15 PUB. 12 2022 ISSUE 2 Financial services companies that have yet to define their ESG goals and objectives will need to undertake readiness assessments. Human capital, social, and governance matters will likely be a top priority. Evaluating an organization’s data inventory related to these areas can help serve as a cornerstone. Climate impact remains a complex factor for many organizations. The convergence of investor and consumer demand with the overarching possibility of mandated reporting for some companies will likely propel deployment of resources to advance corporate ESG programs. Next Steps: Each company is unique; there isn’t a one-size-fits-all solution. Align, Plan, and Execute No matter the size and scope of your ESG program, aligning goals and incentives, and correlating the framework to consistent ESG reporting, can help move you a step ahead. Your investors, customers, suppliers, and community all have a stake in your success. Your employees have both a stake and a responsibility to make these efforts impactful. Planning and insight, followed by execution, can help produce results for your institution. Fintech: Non-Digital Assets Relevant Issues: Investments and Regulations Global venture capital investment in fintech companies exceeded $200 billion in 2021.The pace of traditional nonventure capital investment is roughly as high as well. With such large amounts of capital invested, fintech companies are succeeding in challenging the traditional business models of old-line brick and mortar financial institutions. This results in a convergence of fintechs in the market that traditional banks serve. In addition, many fintechs service markets that traditional banks have been unable to service. Fintech companies in the Americas received roughly half of these investments, while companies in the rest of the world received the rest. Premoney valuations of fintech companies continue to increase substantially. Fintech companies are subject to various levels of regulation. The regulatory environment depends upon the jurisdiction in which each company operates. However, most regulators and governments around the world have been slow to keep up with the quickening pace of these companies’ activities. Next Steps: Prepare for Investment Growth The pace of investment in fintech companies isn’t expected to slow, at least in the short term. Consolidation and mergers and acquisitions (M&A) are expected to surge, some of which will be international. Fintech companies that focus in the cryptocurrency area are expected to continue their explosive growth. Digital Assets Relevant Issues: Reporting and Tracking Requirements The infrastructure bill attempts to redefine the definition of a broker. This could possibly push cryptocurrency exchanges like Coinbase and others to begin reporting 1099 information to the IRS on behalf of their customers, similar to requirements for traditional brokerages. That’s a starting point, but it will be difficult to assess what regulations will help track information without being overly burdensome to the cryptocurrency space and effectively slow down innovation. 1099 Tracking Some traditional rules will be hard to follow, especially in the decentralized finance (DeFi) space where customers interact directly with a protocol rather than a human service provider. Forcing 1099 tracking or Know Your Client (KYC) rules on these types of platforms may be a near impossible ask. If 1099 tracking is possible, it could be overly burdensome to the industry. Investors who buy and hold as a long-term investment may see similar treatment to buying and selling stock. Those who mine or stake cryptocurrency will likely end up with ordinary income treatment under Tax Notice 2014-21. No specific guidance currently exists for the treatment of non-fungible tokens (NFTs). Digital art purchases may be deemed to fall under the IRS’s definition of a collectible, which has an even higher tax rate than stock or other cryptocurrency if held long-term. Tracking Software Applications Those who trade cryptocurrency probably engage in numerous other activities in the DeFi space such as staking, liquidity pools, or yield farming. Many thirdparty cryptocurrency tracking software applications now exist to help aggregate and track various transactions, including activity on DeFi platforms and NFTs. Transfer of Funds from Banks to Cryptocurrency Exchanges The potential decline in customer deposits is a major issue the traditional banking sector faces. Customers are pulling out a percentage of, or in some extreme cases all, their funds from traditional banks and moving funds to centralized and decentralized cryptocurrency exchanges like Coinbase. Visa announced a new service to help banks determine how to provide services for cryptocurrency and digital asset holders. A Visa study also found that 40% of consumers who already own cryptocurrency would be Continued on page 16
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