2017 was a seismic year for fintech, with 2018 already promising another year of radical change. What exactly does 2018 hold? No one knows for sure. Based on client discussions, below are a few educated guesses for the year ahead: 1. More small and medium size enterprise (SME) institutions will integrate distributed ledger technology (DLT). Several financial institutions are investing in, or collaborating with, DLT companies. However, only a few large firms have sought to integrate such technology. DLT, which relies on blockchain technology, creates a common, synchronized record of transaction activity that is shared across network participants in different locations. In 2018, more firms, particularly SMEs, will integrate DLT across different business lines and payments activities. These lines include treasury functions, capital markets, trading, and custodial or fund services. This trend will likely persist through 2019 as institutions realize greater cost efficiencies in storing, protecting, and transferring financial assets and data. 2. The Financial Stability Oversight Council (FSOC) will evaluate the systemic importance of, and possibly designate, large exchanges facilitating digital currency transactions. Title VIII of the Dodd-Frank Act enables the FSOC to designate systemically important payment activities and financial market utilities (FMUs). These are payment activities or FMUs whose disruption or failure could threaten U.S. financial stability. In 2012, the FSOC designated the world’s largest exchange company, the Chicago Mercantile Exchange, Inc. (CME), as an FMU. Last December, the CME began offering bitcoin futures. As virtual currency trading continues to take hold at large institutions, the FSOC may designate exchange participants, such as GDAX and Gemini Trust Company, LLC, as FMUs subject to enhanced supervision and risk management standards. Alternatively, the FSOC might designate digital currency transactions as a systemically important payment activity. 3. Global central banking authorities will take a new tack to dealing with cryptocurrency. Regulation aside, central banks across the world are weighing the benefits and drawbacks of cryptocurrencies, with some even considering adopting their own cryptocurrency. The Federal Reserve Vice Chair of Supervision, Randal Quarles, has encouraged central banks to evaluate digital-currency-use cases, noting that such currencies can impact monetary policy and transform payment systems. Quarles, however, cautioned against central banks issuing digital currencies, citing legal issues and financial stability risks. How and when will central banks participate in cryptocurrency? That is anyone’s guess. However, one thing is clear — central banks are actively exploring new approaches to fiat-backed cryptocurrency. 4. Approval of Square’s industrial loan company (ILC) application will incite other fintech companies to apply for ILC charters. In 2017, Square submitted its application for an ILC charter in Utah. This application will likely be approved in late 2018. ILCs are state-chartered banks that have the same powers and privileges of commercial banks, and are regulated by the Federal Deposit Insurance Corporation (FDIC). While similar to commercial banks, ILCs operate under an exception in the federal Bank Holding Company Act of 1956 (BHCA), which does not include ILCs in the definition of “bank.” As a result, ILCs can be owned and operated by companies that conduct business other than banking. Traditional bank charters do not permit this. ILC applications in 2018 will be bolstered by additional factors, including the breadth of a prospective applicant’s operations, the limited appeal (and regulatory restrictions) of the OCC’s special purpose national bank charter, and the forthcoming transition in FDIC leadership (anticipated to be more accommodating to de novo bank charters, including ILCs).

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