and Markets Bill (FSMB), which includes crucial provisions related to crypto and stablecoins, received royal approval and has become law. This paves the way for the Treasury, Financial Conduct Authority, Bank of England, and Payments Systems Regulator to introduce and enforce regulatory measures for the sector.

Turning to Indonesia, the Commodity Futures Trading Supervisory Agency (CFTSA) took a distinct approach from the U.S. SEC in terms of digital asset classification, officially designating 501 cryptocurrencies, including some that the SEC considers securities, as commodities. In the EU, representatives from the European Parliament, national governments, and the European Commission have reached a political agreement on new bank-capital legislation. This legislation aims to prevent unbacked crypto from entering the traditional financial system by assigning a maximum risk weight of 1,250% to free-floating cryptocurrencies, which imposes significant costs for banks holding such assets on their balance sheets. Additionally, a political agreement has been reached on the upcoming Data Act, which will implement "kill switches" allowing administrators to terminate smart contracts in the event of a security threat.

2. Enforcement

In recent news, the SEC has reportedly called the new wave of filings for bitcoin-linked exchange-traded funds (ETFs) "inadequate," which prompted Fidelity to reapply for approval. The new application revealed that the applicant’s exchange operator Cboe BZX Exchange intends to enter into a surveillance-sharing agreement with crypto exchange Coinbase. Such an agreement enables the exchange to provide and share pertinent information about market trading activity, clearing activity, and customer identity, overriding any rules, secrecy, or blocking laws that might impede the process. In another development, a federal court ruled that cryptocurrency exchange Kraken must disclose account and transaction details to the Internal Revenue Service (IRS) for users who conducted transactions exceeding $20,000 in a calendar year between 2016 and 2020.

Shifting the focus to the fintech sector, trade finance fintech company PayServices announced its intent to sue the San Francisco Federal Reserve after being denied a master account despite being a fully reserved business with no lending activities. And in a rather surprising (and perhaps comical) turn of events, the Consumer Financial Protection Bureau fined payment processor ACI Worldwide Corp. $25M over a testing error that occurred in 2021. ACI mistakenly used actual consumer data during tests, which led to transaction files being processed as authentic, resulting in 500,000 borrowers being erroneously asked to pay $2.3B. This error exposed them to overdrafts and penalty fees, leading to the regulatory fine.

3. CBDCs

Last week, the European Commission announced two important proposals related to a “single currency package.” The first proposal is focused on guaranteeing continued access to euro banknotes and coins throughout the euro area, while the second aims to establish a legal framework for the potential introduction of a digital euro. The Commission clarified key aspects of the digital euro, stating that it would be accessible through banks and payment service providers. Notably, it would not necessitate a bank account, could be utilized offline for in-person transactions, could be stored locally on devices up to a certain limit, would prioritize user privacy by not enabling user identification by the European Central Bank (ECB), and would not be programmable.

4. Payments

In addition to the “single currency package,” the European Commission also put forward proposals to increase competition and improve consumer protection in electronic payments last week. The new proposals seek to facilitate fintech companies’ access to bank accounts and payments infrastructure on par with traditional banks. Moreover, the Commission aims to establish clearer guidelines on sharing information between banks and other payment firms that would be compliant with EU data protection regulations.

5. Open Banking (from our guest contributor, Phil Chang, General Counsel of Method Financial)

On June 14, 2023, Rohit Chopra, the Director of the Consumer Financial Protection Bureau (CFPB), testified on Capitol Hill. Among the topics discussed was the CFPB’s proposed open banking rule expected this October.

The likely impact of open banking cannot be overstated. As Director Chopra testified: “Just to be clear, open banking is going to probably be one of the most important things we should probably all work on together. It’s basically about the future of finance and how do we shape it in ways that is good for consumers, businesses, and others.”

To be sure, open banking already exists to some degree in the US. Millions of people have likely used it, perhaps unknowingly, if they’ve connected their accounts to personal financial management apps for example. The CFPB’s upcoming rule, however, will bring necessary clarity to this regulatory gray space. And with it will likely come an explosion of different use cases and competition among financial service providers. As Director Chopra testified, open banking should give consumers increased account portability, more access to credit, lower APRs, higher APYs, and improved customer service quality. Because, as he noted, consumers’ ability to vote with their feet will force service providers to improve across the board.

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See you next week!