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 email@example.com – 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
France 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.