Elon Musk, the visionary entrepreneur known for ambitious ventures such as Tesla and SpaceX, has recently outlined extraordinary plans for X (formerly known as Twitter), vowing to radically transform the way we manage our financial lives.

In this blog post, we delve into X’s ambitions to become an all-encompassing financial platform, examining the challenges and opportunities this endeavour entails, particularly considering a potential expansion into a
regulated market like the European Union.

Furthermore, employing lateral thinking, we envision what additional opportunities X might have in a space regulated by
MiCAR, possibly leading to the creation of its own stablecoin.

Lastly, we understand the importance of account identification processes, initiated a few months ago for the “Blue Tick,” a fundamental prerequisite (now and in the future) for providing techno-financial services.

 

Introduction

During a recent meeting with employees, Musk revealed the goal of expanding X to manage users’ “entire financial lives,” eliminating the need for a traditional bank account by the end of next year.

Elon Musk and CEO Linda Yaccarino’s ambitious project to transform X into an all-encompassing financial platform is taking shape through a series of strategic initiatives. One of the most crucial is obtaining
Money Transmitter licenses across the United States, a process that is not only complex but also fundamental for the legality and functionality of the services they plan to offer.

 

The Authorization Process for Money Transmitter Licenses in the US

In the United States, activities involving electronic payments and, more broadly, the transmission of funds for payment services, are regulated at both federal and state levels. Companies wishing to operate in this context must apply for and obtain authorization
to operate as a Money Transmitter from the financial regulatory bodies of each state in which they intend to operate. This process is notoriously complex and unfolds through a myriad of regulatory requirements that we summarize very briefly.

1. Variable requirements at the individual state level

Each federal state has its own laws and regulations for Money Transmitters, and companies must comply with each of these. This may include demonstrating financial solvency, submitting detailed business plans, securing insurance policies to protect customer
funds, and complying with AML/KYC rules to combat money laundering and terrorist financing.

2. Examination and approval

Authorization applications undergo a rigorous examination process. Regulatory bodies assess everything from the company’s financial strength to internal policies, the professionalism requirements of executives, and much more. This process can take several
months and requires transparent communication.

3. Maintenance and ongoing compliance

Even after obtaining licenses, authorized Money Transmitters must maintain high compliance standards, including regular financial reviews, periodic reporting, and adapting to legislative changes. Non-compliance can lead to severe penalties, including license
revocation.

In addition to the complexity of obtaining licenses in all states, X will need to build and maintain a robust and secure technological infrastructure, protect customers’ sensitive data, and earn user trust in an industry known for its risk aversion and resistance
to change.

 

Future goals and challenges for operations in the US

Musk and Yaccarino aim not only to secure these authorizations but have a broader vision for 2024. They plan to implement a range of financial features on X that could revolutionize the way users interact with their money. These features could include peer-to-peer
payments, investment services, lending options, and perhaps even insurance products.

 

What if X wanted to extend its new services to Europe?

Let’s now imagine, not sparing in the exercise of lateral thinking, what some of the potential and possible developments of X’s financial services in the
European Union territory could be, and what steps Musk’s company would need to take to meet the requirements of the community legislator.

The first step: establishing an electronic money institution under EMD2

To expand its revolutionary financial platform in Europe, X must tackle the European Union’s complex regulatory system, which requires specific authorizations to operate payment services. One route X could take is to obtain authorization as an electronic
money institution under the European Directive 2009/110/EC, also known as the
second Electronic Money Directive or EMD2.

This authorization would allow X to issue electronic money, i.e., monetary value stored electronically, representing a claim on the issuing entity. This monetary value can be used to make payment transactions, allowing users to purchase goods and services.

A strategic choice: establishing a payment institution under PSD3

Alternatively, or as a natural extension of its strategy, X might seek to position itself in anticipation of the future Payment Services Directive, also known as “PSD3.”

This new directive (currently presented in draft form by the European Commission on June 28, 2023) introduces additional requirements and opportunities; if X wished to operate as a payment institution, it should be enabled to issue electronic money and arrange
payment orders (or Payment Initiation).

This status would require, similarly to the current EMD2, strict compliance with capital requirements, risk management procedures, and mechanisms to protect customer funds, ensuring that X maintains high standards for transaction security and consumer data
protection.

The procedure for obtaining authorization to operate as a payment institution under PSD3

The procedure for obtaining authorization to operate as a payment institution under PSD3 requires the submission of a series of documents and information to the competent authorities, of which we summarize the main points.

1. Corporate structure and financial planning

Submission of a formal application that includes a detailed business plan, financial forecasts, and proof of initial capital, outlining the planned activities and demonstrating the company’s financial solidity and strategic planning.

2. Security measures, risk management, and compliance

Definition and documentation of comprehensive security measures, risk management procedures, and compliance strategies, including data and user funds protection, complaint management, and adherence to anti-money laundering and financial security regulations.

3. Organizational structure and governance

Preparation of detailed information on the company’s organizational structure, governance mechanisms, internal controls, and the suitability and competencies of key figures, ensuring transparent organization and responsible management.

4. Operations and technological infrastructure

Description of plans to maintain a robust technological and operational infrastructure, ensuring the continuity of critical activities, protection of sensitive data, and integration with existing payment systems.

5. Legal requirements and contingency plans

Presentation of legal requirements, including audit details, the company’s legal status, and preparation of comprehensive contingency plans to address potential crisis scenarios, ensuring compliance with relevant jurisdictions and stakeholder protection.

Each point combines various critical elements into a cohesive statement, highlighting the fundamental areas that authorities will consider during the authorization process.

 

Operating in Europe: opportunities and economic sustainability

Operating in the EU, with its vast population and single market, offers enormous opportunities but also entails strict regulation to ensure consumer protection and financial system stability.

Should X wish to tackle the European market, it will need to demonstrate not only its technological and financial robustness but also its commitment to transparency, consumer protection, and security, fundamental elements (as in the United States) to gain
the trust of regulators and potential users in Europe.

 

An additional challenge-opportunity: issuing a stablecoin

Now, let’s take a leap of faith!

Assuming that, at the date of writing this post, the author has no indication of a specifically announced strategy, let’s imagine what further steps X might take in European territory in the
direction of crypto assets. This market, strongly monitored by the community legislator, develops (in the opinion of the writer) a certain capital attractiveness for investments (not only European), thanks to the definition of a precise authorization
regime and the provision of harmonized rules for conducting business.

Given the premise, then, let’s imagine that X’s entry into the European financial market could be further amplified considering the recent
MiCa regulation (Regulation (EU) 2023/1114 of May 31, 2023), which provides a legal framework for crypto assets in the European Union.

This regulation could open new strategic opportunities for X, especially if the company wanted to consider issuing its own stablecoin (similar to what PayPal did in August 2023), a form of cryptocurrency designed to minimize price volatility, typically tied
to a stable asset like fiat currency.

Possible strategies in light of MiCAR

In line with the premise, let’s try to understand what the opportunities and risks of a strategy focused on expanding services in the crypto-asset field could be.

Compliance and innovation

Complying with the MiCa regulation would not only position X as a responsible player in the growing crypto asset space but could also serve as a powerful marketing tool. By demonstrating that its potential stablecoin complies with EU regulations, X could
gain the trust of cautious consumers and investors interested in crypto assets but concerned about associated risks.

Service diversification

By issuing a stablecoin, X could further diversify its financial services. This could include facilitating cross-border transactions, offering new forms of savings or credit products, or integrating crypto-asset-based payment systems for merchants and consumers.

Strategic partnerships

Collaborating with existing financial institutions or cryptocurrency exchange platforms could accelerate the adoption of X’s stablecoin and help establish a broader ecosystem. These partnerships could also facilitate regulatory compliance, as these entities
would already have some experience navigating the EU’s legislative framework.

A future-proof positioning

As the crypto-asset market continues to evolve, having a MiCAR-compliant stablecoin could advantageously position X to adapt to any changes. This could include participating in new regulatory schemes, integrating emerging technologies in the field of cryptocurrencies,
or developing new services for web3 and DeFi (Decentralized Finance).

Risks and final considerations

Naturally, moving into this space carries risks. The crypto-asset market is known for its volatility and regulatory uncertainty. Moreover, issuing a stablecoin could attract even more rigorous scrutiny from regulators, who might be concerned about issues
such as money laundering prevention, financial stability, or consumer protection.

In conclusion, while the adoption of the MiCA regulation and the issuance of a stablecoin could offer significant growth and innovation opportunities for X, it is essential that these strategies are accompanied by careful planning, a strong commitment to
regulatory compliance, and continuous assessment of risks and opportunities in a rapidly evolving market.

 

The importance of identifying X accounts

We do not know if X will want to venture into the regulated market of the European Union, nor if it will want to do so by merely expanding the financial activity announced a few days ago, or, as we have imagined, extending into the field of stablecoins.

Of one thing, however, we are certain. A fundamental element in transforming X into a financial platform is the implementation of a
robust account identification process.

This measure, among the opportunities offered by legislators (not just the European one) to comply with it, fundamentally involves:

1. the requirement to associate each account with a payment instrument (it could be a credit/debit card or a permanent account charge),
2. the acquisition of an identification document,
3. a procedure for verifying identity,

is not a mere bureaucratic compliance but an essential step to ensure security in every transaction.

Perhaps it is no coincidence that such requests have already been made a few months ago for obtaining the so-called “blue tick.”

The “authenticity tick,” we remind you, is obtained automatically, with the subscription to the Blue service, which requires users to pay a periodic fee to access extra features, including the authenticity tick next to the name.

This association ensures that behind every operation there is an identifiable individual, creating a safer environment for users and helping to prevent illicit activities such as fraud or money laundering.

As they say, a necessary “tick” for the development of X’s future financial services.

 

Conclusion

In conclusion, X’s trajectory illustrates the boldness and complexity of innovating in the global financial sector. While Musk and Yaccarino’s ambition to eliminate the need for traditional bank accounts and centralize users’ finances on a single platform
is revolutionary, it is clear that the path to realizing this vision is fraught with regulatory, technological, and operational challenges.

Expansion into Europe, with its stringent regulations, represents fertile ground for X, offering unique opportunities and significant hurdles simultaneously. The potential introduction of a stablecoin, in particular, could mark a turning point, positioning
X as a leader in the crypto-asset market, provided the company can meet the challenges of regulation and win consumer trust.

Finally, the role of account identification emerges as a fundamental pillar in building a secure and reliable financial ecosystem. This process not only strengthens transaction security but also serves as a foundation for trust between users and the platform,
an aspect that will become increasingly critical as X ventures into new financial horizons.

Ultimately, while X’s future is certainly promising, success will depend on its ability to balance innovation and compliance, maintain user security and trust, and adapt agilely to the changing dynamics of the digital financial world.

NOTE

This post, authored by Roberto Garavaglia, was posted in original language (Italian) on October 28, 2023 on the CloseToPay blog: https://closetopay.wordpress.com/2023/10/28/x-la-rivoluzione-finanziaria-di-elon-musk/