Karsten Wenzlaff, Advisor
August 26th, 2025
Karsten Wenzlaff is a Crowdfunding and Fintech Expert from Germany. He is Secretary-General of Digit[...]
Category Archives: Regtech, Compliance, Governance
CFPB’s New Rule Boosts Open Banking Standards
Open Banking Jun 12, 2024
Image: Freepik
CFPB Publishes Final Rule on Personal Financial Data Rights
The Consumer Financial Protection Bureau (CFPB) has published final rules for personal financial data rights (PDF)| Newsroom announcement, which focuses on recognizing industry standard-setting groups. The approved rule is a part of a larger initiative to enhance consumer's control over their financial data and promote open banking by implementing Section 1033 of the customer Financial Protection Act. Here's what you need to know.
10 Takeways
1. The final regulation will go into force on July 11, 2024. This gives companies one month to get ready for compliance.
2. The rule lays out the procedure by which industry organizations can be recognized by the CFPB. Consensus standards will be created by recognized organizations to help with the new Personal Financial Data Rights rule's compliance. The CFPB also released this guide.
3. Five essential characteristics that standard-setting bodies must exhibit are: transparency, openness, balance, due process and appeals, and consensus. These characteristics ensure fairness, inclusivity, and transparency of the standards that are set.
See: Open Banking: Revolutionizing Financial Data Sharing
4. This is an open role opportunity. All interested parties, including consumer advocacy organizations, app developers, and different financial institutions, must have access to the processes and procedures of standard-setting bodies. Because of its diversity, no one group is able to dominate the market.
5. To prevent any one group from dominating, decisions must take into account the interests of all parties involved. Meaningful representation from both big and small entities must be part of any decisions.
6. Rather than being created by unanimity, standards must be formed by universal agreement (consensus standards). This guarantees that every opinion is taken into account while creating standards.
7. Accredited organizations are required to have written, publicly accessible policies as well as equitable procedures for hearing appeals and settling disputes. This includes providing sufficient notice of meetings and time for review and objections as per this MortgagePoint article.
8. Transparent methods must be used to create standards which must be open to the public. As stated by American Banker, "this transparency is crucial for maintaining trust and ensuring that the standards are developed openly."
9. Organizations must reapply for standards accreditation after their five-year recognition period is over. This recurring evaluation makes sure that the requirements are met throughout time and that the criteria are still applicable.
See: Open Banking Regulation in the U.S. Strikes a Chord
10. The rule lays the groundwork for future rules that will rely on these acknowledged standards, even if it does not impose any immediate costs for compliance. It is recommended that financial institutions and fintech startups are ready to comply with these agreed norms in the future.
Rohit Chopra, CFPB Director:
"Industry standards can be weaponized by dominant firms to maintain their market position, undermining competition for all. Today's rule will prevent these firms from rigging standards in their favor by identifying attributes the CFPB will use to recognize standard setters"
Image: Freepik/tonodiaz
Implications of CFPBs Final Rule
CFPBs final rule on personal financial data rights is a big step towards open banking and open finance in the US. Here's what it means to various stakeholders.
Empowerment (Control), Access and Potential Cost Savings for Consumers
- Thanks to the ability to share their financial information with fintech companies and other third parties for individualized financial services, customers have more control over their financial information.
See: Credit Reference Agencies Are Coming For Your Data
- Boosts financial inclusion by providing underprivileged communities with access to specialized financial services via fintech innovation and open banking.
- The rule aims to lower long-term costs and improve efficiency through uniform methods, but it does impose certain early expenses on industry participants. Consumers may benefit from these cost savings, which would increase the accessibility and affordability of financial services.
Fintechs
- The rule gives fintechs the chance to innovate and provide services that are competitive by allowing data sharing. By having direct access to customer data, smaller fintech businesses can better compete with larger incumbents in the market.
- Fintechs must make sure that the new standards are followed, which will come with compliance costs and the creation of safe data-sharing solutions.
Financial Institutions
- To comply, banks and other financial organizations must adjust their data-sharing procedures to comply with new rules and accepted norms. To be competitive, this may require more tech expenses and potentially a new business strategy.
- According to American Banker, the law permits banks to charge reasonable fees to third parties for access to their data, which helps them defray the expenses of compliance and data security improvements.
See: 2023 Data Privacy in North America – Year in Review
- The rule requires standard-setting organizations to have open and honest procedures, guaranteeing that customers are aware of the uses and sharing of their data. This boosts confidence in the banking sector
Standard Setting Groups
- The rule outlines the requirements for being recognized as a body that sets standards, placing a strong emphasis on openness, balance, due process, consensus, and transparency. These organizations will be essential in creating and upholding the industry standards.
- To make sure that standards keep up with developments in the market and with emerging technologies, recognized bodies are required to go through periodic assessments every five years.
Outlook
It is anticipated that CFPBs new rule will promote innovation, increase consumer empowerment, and guarantee equitable competition between fintech startups and financial institutions.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Insights from the Tokenization Report Act of 2024 Hearing
Tokenization | Jun 11, 2024
Image: Tokenization of RWA Tokenization Report Act of 2024 (youtube)
US Congress considers the regulatory challenges and benefits of tokenization
On June 5, 2024, Washington lawmakers discussed the "Tokenization Report Act of 2024" (HR 8464), which is sponsored by Rep. William Timmons and co-sponsored by Rep. Ritchie Torres in the 118th Congress. The Act mandates a thorough report on the advantages and disadvantages of asset tokenization using blockchain technology, the variations between blockchain networks, the current level of interoperability, and international regulatory strategies.
The Federal Deposit Insurance Corporation, the Comptroller of the Currency, the National Credit Union Administration Board, and the Board of Governors of the Federal Reserve System are to jointly submit this report. Within 180 days after the act's passage, the report must be given to the Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services.
See: U.S. House passes FIT21 with Bipartisan Support
Strong regulations are required to control the tokenization of RWAs, as recent talks in Washington have shown. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), among other legislative and regulatory organizations, are investigating the applicability of current securities and commodities rules to tokenized assets. The classification of digital tokens is a central topic of discussion in the policy space. The question of whether tokenized assets belong in the securities, commodities, or new asset class categories is being investigated by regulators. This classification will have a big impact on the regulations, taxes, and trading of these assets.
The Tokenization Report Act of 2024 (HR 8464)
Objectives
- Determine how blockchain technology is being used for asset tokenization, both now and in the future.
- Determine regulatory implications such as possible obstacles to regulation and suggested policies to deal with them.
- Examine the effects of tokenization on market liquidity, investor protection, and financial stability.
- Actionable suggestions should be given to legislators in order to promote a well-balanced regulatory environment that promotes innovation and protects the interests of all parties involved.
Scope of the Report
- An analysis of the advantages and disadvantages of tokenizing traditional assets via blockchain networks, taking into account effects on counterparty risk, cost, and settlement efficiency.
- The differences between permissioned and permissionless blockchain networks are compared, along with the consequences for asset tokenization.
- An evaluation of the state of blockchain integration and interoperability across various networks and platforms, as well as the implications for broad adoption.
See: Citi’s PoC Success in Private Market Tokenization
- Review of emerging global regulatory approaches to tokenizing traditional assets including capital requirements.
- An assessment of the additional guidelines or rules required to support the tokenization of traditional assets.
- An examination of how blockchain networks' control features affect traditional assets that have been tokenized and how much of their current risk profiles they can carry.
- Synopsis of the regulations and legal framework around the tokenization of traditional assets using blockchain technology.
The act also requires the federal agencies concerned to gather public feedback in order to inform the report's development. This makes sure that when developing the regulatory framework, the opinions of different stakeholders—such as investors, technology developers, and industry experts—are taken into account.
Key Takeaways from the Hearing
The real-world asset (RWA) tokenization's disruptive potential was highlighted during the House Financial Services Subcommittee on Digital Assets' recent hearing on the topic. Chair French Hill highlighted how blockchain technology may lower costs, improve efficiency and transparency, and alleviate liquidity concerns in order to modernize U.S. markets. See more at blockchain tipsheet
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The Intelligence Authorization Act for Fiscal Year 2025 (S.4443) incorporates Senator Mark Warner's Terrorist Financing Prevention Act (S.3441), which requires the identification of foreign financial institutions and digital asset facilitators involved in unlawful transactions. Although the goal of this action is to stop the funding of terrorism, there are worries about the growing sanctions and regulatory costs on the digital asset market.
See: Real World Implementation of Real Estate Tokenization
There was no denying the partisan divide during the hearing. Democratic members emphasized consumer safeguards and fraud prevention, frequently criticizing recent regulatory initiatives like the Financial Innovation and Technology for the 21st Century Act (FIT 21). Republican members, on the other hand, emphasized the innovation and efficiency brought about by tokenization.
The Depository Trust and Clearing Corporation's Nadine Chakar emphasized how tokenization could improve the architecture of the financial markets. Nonetheless, there was a general consensus regarding the necessity for balanced legislation and the clarity of regulations. Representative Wiley Nickel and Vice Chair of the Subcommittee Warren Davidson expressed support for more precise rules to encourage innovation in the digital asset market.
RWA Tokenization Trends for 2024
- Tokenization is being adopted for a variety of asset classes by major financial institutional organizations, including HSBC, Goldman Sachs, and BlackRock. These establishments are employing blockchain technology to provide digital renditions of conventional financial instruments, including as money market funds and bonds.
See: MAS Update: Asset Tokenization in Project Guardian
- To support the expansion of the tokenization business, strong regulatory frameworks are being developed. The Electronic Trade Documents Act of the United Kingdom, for example, is compliant with blockchain applications and guarantees a safe and controlled environment for tokenized assets.
- Decentralized finance (DeFi) protocols are increasingly using tokenized RWAs as collateral. The adaptability and usefulness of tokenized assets are increased by this integration, which makes it possible to offer more advanced financial products and services (BIT Blog).
- There is a lot of room for expansion in the tokenized asset market across a number of industries, such as commodities, real estate, and the arts. The growing awareness of tokenization's advantages among institutional and retail investors is what is driving this expansion.
Conclusion
The Tokenization Report Act of 2024 is essential because it lays the groundwork for well-informed government that promotes innovation while defending investor interests. The future of tokenization will be shaped by the continuing legislative initiatives and regulatory conversations, opening the door to a more effective and inclusive financial environment.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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The Importance of Having a Business Contract Lawyer in Your Network
Jun 9, 2024
Image: Pexels/Sora Shimazaki
In the complex world of business, having the right professionals in your network is crucial. One such indispensable professional is a business contract lawyer.
Whether you're a startup or a well-established enterprise, the expertise of a contract lawyer can be a game-changer for your business. Here's why:
Expertise in Drafting and Reviewing Contracts
A commercial contracts lawyer has the special knowledge needed to draft and review contracts accurately. Their expertise ensures that all the necessary details are covered, reducing the risk of future disputes.
With their help, businesses can be confident that their interests are protected, and all agreements are clear and fair. They carefully check every clause and term, making sure everything is legally sound and beneficial for the parties involved.
Risk Management
When it comes to managing risks in business, a contract lawyer is a valuable asset. They help identify potential issues before they become big problems. For instance, a contract lawyer can point out terms in a contract that might expose your business to unnecessary risks.
By addressing these risks early, they help keep your business safe and avoid costly mistakes. In essence, having a contract lawyer means you have someone who is always looking out for your best interests, ensuring that all your agreements are solid and secure.
Ensuring Compliance
Making sure your business follows all laws and regulations is crucial, and this is where a contract dispute lawyer can help. They are experts in understanding the rules that apply to your business and ensuring that your contracts meet these standards.
By doing so, they help you avoid legal troubles that can arise from non-compliance. Having a lawyer check your contracts regularly means you can focus on growing your business, knowing that you are following all the legal guidelines.
Their guidance ensures that your agreements are in line with current laws, preventing issues that could disrupt your business operations.
Negotiation Support
A contract lawyer helps when you need to make a deal. They talk to the other side for you. They make sure you get a good deal. This means they help you get what you want and also make sure the other side is happy. They know how to talk about the tricky parts of deals.
They can help you if the other side tries to make you agree to something that might hurt you later. Having a lawyer means you don't have to worry about the hard parts of making deals. They do the tough talking so you can focus on your business.
Protecting Intellectual Property
A contract lawyer plays a crucial role in protecting your business's intellectual property, which includes ideas, inventions, and brand names. They help you secure your rights to these valuable assets by creating strong contracts.
These contracts make sure that others cannot use your intellectual property without your permission. This protection is important because it keeps your unique ideas and products safe from being copied or stolen.
By having a lawyer handle this, you can rest assured that your business's creative work and innovations are well-guarded, allowing you to maintain a competitive edge in the market.
Handling Disputes
When disagreements happen in business, a contract lawyer can be very helpful. They step in to solve problems quickly and fairly. If you end up in a disagreement about a contract, your lawyer knows what to do. They work to fix the issue without going to court, which saves time and money.
However, if you must go to court, they will represent you and fight for your side. Having a contract lawyer means you have someone who understands how to manage disputes, ensuring that your business remains safe and strong.
Building Trust and Credibility
Working with a contract lawyer helps your business build trust and credibility. When your contracts are clear and fair, other businesses and partners see you as honest and reliable. A lawyer ensures that all agreements are easy to understand and fair to all sides. This makes people more willing to do business with you.
When your business consistently follows through on its promises, it builds a solid reputation. Over time, this trust helps your business grow and attract more opportunities. Having a contract lawyer shows that you take agreements seriously, which strengthens your business relationships.
Streamlining Business Operations
Streamlining business operations means making your business work more smoothly and efficiently. A contract lawyer helps in this process by simplifying agreements and making sure everything is clear and straightforward. When contracts are easy to understand, it saves time and reduces confusion.
This means that your business can run without unnecessary delays. By having well-organized and simple contracts, you spend less time dealing with mistakes and more time focusing on what's important-growing your business.
A contract lawyer's help ensures that all parts of your business work together seamlessly, making everything run better and more efficiently.
Cost Efficiency
Cost efficiency means saving money and using your resources wisely. A contract lawyer can help your business save money. They make sure contracts are clear and fair. This helps you avoid big problems that could cost a lot of money later.
When contracts are simple, it takes less time to understand them. This means your business can run smoothly and you can spend less on legal issues.
By handling everything properly, a lawyer helps you not waste money. They make sure every deal is good for your business, so you keep more of your hard-earned money.
Securing Funding
Securing funding is about getting money to help your business grow. A contract lawyer can make this easier. They help you get the best deals when you borrow money or find investors.
They make sure the terms are good for you and check that everything is legal. This way, you avoid problems later. With a lawyer's help, you can feel safe knowing your business has the money it needs to succeed without hidden troubles.
Learn All About Business Contract Lawyer
In conclusion, having a business contract lawyer is very important. They help with making and checking contracts, managing risks, making sure you follow laws, and handling disputes. They also protect your ideas and inventions, help with negotiations, and make your business trustworthy.
See: Ryan Reynolds-Backed Canadian Fintech Nuvei Buyout Talks
By streamlining operations and saving costs, they make business easier for you. With their help, your business can grow confidently and smoothly.
Did you find this article helpful? Check out the rest of our blog.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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ESMA Releases Statement on AI in Retail Investment Services
Regulation | Jun 5, 2024
Image: AI and Retail Investment Services, ESMA Statement
AI in Retail Investment Services Guidance Released by the European Securities and Market Authority (ESMA)
The European Securities and Markets Authority (ESMA) has published a public statement on the use of Artificial Intelligence (AI) in retail investment services. The document offers important advice for investment organizations hoping to balance the risks and rewards of artificial intelligence, especially those that provide retail investment services in the European Union (EU). Chief Operating Officers (COOs), Chief Compliance Officers (CCOs), and other senior management in charge of implementing and overseeing how AI technologies are used in their companies.
Important to note that the EU's AI Act was given final approval on May 21, 2024, (effective 2026), by establishing a comprehensive legal framework that regulates the application of AI across a variety of industries, including financial services, and possibly setting a new global standard for AI regulation.
See: EU: MiCA, DORA, Open Finance Framework, and Digital Euro
While ESMA's guidelines are primarily concerned with MiFID II compliance and the use of AI in retail investing services and to support participants in understanding the legal requirements and industry best practices for incorporating AI into their operations while maintaining ESMA standards compliance and protecting the interests of their clients.
5 Select Takeaways from ESMAs Statement
1. Protecting Client Interests
Behave in the best interest of clients. Businesses need to make sure that the use of AI tools in investment decision-making is transparent. This means being transparent with clients about how AI is used in decision-making procedures, and making sure the information is delivered clearly without misrepresentation.
See: Christine Lagarde Advocates for a European SEC
- Do you tell your clients up front about how AI affects their investment decisions?
- Do your clients receive accurate, impartial, and non-misleading information from our AI tools?
2. Improving Governance and Oversight
Management must take responsibility and ownership of the application of AI technologies within their firms. So establishing a strong governance framework to monitor AI's performance and how it aligns with the company's risk tolerance, strategy, and overarching compliance structures is key.
- What governance does your company have in place today to keep track and evaluate the use of AI applications?
- How well does your management even understand the AI technologies we are using?
3. Effective Risk Management
This includes understanding the quality and types of data being used to train AI systems, regular testing, and monitoring of AI models to mitigate potential risks and biases. Special focus on the performance and integrity of AI applications and use.
See: The Necessity of Copyrighting Your Voice in 2024
- Is your data quality sufficient and reliable for your AI requirements?
- Do your regularly test and monitor our AI models for risks and biases?
4. Staff Training and Competence
Firms must adequately train all staff using AI technologies on operational aspects, potential risks, ethical considerations, and regulatory implications. Training and upskilling must be continuous to adapt to the quickly changing regulatory landscape.
- Does your staff and leadership adequately trained on the use of AI technologies?
- Is there a continuous learning program to keep up with evolving AI technologies and regulations?
5. Keep Detailed Records
To ensure compliance with MiFID II requirements and provide a clear audit trail for regulatory review, companies are expected to keep extensive records documenting the use of AI technologies, including decision-making processes, data sources, algorithms, and any modifications over time.
Read: AI’s Impact on Competition: Bureau Calls for Insights
- Does your firm maintain comprehensive records of its AI applications, decision-making, and use?
- Does your company meet the MiFID II requirements regarding AI record-keeping practices?
Conclusion
Stay up to date with this AI in retail investment services statement from ESMA. Innovate while maintaining investor confidence by establishing a strong risk management culture and meeting regulatory requirements.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Regulatory Demands: Fintechs Caught in the Crossfire?
Regulation | Jun 5, 2024
Image: Freepik/rawpixel
Podcast Insights: Hester Peirce on SEC Rule-making and Regulatory Demands
In a recent podcast interview hosted by Compliance Week titled "Regulatory Demands," SEC commissioner Hester Peirce, often known as "Crypto mom," is blunt in her criticism of the SEC's rule-making process. However, what does this signify for investors, innovators, and fintechs—the main participants in the game?
Transparency Concerns
"We've seen a flood of rulemaking come out of the SEC in the last year or two... I have some concerns that the Commission hasn't been as engaged in public outreach as it could be, and the best way to write rules is to get input from the people who are actually going to be complying with them...If we start treating it as a burden rather than a privilege to get the input of the public, then our rules just won’t be as good, and they won’t stand the test of time."
Peirce focuses her critique on the SEC's lack of public outreach. "We've seen a flood of rulemaking come out of the SEC in the last year or two," according to her, "I have some concerns that the Commission hasn't been as engaged in public outreach as it could be."
See: Peirce Laments, SEC ‘Squandered A Decade’
Fintech companies, which are renowned for their agility and capacity for rapid adaptation, face difficulties as a result of this lack of transparency. According to Peirce, "the best way to write rules is to get input from the people who are actually going to be complying with them," therefore without clear communication and participation in the rule-making process, these restrictions may inhibit innovation and impair their capacity to benefit investors.
Protecting Investors, Not Stifling Innovation
"If a compliance officer is afraid to speak up... The focus should be on what the compliance officer did, not just on the outcome...Innovation is something that the SEC should be encouraging, not stifling."
Peirce goes one step further, emphasizing how these fintech companies may have a chilling effect on compliance officials. "If a compliance officer is afraid to speak up because they're worried about being blamed if something goes wrong," she contends, "The focus should be on what the compliance officer did, not just on the outcome." As Peirce notes, these officers may be reluctant to alert investors to any risks connected to novel financial products out of fear of incurring excessive responsibility, "leaving investors exposed." In the long run, this might make investors less protected.
See: Balancing Fintech Innovation and Regulation
Perhaps Peirce's most important quote is "Innovation is something that the SEC should be encouraging, not stifling," which is a direct call to action for the agency. This is a clear message for entrepreneurs and fintech companies alike. Peirce contends that in addition to safeguarding investors, the SEC should promote an atmosphere that welcomes novel concepts and technological advancements.
Striking the Balance
"We need to be mindful of the costs of regulation, and not just the benefits. When we write rules, we should try to write them in a clear and concise way."
Peirce does concede that rules are necessary. "We need to be mindful of the costs of regulation, and not just the benefits," she asserts. "When we write rules, we should try to write them in a clear and concise way." As Peirce notes, laws that are unduly onerous and complicated can "put a strain on smaller fintechs and innovators," restricting their capacity to compete. They can prosper as long as laws are reasonable and clear, safeguarding investors in the process.
See: Insights from the UK’s Pro-Innovation Regulation Review
Peirce is aware of the difficult balancing act. "The SEC needs to take a thoughtful approach to writing rules for this new and innovative area," she warns. Encouraging innovation while safeguarding investors must be balanced if the financial system is to remain healthy in the long run.
Closing Thought
The interview with Hester Peirce provides an insightful viewpoint on the difficulties faced by financial industry players. Her emphasis on encouraging innovation, emphasizing results over blame, and encouraging open communication are all in line with the goals of NCFA Canada and its members. The SEC can promote responsible innovation in the financial sector and eventually help all investors by pushing for a more balanced approach to regulation.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Elliptic Publishes New Research on AI and Money Laundering
AI Research | May 31, 2024
Image: Freepik/macrovector_official
Elliptic's new AI research advances blockchain analytics, enhancing risk detection and transaction analysis
Elliptic, in collaboration with the MIT-IBM Watson AI Lab, has unveiled updated research showcasing the potential of AI in enhancing blockchain analytics, and more specifically using AI to detect money laundering in crypto markets. The study uses deep learning models to identify money laundering activities, using the extensive Elliptic2 dataset comprising over 200 million transactions. This approach not only detects known laundering patterns but also uncovers new, previously undetectable illicit activities.
Instead of concentrating on finding specific unlawful wallets, Elliptic's AI models identify "subgraphs," which are collections of transactions that indicate laundering operations. A more thorough and precise detection of money laundering is possible with this approach. The AI model used in the study demonstrated remarkable performance measures, such as an F1 score of 0.933 and a ROC-AUC of 0.889. The model's effectiveness was validated through practical testing with a cryptocurrency exchange, which correctly detected 14 out of 52 flagged subgraphs as potentially related to money laundering.
See: FINTRAC Guidance on Bitcoin ATMs and Money Laundering
Elliptic has made the Elliptic2 dataset publicly available in addition to its technical accomplishments in order to promote additional study and advancement in the area. By encouraging cooperation and creativity, this openness hopes to improve the identification of illegal cryptocurrency activity. Read the full research paper here.
Final Thought
The creative application of AI in blockchain analytics by Elliptic's new research is a major advancement in the battle against financial crime. Through the utilization of vast datasets and sophisticated artificial intelligence methodologies, this study improves the security and transparency of blockchain transactions.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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Implications of the BaaS Synapse Collapse
BaaS | May 29, 2024
Image: Freepik/yanalya
The Synapse Collapse and What It Means for up to 10 Million Consumers and the Fintech Industry
Synapse's shutdown is sending ripples throughout the fintech space
The fintech sector has been rocked in recent weeks by the failure of Synapse Financial Technologies, which has surfaced huge issues within the fintech sector’s Banking-as-a-Service (BaaS) model of doing business. Synapse, a high profile BaaS player backed by Andreessen Horowitz (a16z) filed for Chapter 11 bankruptcy in late-April 2024, potentially affecting up to 10 million consumers per TechCrunch. So lots of customers are unable to access their funds exposing vulnerabilities within the BaaS middleware model providing crucial lessons for the entire fintech ecosystem.
Banking-as-a-service (BaaS)
Banking-as-a-service (BaaS) is the delivery of banking services in partnership between a licensed bank and a fintech or nonbank entity. By and large, the services offered are a range of online banking, payment processing, money transfer, lending, and tools to help budget, save, and invest. BaaS allows fintech firms to innovate at speed and to provide financial services at a lower cost of entry. BaaS does have additional risks in the areas of compliance, security, and operational resilience.
What caused the collapse?
Synapse's failure can be attributed to a number of operational and partnership issues. Among these was a €13 million deficient reconciliation problem with its major banking partner, Evolve Bank & Trust, highlighting inherent risks where middleware can delay real-time financial reconciliation. This was further complicated by Synapse using For Benefit Of Accounts (FBO),a common setup with BaaS firms where FBO accounts hold customer funds under a single account on behalf of multiple end-users, which made reconciliation and tracking of customer funds more difficult.
See: Bank-Fintech Partnerships and Trends 2024
To add fuel to the fire, there was a lack of proper management of such technological and operational bugs which eventually resulted in the freezing of the accounts of Synapse as well as the winding up of its operations. So millions of end customers across a variety of fintech applications like Juno, Yotta, and Copper woke up one day and were denied access to their accounts, with no apparent solution in the near term. For customers, it is a cautionary tale of the risks involved when banking with fintech company relying on a BaaS model.
Industry Implications
The implications for the fintech industry and its investors are significant.
- Greater regulatory scrutiny is also likely to follow, with regulators possibly seeking to impose greater constraints to hold fintech companies to account to high expectations of compliance and risk management.
- Andreessen Horowitz, a leading investor in Synapse, and other investors are now cautious and applying more rigor to the commercial sustainability and risk mitigation systems of BaaS providers. There may be less money on offer for new fintech startups and a more risk-averse strategy towards investment.
See: Bain & Co Embedded Finance Report: What It Takes to Prosper in the New Value Chain
- The failure has also sparked a debate as to whether such failures are the nature of the BaaS model or whether such shortcomings can be averted by more effective governance and operational controls. Experts are of the opinion that while the BaaS model itself is not having any fundamental flaw, management of partnership workings, and particularly with banking institutions, has to be managed closely.
- Fintech companies must work out sound reconciliation process, maintain frank communications with banking partners and ensure fulfillment of regulatory requirement.
- Consolidations and M&A may increase across the market as smaller struggling companies are forced out of the market or into the arms of larger, stronger companies, leaving fewer but more robust providers of BaaS.
Insights for Fintech
To avoid running into the same problem that Synapse Inc. encountered, fintech companies are advised to undertake some proactive measures:
- Provide clear and transparent as well as well-documented agreements with banking partners. Periodically review and update such agreements, so that new risks are addressed. The goal is to foster positive, sustainable relationships.
- Test and verify that middleware systems can effectively process complex financial transactions and reconciliation processes.
See: How GenAI Is Transforming Risk and Compliance in Banking
- Compliance. Compliance. Compliance. Adhere tightly to the specifications of the regulatory bodies to avoid major operational gotchas.
- Establish and follow extensive risks management frameworks with contingency plans for operational breakdowns and partnership failures.
The Road Ahead
As the sector looks on amid the ruins of Synapse’s collapse, it is obvious that fintech firms and their financiers will need to re-establish trust and a high degree of operating resilience. The appointment of an unaffiliated Chapter 11 trustee will serve to manage the immediate crisis, but the fallout will be felt among BaaS participants for some time.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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