CCAF: Regulation of Alternative Finance is Key to Make Sector Safe to Scale for the Masses

The Cambridge Centre for Alternative Finance (CCAF), part of the Judge School of Business at Cambridge University, has partnered with the World Bank to publish a report on the global regulation of alternative finance and innovative Fintech firms. According to the new report, the regulation of alternative finance will increase significantly over the next two years, as indicated by a global survey of 111 regulatory jurisdictions.

Equity Crowdfunding, Peer to Peer Lending & Initial Coin Offerings

As various forms of alternative finance emerge, typically regulators are slow to update or create new rules as they research and dissect digital services. More specifically, access to capital platforms such as equity crowdfunding, peer to peer (marketplace) lending and initial coin offerings (or token offerings), have digitized investment opportunities and the capital-raising process. These three types of finance are the focus of this report. The CCAF study seeks to better comprehend alternative finance via empirical information gleaned from regulators and other public authorities.

Alongside AML/KYC requirements, regulators’ main priorities are said to be:

“… protections against misleading promotions or the misuse of client money. Depending on the activity in question, between 93% and 100% of regulatory frameworks impose requirements in relation to the clarity and fairness of promotions; between 100% and 88% impose sector-specific AML/KYC requirements, and over 80% impose the segregation of client assets, where applicable.”

While regulators and other policymakers see the potential for new forms of finance they simultaneously understand the need to better regulate the sector for the “mass market” including individuals and mid to small businesses (MSMEs).

CCAF explains:

“Despite a boom in alternative finance regulation since 2015, the relevant activities are still not formally regulated in most jurisdictions – only 22% of jurisdictions formally regulate P2P lending, as opposed to 39% for ECF [equity crowdfunding] and 22% in the case of ICOs [initial coin offerings]. Where these activities are regulated, some jurisdictions apply to them pre-existing regulatory frameworks (e.g for securities). More often, they are subject to bespoke regulatory frameworks, particularly in the case of P2P lending (12% of jurisdictions) and ECF (22% of jurisdictions).”

While not the norm today, CCAF predicts that by 2021 most jurisdictions will have bespoke rules for investment crowdfunding and over a third will have new rules for peer to peer lending and ICOs.

Creating new rules or updating old ones is not always an obvious task. Regulators, as one would expect, look towards other jurisdictions to gauge and compare rule-making progress and development.

While fraud and capital loss are big concerns, regulators frequently lack the expertise and other resources to move quickly and better regulate. Innovative policy approaches have helped in their task. CCAF states:

“Regulators are thus looking to more innovative solutions to overcome these limitations in regulation and supervision. Among respondent regulators, 22% have created regulatory sandboxes, 26% have innovation offices and 14% have active Regtech/Suptech programs. Based on regulators’ responses, the number of sandbox and Regtech/Suptech programs could double and triple respectively in the coming years. In terms of sheer numbers, it seems that innovation offices that have the most quantifiable impact to date, having assisted twelve times as many firms as sandboxes – over 2,100 in total, against just 180 for sandboxes. However, proponents of the sandbox might argue that for particular ‘policy-testing’ orientated sandboxes, the purpose is not to increase the number of innovative firms supported but to facilitate policy learning, design, and review.”

Learning from more established ecosystems is vital for policymakers to better manage innovative financial service firms. Today, the “most benchmarked-against jurisdiction is the UK, followed by the USA and Singapore, but emerging markets such as Malaysia, the UAE and Mexico also rank among the top 10.”

Lower-income jurisdictions are understandably less likely to pursue “active regulatory innovation.” At the same time, these jurisdictions may stand to benefit the most. There is strong interest “for co-learning from other regulators,” reports CCAF.

The goal of the CCAF-World Bank report is to support an agenda of financial inclusion and support for micro, small and medium-sized enterprises. These MSMEs drive economic wealth and create much-needed jobs. Alternative finance is an important variable to support access to capital and financial services.

The report concludes:

“It is clear from this study that regulators around the world believe that alternative finance is a force for good and understand the benefits which it can bring about for access to finance, financial inclusion, competition in financial services, job creation and economic growth. There is also a desire among regulators to make the necessary changes to bring this about, and plans are being made to do so.”

But as we all know, change is hard. Keeping things simple is never easy and convoluted rules can crush the benefits of innovation. CCAF recommends a “significant and coordinated effort” to help support development of effective regulatory ecosystems to fuel the benefits of Fintech and alternative finance.

The report, Regulating Alternative Finance: Results from a Global Regulator Survey, is embedded below.

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CCAF Publishes ASEAN Fintech Benchmark Study: The Emergence of Fintech Start-ups in the ASEAN Region Has Progressed at an Unprecedented Pace

The Cambridge Centre for Alternative Finance (CCAF), at Cambridge Judge Business School, is out with the Asean Fintech Ecosystem Benchmarking Study published in partnership with the Asian Development Bank Institute (ADBI) and FinTechSpace in Taiwan.

CCAF is the leading research institute covering the global alternative finance. CCAF has published numerous reports covering the emerging Fintech ecosystems around the world including the most recent report on blockchain (DLT) utilization.

The Report surveyed data from 327 firms from the six main countries in the ASEAN region: Singapore, Indonesia, Malaysia, Thailand, Philippines, and Vietnam. CCAF reports that the emergence of Fintech start-ups in the ASEAN region has “progressed at an unprecedented pace.” During 2018, over $485 million was invested in 68 different deals – a 143% increase versus year prior and more than 4X in 2016.

CCAF states that there are more than 600 Fintech start-ups in the ASEAN region and new Fintechs are emerging almost daily as the financial services industry shifts from its analog past to its inevitable digital future.

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Financial Inclusion is Key

Even while innovation in financial services is taking place at a rapid velocity, more than half of the adult population in the ASEAN region remain unbanked. In fact, a majority of the population is living at, or below, the poverty level, CCAF explains. Fintech can be a catalyst to drive wealth and move the population of these various markets into the middle class.

The CCAF Report notes that digital payments and online lending are the two most dominant Fintech models in the ASEAN region accounting for almost 60% of all Fintech activity.

Within digital payments, peer-to-peer (P2P) transfers/mobile money and international remittances represent the largest sub-segments at over 65%. Peer to peer (P2P) lending to SMEs is the largest sub-segment for online lending with 53% of responses.

Robert Wardrop, Director of the Cambridge Centre for Alternative Finance, comments in the forward of the Report that in 2018 the ASEAN region experienced a 58% increase in internet penetration and a 141% jump in mobile connectivity. Obviously, the advent of smartphones is a huge catalyst for mass access to sophisticated Fintech services.

“This indicates a region primed to lead the push in developing Fintech solutions to revolutionize financial services and realize its potential to tackle critically important regional issues such as access to financial services and financial inclusion,” said Wardrop. “While Fintech solutions can be a key enabler for financial inclusion, the study shows that only 170% of customers served by Fintech firms in the region were categorized as unbanked and 28% were underbanked. More work is needed to help the unbanked, given that more than 50% of the adult population in most ASEAN countries are unbanked.”

The CCAF report states that Fintech firms place the highest priority on ease of customer use and speed of service as their main strategies across all business models. Additionally, as the Fintech ecosystem matures, firms are “increasingly shifting towards servicing small businesses and larger corporations, moving away from a consumer/individual focus.”

Dean Naoyuki Yoshino of the Asian Development Bank (ADB) commented that individuals, households and firms cannot fully take advantage of the opportunities for economic and social development available if they do not have adequate and appropriate access to financial products and services.

“Developments of financial technology show great potential to extend the availability of financial products and services to households and small and medium-sized firms in Asia.”

A good portion of the report focuses on the important role that regulation plays in the advancement of Fintech and financial inclusion.

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CCAF includes a regional comparative analysis of the current state of regulations and legislation as well as a regional overview of regulatory innovation initiatives. The Report provides a country-by-country review for each of the 10 ASEAN member states, detailing the regulations governing prominent Fintech sectors.

The study found that each country is interested in emerging technologies within financial services. Bespoke regulation exists in all of the countries covered. As an example, 80% of the ASEAN countries have introduced specific rules for the regulation of digital payments.

ASEAN regulators are also widely leveraging regulatory sandboxes (60%), Regtech (50%) and opening up innovation offices (50%).

The majority of regulators have signed co-operation agreements to share information on Fintech sectors in their respective markets.

Regulatory harmonization is very important to remove jurisdictional friction and efforts are “underway to encourage and further facilitate this, specifically involving cross-border initiatives.” Over-regulation can hamper growth, of course.

Report partner FinTechSpace issued the following statement:

“For regulators and policymakers in greater ASEAN, (the report) could be a great reference for their Fintech international strategy plans. For private sectors, both financial institutions and Fintech companies like to explore and enter these markets; thus, our report could be a great start for market research. The new study, focusing on the ASEAN FinTech ecosystem, complements earlier CCAF studies on the growth of alternative finance in the wider Asia–Pacific Region.”

Wardrop noted that this report has been one of CCAF’s most challenging research projects. But while a challenging survey to complete, Wardrop believes it provides a “valuable overview of Fintech in the region and will inform the work of others seeking to realise the potential that Fintech innovation offers.”

As with all other CCAF research reports on alternative finance/Fintech, this is a must-read document for industry participants as well as interested policymakers.

Lead Authors include:

Miguel Soriano (Fintech Market)
Dr. Miguel Soriano is a Research Affiliate at the Cambridge Centre for Alternative Finance where he leads research on FinTech for financial inclusion in emerging markets. Miguel is also a Digital Finance Senior Specialist at the World Bank and IFC, advising on numerous technical programs related to digital banking, FinTech and off-grid solar in Africa, Asia and Latin America.

Tania Ziegler (Fintech Market)
Tania is the Head of Global Benchmarking at the Cambridge Centre for Alternative Finance, leading research on capital raising alternative finance in five regions. Her research interests include small business economics and SME utilization of alternative funding models to access finance. She is a 2009 Fulbright Scholar and has an MsC from the London School of Economics.

Zain Umer (Regulatory Landscape)
Zain is a Research Affiliate at the Cambridge Centre of Alternative Finance. His research interests and expertise include regulatory innovation and FinTech as a means to facilitate financial inclusion, especially in emerging and developing economies

Hungyi Chen (Regulatory Landscape)

Dr. Hungyi Chen is Asia-Pacific Region Manager for the Cambridge Centre for Alternative Finance. Hungyi has led and co-authored many of the most influential industry reports on the alternative finance industry in APAC since 2015.

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Cambridge Centre for Alternative Finance Publishes 2nd Global Blockchain Report: Enterprise Utilization and Network Development

The Cambridge Centre for Alternative Finance (CCAF) has published its 2nd Global Enterprise Blockchain Benchmarking Study. CCAF is the leading Fintech research in the world. The Centre has published multiple reports on the global alternative finance market which are frequently referenced by policymakers and industry participants.

CCAF’s first blockchain report was highly regarded and well-received by industry followers.

This newest report on blockchain “delves into the granular detail of how the enterprise blockchain ecosystem has evolved” since the publication CCAF’s first report in 2017. Between July and November 2018, the Centre collected data from more than 160 entities and 67 live networks. This data was augmented with data collected between April and June 2019 from 67 live enterprise blockchain networks

The research notes that adoption of enterprise blockchains within the private sector has been increasing with several networks moving from ideation to production but the technology is “not a panacea.” Additionally, much of the progress in live projects is via permissioned blockchain networks and not the widely promoted permissionless iterations.

Key Findings of the CCAF Blockchain Report

As one may expect, the banking, finance and insurance industries are responsible for the largest share of live blockchain networks.

According to CCAF:

“The trend indicated in 2017 has continued: 43% of enterprise blockchain networks deployed in production can be attributed to Financial Services, far ahead of any other sector and industry. The specific use case of a network can be at times difficult to identify, but supply chain tracking, trading infrastructure, and document certification seem to currently dominate.”

While financial services may be the biggest beneficiary of blockchain, successful projects “require a long-term perspective and commitment.”

CCAF states that the median enterprise blockchain project requires 25 months from proof of concept to being deployed in a production environment. Some larger projects may take years to deploy.

Interestingly, 71% of live networks have been launched by a single founder even while popular perception has focused on “large scale consortia” developing blockchain projects.

CCAF reports that:

 “88% of deployed blockchains are designed for shared use between multiple independent entities, but the majority are restricting membership to partners: only 19% are jointly operated by direct competitors.”

What are the incentives to deploy blockchain? Cost reduction.

“72% of live networks are currently primarily used to reduce costs for participants through reduced reconciliation efforts. However, 69% of network participants indicate that the key motivation for joining the project is the potential of generating incremental revenues through the provision of new products and services.”

CCAF says that Hyperledger Fabric appears to be the clear winner for enterprise blockchain projects with “48% of covered projects that are used in production have chosen Hyperledger Fabric as the core protocol framework underlying the network, followed by R3’s Corda platform (15%) and Coin Sciences’ MultiChain framework (10%).”

Centralization is the norm even while many proponents tout the benefits of decentralization. But many projects expect to “gradually distribute control over time.”

“81% of covered networks have a leader entity dominating the governance process (centralized social consensus), and many networks — at least in their current form — use third-party service providers to host and operate nodes on behalf of network participants (centralized network consensus).”

Terminology, or industry semantics, tend to fuel sector hype. CCAF states that 77% of live enterprise blockchain networks “have little in common with multi-party consensus systems apart from incorporating some of the same technology components (e.g. cryptography, peer-to-peer networking) and using similar nomenclature.”

Even while blockchain hype reigns, the heightened attention is acting as a powerful catalyst to trump “corporate inertia” and fuel organizational change.

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To quote CCAF:

“While two years ago, the industry landscape was mostly dominated by half-hearted experiments and short-lived proofs-of-concept – often announced with great fanfare and publicity – the hype has gradually given way to genuine development of sustainable blockchain networks that are increasingly being deployed in production environments.”

Dr. Robert Wardrop, Director of the CCAF at the Cambridge Judge Business School, comments:

“In multiple industries, enterprise blockchains are perceived as a solution to establish common data standards across organisations, eliminate organisational silos, and facilitate record reconciliation to help improve overall efficiency and enable the creation of new services,” explains Dr. Robert Wardrop, Director of the Cambridge Centre for Alternative Finance at Cambridge Judge Business School. “The new study also finds that financial services account for the largest share (43 per cent) of live blockchain networks as banks and other institutions seek to use the technology for greater efficiency. While the report points to revenue generation being the biggest strategic driver for blockchain investment, only six per cent of current enterprise blockchain networks’ value proposition focuses on incremental revenue generation.”

Dave Dowsett, Global Head of Technology Strategy, Digital Transformation, AI and Emerging Technology at Invesco – a sponsor of the research, says that a few points shine through in the research:

“One being that the success of blockchain cannot and will not happen in isolation as the power is in the network, that true transformation of ecosystems takes time, and that new technologies must prove themselves to build trust in the new paradigm.”

Once again, CCAF has produced an excellent, must-read research report on an important and growing sector of Fintech.

The Global Blockchain Report was authored by Michel Rauchs, Crypto and Blockchain lead at CCAF, Apolline Blandin, Research Manager, Crypto and Blockchain at CCAF, Keith Bear, Research Fellow at CCAF, and Stephen McKeon, Associate Professor at the University of Oregon and a Visiting Associate at CCAF.

The CCAF 2nd Global Blockchain Report may be downloaded here.

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Fintech is Driving Financial Inclusion

While much of the discourse revolving around innovation in financial services tackles specific sectors of the industry, such as lending, payments,  or online capital formation, the reality is that the biggest beneficiaries of Fintech may be the underbanked: the millions of people who have never had access to sophisticated financial services.

Regardless of where you are standing today, there are segments within your community that have little or no access to financial services such as a basic savings account. The disparity becomes even more obvious when you compare high-income demographics against individuals with lesser means.

Geography obviously plays a role as rich countries, such as the US or European nations, have far higher percentages of individuals having access to basic financial services. But the advent of Fintech, and perhaps more importantly, the ubiquity of smartphones and internet access, is fueling a significant change.

During the Cambridge Centre for Alternative Finance’s annual conference, which took place in the UK this past summer, Alfonso Garcia Mora, Global Director Finance, Competitiveness and Innovation GP The World Bank Group, addressed this very topic: Fintech is driving financial inclusion.

Mora shared some interesting statistics. While financial inclusion has improved globally, 1.7 billion adults (31%) remain unbanked. As of 2017, 69% of adults around the world have a financial account with 92% of “high income” individuals holding an account as of 2017.  Excluding the high-income group, Mora reported the following percentage of adults with an account as of 2017:

  • East Asia & Pacific – 53%
  • Europea & Central Asia –  58%
  • Latin America & Caribbean – 49%
  • Middle East & North Africa – 44%
  • South Asia – 48%
  • Sub Sahara Africa – 41%

Worldwide, most unbanked adults are women at 56%.

Cash Still King

Additionally, 235 million unbanked individuals earn money from agricultural employment; 100 million receive government payments in cash and 260 million of the unbanked use cash for remittances.

Mora said that traditional methods such as ATMs/Debit Cards, Bank Deposits, Credit providers are slow, expensive and lack transparency. This is where Fintech can step in and improve the situation with digitally native services unburdened by legacy shortcomings.

Virtual currencies, DLT based settlements, mobile payments, and more can improve transfers and savings.

Robo-advisors and automated wealth management can provide access to sophisticated services to the masses.

As of 2017, it is estimated that two-thirds of underbanked adults have a mobile phone – key to financial service availability. This access can be the catalyst for financial inclusion as has been experienced in Sub Saharan Africa where mobile money accounts have grown dramatically in recent years.

Of course, these opportunities bring new challenges such as regulatory issues and compliance as digital financial services frequently ignore national borders. But policymakers must be cautious not to let perfect get in the way of the common good. And established finance must be partners in innovation not create unnecessary barriers to innovation.

Mora said that Fintech is making inroads globally but has not yet reached the disruptive critical mass. He explained:

  • Most advances are in mobile payments with major impact on financial inclusion
  • Big Techs are increasingly offering financial services and challenging incumbents
  • Traditional financial institutions are adapting rapidly, increasing their digital footprint
  • Supervisory agencies are exploring Fintech applications
  • Impact on monetary systems and financial stability is limited at present

In the end, Fintech is not just for the betterment of developed countries and an educated populace. Fintech can be a catalyst for the greater good of lesser developed regions, helping to boost wealth and economic development.

CCAF Benchmarking Report: Global Regtech Tops $5 Billion in 2018 as Startup Activity Surges

The Cambridge Centre for Alternative Finance (CCAF) has published its first “Global RegTech Benchmarking Report,” sponsored by EY Japan. According to the research, the Regtech industry has topped $5 billion in revenue in 2018 following a five-year surge in startup activity. CCAF reports that, while Regtech is not necessarily that new, about 60% of all Regtech firms were founded and 82% had their first funding round during this five year period as interest in the sector boomed. The report says that Regtech has developed into distinct market segments.

This is not the first research by CCAF that has examined regulators’ interest in the potential of Regtech and Suptech [Supervisory Technology]. Earlier this year, CCAF reviewed this growing trend in a report by CCAF and the FinTech Working Group of the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development (UNSGSA), published earlier this year. The latest CCAF research is said to corroborate and adds to those findings.

As of 2018, Regtech firms employed an estimated 44,000 people globally, having raised about $9.7 billion in external funding to date. The research is based on a survey of 111 Regtech firms as well as qualitative interviews with industry experts and regulators. The Benchmarking report was unveiled by CCAF Executive Director Bryan Zhang at FIN/SUM in Tokyo, the largest Fintech event in Japan.

Firms headquartered in Japan made up 4% of the survey sample and just over twice that total (9%) had operations in the country. This places Japan at the top of Regtech jurisdictions.

The report indicates that the Regtech industry is already highly international, with fewer than one-third of firms active in just one market and over a third present in five or more jurisdictions.

Nearly two-thirds of firms had a physical presence or significant market share in the UK, and nearly half have the same in the US.  There are also significant Regtech activities in Australia, Canada, Singapore, Hong Kong, Japan, Luxembourg, Switzerland, Ireland, Germany, and France.

CCAF states that there is a “clear link between the surge in Regtech market entry in the years 2014 to 2018 and the amount of new regulation introduced or implemented during that time.”

According to the report, about “two thirds (66%) of the sector delivers its offerings through the cloud, with 56% of vendors employing machine learning and 43% using predictive data analytics to describe patterns or predict behaviours.”

Natural language processing, machine learning, data analytics are key to the Regtech sector. There is a demand from firms that have to report large volumes of data in standardized forms for supervisory compliance. CCAF states that offerings focused on anti-money laundering requirements or on creating data lakes for reporting purposes, are relatively common.

Regtech holds a strong focus on Fintechs as between 49% and 68% of firms target Fintechs. Increased effectiveness, speed, cost savings and more are all cited as firm goals.

CCAF researchers identified five distinct segments of the RegTech market. The largest by funds raised to date were the Profiling and Due Diligence and Dynamic Compliance segments, while the largest share of turnover was claimed by firms in the Reporting and Dashboards and Risk Analytics segment. A smaller Market Monitoring segment was also identified.

While the industry is growing rapidly, market participants face challenges such as complexity and long sales cycles. A handful of larger vendors have dominated most funding and commercial activity so far but a half of these firms have raised less than $1.6 million. Over 25% have accepted no external funding.

Zhang said that the Regtech report is building on CCAF’s previous work in benchmarking various Fintech sectors:

“… this report brings together empirical data in order to elucidate the size, growth, dynamics, and development of the Regtech sector. The report findings point to a rapidly growing and technology-enabled global industry serving an increasingly diversified customer base, yet still working to establish trust and credibility as it matures,” said Zhang.

Emmanuel Schizas, the lead researcher from CCAF on the report, said that there is a greater emphasis among Japan-based firms on fraud detection and customer identification as core use cases, particularly those powered by machine learning.

“In Japan, as elsewhere, regulators seek a balance between helping the sector grow, collaborate and build public goods; and letting firms make their own commercial case for automating compliance,” explained Schizas. “It will be interesting to see how Japan’s network of Regulatory Sandboxes interacts with the RegTech sector. The level of demand for such assistance is comparable with that at the global level, where one in five firms has applied to a Sandbox.”

In the forward of the report, Keiko Ogawa, Partner and EY Japan Regtech Leader, said  that EY Japan has been working with many parties in public and private sectors to create a global environment that boosts Regtech innovation.

“A variety of key players, including regulated companies, regulators, technology start-ups, and research institutions, can contribute to each other and mutually benefit, and further drive innovation in the entire society. We hope that this report will provide them with some indication of to how to realize such a Regtech ecosystem.”

CCAF notes that the report’s survey fieldwork was supported by the International RegTech Association (IRTA) and the Australia-based RegTech Association, while EY Japan and the Fintech Association of Japan helped CCAF reach more of the Japanese Regtech market.

Bruno Abriux, President of the Japan Chapter of the International RegTech Association (IRTA), described the research as an important publication which will help the IRTA deliver on their goal of supporting Regtech development.

Deborah Young, CEO, of The RegTech Association, said that evidence-based research is vital for sector growth:

“To understand the breadth, size and growth of what is now a thriving, global industry is key in setting the cornerstone for trust, efficiency, and productivity across not only financial services but all regulated industry verticals. The RegTech Association is pleased to have been able to support this global data collection exercise by CCAF and EY Japan,” Young said.

CCAF is the leading research institute covering the global Fintech industry. CCAF has published research reports on the alternative finance industry including blockchain, online capital formation, regulation, and more.

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The Cambridge Centre for Alternative Finance Joins with World Economic Forum in Research Project Regarding Artificial Intelligence and Financial Services

The Cambridge Centre for Alternative Finance (CCAF) has partnered with the World Economic Forum (WEF) to jointly launch a research project addressing Artificial Intelligence (AI) in financial services.

CCAF is an academic research institute at Cambridge Judge Business School, University of Cambridge, and is the global leader in alternative finance research. The Centre’s publications have become a touchstone for policymakers around the world seeking to encourage Fintech innovation and better understand emerging trends in financial services.

The World Economic Forum is a global non-profit that engages leading political, business, and other stakeholders who shape global, regional and industry agendas. The Forum was established in Switzerland in 1971 to provide an independent perspective on a plethora of issues, most pointedly economic issues.

According to CCAF, the research will incorporate a survey of the applications, evolution, and impact of AI in financial services. The project will query both traditional financial service firms as well as emerging Fintechs. CCAF-WEF will seek to better understand the utilization of AI by applying both empirical quantitative and qualitative data in a global and comparative context.

The data will be used to create a comprehensive report which is expected to be published in the 4th quarter of 2019.

Bryan Zhang, the Executive Director of the CCAF, commented on the announcement of the pending AI research:

“With the increasing application of AI in finance by incumbent banks, Fintechs and Big Techs in recent years, comes a lot of hype and hyperbole which are not underpinned by empirical evidence. The Cambridge Centre for Alternative Finance and the World Economic Forum’s AI in Finance Global Survey aims to bridge that gap in research and collect first-hand empirical data to understand the usage, evolution and impact of artificial intelligence in financial services globally. The resulted report should be able to inform business decision-making as well as regulatory discussions in regard to AI in finance.”

Specifically, the research seeks to accomplish the following:

  • Inform business decisions regarding AI development and implementation
  • Illustrate the impact of AI in transforming financial service business models
  • Analyse the current state of AI application and awareness
  • Evaluate future AI-driven trends within the financial services industry

In 2018, the World Economic Forum published The New Physics of Financial Services which reviewed selected use cases and implications of AI across financial service providers. This report cautioned readers that this shift will have “far-reaching consequences for the make-up of financial services, placing legacy business models under pressure from those whose businesses are built around these new attributes.”

AI will inevitably become intertwined into the development of all other technological innovations transforming all aspects of financial services. While AI has garnered a good share of hyperbole, and popular commentary remains “highly sensationalized, creating an excess of both exuberance and fear,” the CCAF-WEF research should help clarify where AI and financial services stand today and what to expect in coming years.

As more processes become automated by tech, financial service firms will need to refocus its human capital to be more effectively distributed.

The transformation of the back office will shift the competitive basis of firms towards the front office, and change the distribution of talent in the industry. The WEF report states “talent will shift from financial institutions to service providers.”

While the opportunity is profound there are few foregone conclusions except for the fact that AI is coming, fast.

CCAF emphasizes that all collected responses from the survey will be fully anonymized and sanitized.

The resulting report will only present aggregate, industry-wide figures and no organization-specific data will be publicized in any way.

As with all of the other CCAF reports, the document should help regulators and other policymakers better manage challenges and questions surrounding AI and financial services.

The AI in Finance Global Survey will be closed on 31st August 2019.

The survey can be accessed here.

Inquiries about the AI research project may contact Lukas Ryll at

Cambridge Centre for Alternative Finance Launches Energy Consumption Tracker for Bitcoin

Cambridge Bitcoin Electricity Consumption Index Updates Every 30 Seconds: BTC Uses Less Energy than the Czech Republic but More than Switzerland Each Year.

Last week during the Cambridge Centre for Alternative Finance annual conference, the prominent research group unveiled a unique tracking platform that monitors energy consumption of Bitcoin – the worlds most popular cryptocurrency.

The new index was announced by Michel Rauchs, the Cryptocurrency and Blockchain Lead at CCAF. Rauchs, an expert in all things crypto, has published several well regarded empirical studies on blockchain (DLT) and cryptocurrencies.

Bitcoin uses a “Proof of Work” (PoW) methodology to mint or mine new Bitcoins. This cryptomining process entails the use of computers attempting to solve an equation and thus “earn” a Bitcoin. As Bitcoin is currently worth about USD $11,000.00 – if you get the answer right you get to keep that bounty. China, a place where cryptocurrency is officially banned, is perhaps the biggest crypto mining jurisdiction in the world.

Over time, the mining process has migrated away from hobbyists operating their own mining nodes to highly professional mining farms scattered around the world competing to earn free money; except the virtual currency is not really free as it costs considerable sums to operate these farms – most of it in electricity bills.

Bitcoin, and those individuals and corporations that mine the crypto, have come under scrutiny and criticism for the amount of energy used in creating the crypto. The Cambridge Bitcoin Electricity Consumption Index (CBECI) provides a “real-time estimate of the total electricity load and consumption of the Bitcoin network.” While acknowledging that the exact amount of energy utilized cannot be determined, the CBECI is probably the best real-time estimate of Bitcoin mining energy usage in existence.

So what does the Index tell us?

According to their numbers, annualized consumption stands at a whopping 60.45 TWh. That’s a big number, but to most of us, this measurement means little until you draw some comparisons which Cambridge provides.

  • Bitcoin mining uses more energy than the entire country of Switzerland in a single year (and just under the Czech Republic). Bitcoin energy consumption also tops Greece and Israel.
  • The amount of electricity utilized by BTC in a single year could power all of the Tea Kettles in Europe for two years (currently this includes the UK).
  • The electricity used by Bitcoin mining could satisfy all of the energy needs of the University of Cambridge for 343 years.
  • Bitcoin uses 0.24% of all electricity production globally and 0.28% of all electricity consumption

Cambridge adds that it is important for Bitcoin to be “inefficient.” It is this inefficiency that prevents a “single entity or colluding group of actors to easily gain control and dominate the network.”

Other Bitcoin defenders will ask the question as to how much energy does the traditional financial system consume? And what about gold mining?

The exploration and uncovering of gold takes massive investment and plenty of energy consumption. Bitcoin proponents frequently compare the favored crypto to being a gold like digital asset.

Additionally, at some point in the future, the mining of Bitcoin will end – because it is capped at a certain amount. The “Halving” (as it is called) is an event that takes place every four years when mining rewards are cut in half. This event has already happened three times with the fourth expected to take place next year.

As the supply of Bitcoin is limited, some people expect the value to rise. But markets can act in interesting ways – the price of Bitcoin could go down making it too expensive to mine. Or perhaps, Bitcoin will simply end, replaced by something else or taken down by an exogenous event. Anything is possible in the land of crypto.

UK Financial Conduct Authority Addresses Topic of Stablecoins Providing Insight into Regulatory Approach

In a speech presented today by Christopher Woolard, Executive Director of Strategy and Competition at the UK Financial Conduct Authority (FCA), the regulator addressed the hot topic of “stablecoins.” The speech was delivered at the annual Cambridge Centre for Alternative Finance conference which saw regulators from all over the world visit the Judge Business School at Cambridge University to discuss emerging Fintech innovations and the future of finance.

Earlier this month, Facebook announced the creation of a stablecoin labeled “Libra.” Facebook’s spin on crypto is designed to become a global payment platform removing much of the intrinsic friction and cost associated with existing payment rails.

The Facebook stablecoin is a “basket of assets” designed as a type of corporate currency which will hold a relatively consistent value. Additionally, Libra’s blockchain is able to create smart contracts similar to Ethereum – currently, the most popular blockchain for creating utility type features for the cryptosphere.

Woolard provided an interesting perspective from the FCA, globally viewed as the most innovative regulator when it comes to Fintech innovation.

Woolard said the term “Stablecoin” has been widely adopted by the crypto industry as a distinct sector of cryptoassets. He noted that depending on the characteristics of an individual stablecoin, it could, or may not, sit within the FCA’s regulatory perimeter.

“As has been widely reported, along with other regulators and central banks, we have been discussing their plans with Facebook. If this comes to fruition, Libra could be very significant indeed,” stated Woolard. “It will pose questions for us as a regulator. It will pose questions for our colleagues at the Bank of England. It will pose questions for us working with our international partners. Moreover, its size and scale will pose questions for society and government more generally about what is acceptable and desirable in this space.”

Woolard said the term stablecoin is a “broad term” which encompasses a variety of cryptoassets. Some may be pegged to a single fiat currency, others linked to an asset like gold, or perhaps defined by an algorithm. Regardless, the FCA looks at each crypto individually to determine its makeup before determining their regulatory approach.

A stablecoin could constitute e-money if it meets the definition provided in the Electronic Money (e-money) Regulations.

A “stablecoin” could fall between regulatory categories. Because of this, the FCA questions the accuracy of the label.

If a cryptoasset is e-money then the issuer needs to be authorized as an e-money issuer and needs to comply with all relevant requirements under the E-Money and Payment Services Regulations.

If a stablecoin is algo-driven it would need to be judged on its characteristics. Or perhaps it may be considered a regulated product such as a collective investment scheme. It simply depends.

“Volatility and stability are important concepts, but they are relative in nature,” said Woolard. “Whilst a wobbly tripod is seldom a good thing in the world of wildlife photography, ’volatility‘ in financial services is completely context-dependent.”

He said that FCA does not have criteria for endorsing the stability of any cryptoasset.

“What is this thing, why is there a new term and what problem is it trying to address? Who is it for – wholesale banks or retail consumers? Is it within our regulatory scope or outside? Is this really an innovation or just something old in a new, flashy wrapper?”

Woolard said the FCA reviews each question as to the benefit to consumers or how it impacts competition. The agency also questions if there is harm created due to increased risks or complexity.

“In short, we seek to consider any cryptoasset, including those labeled “stablecoin,” on a case-by-case basis and we encourage both consumers and firms to do likewise.”

Additionally, does the “stablecoin” adhere to international regulatory standards such as AML and KYC. An important question, especially in light of the recent FATF guidance for VASPs.

The FCA is nearing the end of a consultation on cryptoassets. The comments have been received and the regulator is correlating them now. The final response will be forthcoming shortly as the FCA provides additional clarity regarding their regulatory approach when it comes to crypto.

In the end, the FCA does not accept the stamp of stablecoin at face value. A smart approach.

Recent events at Tether, the largest stablecoin by market cap, uncovered glaring shortcomings in the sector which begs for more stringent regulation.

This will hold true for any aspiring stablecoin including Facebook’s attempt to create its own version of a Euro type basket of assets. Libra is a crypto that can expect stiff regulatory challenges. While moving fast and breaking things can drive change it also forces regulators to slow things down.

“When considering these changes as regulators we need to be ready to lean in, to experiment, learn and adapt, but always be ready to protect consumers, competition and market integrity,” Woolard said, “… In other words, we, ourselves need to go behind the scenes.”


Cambridge Centre for Alternative Finance Publishes Global Cryptoasset Regulatory Study

The Cambridge Centre for  Alternative Finance (CCAF), with the support of the Nomura Research Institute (NRI), has just published a new study entitled the Global Cryptoasset Regulatory Landscape Study.

The report is a detailed analysis of the regulatory environment in multiple jurisdictions from around the world.

The research team developed a three-point framework to collect the date and to keep it standardized: (1) asset nature and form; (2) token creation, initial distribution, and secondary market trading; and (3) intermediated activities. CCAF reviewed 23 different jurisdictions using this process. The review took place from November 2018 to early February 2019.

Beyond the well-documented lack of a common lexicon, the CCAF report highlights several challenges in the development of crypto or digital assets. The research states:

  • Regulators have primarily focused their attention on ICOs and exchanges to date. Consequently, other key activities, such as alternative token distribution mechanisms (i.e. airdrop and fork), decentralised exchanges, and the creation of cryptoassets through mining or the peer-to-peer transfer of cryptoassets, have been overlooked;
  • Unclear terminology and classification, inherent limitations to regulatory principles, and regulatory arbitrage are factors that challenge regulators’ ability to robustly define their regulatory perimeter and implement regulations;
  • In many of the jurisdictions studied, regulators have addressed key risks related to financial integrity and systemic issues as well as investor and consumer protection. Additional risks may warrant further regulatory attention;
  • Securities laws, banking and payment laws, and/or AML laws have so far received the most regulatory attention in relation to regulating cryptoasset-related activities. Regulators may need to consider how other laws might be applicable, such as tax or property law. Regulators might want to fully examine the efficacy and adequacy of existing regulations before developing new and bespoke regulations, and identify cryptoasset activities that do not require (additional) regulation.

[easy-tweet tweet=”Regulators have primarily focused their attention on #ICOs & exchanges to date. Consequently, other key activities have been overlooked” template=”light”]

So what does the CCAF report recommend?

  • Traditional assets recorded on a distributed ledger technology (DLT) infrastructure (i.e. tokenisation) should be distinguished from new and natively-digital cryptoassets with unique characteristics. The fundamentally new characteristic of a natively-digital cryptoasset is the incentive role that it may play in a particular network;
  • A legal and regulatory classification of a cryptoasset should be based on an in-depth assessment of several factors (e.g. rights attached, access, economic function of the token), generally conducted on a case-by-case basis;
  • The majority of cryptoasset-related activities carried out by intermediaries show strong similarities to existing financial activities found in traditional markets (e.g. exchange and trading), and therefore might be regulated as such. Only a relatively small number of cryptoasset-specific activities can be considered novel (e.g. mining).

It is interesting to note that the report indicates that countries with a higher level of domestic activity in the crypto sector “tend to have retrofitted regulation.” This may be indicative of political or regulatory pressure to react to a fast-paced and growing marketplace that, at least in the early days, experienced rampant fraud. Smaller jurisdictions have been able to create “more sophisticated regulatory regimes” as they tend to have a relatively low level of crypto activity.

Some larger countries are in the midst of developing bespoke regulatory regimes. France’s Pacte Law (Loi Pacte) is, perhaps, the best example. Legislation has been introduced into the US House of Representatives but it is not clear if the bill, as it stands now, has sufficient support to move forward.

Decentralized Does Not Necessarily Mean Disintermediation

CCAF desires that their research will aid in highlighting “coverage gaps in regulatory frameworks.” Policymakers may more easily review other jurisdictions and compare regulatory approaches. A good portion of the report is a series of “Case Studies” which provide a summary of many crypto active jurisdictions.

Additionally, self-regulation stands to play an important role in the evolution of digital assets. As the report states:

“The logic of industry self-regulation is that the players often have better expertise and information than regulators, as well as an incentive to design an efficient and trusted system. A risk associated with these regimes is that members begin implementing or lobbying for rules that protect their interest rather than consumers. Hence the existence of a formally authoritative hybrid, “enforced self-regulation”, in which self-regulation occurs under the aegis of an official mandate delivered by regulators. In such cases, industry performs many of the day to day functions of self-regulation, but a regulatory agency retains powers to alter the regime, or provide additional enforcement.”

Obviously, policymakers must be open to engaging with industry participants on a mutually beneficial and transparent basis establishing a relationship of trust and collaboration.

The CCAF Cryptoasset report is an excellent compendium reviewing an industry that did not exist until just a few years ago. This is a must read document for all public officials tasked with either regulatory compliance or legislative powers in the financial services sector and overlapping commerce related sectors.

[easy-tweet tweet=”The CCAF Cryptoasset report is an excellent compendium reviewing an industry that did not exist until just a few years ago” template=”light”]

The CCAF Global Cryptoasset Regulatory Landscape Study is embedded below.

[pdf-embedder url=”” title=”CCAF 2019-global-cryptoasset-regulatory-landscape-study (1)”]

Cambridge Centre for Alternative Finance Publishes 4th European Alternative Finance Report. Total Online Alternative Finance Grows 36% Topping €10 Billion

The Cambridge Centre for Alternative Finance (CCAF) has published its 4th annual European Alternative Finance report. The publication, entitled “Shifting Paradigms” – completed in partnership with the University of Agder in Norway, tracks the growth of alternative finance across Europe including the UK.

According to CCAF, in 2017 the alternative finance market grew by 36% to € 10.44  billion – dominated by the UK.

Excluding the UK, European online alternative finance industry grew 63% from €2.06 billion to €3.37 billion in 2017.

[easy-tweet tweet=”Excluding the UK, European online alternative finance industry grew 63% from €2.06 billion to €3.37 billion in 2017 #Fintech” template=”light”]

While growth remained strong, in 2016 the market grew 102%. Between 2013 and 2017, the average annual growth rate for Europe was reported at around 80%.

The UK captured 73% of the alternative finance market in Europe or more than €7 billion.

The top three European markets following the UK, include:

  • France at €661 million
  • Germany at €595 million
  • The Netherlands at €280 million
  • The Nordic countries collectively generated €449 million, making them the third-largest regional market in Europe following France and Germany.

In comparison, the Asia Pacific Market grew at a 4 year average growth rate of 145%. China accounts for well over 90% of the market.

The Americas, dominated by the US with 96% of the market, grew by just 26% versus year prior and an average growth rate of 89% over the past 4 years.

CCAF said that while Europe is smaller in contrast to the other two regions, it is noteworthy that Europe’s per-annum growth has been far steadier, growing 79% annually on average between 2013 and 2017.

Regarding specific models, peer to peer (P2P) consumer lending accounted for 41% of all European alternative finance. Invoice trading came in second at 16% with P2P business lending at 14%.

Real estate (property) crowdfunding garnered 8% of the volume with equity crowdfunding at just 6%.

P2P consumer lending grew by 99.8% from € 697 million in 2016 to €1.392 billion in 2017.  CCAF said this growth may be attributed to strong incumbent firms that have increased their operations internationally.

Invoice Trading grew even by jumping 113% between 2016 and 2017, increasing from €252 million to €536 million.

P2P Business Lending grew 33% from €350m to €467m and real estate crowdfunding jumped by 136% rising to €259 million from €109 million year prior.

Equity crowdfunding declined to drop from €219 million in 2016 to €211 million in 2017.

As with past reports, CCAF worked closely with Fintech platforms to garner the data correlated in the report. CCAF said that this year’s study gathered data from 269 platforms with reported operations in 2017. These 269 platforms were responsible for 519 unique data entries across 45 countries in Europe. CCAF is recognized as the leading research institute for the global alternative finance sector.

Professor Raghavendra Rau, Academic Director of the Cambridge Centre for Alternative Finance, said the sector continues to evolve in creating both new opportunities and challenges:

“It has, therefore, never been more important to understand its evolution and track the trajectory of its growth. This year’s report is entitled ‘Shifting Paradigms’ to emphasize the dynamics of this still relatively nascent marketplace, responding to consumer demands as well as recent regulatory changes.”

Dr. Kristin Wallevik, Dean of the University of Agder’s School of Business and Law, said that the report’s message of shifting paradigms is of relevance for the financial sector, business education, and research:

“Here, by focusing attention on the important financial aspects of our ever more digital lives, we actively contribute to more informed decision making, policy formulations, as well as responsible development of new industries.”

Seeking additional insight, Crowdfund Insider reached out to Tania Ziegler, CCAF’s Head of Global Benchmarking, and Rotem Shneor a professor at the University of Agder who worked on the report.

We asked about the slowing growth of digital finance and it this was a sign of maturation, competition or the overall economy.

Ziegler said this appears to be the result of maturation but that even with the slowing growth, Europe grew at a faster pace than other regions:

“The over-all European region (including the UK) grew by nearly 40% from 2016 to 2017. When we exclude the UK, this growth jumps up to 63%.  On the whole, we are seeing strong incumbent Fintech firms across Europe, and an emphasis on internationalization. As more Fintech friendly regulation emerges across Europe, the landscape should continue growing steadily across the continent in 2018,” said Ziegler.

Shneor added that this maturation pertained to the early adopters’ segment but the vast majority of potential users still do not make use of alternative finance channel.

“The speed of future growth is hence uncertain, but ongoing long-term impressive growth will continue. The extremely high growth rates in earlier years were a result of very low starting volumes, but as volumes increase the growth rates will decline, even though in absolute terms impressive growth will continue.”

Germany stood out due to its rate of growth. We asked if there was a specific catalyst.

“P2P Consumer Lending, for the most part, was responsible for the jump in Germany’s volume,” explained Ziegler. “This model grew by 79% from €181.5m in 2016 to €325.3m in 2017. Activity was primarily driven by a large increase in the volume of one key platform.”

According to the report, institutional investment dropped precipitously (over 50%) in the equity-based crowdfunding model. Is this a concerning sign?

Zeigler said that while both institutional investment and overall volume for equity-based crowdfunding shrank in 2017, this does not necessarily mean that this model will not improve in 2018. Since this model complements traditional angel and seed-level investment activities, it is important to view this model within the broader European VC and PE activities that went on in 2017.

In 2017, while deal size was on the rise, the number of early-stage deals fell. As such, it is not surprising that early-stage investments across European Equity-based Crowdfunding models followed similar trends for 2017. While institutional involvement in Equity-based crowdfunding decreased, the involvement of retail investors remained steady.

Shneor said that equity crowdfunding is one of the models where a “regulatory blockage exists.”

“The high entry barriers in most countries and the limitations on the promotion of offerings pose serious challenges for platforms in this sphere. In most cases, platform requirements have been very similar to those of traditional investment firms, which lead to traditional thinking and biases even among platforms who do operate. In addition, this also leads to a certain degree of platforms using regulation to block entry of new entrants and  focus on relatively large ticket campaigns. All of these together pose a certain departure from idealistic notions of opening up the market and democratizing it, and the results are slower growth overall.”

[easy-tweet tweet=”Equity crowdfunding is one of the models where a regulatory blockage exists. The high entry barriers in most countries & the limitations on the promotion of offerings pose serious challenges for platforms #Fintech” template=”light”]

We asked if Brexit having an impact in the UK as well as continental Europe. Zeigler said, while it is possible, it is too early to say what the impact is or may be. Zeigler noted that the UK continued to grow and made up the largest share of total regional volume – though this decreased from 81% in 2016 to 73% in 2017.

“Interestingly, 2017 saw a lot of internationalization of platform operations, with UK firms operating across Europe significantly. We also recorded a number of strong EU firms driving UK-fundraiser volumes. At present, firms are able to take advantage of certain harmonized rules but we don’t know how Brexit will affect this once the UK leaves the EU.  We do know that several British platforms operating outside of the UK have developed contingency plans. Additionally, some countries have noted increased interest by British platforms opening offices to utilize passporting rules.”

The European Commission continues to discuss the creation of a pan-European securities crowdfunding exemption. This policy aligns with CMU but, as of yet, has not occurred. So will a single market online capital formation approach help to drive sector growth and utilization?

“In general, unified regulation would establish a helpful baseline for regulating the sector in regions that are still developing or have not yet implemented guidelines for operating in the market,” said Ziegler. “It should help continue to drive sector growth – particularly through equalizing international barriers to entry for platforms with newer markets. Moreover, platform survival depends on ability to reach scale, which remains a challenge in most small countries in relying only on domestic market. Harmonization of regulation will help increase volumes, experience and actual funding for projects currently underfunded.”

The CCAF 4th Annual European Benchmark Report is embedded below.


CCAF’s 3rd European Alternative Finance Report

CCAF’s Americas Report: Sector Grows by 26% as US Market Leads with 97% of Market Share

CCAF: Asia Pacific Alternative Finance Sector Grows to $358 Billion Dominated by China

CCAF: UK Alternative Finance Market Grows 35% Aided by Institutional Participation, Some Segments Slow & Brexit Concerns are Significant

Cambridge Centre for Alternative Finance Launches New Fintech Collaboration Network with UN Economic Commission for Latin America and the Caribbean

The Cambridge Centre for Alternative Finance (CCAF), the leading research group on all things Fintech, has launched a new Fintech collaboration network in partnership with the United Nations Economic Commission for Latin America and the Caribbean (UNECLAC). According to a release by the UK government, the network was the genesis of a meeting in Santiago, Chile in March. This network is the third one launched by the Centre outside the UK after China and Sub-Saharan Africa. This initiative has been supported by HMG as an observer country of this group.

The network is designed to enable research and policy support for regulators throughout Latin America, in particular in Pacific Alliance countries, which already have guidelines to harmonize Fintech policies.

The British Embassy organized a seminar on 25 March where UNECLAC’s Executive Secretary, Alicia Barcena, delivered some opening words about this landmark partnership. The Governor of the Central Bank of Chile, Mario Marcel, also participated in delivering remarks praising this initiative, and about what it means for developing fintech friendly policies, both in Chile and Latin America.

Reportedly, the activities of the Centre will receive support from the GREAT campaign, a cross-government initiative aimed to showcase the best of the UK and encourage people to visit, do business, invest and study in the UK.


North American Securities Administrators Association Worries About Fintech and State Regulatory Relevance

Last week, the North American Securities Administrators Association (NASAA) issued their legislative agenda for the 116th Congress. Buried within their priorities were the Association’s concerns pertaining to emerging Fintech services.

Fintech has the capacity to provide better services for both consumers and businesses – typically smaller firms and retail investors. The promise of Fintech, if allowed to evolve, is to better serve the underbanked population or the population that is not banked at all. Additionally, Fintech can provide more efficient access to capital for SMEs.

A recent report by the Cambridge Centre for Alternative Finance (CCAF), the global leader in research regarding alternative finance, emphasized the fact that Fintech can “extend the benefits of financial inclusion to millions of unbanked and underbanked people around the world.”

Philip Rowan, Regulatory Innovation Lead at CCAF, said that one of their biggest takeaways for positive change is “the importance of an internal mindset and culture which is supportive of innovation within the regulator.”

NASAA is the lobbying group that represents state and provincial securities regulators. Over the years, it has become apparent that state regulators frequently overlap with federal regulators thus creating a duplicative compliance process. Financial service firms must manage regulations at both the federal and state level – all 50 fifty of them (and perhaps the provinces in Canada). This process comes with a cost – one that is inevitably carried by the end user – businesses and consumers.

NASAA President and Vermont Department of Financial Regulation Commissioner Michael Pieciak issued a statement on their legislative agenda stating they are prioritizing “retail investor interests:”

“We have developed specific recommendations for promoting investor protection, safer capital formation, and innovation in the modern securities marketplace to help inform Congressional action to the benefit of American investors.”

Under NASAA’s “Principle 1” is the heading “Putting Main Street Investors First.”

NASAA states:

“The rapid expansion of technological innovation in the financial services industry (“Fintech”) has brought new opportunities to the financial marketplace but also significant investor protection concerns.  Fintech holds the potential to improve and expand access to investment services and products.  At the same time, the public’s interest in the benefits of innovation cannot supersede its risk or justify exempting innovators from the requirements of longstanding investor protection laws and regulations.  The 116th Congress must carefully evaluate proposed legislation designed to promote innovation to ensure that it does so in an informed and thoughtful way that adequately protects investors and users.  Investor protections must not be diminished at the state or federal levels for the sake of potential yet unproven innovation in the financial services industry.  Congress should, therefore, refrain from preempting any protections afforded to investors under state law.”

NASAA cautions Congress on the creation of Regulatory Sandbox’s – a concept first initiated by the innovation-friendly Financial Conduct Authority (FCA) in the UK. The UK is regularly recognized as the leading jurisdiction when it comes to fostering competition and innovation in financial services.

Since the creation of the first Fintech Sandbox, many international jurisdictions have embraced the concept as an opportunity to promote competition and boost innovation. Recently, the FCA took the project a step further in creating the Global Financial Innovation Network (GFIN) which includes a grouping of international regulators.

Simultaneously, the Sandbox concept is touted as an opportunity for regulators to closely monitor emerging Fintech firms as they seek to improve on financial services offerings. In theory, it is a win-win. The Fintech can experiment in a safe environment while the public authority learns about the service first hand – prior to any public introduction.

NASAA says that Sandbox proposals “may create new risks” including “regulatory arbitrage.” NASAA demands that Congress carefully review agency actions.

“.. risks arising from financial innovation generally should be shouldered by sophisticated or institutional investors, not retail investors who can ill-afford the consequences of a failed investment,” states NASAA.

Regarding cryptocurrencies and initial coin offerings (ICOs), NASAA tells Congress they should be rigorous in guarding against fraud and exploitation of “digital instruments such as coins, tokens, and cryptocurrencies.”

NASAA tells Congress to require the Securities and Exchange Commission to provide further guidance on the treatment of ICOs and minimize the “opportunities for price manipulation of cryptocurrencies and similar assets.”

In July of 2018, the US Department of Treasury published a comprehensive report on Fintech and access to capital. The Treasury had a bit of a different opinion when it comes to innovation in financial services. When addressing the overlap of state regulation and federal securities law, the Treasury had this to say:

“Treasury supports state regulators’ efforts to build a more unified licensing regime and supervisory process across the states. Such efforts might include adoption of a pass-porting regime for licensure. However, critical to this effort are much more accelerated actions by state legislatures and regulators to effectively reduce unnecessary inconsistencies across state laws and regulations to achieve much greater levels of harmonization. Treasury recommends that if states are unable to achieve meaningful harmonization across their licensing and supervisory regimes within three years, Congress should act to encourage greater uniformity in rules governing lending and money transmission to be adopted, supervised, and enforced by state regulators.” [emphasis added]

NASAA has consistently played an important role in preventing fraud. Investor protection is paramount for all financial services firms. NASAA believes that markets are “best served by robust enforcement of securities laws at the state and federal levels.”

“Congress must not enact any laws that will weaken or diminish existing regulatory oversight of the capital markets or any participants, such as issuers, broker-dealers, or investment advisers … Congress must never take state regulators off the securities beat, or any portion thereof, or otherwise limit a state’s discretion and autonomy in pursuing bad actors through enforcement actions and prosecutions.”

But many Fintech industry participants recognize the fact that duplicative compliance demands across all 50 states, alongside the multiple federal regulators, undermines innovation and competition in financial services. The Department of Treasury agrees to a point with NASAA that Congress should act. But when it comes to Fintech innovation, Treasury’s recommendations may undermine the relevance of state-based regulators and their profound lack of regulatory harmonization.

Cambridge Centre for Alternative Finance Research: Fintech Can Boost Financial Inclusion if Regulatory Innovation Exists

A new report by the Cambridge Centre for Alternative Finance (CCAF) states that if properly regulated, Fintech can “extend the benefits of financial inclusion to millions of unbanked and underbanked people around the world.” Fintech has the potential to provide enormous benefit for the less fortunate population but, in brief, CCAF concludes that regulators must play an active role in enabling financial innovation and not stymie change.

CCAF is the leading research institute covering innovation in financial services. The Centre has tracked the growth of alternative finance around the world. This most recent report, entitled Early Lessons on Regulatory Innovations to Enable Inclusive Fintech, has been completed in partnership with Fintech Working Group of the United Nations Secretary-General’s Special Advocate for Inclusive Finance for Development (UNSGSA). The Fintech Working Group is guided with the assistance of Her Majesty Queen Máxima of the Netherlands in her role as the UNSGSA.

The document was also supported by the Monetary Authority of Singapore (MAS), a jurisdiction that has established a strategic goal of empowering innovators in financial services.

The CCAF report states that over the past three years, regulators from both developed and developing countries have sought to better understand, and sometimes support, financial innovation. Initiatives such as Fintech regulatory sandboxes or designated committees and offices with a mission to foster innovation now exist in more than jurisdictions.

CCAF notes that currently there are 20 jurisdictions which are pioneering Regtech models as regulators seek to foster innovation internally by providing better services to both consumers and businesses.

Bryan Zhang, Executive Director of the Cambridge Centre for Alternative Finance, explained the mission to Crowdfund Insider:

“This empirical research was conducted over a period of eight months and involved interviewing more than 40 regulators from over 20 countries. We wish to understand how regulators are innovating themselves to better respond to financial innovation and create a more conducive regulatory environment for inclusive Fintech to grow and scale. By learning from the experiences of regulators, especially from developing countries, this study aims to broaden the evidence base on regulatory innovation and encourage the spread of good practices, peer-learning, and policy transfer.”

But while Fintech holds many promises regarding financial inclusion it also creates a substantial challenge for policymakers. This is particularly true in emerging and developing economies, where resources may be limited.

The report explains:

“Regulators with limited expertise in technology may find it difficult to understand Fintech and assess its implications for regulation. Regulators in emerging and developing economies typically have limited resources, and technology-led innovation adds additional pressure. Without an appropriate regulatory environment, inclusive financial innovation may be stifled and financial exclusion exacerbated.”

The research has generated several lessons from early examples of regulatory innovation which can help guide policymakers if they are supportive of financial inclusion and innovation.

Innovation offices can play an important role in boosting Fintech awareness and to support a supportive regulatory response. The report highlights the importance of “early, and close, engagement with innovators.

Executive buy-in can be key. Inter-agency coordination, in jurisdictions with overlapping responsibilities, can boost effectiveness.

Setting eligibility criteria can help regulators prioritize engagement with providers deemed most critical to achieving the innovation office’s established objectives. Importantly, innovation offices are only as good as the quality of their resources, meaning leadership must dedicate qualified and empowered personnel.

Fintech regulatory sandboxes are said to be “neither necessary nor sufficient for promoting financial inclusion.”

Sandboxes do provide benefits but are complex to set up and costly to run. Sandboxes may be a good tool for developing evidence-based policy but they should not distract regulators from pursuing “other avenues and tools for engaging with market participants and adopting more fundamental regulatory enablers to advance financial inclusion.”

Finally, Regtech can support better delivery of innovative financial services, which can directly improve financial inclusion. By leveraging Regtech, officials can more swiftly respond to market developments.

Zhang said regulatory responses to Fintech are still in the early days of their development. The data is still limited and there is no “silver bullet” for effective regulation. More observation and experimentation is needed:

“Many regulatory techniques in this area are resource-intensive, so a cost-benefit analysis will be needed. But this report is an important early snapshot of both financial inclusion through FinTech and steps to regulate this important sector.”

Philip Rowan, Regulatory Innovation Lead at the CCAF, added that regulators in developing and emerging economies can learn much from others who have gone before them. Regulators considering different strategies of managing and encouraging beneficial change can improve outcomes by learning from other jurisdictions:

“One of the biggest takeaways we’ve seen is the importance of an internal mindset and culture which is supportive of innovation within the regulator. Direct engagement between regulators and innovators has also proven to be mutually beneficial, regardless of the form which this takes, through promoting understanding and reducing uncertainty.”

If you are a financial regulator, or policymaker interested in boosting financial inclusion for the unbanked or underbanked, this is a must-read report.

The document also shares, by name, all of the Fintech innovation offices and sandboxes from around the world. There are also several Case Studies that merit review.

The UNSGSA FinTech Working Group is made up of members from Alliance for Financial Inclusion, Ant Financial, Bankable Frontier Association, Bill & Melinda Gates Foundation, Bangko Sentral ng Pilipinas, Better Than Cash Alliance, Consultative Group to Assist the Poor, International Finance Corporation, MAS, McKinsey, Omidyar Network, PayPal, Reserve Bank of India, and the World Bank.

The full report entitled “Early Lessons on Regulatory Innovations to Enable Inclusive FinTech: Innovation Offices, Regulatory Sandboxes, and RegTech” is available below:

Early Lessons on Regulatory Innovations to Enable Inclusive FinTech: Innovation Offices, Regulatory Sandboxes, and RegTech

[pdf-embedder url=”” title=”CCAF 2019-early-lessons-regulatory-innovations-enable-inclusive-fintech”]

Download the report here.

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Regtech: Cambridge Centre for Alternative Finance Launches New Regulatory Benchmarking Survey

The Cambridge Centre for Alternative Finance (CCAF), the leading research institute for all things Fintech,  has launched its first survey of Regtech (regulatory technology) and Suptech (supervisory technology) firms. The new report is being completed in partnership with EY Japan.

CCAF states that fieldwork is now in process. The objective of the new study is to create an “evidence-based taxonomy of Regtech firms,” and to then produce benchmarking data for Regtech firms to use as a measure. CCAF expects to publish the report in the first half of 2019.

The Global Regtech Benchmarking Survey is now live, and the CCAF invites Regtech leaders to respond.

CCAF’s series of Alternative Finance surveys is now in its fifth year. CCAF covers the panopoly of online capital formation, as well as other categories of Fintech such as blockchain and cryptocurrency. CCAF recently published its 2nd global cryptoasset survey.

Emmanuel Schizas, Lead in Regtech & Policy at the CCAF, says that Regtech and Suptech are critical if the pace of industry and regulatory change is to be made manageable.

“This type of benchmark survey will help accelerate the conversation by establishing a common language around the sector.”

CCAF states that research sponsor EY Japan has been actively and closely working with many government and private sector stakeholders to develop the environment underpinning regtech innovation globally.

EY Japan explains that market regulations have become more complex and market participants are increasingly looking to incorporate innovative technology to comply with regulations.

In a public statement, EY Japan said:

“… we face a gap where traditional regulations are not corresponding to new operations. EY Japan has great hopes for advanced technologies and the contribution they can make to regulatory compliance; we believe that government and the private sector can cooperate successfully to implement innovative solutions. And we are confident that this research will contribute to and help advance the technology-driven disruptive innovations currently evolving worldwide. We look forward to the survey findings assisting key players in the regtech ecosystem, including regulated entities, regulators and innovative technology startups, in driving breakthrough innovation.”

CCAF is also working with Regtech industry leaders such as Ben Richmond, CEO at the International RegTech Association (IRTA), said:

“This initiative supports the IRTA’s goal of enabling global collaboration and connections to advance the market development and adoption of regtech. It will provide ITRA members with an opportunity to help shape a much-needed global taxonomy of solutions and educate industry and policymakers on regtech use cases. We support the work that academics and advisory firms are putting into this and we particularly welcome the CCAF’s research.”

Deborah Young, Chief Executive of the RegTech Association (RTA), added that they welcome this global Regtech data collection program.

“This is consistent with our goal of accelerating regtech adoption and creating a global centre for excellence through fostering closer collaboration between regulators, regulated entities and Regtech firms.” 

Dr Sian Lewin, Head of Client Delivery at specialist advisory firm RegTech Associates and Founder of RegTech Women, stated:

“We welcome this research into the fast-growing regtech industry and see this project as complementary to the work we have done in the RegTech Directory to map and categorise the many regtech products that are currently available globally. We believe this sort of independent research is vital to separate the signal from the noise and hype in the regtech industry. It will hopefully bring needed clarity about regtech to financial institutions, regtech firms and regulators.”

Related: Cambridge Centre for Alternative Finance Publishes Definitive Global Cryptoasset Benchmarking Report

Q&A: Invesdor’s Mikko Savolainen on 2018 Successes & 2019 Plans

2018 was another great year for Invesdor, according to management. Founded in 2012 and headquartered in Helsinki with a branch office in Stockholm, the award-winning Nordic market leader in digital fundraising and investing connects European growth companies with global investors.

Named Best Nordic Fintech Startup 2018 and regulated by the Finnish Financial Supervisory Authority, Invesdor’s clients include private and publicly traded companies from Finland, Sweden, Denmark, Norway, and the UK as well as investors from more than 80 countries.

In May 2018, Nordea, one of the largest banks in the Nordic region, formed a strategic partnership with Invesdor aiming to improve the availability of alternative financing solutions for Finnish growth companies.  The idea is to combine Nordea’s expertise in creating a comprehensive financing plan for growth companies with the equity financing available through Invesdor’s platform.

Last week Invesdor co-founder and CEO Lasse Mäkelä shared some 2018 stats:

“What a year it was! Almost EUR 23,000,000 raised in 22 public and 5 private rounds for our client companies in 2018 via Invesdor. Yepzon, Mekitec, KleverApp, Seabased AB, Pupu, Tingent, Naava, Fafa’s Plats Oy, Sharetribe Ltd, InCoax Networks AB, Vere, Parkkisähkö, Treamer, Yeply Oy, Melobee, Movesole, Wello Oy and ZENZ Organic Products just to mention few…”

With its mission to “Play fair; Get sh*t done; Take the business seriously, not yourself,” it’s no wonder the Invesdor team has experienced continued success.

I recently had the opportunity to catch up with Mäkelä and Invesdor Head of Marketing Mikko Savolainen via email to learn more about the platform’s successes, his reflections on 2018, vision for the sector in 2019,  insight into market fluctuations and book recommendations. Our interview follows:

Crowdfund Insider: Congratulations on a great year.

Mikko Savolainen: Indeed, we had another good year in the crowdfunding business, raising a total of some €23M in 22 public and 5 private funding rounds for companies in Finland, Sweden and Denmark. We have also been building a second business line to balance the crowdfunding side (more about this in the later paragraphs).

[easy-tweet tweet=”#crowdfunding with @Invesdor in 2018: €23M in 22 public and 5 private funding rounds for companies in #Finland, #Sweden and #Denmark” template=”light”]

CI: What are your thoughts about innovations in the industry this year?

Mikko: As Dr. Rotem Shneor wrote in the latest Cambridge Centre for Alternative Finance (CCAF), at the Judge School of Business at Cambridge University report on the European alternative finance industry, we get an impression that the industry is moving from the ‘innovators’ to the ‘early adopters’ on the innovation diffusion curve.

It’s clear from looking at the industry growth rates around Europe that, while the rates are substantial, more or less doubling every year on the whole, we haven’t reached the masses yet. It’s, therefore, a long game, one which we have so far been playing in a prolonged bull market.

CI: Please comment about market fluctuations and their effect on the industry. 

Mikko: When the markets dip and investor confidence temporarily wanes, the riskiest assets – such as early-stage growth company equities – will probably be hit hard. From the platforms’ point of view, crowdfunding is a highly volatile business, similar to many other professional services businesses that are based on relatively short projects. This puts significant inherent stress on the platforms and exposes them to the effects of market cycles. The competitive dynamics of our industry will be in for a reshuffle if or when the cycle changes and platforms are unprepared.

[easy-tweet tweet=”The competitive dynamics of our industry will be in for a reshuffle if or when the cycle changes and platforms are unprepared @Invesdor” template=”light”]

CI: What are Invesdor’s plans in the current market cycle?

Mikko: I would prefer not to frame this as anything too alarmist, though. While I think the reality of market cycles is important to recognize, especially now that early signs of potential dips are being heard around the world, it’s still the responsibility of us in the industry not to make it into a self-fulfilling prophecy. People need cool and steady, in my opinion.

Hedging against this inevitable market cyclicality and the volatility of the crowdfunding business model has been one of the main reasons why we’ve fired up the new business line Invesdor Technologies.

It’s all about taking the practices that we’ve honed in crowdfunding and helping the established players – broker-dealers, investment firms, corporate finance boutiques, etc – adopt them, thereby making these traditionally insulated parts of the financial ecosystem operate more efficiently.

These established players tend to do quite manually the same processes that crowdfunding platforms have learned to do very efficiently and in a scalable manner simply due to the high volumes of funding rounds that platforms are helping organize.

CI: How did Invesdor Technologies originate? What do you expect to accomplish with Invesdor Technologies?

Mikko: We started piloting Invesdor Technologies’s PaaS (platform-as-a-service) product around the time of our own funding round in June this year. We’ve been focusing on iterating on the product with our first pilot customers and will soon be ready to roll it out in higher volumes.

We think that there is a lot of development of the growth finance ecosystem that we can do by bringing best practices from crowdfunding to the established circles. This will ultimately benefit growth companies as well as investors by eliminating friction in the system. It will also enable us at Invesdor to mitigate the effects of overall market cycles on our own company while adhering to our purpose of making participation in growth finance easy for everyone.

[easy-tweet tweet=”We think that there is a lot of development of the growth finance ecosystem that we can do by bringing best practices from crowdfunding to the established circles @Invesdor” template=”light”]

CI: Last year was a strong year for Invesdor?

Mikko: We had a good handful of blockbusters last year. The big winners would be Naava, Mekitec, and Wello, which raised €2 million each.

We also opened up the Swedish market, producing the successful funding rounds of Tingent, Seabased and Melobee, which we’re very happy of and hoping to continue the trend this year.

If I had to mention one case that really piqued investors’ interest last year, it would be Sharetribe with its never-exit strategy. Theirs is a very innovative approach to entrepreneurship (and capitalism, really), and the campaign had extremely high engagement out of the gate.

CI: Which new Invesdor campaigns should investors eyeball?

Mikko: Weecos and Valtavalo both kicked their campaigns off last year and rolled over to 2019, while InsightsAtlas is a brand new 2019 case. The three of them focus on sustainable e-commerce, sustainable LED lighting, and AI analytics boosted by mass human input, respectively, so it’s a very diverse selection.

Our investors keep telling us they want to see diversity in investment opportunities, and we are happy to oblige.

Weecos is currently overfunding, so the momentum is looking great. Valtavalo still has some way to go to reach its €500k minimum in the remaining days, but they have had a very high amount of traffic and engagement. As we’ve seen over and over, most investors tend to invest in the very last days of the campaign, so we expect that to happen with Valtavalo as well.

InsightsAtlas just published its campaign today (at the time of writing this), so it’s early to comment on their momentum. The business is highly interesting though, as the AI-powered analytics market has been witnessing significant M&A activity (which tends to be good for investors’ exit aspirations).

CI: What sets Invesdor apart from its crowdfunding peers? What are your plans for 2019?

Mikko: We have a handful of pilot clients with whom we’ve been iterating on our platform-as-a-service (PaaS) product. The platform is currently at a stage where it can be scaled out during this year and is available to purchase for the larger market as of now. We’ve made actually such big technological improvements with the PaaS product that we’re planning on bringing many of them into our crowdfunding platform, too.

As far as features go, I think we’ve created a product that’s superior to anything currently in the market. We think that many existing players in the digital finance space as well as in more traditional finance can really improve their business with this tech, especially due to the MiFID II regulations which most platforms engaged in equity financing must comply with. We’re actually currently looking for key partners in other digital finance platforms as well as financial intermediaries to scale PaaS.

CI: I am always interested in what Fintechers are reading… what’s on your book recommendations list? 

Mikko: I wish more people asked what others are reading! Spurred by our experiences in crowdfunding, I personally have been into behavioral economics for the past couple of years and just finished a brilliant big-picture look at contemporary financial markets written by the Charles E. and Susan T. Harris Professor at MIT Sloan Andrew W. Lo. I love seeing that financial economists are starting to push points of view that depict the markets in a very human light, in stark contrast with the traditional views of market actors being basically hyperrational robots.

Invesdor’s own investor surveys keep demonstrating that, while profits are still the #1 motivation for some 80% of investors, some 60% also report values and ethical concerns as highly important for their investment decisions. Investing is not a purely rational, machine-like exercise, nor should it be. I think it’s time to put the ol’ homo economicus to rest.

Here are two books from my list:

Last read: Adaptive Markets: Financial Evolution at the Speed of Thought by Andrew W. Lo.
Next up: Transforming Nokia: The Power of Paranoid Optimism to Lead Through Colossal Change by Risto Siilasmaa

CI: Mäkelä also shared what’s on his book list. 

Lasse:  Most recently: Transforming Nokia: The Power of Paranoid Optimism to Lead Through Colossal Change by Risto Siilasmaa

Next: Shoe Dog by Phil Knight

Alternative Finance is Booming in Latin America: Diego Herrera from the Inter-American Development Bank Provides Deeper Perspective into the Fast Emerging Fintech Market

Last month, CI covered the Cambridge Centre for Alternative Finance (CCAF) Americas Report. Overall, alternative finance grew 26% with the US dominating the sector as the largest market in the region. But digging into Latin America and the Caribbean (LAC), this market grew by a huge 94% going from $342 million in 2016 to $663 million in 2017 – a sizeable increase. While the US pumped the brakes a bit rising just 24%, LAC showed displayed more sector strength.

While LAC is a small percentage of alternative finance in the Americas – it is still very important. The countries that contributed the largest to the volume were Brazil, Mexico, Chile, Colombia, Argentina, and Peru. The rest of LAC countries and territories contributed $35 million to total volume. CCAF reports that more than a dozen new LAC based platforms participated in the Americas survey.

CCAF states that while the US is more consumer-driven, LAC is all about business:

“Just over 85% of all volume came from debt, equity, and non-investment-based activities to businesses across the [LAC] region. Business lending in LAC grew by 142% between 2016 and 2017, amounting to $565.7 million in 2017. Debt-based models made up the largest share of business finance, accounting for 92% of volume ($522 million), followed by 7% from equity-based models ($39.4 million) and just shy of 1% from noninvestment models ($3.8 million).”

CI reached out to Diego Herrera, Financial Markets Lead Specialist at the Inter American Development Bank, for his unique perspective. The IDB has been a long time partner of CCAF and Herrera has worked closely with Cambridge’s research team.

Our discussion on the growth of alternative finance and Fintech is shared below.

According to CCAF, LATAM and the Caribbean experienced a growth rate of 94% in 2017. In your opinion, what was the biggest driver of this growth?

Diego Herrera: Before answering, let us say that the Fintech ecosystem in Latin America and the Caribbean (LAC) has been increasing steadily during the last 5 years. For instance, a recent study from us at the Inter-American Development Bank (IDB), showed how the Fintech industry in LAC grew up more than 66% in the number of platforms in 2017, up to 1,166 from 703 in the previous year.

These firms are distributed along 11 different segments but concentrated in three of them: lending and crowdfunding (25%); payments and transfers (24%), enterprise and individual financial management (15%), totaling almost two-thirds of the industry.

In fact, crowdfunding/alternative finance has not only grown in the number of platforms but in the monetary value of originations, from $324 million in 2016 to $663 million in 2017, as the study from CCAF and IDB showed. For the case of this vertical, the main driver is the increasing demand for financing alternatives on the side of businesses. In fact, 85% of all alternative finance activity relates to business-specific fundraising. In 2017, business-focused alternative finance rose to $565.7 million from a variety of lending, equity and non-investment fintech models. More importantly, the study results hint that crowdfunding platforms, mainly those from the lending space, can be used as a suitable instrument to finance productive development in the region. In fact, more than two-thirds of this specific segment (92%) are explained by debt platforms.

Brazil took the lead (for the first time), followed by Mexico and Chile. Is it all about SME access to capital?

Diego Herrera: These three countries have different particularities in terms of the alternative finance market.

To begin with, Brazil explains 33% (US$216 million) of the regional market and it is concentrated in consumer lending, either through marketplaces or balance-sheet lenders (more than US$111 million), followed by business lending (US$50 million).

So, for the largest market in the region, it is more about consumer lending and competition with the traditional financial sector in that space.

Mexico follows Brazil in size with US$151 million and shows a rather balanced market where the shares of consumer and enterprise lending are changing fast in the favor of the latter. As of now, consumer lending takes 59% while the rest is essentially directed to enterprises.

Finally, Chile’s size is similar to Mexico in absolute value (US$150 million) but larger if controlled by measures such as the Gross Domestic Product (GDP).

This market is particularly concentrated in business lending, either through invoice trading platforms (US$118 million) or marketplaces (US$24 million).

So, for Chile, it is all about SME access to capital. Yet, when adjusted to review the main fundraising purpose, the results highlight that 85% of all alternative finance in LAC activity relates to business-specific fundraising. So, individuals are using funds for their businesses.

What about the regulatory environment in LATAM. Is there a clear standout? Are policymakers supportive of Fintech?

Diego Herrera: Governments all across the region are supporting Fintech through specific public policies.

For instance, in 2018 LAC had a very active year in terms of regulations: In Mexico, the National Banking and Securities Commission (CNBV) and the Ministry of Finance and Public Credit of Mexico, among other public institutions, pushed for the issuance of a Fintech Law. By April, the law was enacted and a series of rules are being issued since the last quarter of last year. This comprehensive Law, perhaps one of the most holistic around the world, includes crowdfunding as one of four regulated Fintech types of businesses.

On the other hand, the National Securities Commission (CNV) in Argentina issued a General Resolution on crowdfunding within the framework of the Law on Production.

Similar regulations were published by Brazil and Colombia, with the specific intention of creating rules for alternative finance.

Finally, Chile has recently announced the intention of regulating the crowdfunding ecosystem, given its relative size, but also with the intention of creating a regulatory sandbox. To the latter extent, Brazil and Mexico are on the way of kicking off their regulatory sandboxes, while Colombia has a sandbox where traditional financial institution can test their products. More to come from other jurisdictions this year…

How is the IDB engaged in the alternative finance sector? How are you fostering change?

Diego Herrera: IDB Group (IDBG) is an active participant in the Fintech Ecosystem across Latin America and the Caribbean.

To begin with, our public sector has been supporting Governments in the issuance of Fintech regulations and other public policies.

During the past couple of years, we supported the governments of Mexico, Brazil, Chile, Argentina, Peru, Paraguay, and the Dominican Republic directly with their public policies using technical assistance.

We also supported the Pacific Alliance countries (Chile, Colombia, Mexico and Peru) in the issuance of a set of principles for their fintech regulation.

Currently, we are on the way of using a regional instrument to support policies and regulations across the region for 15 countries, including assistance to regulators and Fintech associations and chambers.

We have also worked with partners such as CCAF and Finnovista in the creation of data to deconstruct the Fintech ecosystem and its verticals. To complement such efforts, we were the first international organization in publishing regulatory recommendations on how to regulate crowdfunding in 2016 in the region, and then on regulatory sandboxes.

There is much more to come.

On the other hand, our private sector branch, IDB Invest, has been investing in Fintech platforms in Argentina, Brazil, and Mexico, among other countries. Last but not least, our IDB Lab, our innovation lab, has supported Fintech entrepreneurs for many years, among many other interesting initiatives. So, in short, IDB Group has done a lot.

What about providing access to services for the underbanked or unbanked?

Diego Herrera: To give you a little context, there are more than 45 million Micro, Small, and Medium Enterprises -MSMEs- in the region, with a financing gap that reaches 23% of total GDP. To that extent, many of our programs are devoted to the provision of financial services to underbanked or unbanked populations, mainly MSMEs.

The IDB Group is aware of the importance of improving access to finance for the productive sector in Latin America and the Caribbean, as a way to boost productivity in the region. In fact, the relevance of access to finance and development of financial systems as a key determinant of productivity has been widely documented and, we are acting on it.

For instance, as a total of 410,000 MSMEs received financial support from IDBG-financed projects, only in 2017, showing the relevance for IDBG in this topic and how we are generating financial inclusion through our operations.

What about blockchain? Is there any real traction?

Diego Herrera: Like in the rest of the world, Blockchain has gotten a lot of traction in the region in the last few years.

Blockchain seems to have potential for asset and agricultural traceability, green certification, property records, medical history, and many other uses.

However, much more knowledge and actual applications at scale of such a technological enabler are still to be seen in the region, as in the rest of the world.

IDBG is leading some initiatives with global partners to explore the uses of blockchain and its potential impact in the region.

On the other hand, cryptocurrencies are rapidly evolving in some jurisdictions such as Mexico, Brazil, Argentina, and Chile. In fact, Mexico included “virtual assets” as one of the types of Fintech activities to be regulated and it is expected to create some momentum for the exchange segment, mainly.

What are your predictions for the alternative finance sector in LATAM for 2019?

Diego Herrera: We expect that alternative finance will keep on growing in the region for the following years. However, we are predicting two major trends.

First, the internationalization of firms is unavoidable in the sense that with few exceptions, individual country markets are still small to reach scale. As a matter of fact, many of the most established platforms are moving across borders in and outside of the region. Mexico and Brazil seem to be two of the favorite destinations for entrepreneurs, mainly because of the size of the potential market but also because of regulatory certainty.

Secondly, we are predicting a transition from mono-product to multi-product platforms as another way to create scale and to reach broader markets. This comes accompanied by alliances and mergers with traditional financial institutions or the transition to open banking, depending on the markets.

The challenge is larger for regulators and policymakers under this scenario but IDBG is there to accompany the ecosystem. Finally, I would like to mention the coming of BigTech companies as competitors in the financial system, they might enter through payments, but having such data would enable them to enter the financing space for MSMEs and individuals.

Where do you see the most opportunity?

Diego Herrera: As mentioned before, there is a HUGE opportunity in creating products and services for MSMEs. A gap of over US$1 trillion needs to be filled, and as a study on Mexico and Chile that we jointly developed with CCAF showed, alternative finance platforms are a very viable alternative to provide financial services for MSMEs.

That means not only financing, but also opportunities for alternative credit scoring, identity, business management, and many other types of platforms.

Fintech should be in the agendas of regulators and policymakers as it is a relevant tool for financial inclusion.

A Closer Look at the US Alternative Finance Market

Last month, the Cambridge Centre for Alternative Finance (CCAF) published their annual report on alternative finance covering the Americas. “Reaching New Heights” covered online alternative finance data in North, South, and Central America as well as the Caribbean. CI wrote about the report when it first came out but we wanted to take a closer look at the data regarding the US as provided by CCAF

First of all, during 2017 the Americas generated $44.3 billion in total alternative finance during the year. An increase of 26% versus 2016. The bulk of this amount came from the US at $42.81 billion or 97%.

CCAF states that the US is one of the most advanced markets for alternative finance in the world.

“In 2017 the total volume of the market rose 24% compared to 2016, reaching $42.8 billion. Overall, from 2013-2017, the market grew at an average of 88.5% each year. Over these five years, the USA Market accounted for a total of $121.7 billion.”

While the US market may be very advanced the number of platforms actually contracted during 2017.

CCAF reported that 48 platforms either pivoted away from alternative finance or shut down. CCAF gave the concrete example of equity crowdfunding – a sector of Fintech that has always been targeted for outsized growth. CCAF said that a handful of equity crowdfunding sites moved away from the sector to become “entirely private placement.”

Online lending changed as well with some lenders merging or being acquired by existing firms as the sector matured.

Online consumer lending was the largest segment of alternative finance segregated as follows:

  • Balance Sheet Consumer Lending model accounting for $15.2 billion (or 35.5% of the USA market share)
  • Marketplace/ P2P Consumer Lending accounting for $14.7 billion (or 34.3% of the USA market share)

Marketplace/P2P Consumer Lending exhibited the most severe contraction of any model in the US, dropping by 30%. In 2016, this segment generated $21 billion. During 2017, that number tanked to $14.7 billion.

Online business lending was the next largest segment.

CCAF states that in 2017, 130,264 businesses across the US raised about $10.1 billion through online alternative finance platforms. This amount represents 24% of all US market volume and an increase of 14.8% versus the year prior. Although the number increased the actual number of businesses using online lending declined by 9%.

Investment crowdfunding (equity crowdfunding) represented 12% of the total amount of US alternative finance. The total for 2017 was measured at $236 million – a significant decline of 57% versus 2016 when CCAF reported $549 million.

So where is the growth?

Balance Sheet Consumer Lending generated $15.2 billion in 2017 compared to the $2.9 billion it raised in 2016, a growth rate of 417%. Balance sheet lending is easily topping P2P/marketplace lending models.

Marketplace/P2P Business Lending grew by 9% in 2017 from $1.3 billion to just over $1.4 billion.

Marketplace/P2P Property Lending grew by 18% from $1.0 billion in 2016 to $1.2 billion in 2017.

Real estate crowdfunding experienced dramatic growth of 129% from $807 million in 2016 to $1.9 billion in 2017.

So what is the takeaway from all of this?

Online lending or debt based platforms dominate alternative finance in the US – just like the rest of the world. Traditional debt markets are huge so this is not unexpected.

Models of alternative finance for both consumers and businesses are morphing, and adapting, as the sector evolves and models change to remain competitive.

Real estate, both debt and equity, is a big winner as the model of providing more efficient access to an asset class previously difficult to access appears to be working.

Investment crowdfunding may be the biggest disappointment. The authors of the CCAF report speculate that the regulatory environment may be at least part of the cause.

In the US, there are three separate securities exemptions that equity crowdfunding platforms use. These exemptions each come with certain limitations and requirements but engender a convoluted and confusing ecosystem. The most popular exemption, Reg D (506c), is also the one that blocks out smaller investors as it is available only to accredited investors – an issue that policymakers say they will address.

The Cambridge Centre for Alternative Finance, Asian Development Bank Institute, and FinTechSpace Launch ASEAN Fintech Industry Survey

The Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge Judge Business School,  Asian Development Bank Institute and FinTechSpace have formed a partnership to launch the ASEAN Fintech Industry Survey – the first study of its kind.

According to CCAF, the research will focus on all forms of Fintech including:

  • Online lending (P2P/Marketplace
  • Crowdfunding
  • Digital Payments / Transfers
  • Insurtech
  • Trading / Capital Markets
  • Wealth Management
  • and more

The study will also cover fast emerging iterations of Fintech such as artificial intelligence (AI), machine learning (ML) and the incorporation of blockchain/distributed ledger technology (DLT).

Blockchain, described as a game changer in finance by some, has boomed in recent years yet many questions persist as to how the tech will be incorporated into the finance stack and whether it will have the impact claimed by some.

CCAF says that the research will be completed soon and made available to the public by the end of March 2019.

The leading global research entity in the alternative finance sector, CCAF’s research reports are closely read by policymakers, regulators, and industry participants around the world. As with all of their other published research, CCAF seeks to facilitate a dialogue between public and private Fintech stakeholders. Correlated data will be presented in aggregate, by country or product, as participants information will be anonymized so no individual data will be revealed.

Dr. Miguel Soriano, who is the co-lead of the study at CCAF, said the Fintech landscape is continuing to evolve, impacting all products and services in the financial services industry.

“This research study will be essential to map the progress and development of the different products, services, business models and technologies being used by Fintech companies in the ASEAN region,” said Soriano. “This study will provide important market data and analysis of the industry for all stakeholders in the ecosystem.”

Dr. Hung-Yi Chen, Asia-Pacific Region Manager at CCAF added that it was a pleasure to partner with the Asian Development Bank Institute as well as FinTechSpace on the inaugural study tracking emerging dynamics and developments within the fast-changing industry in ASEAN.

Dr. Naoyuki Yoshino, Dean at Asian Development Bank Institute, pointed to the ability of Fintech to provide access to financial services to the underbanked.

“There are various aspects that relate to the development of financial technologies in ASEAN countries. One is ‘access to finance.’ People can use mobile phones to make their deposits and purchase a variety of financial products,” said Dr. Yoshino. “Individuals and businesses can now borrow money online or through their mobile phones. Financial Institutions can collect data on these borrowers and, in turn, make lending decisions easier especially as related to risk assessment.”

Dr. Yoshino said that financial education will play a vital role for Fintech firms as they engage with industry stakeholders:

“Financial technology will change the way of life for many people in the ASEAN region. We believe that this ASEAN Fintech study will provide key insights on the overall development of digital financial technologies in the ASEAN region.”

 CCAF explained that the survey aims to be the first study to capture a complete picture of the Fintech landscape in the region. The balanced perspective will serve as a guide to regulators and policymakers for promising sectors of Fintech.

Eddie Lee, Vice President of the Singapore Fintech Association, a key industry partner for the study – as well as previous APAC Alternative Finance research published by CCAF, said ASEAN is complicated with ten different countries and ten different sets of regulations. These ten different countries represent a population of about 600 million:

“With the experience and network that the research team has accumulated in the Fintech landscape, we are very eager to see and be part of the next piece of work,” said Lee.

Chih-Shan Luo, Managing Director of FinTechSpace – the leading Fintech hub in Taiwan, called the research a great opportunity to study the Fintech landscape in detail given the rapid change and the diverse range of regulation.

“This initiative further promotes greater collaboration amongst Fintech players within the ASEAN region. It will showcase a better understanding of the industry’s dynamics and prospects for exponential growth in building and expanding a sustainable digital finance ecosystem,” stated Lito Villanueva, Chairman of Fintech Alliance Philippines.

All Fintech platforms in the ASEAN region are invited to contribute to the survey below. All participating platforms will be kindly acknowledged in the report, with their respective logos displayed prominently.

Link to the Survey:

For inquiries about the ASEAN FinTech Survey, please contact:

Fintech News: The Biggest Fintech Stories of 2018

Fintech, or financial innovation, is pervasive within the financial services industry. Innovation has always existed in this sector of business but the advent of the internet combined with the creativity of risk taking entrepreneurs has engendered an accelerated period of disruptive change in finance.

Think about how the newspaper and magazine industry has been crushed by the internet. Do you know anyone who reads a paper news product anymore? If you said yes, well then you are most likely above a certain age demographic. The dead tree industry is, pretty much, dead.

But finance comes with an interesting caveat. It is a highly regulated sector of industry. While some people, in some jurisdictions, believe that finance may be over-regulated, most everyone understands regulation is dearly needed for Fintech to survive and thrive.

As for 2018, it was a momentous year for innovation in the financial services industry. Cryptocurrency and blockchain boomed. Initial coin offerings (ICOs) rocketed to unbelievable levels as regulators struggled to maintain control. Today, ICOs are swiftly morphing into security token offerings (STOs) as the reality of regulation sinks in.

Meanwhile, more routine types of Fintech innovation are becoming established or commonplace. Online lending is quickly becoming the norm – not the exception. Payments and transfer firms are going through a rapid period of consolidation as the concept of money, and how it is utilized, is Appified.

Online capital formation for investments in early-stage firms or real estate is playing a more pronounced role in certain jurisdictions. Robo-advisors are undercutting more traditional advisory firms with better advice and lower costs.

And could you ever imagine wanting to go to a bank?

I can’t … because the experience of visiting a bank branch just sucks. Long live digital-only challenger banks.

The following is a selection of some of the top stories in Fintech from 2018. You may have your own picks so please do share as this is just a small selection. Post in the comments or email them to – I may just add them below.

ICOs Zoomed. Regulators Warned. The Inevitable Followed.

2017 was an enormous year for initial coin offerings (ICOs). Billions upon billions of dollars were raised in lightly (or not at all) regulated offerings. But then 2018 came along and the ICO market went even higher.

In fact, by June of 2018 it was estimated that $13.7 billion had been raised via ICOs – more than all ICOs combined previously, according to a PwC / Crypto Valley Association report.

The exuberance was astounding simply due to the fact the US Securities and Exchange Commission (SEC) had warned everyone the enforcement drums were pounding. And you do not mess with the Feds.

SEC Chairman Jay Clayton slammed the legions of professional gatekeepers working the doors of the securities industry who were lured into the sexy world of crypto offerings:

“To be blunt, from what I have seen recently, particularly in the initial coin offering space, they can do better,” stated Clayton.

He said the SEC staff was on “high alert” regarding ICOs that conflicted with existing securities laws issuing a clear warning to token offerings and their minions.

How could he be any clearer?

The enforcement actions that first focused on clear acts of fraud, moved to unregulated securities offerings, crypto exchanges, and paid promoters pumping the ridiculous shitcoins that had become ubiquitous.

Naive investors were fleeced. Subpoenas were issued. Lawsuits followed. Fraudsters and scofflaws found themselves in court.

This is a story that will continue well into 2019.

The UK Leads the World with Open Banking Rules

Once again, the United Kingdom schools the rest of the world on financial innovation and why its cool to be a Fintech entrepreneur in Great Britain.

Open Banking, simple to say but challenging to comprehend, gives control of any and all financial data back to consumers. Banks may no longer own your info and sell it to whomever or whatever platform that pays the toll. You, the consumer, own your data and choose who may access it and who may not. High Street banks must provide simplified access via APIs to facilitate your control of this data while making it easier for the consumer to shop around for better financial services.

While Open Banking is still very much a work in progress, my only question is when will the rest of the world catch up?

Down Under, They Call It Crowd-Sourced Funding

Australia has been a hotbed of financial innovation for several years now. A smaller market that benefits from rule of law, the language of business, and proximity to many developing markets, Australia has had a good share of supportive elected officials and a robust advocacy group (Fintech Australia). But for some reason, the Aussie crowdfunding sector (or Crowd-Sourced Funding as they call it) struggled to emerge.

At the beginning of 2018, the Australian Securities and Investment Commission (ASIC) announced it had approved the licensing of the first seven “crowd-sourced funding” platforms.

Issuers are able to raise up to A$5 million online backed by both retail and professional investors.

But there remained another hurdle.

The egregious omission of allowing proprietary companies (ie most all smaller firms) to crowdfund undermined the efficacy of the process. But in September, the Parliament of Australia finally legalized the ability of proprietary firms to use “Crowd-Sourced Funding” (CSF) or investment crowdfunding. Finally.

The European Commission Publishes Fintech Action Plan

In March of 2018, the European Commission published its Fintech Action Plan designed to boost financial innovation in the member states by streamlining the marketplace for Fintech firms. This included a grand list of 23 different steps for Brussels to pursue. The Fintech Action Plan was described as “foundational to Europe’s Capital Markets Union (CMU), the ongoing pursuit of a true single market in the financial services sector.”

The plan also included a crowdfunding proposal that Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services, and Capital Markets Union, described as necessary to compete globally;

“Europe’s innovative companies need access to capital, space to experiment and scale to grow. This is the premise for our Fintech Action Plan. An EU crowdfunding license would help crowdfunding platforms scale up in Europe. It will help them match investors and companies from all over the EU, giving more opportunities for firms and entrepreneurs to pitch their ideas to a wider base of funders.”

In the Fall of 2018, the European Parliament produced draft legislation on their proposed crowdfunding rules that would create harmonized regulations including bumping up the crowdfunding cap to €8 million. The proposal even included ICOs (at least initially).

The European Crowdfunding Network vocally supported the initiative as an obvious policy improvement – something the group has been advocating for years. Just ask ECN Director Oliver Gajda.

Europe is still waiting but hope remains for change soon.

France Decides it Wants to Become Crypto Central in Europe

The French FranceFrance sees opportunity in blockchain tech and crypto innovation. While some smaller countries have moved far quicker to enable digital assets to thrive, France may become the first major economy to create bespoke rules under le Loi Pacte – pending legislation that is expected to become law in 2019.

None other than Bruno Le Maire, the Minister of the Economy and Finance of France, stated:

“A revolution is underway, of which Bitcoin was only the precursor.”

The National Assembly in France duly moved forward with the legislation that allows an ICO issuer to receive regulatory approval – or not.

Sebastien Raspiller, Head of the Service in charge of the financing of the Economy at the French Treasury (Directorate General of the Treasury – Ministry of the Economy and Finance), explained:

“We want France to become a leading jurisdiction for solid ICOs, as an emerging means for funding growth SMEs and larger endeavours.”

Goldman Sachs Takes Online Lender Marcus and Turns it Into a Digital Challenger Bank

No, Goldman Sachs has not lost their minds, said former CEO Lloyd Blankfein explaining their move into retail banking as Marcus morphed from online lender to a full-blown bank.

And, in my opinion, he is correct. Legacy businesses suffer from legacy tech and Goldman (or Marcus) suffers none of this baggage.

Jurassic banks are saddled with an epidemic of branches and green screen computers running COBOL.

Marcus is born of the pain and experience from early Fintech innovators and benefits from a clean slate. Marcus wants to be the money center bank of the future: Borderless, mobile, user-friendly and forward thinking.

Marcus crossed the Atlantic to establish a foothold in the land of Fintech innovation and quickly captured tens of thousands of UK users and deposits. Ironically, the digital bank helps to bring hope to traditional big banks watching with envy. Marcus also puts legacy online lenders on notice with their low cost of capital, constant user touch point, and far broader portfolio of services.

Digital Bank Revolut: Crowdfunded Fintech Unicorn

Speaking about digital challenger banks, it is hard not to think about UK based Revolut.

The iconoclastic startup raised early money crowdfunding on both Seedrs and Crowdcube. Luke Lang, co-founder of Crowdcube, called the success of Revolut a watershed moment for the crowdfunding industry. When it first crowdfunded, Revolut held a valuation of a mere £42 million. It then went on to raise additional money the more traditional VC method receiving a valuation of well over a billion dollars.

Meanwhile, Revolut added a plethora of new features and services while expanding across Europe and plotting an ocean crossing or two.

Is China the World’s Top Fintech Hub?

A report produced by the Sinai Lab from Academy of Internet Finance (AIF), Zhejiang University, in partnership with the Zhejiang Association of Internet Finance, published a “Global Fintech Hub Index” (GFHI). The Index sought to portray the global development of Fintech industry and increase the understanding of global Fintech hubs at both the regional and city levels. According to their research, China holds the top spot.

China is clearly the largest Fintech marketplace. Online lending alone easily surpasses every other market in the world in dollar volume. According to the most recent report by the Cambridge Centre for Alternative Finance, the alternative finance sector in the Asia Pacific (APAC) region increased to $358 billion in 2017. China dominated the market accounting for around 99% of the total volume. The next nearest market is the US at a mere $42.81 billion. But size is not everything, so I hear, and Fintech regulation in China is more than a bit opaque.

So does China surpass London (UK)? Singapore? And what about Silicon Valley?

Depending on how you look at it – yes and no. But this report affirms China’s relevance, and dominance, in certain categories of Fintech.

The US is Losing the Regulatory Battle. The UK Continues to Reign Supreme.

In July of 2018, the US Department of Treasury published an excellent report on Fintech innovation and what needs to be done to improve the emerging digital finance sector. The authors should be commended for their work.

Commenting on the document, Secretary of the Treasury Steven T. Mnuchin, said American innovation is a cornerstone of a healthy U.S. economy.

“Creating a regulatory environment that supports responsible innovation is crucial for economic growth and success, particularly in the financial sector. America is a leader in innovation. We must keep pace with industry changes and encourage financial ingenuity to foster the nation’s vibrant financial services and technology sectors.”

But while many people take for granted the ability of US entrepreneurs to break things and then fix them, the US suffers from a profound challenge of regulatory overlap that stymies far too many aspiring disruptors.

The Byzantine labyrinth of agencies, commissions, and state regulators, are mind-boggling, not to mention incredibly redundant and unnecessary.

Treasury, a part of the federal government that is well aware of this problem, said regulatory modernization must take place while wagging their finger at recalcitrant states. In fact, Treasury said, “if states are unable to achieve meaningful harmonization across their licensing and supervisory regimes within three years, Congress should act.”

Don’t hold your breath.

Meanwhile, the UK continues to forge ahead, determined to remain the leading Fintech Hub and global financial center in Europe. It certainly helps that in the UK there is a single regulator that is mandated to support Fintech innovation and competition. Brexit be damned.

Crypto Meets Traditional as SeedInvest is Acquired by Circle

SeedInvest, one of the more prominent investment crowdfunding platforms in the US, was purchased by Circle last fall. The acquisition by Circle, a “global crypto finance company” that has received over $250 million in venture capital, represented a paradigm shift in the crowdfunding sector.

Depending on who you speak to, some people believe investment crowdfunding has struggled in the US due to ham-fisted rules that over-regulated and under-appreciated the needs of early-stage firms. Crypto, or more specifically the ICO days of lore, provided rapid-fire financing quickly followed by secondary trading of digital assets. It is time for the two aspects of Fintech to mate? It appears so.

Security tokens, or blockchain based securities, may help alleviate some of the friction intrinsic to online capital formation under existing exemptions (Reg D 506c, Reg A+, Reg CF). SeedInvest has honed its crowdfunding tools to provide access to capital for vetted issuers while benefiting from the fact they are a broker-dealer.

So what is the sum of this equation? Let’s talk next year.

Neufund Issues Security on Blockchain for Parent Company Fifth Force GmbH

Europe has a crypto force to reckon with in Neufund co-founder and CEO Zoe Adamovicz. She has been championing the benefits of issuing securities on blockchain for some time now while dealing with Germany’s regulator BaFin which leans to the conservative side.

Their “equity token offering” or “ETO” successfully raised €3.4 million for parent company Fifth Force GmbH. As a shareholder in Neufund, you may be entitled to dividends and vote on shareholder resolutions. All managed by the Neufund platform.

Neufund’s mission is to “enable ownership for all” using blockchain to issue and manage shares and shareholders all in a regulatory compliant manner. Neufund already has a list of issuers queuing up to use their service. In fact, 11 companies in total are in the queue.

Neufund is a platform to watch as they aren’t just talking the talk – they are doing the equity token walk.

EY Report: In the UK, Crowdfunding Tops Bank Financing as Preferred Option

EY has published their second annual “Fast Growth Tracker” report that surveys founders and entrepreneurs in the UK. The brief report provides an interesting perspective into the UK innovation economy that is vital to economic growth and prosperity.

An interesting finding from the report is that crowdfunding has edged out bank financing when early-stage firms consider their funding opti0ns.

While venture capital is still the preferred path to accessing growth capital (by far at 75%), crowdfunding has now passed bank financing (19%) to become the second favorite choice at 20%. The Cambridge Centre for Alternative Finance reported that equity-based crowdfunding grew from £3.9 million in 2012 to £333 million in 2017.

The UK arguably has the most robust crowdfunding ecosystem in the world with well-established platforms regularly allowing retail investors to fund both start-ups and later stage firms. With growing regularity, these same firms are also being funded by VCs or professional angel investors as there may be benefits to combining smaller investors with pros.

Bruce Davis, Director of the UK Crowdfunding Association (UKCFA), commented on the report:

“This report confirms how significant crowdfunding has become for entrepreneurs, now passing the banks as their preferred funding source after venture capital,” said Davis.

Earlier in 2018, a legal ceiling was changed for crowdfunding platforms now allowing issuers to raise up to €8 million (USD $9.1 million or £7.2 million) online, thus making crowdfunding a more viable option for issuers, platforms, and investors. This increase makes crowdfunding more palatable for more established firms – a good thing for retail investors as they gain access to less risky firms.

“With more than half of entrepreneurs planning to raise between £1 million – £5 million next year, the changes earlier this year to the Prospectus Directive, raising the ceiling on crowdfunding to 8 million Euros, puts crowdfund platforms in the sweet-spot for entrepreneurs’ funding needs,” Davis stated. “Add to this the increasingly frequent practice of VC funding and crowdfunding working side by side on a raise, and few would argue that crowdfunding is now a truly mainstream source of funding for entrepreneurs, whether at very early stage or right through to later when money is needed to scale up.”

Early stage firms still have many challenges, Brexit aside, many UK firms believe that structural shortcomings in the UK persist:

“This implies that there is more work to be done by the public and private sector to support UK entrepreneurs. Maintaining the UK ‘s status as an attractive market to build a company will be of vital importance if the economy is to thrive in the future.”

While best should never get in the way of better, a motivated private sector combined with a supportive public sector that understands the benefits of entrepreneurial risk-taking is exactly what the UK, and other countries, dearly needs.

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