LDN / SAN-FRAN
#25 | FEBRUARY 2019 | £2
THE WORLD'S FINTECH NEWSPAPER
CYBERCRIME AS AN ECONOMY
PAYMENTS: WE’VE BROKEN THE INTERNET!
DEFINING TRADE FINANCE AS AN ASSET CLASS
Digitisation and the personal touch page 12
Fintech for Good: Nationwide’s OB4G challenge page 14
People: Teresa Grobecker, SVP US Capital Global & Founder of Real Estate Consortia
CEO Interview Secret Sauce of Payments Success – Paybase page 26
What you don’t know about quantum computing could fill a warehouse. Nothing personal, just a statement of fact. The good news is, you’re not alone. p4 Quantum Computing: Predicting portfolio optimisation’s future
p5 IBM: Bringing the observable universe closer
FINTECH NEWS AND UPDATES
News Updates Tech Sector Growth Weakest for Three Years as Uncertainty Begins to Bite
THE FIN TECH TIMES
Staff hiring slows from peak Some tech companies have responded to subdued business investment across the wider economy by putting the brakes on staff hiring at the end of last year. While employment numbers continued to rise overall in Q4, the rate of growth continued to soften from a survey-record high seen at the start of 2018.
Robotic Process Automation revenues in banking and financial services to reach $1.2 billion by 2023
Higher wages drive up costs in Q4 Operating expenses continued to rise sharply at tech firms, albeit at a weaker pace than the record highs seen in 2017. Difficulties filling vacancies pushed up staff costs, while exchange rate depreciation fuelled input cost pressures for dollar denominated purchases. Business outlook remains upbeat
Political uncertainty and global trade frictions have dented client confidence, but buoyant staff hiring and capital spending plans are still in place for 2019, according to a new quarterly survey of UK technology sector companies by KPMG. UK tech sector growth cools The tech sector experienced a difficult end to 2018, as business activity growth eased to its weakest for three years and new work remained subdued. Global trade frictions and Brexit-related uncertainty were widely reported to have acted as a headwind to client spending. At 52.4 in Q4, the KPMG UK Tech Monitor Index – which measures the strength of business activity across the sector – remained above the crucial 50.0 no-change value, which continued the upward trend signalled since the summer of 2012. However, the latest reading was down from 54.0 in Q3 and pointed to the slowest rate of tech sector business expansion since Q4 2015. Tech companies also signalled the sharpest fall in backlogs of work for seven years, suggesting a lack of new work to replace completed projects at the end of 2018.
Tech Companies Drilling for Talent in the ‘Oil Fields’ of Big Data Specialist technology talent is in greater demand than ever as technology reaches into every aspect of the economy, according to the Reed Technology State of Skills research. For its State of Skills interactive tool, Reed Technology analysed 10 years of data from Google and O*NET to find out more about the changing roles, skillsets and software driving the sector. It found that specialist roles and skills are essential to successful businesses and workers in this sector. The research charted a rapid rise in interest over the past five years for roles such as DevOps engineer (986 per cent) and data scientist (428 per cent). This rise in specialist roles has seen interest in more general roles such as web developer fall – a 52 per cent drop from October 2008 to July 2018. Problem solving skills were found to be paramount, with ‘deductive reasoning’ (solving problems with general rules) and ‘critical thinking’ (using logic and reasoning to identify the best way to approach a problem), ranked as the most valued skills. Interestingly, within one of the fastest growing roles – data scientist – an aptitude for ‘education and training’ is ranked most important behind ‘complex problem solving’ and ‘deductive reasoning’. This is likely due to the need to explain and inform others about what they do. Aside from this, project manager – for which ‘customer and personal service’ is the most important skillset with ‘active listening’ (retaining
Looking ahead to 2019, there are positive signs in the latest report. While tech firms report that projections for demand growth have softened, they remain highly upbeat about their capital expenditure plans. A strong record of R&D spending continues to drive confidence regarding new product launches, according to survey respondents. Some suggest that a competitive boost from the weak pound will help achieve new export sales. Tech businesses appear set to remain a strong engine of job creation. Almost half of the survey panel expect to boost workforce numbers, while less than one-in-ten forecast a fall. Tech sector employment plans are far stronger than that reported by the UK private sector as a whole, which are now the lowest since Q1 2013. Comment Bernard Brown, vice chair at KPMG UK said: “Our survey reveals that political uncertainty has dented client confidence contributing to a slowdown in growth at the end of last year. But, buoyant staff hiring and capital expenditure plans are still in place for 2019. This confidence is reflected in the statistic that almost 50% of UK tech firms intend to add jobs over the next year, whilst many traditional manufacturers are considering moving jobs offshore. This demonstrates the strength and resilience of the UK tech sector in the new digital economy.”
information and asking appropriate, constructive questions) also integral – is another role within the sector that prioritises communication skills. Andrew Gardner, director at Reed Technology, says: “By its nature the technology sector is constantly evolving and as such employer requirements and candidate aspirations have to be kept under constant review. Companies want talent that keeps them ahead of the game and many are turning to niche specialists to achieve this. Candidates are always searching for the role that makes them indispensable for the next decade – as such, specialist roles are the way to go.” Tech professionals homing in on favoured tools The State of Skills research conducted also investigated the tools favoured by technology professionals. The change of emphasis more towards tools that help to analyse and visualise is apparent, with data scientist interest in Power Bi showing continued growth with 600 per cent between October 2015 and July 2018. For many of the roles in the technology sector there is high search interest for newer tools. This demonstrates the technology workers’ constant search for the best technology, so businesses need to keep up to date, evidenced by interest in AWS by DevOps engineers spiking by 2000 per cent in ten years between October 2008 and July 2018. Andrew Gardner continues: “The constant evolution of tools to support technology workers means that keeping up to date with these tools is essential to giving employees the best chance of excelling in their role. Data collection, visualisation, storage and interrogation will only increase in importance as digitalisation gathers pace.
New data from Juniper Research has found that Robotic Process Automation (RPA) revenues in banking will reach $1.2 billion by 2023. With an estimated revenue above $200 million in 2018, this represents a growth of over 400% over the period. For more insights, read Traditional Banks & Fintech: The Race to Automate. Juniper’s new research, Banking Automation & Roboadvisors: Vendor Positioning, Strategies & Forecasts 2019-2023, found that when combined with Artificial Intelligence (AI), RPA can considerably lower compliance costs, raise productivity, and improve customer experience. Leading 5 RPA Vendors Juniper analysed around 20 leading RPA vendors in terms of AI capability, product innovation and financial services specialisation. The research ranked the 5 leading RPA vendors: 1. Kryon 2. EdgeVerve 3. Nice 4. Pegasystems 5. Kofax Kapow Despite being relatively small, the company with the most advanced AI-driven RPA solution alongside domain expertise in the financial industry is Kryon. Its biggest strengths are its hybrid automation solution and process discovery; enabling autonomous identification of tasks. RPA Potential Still Untapped The research claimed that Financial Institutions (FIs) are still at early stages of RPA implementation and many solutions are underperforming. This is mostly due to the challenges surrounding unorganised and non-textual data, job processes that are hard to summarise and catalogue, and a lack of pre- and post-implementation strategies. Juniper found that FIs must invest in the formalisation of processes, solutions that are able to understand the large range of unstructured data, and consider RPA as a strategic action in order to see benefits. Roboadvisors to See Strong Growth Juniper predicts that automated investment opportunities via roboadvisors will reach $4.2 trillion AUM (assets under management) by 2023; growing at over 60% per year. Presently, incumbent banks are seeking to provide low-cost investment options while pure-play roboadvisor companies are being pressured to offer human advice. Juniper found that hybrid solutions remain the customers’ favoured option, and therefore suggests that partnerships between incumbent banks and pure-play roboadvisors should be sought after in order to provide optimal service.
CEO: Published by Disrupts Media Limited 40 Islington High St, London N1 8EQ thefintechtimes.com
PRINCIPLES • • • •
To deliver fintech opportunities and solutions to mainstream audiences To identify social, economic, political, and cultural trends To bring stakeholders together to develop solutions To connect the elements of the fintech ecosystem
2 I Feb 2019
Managing Editor: Zoya Malik
Digital Editor: Matthew Dove
Contributors: Kate Goldfinch
Somari van der Westhuizen
LinkedIn shutterstock.com pixabay.com
Copyright The Fintech Times 2018. Reproduction of the contents in any manner is not permitted without the publisher's prior consent. "The Fintech Times" and "Fintech Times" are registered UK trademarks of Disrupts Media Limited.
COVER STORY THE FIN TECH TIMES
from page 1
Quantum computing could well prove to be the most seismic technological shift since the Turing machine, but it’s also so widely misunderstood that there’s only a handful of people who really know what they’re talking about. It’s felicitous then that industry experts Markus Braun, Adam Koltun, Abhineet Sarkar and Björn Stein have agreed to share their insights with me. So, what is quantum computing, how can it be used in finance and should we all be afraid, very afraid? Furthermore, what’s this I keep hearing about quantum computing’s ability to break every encryption on the planet, including the supposedly unbreakable ones upon which blockchain technology is based? What happens when unstoppable force meets immutable object, asks Matthew Dove, Digital Editor, TFT What is quantum computing? The short answer is, it’s complicated. Quantum computing (QC) is derivative of quantum mechanics, a branch of physics concerned with the study of nature in its smallest increments, specifically the energy levels of atoms and subatomic particles. Markus Braun is the co-founder of Frankfurt’s JoS Quantum, a provider of quantum software products, and he’s first up to explain how this cerebral field relates to practical computing; “Quantum computing is a completely new form of computation. All of our computers currently rely on zeroes and ones. By using quantum objects, like electrons, ions or atoms, quantum computers allow for values between zero and one. It’s easy to imagine if you think of a sphere, like the earth. With a classical computer, you can only travel from pole to pole, you can just go from zero to one. With a quantum computer you can also go in between and take another route, you can go to any possible point on the sphere.” Quantum versus classical computing For Braun, the prime advantages being proffered by this new breed of computation are simple; speed and power. “Take, for example, that you’re a travelling salesman. You have to travel to different cities to reach all of your customers so you try to find the best route but you have Markus Braun n-faculty possible routes. A quantum computer could provide an exponential upgrade for this system by simultaneously going through all these routes, it can do these kinds of calculations faster.” This doesn’t necessarily mean that quantum is set to eclipse classical computing, not any time soon at least. “Of course, our classical computers are already good in many ways. In addition, multiplication and division, they’re perfectly fine. A quantum computer will always be a side thing. You’ll have a classical computer but when you need to use the highway, you’ll use a quantum computer which will be provided by the cloud.” Adam Koltun, a blockchain consultant and business strategist with the Quantum Resistant Ledger (QRL), chimes in unison with Braun on this last point, emphasising that QC is bringing fireworks to the party and not a wrecking ball. “The opportunities presented by quantum computers are not limitless, but they are vast. While they will not replace traditional computers, they will allow us to compute things that we cannot with current technology. One of the strengths of quantum computers is that they have the potential to answer questions with large numbers of variables, and few solutions. One weakness of quantum computers is that they are extremely expensive to produce, and have limited applications. However, the technology is very young.” To give you an impression of the kind of power that this fledgling processor is packing, a functional 100 qubit (quantum bits) computer would be more powerful than all the supercomputers on
the planet right now combined. Just to put that in perspective, we’re at about 50 qubits now... As the co-founder of Quantum Factory GmbH and having experience in quantum optics and software development, Björn Stein can add to the discourse with considerable authority. With the characteristic objectivity of a scientist, Stein tempers his obvious enthusiasm for quantum innovation with a stiff pinch of pragmatism. “The biggest opportunity of quantum computing is simultaneously a strength and a weakness: It harnesses the entire computational power inherent in quantum physics. This is very powerful. Yet there’s also a big constraint on the engineering behind such a quantum computer. Quantum computers must work on single particles whereas classical computers can work on billions of electrons at a time. This makes dealing with errors rather easy for classical computers. Quantum computers, however, must use elaborate schemes known as quantum error correction to deal with engineering tolerances or environmental interference.” The picture that emerges from
talking to those with feet on the ground and skin in the game is that of a flawed genius, quantum computing as a sort of techie Lord Byron, capable beyond comprehension but hamstrung by its peccadilloes. The question is whether, like Byron, QC is mad, bad and dangerous to know... Can quantum computers break encryption? The hysteria surrounding the threat quantum computing could pose to the world’s encrypted information, stems from its potential ability to take a mathematical theory and make it tangible. Cryptography - the art of writing and solving codes - has underpinned the communication of sensitive information for centuries. In its most modern incarnations, it’s used to encrypt everything from contactless card payments to emails and messenger services. Furthermore, there’s presently somewhere north of 120 billion US dollars invested in the cryptocurrency market, a market almost wholly prefaced on the presumed immutability of encrypted blockchain technologies. So, is a quantum
menace about to descend on Bitcoin and friends? And what’s more, is Grandma’s Hotmail account safe? Shor’s algorithm is designed to perform prime number factorisation, which essentially means that it can take very large numbers and work out which pairs of prime numbers have been multiplied to calculate them. This is no easy feat and can’t be performed by classical computers. A sufficiently powerful QC, on the other hand, could perform Shor’s algorithm with ease spelling trouble for encryptions that rely on the difficulty of such calculations. So-called public-key encryptions - like those made possible by the Elliptic Curve Digital Signature Algorithm (ECDSA) - are especially vulnerable. Simply put, in the ECDSA those really big numbers and their constituent prime number factors protect the secret relationship between your username, email address or cryptocurrency public key and their underlying passwords or private keys. Prime number factorisation exposes this secret relation and could allow bad actors to access your private keys through your public address. So, how realistic is this threat?
Abinheet Sarkar, a fintech and emerging tech consultant, thinks it’s worth worrying about. “Yes, quantum computing can break passwords. Hackers are continually trying to break passwords using various algorithms and computations using classical computing methodology. Quantum computing gives an edge to hackers to simulate and implement the attacks at a faster pace, because quantum computing works on the specific property of superposition in qubits, which allows the qubits to stay in both the state of 0 and 1 at the same time.” Sarkar’s assessment of the blockchain’s chances of withstanding quantum interference is similarly bleak. “Blockchain creates a decentralised system, a secure digital record based on the consensus of each participant in the network. Messages created from hash algorithms [on the blockchain] are practically irreversible by classical computing. However, Quantum computing with qubits, can exponentially enhance the computational speed of the system and Shor’s algorithm can be used to reverse the hash and forge digital signatures.” Elsewhere, opinion is split, with Messrs Koltun and Stein offering less dystopian visions of a quantum future. Speaking like a true exponent of superposition theory, Stein’s response to the question of whether quantum computing can break passwords is both 1 and 0. “The answer is neither yes or no: Quantum computers can be faster in breaking passwords. Breaking passwords by computer amounts to trying passwords, perhaps from a list of popular passwords, or completely by trying all possible combinations, or a combination of these two approaches. A consequence of quantum computing could be a change in what is considered too short a password. Whilst a classical computer can do no better than searching for your password by trying candidate passwords one at a time, needing x amounts of work for x attempts, quantum computers can use a trick known as Grover’s algorithm to cover x^2 (x-squared) attempts for the same amount of work. To summarise: Your passwords are safe from a quantum computer assuming you’re willing to double the minimum length of your passwords.” When pressed on the same issue, Adam Koltun provides an
Feb 2019 I 3
COVER STORY: QUANTUM COMPUTING THE FIN TECH TIMES
Left to right: Adam Koltun, blockchain consultant and business strategist, Quantum Resistant Ledger (QRL) Abhineet Sarkar, a fintech and
even more reassuring summation. “Quantum computers can’t break passwords assuming they’re properly salted and hashed at the server level, which most banks and online institutions should be doing. What they will be able to do is compromise the security of our public key infrastructure (PKI) which encrypts data in transit to the website you’re using making man-in-the-middle (MITM) attacks trivial to do. As there’s currently initiatives like http://test-pqpki.com/ to update the internet’s PKI, there’s very little reason to worry. There will be nothing for users to do except maintain browser updates, something often done seamlessly now. The most common threats to anyone’s security, of virtually any type, is garden-variety social manipulation and impersonation. Being mindful of what information you make public, directly or indirectly, updating one’s passwords and being aware of what types of back-doors already exist into your accounts (password reset to an email/phone, insecure 2fa, etc.) is still the most effective way to secure one’s self.” The Quantum Resistant Ledger’s resident business strategist seems less sure when it comes to the blockchain’s chances against the brute force of QC. “Blockchain utilises ECDSA, which is the same thing that underpins the internet. Assuming a powerful enough quantum computer, they will be able to break blockchain by deriving its private key from its public key. Right now, this is only revealed when spending, though there is about 19% of addresses which hold 36% of the total supply of Bitcoin.” The decentralised nature of cryptocurrency means that any systemic quantum proofing needs to be applied across the entirety of hundreds of disparate networks. Consensus is key and one weak link could undermine the whole chain. This implies that the technology’s greatest strength could yet prove its undoing. Blockchain developers aren’t known for their flat footedness though, and measures are already being put in place to ensure that the QC horror stories don’t become a reality. QRL itself is made quantum safe by using a hash-based signature algorithm called XMSS. Similar to classical computing, quantum
4 I Feb 2019
computing has what is known as ‘quantum bits of security’. Generally anything 128 bits or higher is considered an adequate level of encryption protection so is prudent to use as a minimum. XMSS is by default 128 quantum bits of security and can be made higher if necessary. A blockchain versus quantum showdown might be grabbing headlines, but it’s arguable that the real potential of QC tech lies in its application to other areas of finance. Quantum finance According to Markus Braun, when it comes to the application of quantum computing in finance, the sky’s the limit and everyone’s a winner; “Everyone will benefit from it. In the long run, everyone will get in touch with it. In the short run, I think portfolio optimisation will be a part of it and risk management, credit scoring etc. If you’re an insurance company and you want a risk model - say your customer is paying a higher premium because your model has a high error rate of calculation then you can reduce the error rate, lower costs and raise liquidity as well as equity.” No argument from Koltun, who agrees that managing investments and risk will form a cornerstone of QC’s remit; “Risk assessment and portfolio optimisation probably have the most to immediately gain from the implementation of quantum computing. Risk assessment, due to its high number of variables and the time-sensitive nature of much of the data. Not only calculating more, but calculating it quicker, would have immediate, real value. Portfolio optimisation would likely be a slower endeavour, but when it comes to managing vast portfolios with highly specialised and varied needs, quantum computers may well hold the keys to unlocking the next echelons of portfolio precision. Quantum computers pose a threat to the current predictive modeling industry in banking and fintech. As always in any modeling business, accuracy and timeliness are everything, and a solution that could look at more variables, and assess them quicker, would pose a disruptive threat to the established methods.” Who’s doing what? When asked to name names, it’s obvious who Björn Stein thinks will be the big players in quantum finance but he also sees room at the table for smaller outfits like his, the QRL and JoS Quantum. “Fintechs have unique opportunities at this time. As the algorithms on which any potential
benefits from quantum computing depend are still being developed, an investment in or a collaboration with quantum software companies might result in exclusive access to this technology. On the other hand, a likewise investment in or partnership with a hardware developer might result in exclusive access to the first relevant quantum computer. Such hardware developments are not only pursued by giant corporations such as IBM, Alphabet, and Microsoft but also by many startups, some of which have a competitive edge. In particular, the technology of ion trap based quantum computing … is exclusively pursued by startup companies rather than by large corporations.” As you’d expect, Markus Braun wholeheartedly concurs that fintechs like JoS Quantum can thrive in the space alongside the big hitters. “As we’re a smaller company I have to say that we’re going to benefit! Most of the smaller startups and the fintechs are focussed on the software and aren’t building the hardware as much because this is pretty tough unless you’re funded by 150 million! The hardware isn’t important for the business client because the business client works with software. If you’re doing what we’re doing, which is building client facing and user-centric software, your customer will fall in love with the software and doesn’t care about the back end.” Predictably, legacy banks are sniffing around in the usual fashion, eyeing their slice of the pie, as Koltun illustrates, “Both Barclays and JP Morgan Chase have been a part of IBM’s quantum network since late 2017. The banks were looking to utilise quantum computing for asset pricing, risk analysis, risk mitigation, trading, and portfolio optimisation. Given the amount of money tied up in risk mitigation, and lost to improperly-assessed risk every year, the potential value is massive.” How about the potential value to the retail customer? What benefit, if any, will they reap from advances in QC? The customer? Oh, right! The customer! “For normal guys like us”, Braun asserts, “walking around using our phones, we won’t notice the existence of quantum computing in the first place because there will always just be access via the cloud. You won’t need to buy new stuff, we’ll just have a connection somewhere in the back-up to quantum computers.”
emerging tech consultant and Björn Stein, co- founder, Quantum Factory GmbH
In the medium to long term though, the quantum software developer foresees measurable improvements to the lot of the average customer. “Especially in 10+ years, I think that there’s going to be major benefits. Banking will become more seamless and more personal. Checks will take less time and if they don’t, they will be done with a better model which is more accurate. The customer will feel the difference but they won’t know that it’s coming from a quantum computer.” Koltun feels that immediate benefits will be hard to spot but doesn’t rule out some tertiary advantages finding their way through. “Retail banks have been interested in the potential of quantum computing and its applications towards portfolio optimisation, asset pricing, trading, and risk analysis which, when addressed, could have a meaningful impact on the individual retail customer.” Stein meanwhile remains unconvinced that QC will yield any rewards for the guys and gals in the street as, “benefits will likely be reaped by big players and not affect typical customers significantly.”
Did I forget to mention AI? It seems that these quantum gurus are undisturbed by talk of hardware monopolisation as well as being decidedly underwhelmed by the hysterics surrounding the blockchain and encryption. Markus Braun, however, feels my enquiries into quantum computing are missing one significant and potentially hairraising detail. Apparently, I’ve entirely overlooked the utility quantum computing could have in the burgeoning field of machine learning. “Artificial intelligence will benefit from the existence of quantum computing... infinitely. So, if you’re afraid of AI now, you’ll be more afraid of AI then! In five to ten years, you’ll hear a lot about that...”
we’re still simulating quantum computing. It’s still very error prone and in a research phase, it’s still emerging. What we’re doing right now is simulating these qubit systems, this universal quantum computer.” And what of the perceived threats? “You don’t need a quantum computer to save yourself from a quantum computer. There are already classical algorithms which are quantum safe...I don’t even like to call them threats because basically QC isn’t a threat, it’s what you make of it…” uTFT
But Let’s Not Sh*t Ourselves, Yet When discussing fintech innovation, it’s all too easy to get carried away, and this is certainly the case with regards to quantum computing in finance. Hyperbole and inaccuracy are being spouted in equal measure, so I’ll leave it to Herr Braun to give us a remedial dose of cold hard reality. “For now,
Quantum Computing: Predicting portfolio optimisation’s future Financial services will need to experiment with early developments of QC technology and QC simulation predictions and deploy the technology into their mainstream banking operations, as soon as it becomes available. Ian Bradbury, CTO Financial Services at Fujitsu UK & Ireland spoke to Zoya Malik, managing editor TFT to explain how these predictions will impact near –realtime optimal risk portfolio holdings ZM: How is quantum computing currently being adopted into mainstream banking activities?
IB: Quantum Computing is currently a developing technology – it is not yet completely ready for mainstream banking activity deployment and will not be for a number of years. However, given that Quantum Computing potentially brings a very significant improvement in terms of solving complex optimisation problems in near real time, many financial services are looking to experiment with early
developments of QC technology or QC simulation so that they can deploy the technology into mainstream banking operations as soon as it becomes available. It is also quite possible that some financial services organisations will look to deploy QC technology or QC simulation into certain niche complex optimisation operational activities in the next 12-24 months where there is a significant benefit over traditional computing solutions and operational stability can be guaranteed.
ZM: Which banks are investing in QC capabilities in the UK and overseas (retail, private, investment other) and in which geographies globally is there greater investment?
IB: Many financial services organisations are already experimenting with QC technologies through their innovation labs and technology partnerships. These organisations don’t usually disclose this innovation cycle experimentation to the market, as is normal practice, although some organisations (like NatWest) have revealed successful Proof of Concepts. There is take-up across all geographies and sectors, and use cases are varied and wide.
ZM: Which banking and finance segments will look to harness QC and how will portfolio managers benefit in risk profiling? IB: With respect to risk profiling, QC can speed
COVER STORY: QUANTUM COMPUTING THE FIN TECH TIMES
IBM: BRINGING THE OBSERVABLE UNIVERSE CLOSER At Consumer Electronics Show, Las Vegas in January 2019, IBM unveiled its IBM Q System One - ‘Q’, the first commercial quantum computer that will provide businesses scope for quantum calculations accessed via IBM Cloud. Zoya Malik, managing editor TFT caught up with Bob Sutor, Vice President, IBM Q Strategy & Ecosystem, IBM Research to discuss the hype, attributes and uses of quantum computing for the financial services industry in the future
Bob Sutor ZM: There is a lot of chatter about quantum computing break passwords? What’s the reality? BS: Not today and likely not for many, many years, if at all. As part of a diligent cybersecurity and data protection plan, all organisations should constantly review their current technologies and operations. IBM and others in the industry and in universities have been working to standardise new “post-quantum” or “quantum-proof” encryption protocols in NIST (the National Institute of Standards and Technology). IBM offers a Quantum Security Risk Assessment where clients can learn more about these and other cybersecurity strategies and implementations. ZM: What are attributes of quantum computers over current classics? BS: First, let’s agree that all computing systems rely on a fundamental ability to store and manipulate information. Today’s classical computers manipulate individual bits, which store information as binary 0
and 1 states. Millions of bits work together to process and display information – the “speed” everyone is familiar with on smart phones, laptops, and the servers in the cloud. Quantum computers use the physical phenomena of nature to manipulate information via quantum mechanics, one of the most wonderful and strange parts of science. At this fundamental level we have quantum bits, or qubits. Unlike a bit that has to be a 0 or a 1, a qubit can be in a combination of states. To put that in perspective: 50 qubits can represent over one quadrillion data values simultaneously. Three hundred qubits could represent more values than there are atoms in the observable universe. Quantum computers are not a replacement for classical ones. They complement the traditional systems by possibly being able to solve some forms of intractable problems that “blow up,” or become extremely large or time consuming during computation. ZM: What are real threats? BS: The “threat,” if you can call it that, is a lack of understanding of what quantum computers are and what they can do. This is why IBM wants to help industries get “quantum ready” to use today’s systems. That’s why we want quantum computing to be ubiquitous in university classrooms. From computer science courses to chemistry and business classes, students should become familiar with this technology and consider career paths rooted in quantum computing. It’s why we’ve established IBM Q Hubs at universities and labs all over the world, with the mission to accelerate learning, skills development, and industry collaborations. A clear advantage could be awarded to early adopters in the era of quantum computing who pursue key use cases.
up computing so much that it potentially offers near –real-time prediction of optimal risk portfolio holdings, even taking into account a large number of variables and constraints. As the complexity of these calculations continue to rise, so traditional computing solutions reach a point where they are unable to provide useful input to a Portfolio Manager, as it takes so long to process the calculations. QC offers the potential to overcome this issue.
that enabled High Frequency Trading (HFT) created changes in both the thinking and outcomes of trading practices, QC may well create changes to thinking behind Portfolio Optimisation.
ZM: How can Fujitsu help banks optimise its mix of high quality liquid assets including bonds, cash and government securities?
ZM: How can QC bring in millennial customers and the non-banked to extend greater financial inclusion?
IB: Fujitsu offers banks access to the Fujitsu Digital Annealer, a hybrid technology that merges Quantum Computing principles and techniques with a unique digital architecture. This produces a device which performs better than current Quantum Computers or simulators at a significantly lower price point and with the operational reliability of today’s computing architectures. This allows banks to experiment with and deploy Portfolio Optimisation solutions that perform significantly better than today’s current traditional computing technologies, utilising Quantum Computing modelling techniques, and with the levels of stability and resilience required by any bank.
ZM: What will be a particular use case for a wealth manager with QC power?
IB: At this stage, Portfolio Optimisation is one area where many are investigating the potential for QC deployment. In the same way that the technology
ZM: How will banks’ customers benefit their savings and investments portfolio?
IB: Very broadly, QC should help banks to create portfolios that deliver better returns for less risk than those that utilise conventional computing solutions.
IB: QC is another element in the Digital Transformation that the entire financial services industry is undergoing. In some cases, QC can unlock new digitisation deployments, which have previously been ignored due to inadequate compute power, which in turn drives the digitisation of other related and adjacent areas. The net effect is to drive down costs, offer new services and support digital channels – all of which support greater financial inclusion and consumer take-up.
ZM: How can fintechs compete and partner with banks to offer QC driven platforms?
IB: Fujitsu offers its Digital Annealer as a cloud-based service which can be consumed by any organisation. Some banks are already working with an ecosystem of suppliers to develop QC solutions using cloud services such as that offered by Fujitsu. uTFT
ZM: Kindly provide a SWOT analysis of the trend. BS: In five years, IBM believes that the effects of quantum computing will reach beyond the research lab. It will be used extensively by new categories of professionals and developers looking to this emerging method of computing to solve problems once considered unsolvable. We took a major step closer when we unveiled the IBM Q System One at CES 2019. It is the industry’s first, fully integrated universal quantum computing system, designed and built to scale scientific and commercial use. ZM: How can quantum computing be applied in finance? BS: The challenges of the financial industry are those of optimisation. A quantum computer’s exponential power could potentially find the most efficient trade, or portfolio balance, as well as assess the best options in asset pricing and risk analysis, intractable for today’s machines. Quantum computer applications to further optimise the financial industry could help every corner of society, from retirement planning to individual investors’ stock picking to insurance to better risk assessment for rare events like bad weather. ZM: Which banks are investing and partnering with IBM? BS: I can only speak to the organisations that are part of the IBM Q Network, our worldwide community of leading Fortune 500 companies, startups, academic institutions, and research labs working with IBM to advance quantum computing and explore practical applications for business and science. For example, JPMorgan Chase is a premier global financial services partner with IBM, focusing on use cases for quantum computing applicable to the financial industry including trading strategies, portfolio optimization, asset pricing and risk analysis. Barclays is also working within the IBM Q Network, investigating use cases for financial services.
And in Japan, Mitsubishi UFJ Financial Group, and Mizuho Financial Group are members of the IBM Q Hub at Keio University where they will work with the university and IBM Q to explore quantum applications in finance. ZM: What implications could QC have for wealth management? BS: Eventually quantum computing may be able to better and faster balance private financial instrument portfolios for profit and more acceptable risk. Such as for retirement investing for individuals ZM: How can fintechs exploit developments in QC? BS: They need to start learning now about the technology and what it may and may not do. IBM provides a range of strategy and technical offerings to bring organizations up to speed and focused on how quantum computing may bring them advantage. ZM: How will QC impact regulations within the banking and finance sector? BS: So far that is unknown. Quantum computing is still at an early stage. Another analogy to classical computers is this: What if everyone in the 1950s had had 5 to 10 years to prepare for the mainframe, from hardware to programming, while they were still prototypes? In hindsight, we recognize that jumping in early would have been the right decision. That’s where we are with quantum computing. Now is the time to begin exploring what we can do with quantum computers across a variety of potential applications and industries. Those who delay years until the day a perfect, fault-tolerant quantum machine appears might risk falling behind on the shorter term benefits we are starting to discover today. uTFT
Feb 2019 I 5
ICO JURISDICTION: GIBRALTAR
LEAD STORY: CYBERSECURITY THE FIN TECH TIMES
A new lease for DLT in Gibraltar Nick Hughes, Managing Director, Eulat Consulting works closely with fintechs globally to expand their businesses. He spoke to Zoya Malik, managing editor TFT about the strengthening of Gibraltar’s regulatory framework that is ushering market confidence in the wake of Gibraltar Stock Exchange becoming the first stock exchange to own a regulated blockchain exchange, the GBX and his views on the local industry talent gap ZM: What is Gibraltar Financial Service Commission doing to create market confidence within Gibraltar’s financial sector and economy?
NH: Since 1st January 2018, any firm carrying out by way of business, in or from Gibraltar, the use of distributed ledger technology (DLT) for storing or transmitting value belonging to others (DLT activities), needs to be authorised by the Gibraltar Financial Services Commission (GFSC) as a DLT Provider. The DLT framework positions Gibraltar as a jurisdiction which facilitates innovation, whilst ensuring it continues to meet its regulatory and strategic objectives, and understands the modern need for robust and speedy interaction with regulators, in this fast moving area of business. A flexible, adaptive approach is required in the case of novel business activities, products, and business models.
ZM: What is the current environment for fintechs for ‘ease of doing business’? What more is needed?
NH: As part of the GFSC’s commitment to supporting both existing licensees and those looking to take their first steps into the financial services sector – either as a financial services firm or offering support to financial services firms - the GFSC has established the Innovate and Create Team. The Innovate and Create Team is made up of a number of individuals from across the organisation and it has been set up to help encourage innovation by supporting those businesses looking to develop and introduce innovative ideas for financial products or services into the market.
ZM: What have been new regulations by GFSC during 2018 to address DLT, crypto exchanges and cryptocurrency?
NH: A DLT Provider: • must conduct its business with honesty and integrity needs to ensure that the information is presented in a way that is likely to be understood by the target customer and does not disguise, diminish or obscure important items, statements or warnings; • must pay due regard to the interests and needs of each and all its customers and must communicate with its customers in a way which is fair, clear and not misleading must maintain adequate financial and non-financial resources; • must manage and control its business effectively, and conduct its business with due skill, care and diligence; including having proper regard to risks to its business and customers must have effective arrangements in place for the protection of client assets and money when it is responsible for them must have effective corporate governance arrangements must ensure that all systems and security access protocols are maintained to appropriate high standards must have systems in place to prevent, detect and disclose financial crime risks such as money laundering and terrorist financing; • must be resilient and must develop contingency plans for the orderly and solvent wind down of its business.
ZM: What skills gaps are there in talent and recruitment for the DLT and cryptocurrency industries? How does Gibraltar’s market provide for this gap? How best to incentivise talent in these industries?
NH: There is currently a skills shortage in the Gibraltar market for roles such as Compliance, Risk, Developers and Business Development. New companies are looking to cross-train employees from other prominent industries in Gibraltar such as Gaming and general financial services, or for more technical roles they are conducting international searches for the right candidate.
ZM: What will Gibraltar’s regulatory and market opportunities offer investors during 2019?
Gibraltar has been successful in attracting cryptocurrency businesses such as Etoro, Huobi, Xapo and Coinfloor. The blockchain platform from Gibraltar’s stock exchange also gained regulatory approval and several other licence applications are currently being reviewed. uTFT
6 I Feb 2019
as an economy
Cybercrime is a fast growing industry and with no signs of slowing down. Activities around Cybercrime – from how it is committed to its methods of spread – are becoming more and more ingenious. Kate Goldfinch,reporter at The Fintech Times speaks to industry experts about what to watch out for in 2019 and offers some cautionary notes In 2018, the Cybercrime economy was estimated to be worth $1.5 trillion, according to a study commissioned by cybersecurity company Bromium. That was the first study of its kind, aimed at examining the “dynamics of cybercrime,” in the context of revenue flow and profit distribution. The study discovered new criminal platforms and a booming cybercrime economy. This Cybercrime economy is self-sufficient and blurs the lines of legality. “It’s shocking how widespread and profitable cybercrime has become,” commented Gregory Webb, CEO of Bromium. “The platform criminality model is productising malware and making cybercrime as easy as shopping online. Not only is it easy to access cybercriminal tools, services and expertise, it means enterprises and governments alike are going to see more sophisticated, costly and disruptive attacks as The Web of Profit continues to gain momentum. We can’t solve this problem using old thinking or outmoded technology. It’s time for new approaches.”
Cybercrime enablers In fact, if Cybercrime were a country it would have the 13th highest GDP in the world. Breaking down that $1.5 trillion figure a little more, we can see how profitable some of these illicit activities actually are: $860 billion – Illicit/illegal online markets; $500 billion – Theft of trade secrets/IP; $160 billion – Data trading; $1.6 billion – Crimeware-as-aService; $1 billion – Ransomware. The report finds that cybercrime functions on a number of levels, with some large “enterprise” style operations, netting well over $1 billion, while SME-style outfits made between $30,000-$50,000. “A hyper-connected range of economic agents, economic relationships and other factors are now capable of generating, supporting, and maintaining criminal revenues at an unprecedented scale,” the study suggests. “Platform capitalism – a term used to describe the likes of Uber, Facebook and Amazon – is offering fertile ground for hackers to further their gains. Whether by hacking companies to acquire user data; intellectual property; disseminating malware; selling illegal goods and services; setting up fake shop fronts to launder money; or simply connecting buyers and sellers, it is evident that cybercriminals are adept at manipulating existing platforms for commercial gain.” Yet beyond platforms being the targets and unwitting enablers of cybercrime, the report assumes they have provided inspiration – as a model of platform, criminality emerges. “The main contribution of platforms is to connect individuals with a service or product.” While an individual hacker may only make upwards of $30,000 per year, a manager on a cybercrime platform can make $2 million per job. The study found numerous examples of services and products for sale on these various platforms under the title, “Customer Service.” And these trends show no signs of slowing down.
The evolution of Cyber threats In December 2018, McAfee, the device-to-cloud cybersecurity company, released its McAfee Labs Threats Report: December 2018, that examined cybercriminal underground activity and the evolution of cyber threats during Q3 2018. McAfee Labs found an average of 480 new threats per minute and a sharp increase in malware targeting IoT devices. The ripple effect of the 2017 takedowns of Hansa and AlphaBay dark web markets continued as entrepreneurial cybercriminals took new measures to evade law enforcement.
“Cybercriminals are eager to weaponise vulnerabilities both new and old, and the number of services now available on underground markets has dramatically increased their effectiveness,” said Christiaan Beek, lead scientist at McAfee. “As long as ransoms are paid and relatively easy attacks, such as phishing campaigns, are successful, bad actors will continue to use these techniques. Following up-and-coming trends on the underground markets and hidden forums allow the cybersecurity community to defend against current attacks and stay a step ahead of those in our future.” Hacker forums provide an elusive space for cybercriminals to discuss cybercrime-related topics with their peers. McAfee researchers witnessed conversations around the following topics in Q3 that could be considered as hidden cybercriminal trends:
Successful Breaches Fuel Markets for Data and Copycat Attacks • User Credentials: Due to many recent successful large data breaches, user credentials remain a popular topic. Hacked email accounts are of particular interest to cybercriminals as they are used to restore login credentials for other online services. • E-commerce Site Malware: Cybercriminals have shifted their focus from point-of-sale systems to payment platforms located on large e-commerce sites. Cybercriminal groups, such as Magecart, have successfully skimmed thousands of credit card details directly from victim websites, which has fueled demand for both credit card details and the malicious tools that can be used to steal them. Furthermore, as organisations
Approximate Annual Revenue
$680B Illicit, ilegal online markets
$500B Trade secret, IP theft
$160B Data tradin**
$1.6B Crimeware, CaaS
Ransomeware** *Revenues direved from trading in stolen data, such as credit and debit card information banking log-in details, loyalty schemes and so on ** Revenues derived from extortions based on encrypting data and demanding payments
LEAD STORY: CYBERSECURITY THE FIN TECH TIMES
implement additional security measures, cybercriminals are responding accordingly. For example, as organisations add geographic IP location checks for online purchases, the demand for compromised computers from the same sip code as the stolen credit card information increases.
Common Entry and Attack Methods Remain Popular • Common Vulnerabilities and Exposures (CVE): McAfee researchers witnessed numerous mentions of CVEs in discussions focused on browser exploit kits RIG, Grandsoft and Fallout, and on GandCrab ransomware. The popularity of these topics signals the importance of vulnerability management for organisations around the globe. • Remote Desktop Protocol (RDP): Shops offering logins to computer systems worldwide, ranging from the consumer home to medical devices and government systems, remained popular throughout Q3. These shops provide one stop for cybercriminals looking to commit fraud, selling RDP access as well as social security numbers, bank details, and online account access. • Ransomware-as-a-Service (RaaS): Ransomware remains popular, evidenced by 45% growth over the last four quarters and strong interest on underground forums for leading RaaS families such as Gandcrab. The number of unique ransomware families has declined since Q4 2017 as partnerships between essential services have increased, for example the partnership between GandCrab ransomware and cryper service NTCrypt seen in Q3. Partnerships and affiliate schemes have bettered the level of service provided to customers and increased infection rates. As McAfee Labs saw 480 new threats per minute in Q3 2018:
• New IoT device malware grew 73% in Q3 2018; total IoT malware was up 203% in the last four quarters • Cryptomining malware increased 71% • New mobile malware decreased 24% • Financial sector data breaches increased 20% • New ransomware increased 10% (Source: McAfee Labs Threats Report: December 2018, statistic for Q3 2018, Box Close)
These tactics follow a broad effort on the part of financial institutions to increase security in recent years. Regional Targets. McAfee researchers found a new malware family, CamuBot, targeting Brazil in Q3. CamuBot attempts to camouflage itself as a security module required by the financial institutions it targets. Although organised cyber gangs in Brazil are very active in targeting their own population, their campaigns have been crude in the past. With CamuBot, Brazilian cybercriminals appear to have learned from their peers, adapting their malware to be more sophisticated and comparable to that on other continents. Attack vectors. Malware led disclosed attack vectors, followed by account hijacking, leaks, unauthorised access, and vulnerabilities. Ransomware. GandCrab, one of the most active families of the quarter, increased its required ransom payment to US$2,400 from $1,000. Exploit kits, the delivery vehicles for many cyberattacks, added support for vulnerabilities and ransomware. New ransomware samples grew 10%, and total ransomware samples grew 45% over the last four quarters. Mobile malware. New mobile malware decreased by 24%. Despite the downward trend, some unusual mobile threats appeared, including a fake Fortnite “cheat” app and a fake dating app. Targeting members of the Israel Defence Forces, the latter app allowed access to device location, contact list, and camera and had the ability to listen to phone calls. Malware overall. New malware samples increased by 53%. The total number of malware samples grew 34% in the past four quarters. Mac malware. New Mac OS malware samples increased by 9%. Total Mac OS malware grew 51% over the last four quarters. Macro malware. New macro malware increased by 32%, growing 24% over the last four quarters. Spam campaigns. 53% of spam botnet traffic in Q3 was driven by Gamut, the top spam-producing botnet spewing “sextortion” scams, which demand payment and threaten to reveal victim browsing habits. uTFT
Kit Burden, Global Co-Head of DLA Piper’s Technology Sector
Lou Steinberg, Managing Partner at Authoriti
For tech businesses trying to harness big data across different departments, the ability to utilise and deploy cloud computing, cyber security and artificial intelligence (AI) technologies is critical. Responses to questions in the 2018 Tech Index (350 tech sector senior executives in Europe participated in that research) across these fields, show an increasing readiness for this to happen. The growing maturity of the tech sector is also reflected in respondents’ confidence in their cyber security measures with 73% stating that they feel “fairly secure” against attack. However, businesses are not resting on their laurels and when asked about how concerned they were about cyber breaches, 44% of companies rated their worry as 8, 9 or 10.
Continued cyber compromises in two-factor authentication and biometrics will expose the weaknesses to our current approach. This will trigger a shift in focus from users (authentication) to transactions (authorisation). Although our dependency on data accuracy will increase, our information integrity will become easier to attack. The first industry to suffer from intentional data integrity attacks was the News industry, due to the vast amounts delivered through social media feeds. As more data is created (IoT) and held (cloud) in public, it will become easier to intercept and manipulate. As we increasingly rely on machine learning and analytics we will see “fake news” used to attack “big data.”
Cybersecurity predictions for 2019 There is a new-wave of cyber-attacks such as SIM-jacking and chatphishing, a serious spike in crypto-jacking and some difficult decisions for security teams to make in the age of GDPR. Bharat Mistry, Principal Security Architect at Trend Micro • I’ve got a text! “An all-new social engineering attack will hit the mainstream: SIM jacking, whereby criminals convince phone carriers to port a target’s ‘lost’ SIM card to one that’s in the hacker’s possession. This allows the hacker to take control of any part of the target’s online presence that’s associated with their mobile number, and bypass two-factor authentication that involves an SMS code.” • Chat-phish: “Phishing attempts will rapidly evolve, with attackers designing AI-enabled chatbots that can hold a conversation and lure the target into clicking a phishing link. Hackers will explore a wide range of payloads, including manipulation of orders, installation of a remote access trojan, or even extortion.” • Crypto-jacking – the new currency: “Crypto-jacking has become a rising trend throughout 2018. As the trend evolves over 2019, more and more hackers will hijack cloud accounts to mine cryptocurrency. This helps to save on purchasing the necessary resources and computing power required to mine successfully. Security teams will have a tough task detecting it though – an increase in crypto-jacking malware will occur in 2019, which minimises the risk of detection by throttling resource usage.” • An Offer You Can’t Fake News: “Distinguishing fact from fakery has never been harder, and the efforts from social media brands will not be enough to keep up with the deluge of cyberpropaganda in 2019. Despite calls for additional regulation, these sites won’t have the time to clear the internet ‘airwaves’ of fake news. Motivation to influence democratic elections will only evolve, and thanks to technology that allows fake news propagators to sway public sentiment – whether that’s AI-enabled voice or video editing tools – cyberpropaganda will have the power to decide the fate of nations.” • GDPR – a game of risk: “An organisation will be subjected to the first major fine for GDPR incompliance in 2019, with the ICO making a big example of them so as to ensure the regulation is upheld. But businesses will begin to question GDPR and, by 2020 is predicted up to 75 percent of new business applications will have to make the hard decision of choosing between compliance and security.” • Unexpected cybercriminal in your security layer: “As organisations ramp up their use of AI to identify unusual activity, cybercriminals will use more innovative and malicious tactics to ‘blend in’ in 2019. By repurposing standard computing objects for reasons other than their intended purposes – such as unconventional file extensions or online storage services – the threat actor’s arsenal will evolve significantly, and enable them to intelligently camouflage within the corporate network. In 2019, as cybercriminals look to infiltrate sites under the radar, it’s imperative that enterprises implement comprehensive security solutions that are able to spot disguised profiling attempts.” • The Catcher in the AI: “The AI arms race between hackers and organisations will continue to evolve. Well-funded threat actors will start to use AI for reconnaissance, tracking the locations of high profile executives – whether it’s their favourite restaurant or hotel – in order to gain useful intelligence for future attacks. Security teams will continue to draw more from AI too, and automate threat detection and response. In reaction to hacker’s increasingly advanced techniques, the pressure for organisations to utilise AI well has never been higher.” • Cloud Infrastructure Abuse: “More and more cybercriminals will try their hand at hijacking cloud accounts for a number of nefarious uses, whether it’s mining cryptocurrency or maintaining control over alternative access. As enterprises adopt hybrid infrastructure platforms for the delivery of critical services and applications, the attack surface increases exponentially – especially at the periphery of where the cloud provider’s responsibilities end and the customers’ begin.”
Is your cyber security policy up to date? As former Cisco CEO John Chambers once said, “There are only two types of companies: those that have been hacked, and those who don’t yet know they have been hacked.” It is part of daily life, a new wave of criminal activity and one businesses need to protect themselves against. The most common types of cyber-attacks are malware, phishing, SQL injection and ‘Man in The Middle’ attacks, but without proper security in place, any of these cyber-attacks could be imminent. With no GDPR compliant policies in place, companies could soon find their sensitive customer data in the hands of a cyber-criminal as well. ConsentEye offers five steps on how to protect your company data. - Phishing knowledge. Sending out fake phishing emails is a policy many companies are now adopting, making staff aware of the dangers of opening attachments from unfamiliar sources. - Passwords and 2 factor identification. With 30% of Brits using the same password for their email account as other online accounts, having a personal account hacked could lead to a company breach as well. Ensure all staff are made aware of the phrase ‘longer is stronger.’ Use characters, symbols, numbers anything other than Password1 - make those hackers lives hard! 3 - Not using public WiFi. This should go without saying. Shadowing, side jacking and firesheep make public WiFi easy fodder for hackers. 4 - Be aware of social media. Posting on social media is never secure and anything you put on there can be obtained by a hacker. Once you have ‘tagged’ yourself into work with a few colleagues’ names, hackers have this information and if they have your social media password, it’s then not too much of a leap to get into your personal emails, your work emails, your calendar, anything. 5 - Invest in cyber security. Making the leap to invest in cyber security is often a big financial ask for small businesses, but it is essential and could save you thousands in the long run. uTFT
Feb 2019 I 7
THE FIN TECH TIMES
TOP 5 UPCOMING TOKEN SALES FIDELITY HOUSE
Fidelity House is a social content building and aggregation platform built on Ethereum blockchain. The users can update their interests, meet people with similar interests, publish content, and earn on viewing the content. The author of the original content will be paid based on the number of visits on the page. The currency used as a mode of payment and rewards is called FidelityHouse Coin, an ERC 20 token. The team is based in Switzerland and has an impressive track record in content creation and social networking. The project can have a good commercial use case with an idea of trustworthy and transparent crowdsourcing journalism which the company has in mind. However, the project will face competition as it is not the only decentralised content generating platform and there are competitors that are leveraging AI technologies to strengthen their user engagement. uTFT
Lynked.World look to overcome the trust barrier in digital data and document exchange. Lynked. World is coming up with a multifaceted blockchain platform which will allow businesses and users to build custom applications and forms based on their business or other contract requirements. The platform is built on Ethereum with smart contracts assisting in the execution of the deals. Users will have control of their Lynked. World digital wallets to store their identification details and other documents. This project has vast potential use cases. The team is based in India and has set a very realistic target of the hard and soft caps to develop such projects. The soft cap is set at $5 million and hard cap at $25 million. The white paper makes every detail about the project, from roadmap to technicals, very clear. uTFT
Football has become the most followed sport on the planet, evidence proven by the viewership of The 2018 World Cup. Some of the most successful players today have grown up from an underprivileged background. Bitacademy Football wants to change this by making the sport better funded with the help of blockchain technology and decentralise the management and development of the sport. This funding will be happening with the help of various cryptocurrencies and the Ethereum blockchain will help secure and execute the transactions. The building blocks of this project include a Football Academy, a marketplace for investors who are willing to invest and hold rights for new individual players, and data analysis of the players using the microtechnology to enhance their development and progress. The project fulfils the FIFA standards with their projects and this adds legitimacy to the Estonia based company. The company has applied blockchain technology to raise the crowdfunding round. Although, the use of blockchain technology still remains a matter of concern considering only the crowdfunding aspect, the transparent and immutable database of the players adds value to the use-case. The team has come up with an interesting idea which can be followed with other sports. uTFT
Looking at the influence whales have on the market, the traders are constantly following their activities to follow their trades for short-term profits. The trading volumes have plummeted since the start of 2018 and have not shown any improvement. Spiking aims to add more traders with their Certified Smart Trader (CST) Program where whales will be helping new traders to learn about investing and trading in cryptocurrencies. The smart contracts will also allow traders to mimic the trading activities of the whales and control their own accounts directly. For new traders, Spiking has also developed an AI-driven bot called Robobull. Robobull is an intelligent portfolio manager which creates a portfolio of different whales for traders based on their risk-to-reward ratio. The Cayman Islands-based team aims to build a universal protocol which is self-sustaining and selfregulating. The team is very well experienced and diversified to make the idea of this project successful at all ends. The platform is transparent, secure, uploads verified whale data and reward-based for both traders as well as the whales. Spiking can help fill the market void and the reduction in trading volumes the market has seen. The project has the potential to grow and boost the entire cryptocurrency markets if it becomes successful. uTFT
Encrybit provides a powerful set of solutions for cryptocurrency traders. Its social trading feature allows traders to share trades and ideas within a trading community. Encrybit has employed an order matching algorithm on its Ethereum based platform. The team is well experienced with a very diversified set of professionals from all over the world. The team started this project by surveying more than 12,000 traders from 167 countries to better understand the dynamics and shortcomings of the cryptocurrency market. These shortcomings were predominantly regarding the security, high trading fees, and liquidity. The Hong Kong-based project aims to build an ideal environment for traders with professional Technical Analysis features, market analytics, researches, and social feeds. The pre-ico is in December 2018 and the crowd sale will begin in February 2018. The projectâ€™s idea has gained appreciable popularity on social media platforms. The team aims to raise $32.5 million to implement this project on a large scale. The project is restricted in the United States, China and Canada. The project can act as an interesting solution to the crypto traders and investors can look forward to this project to generate returns in the long-term. uTFT
8 I Feb 2019
GLOBAL TOKEN REVIEW THE FIN TECH TIMES
DISCLAIMER: THE ARTICLE REFERENCES AN OPINION, AND IS FOR INFORMATION PURPOSES ONLY. IT IS NOT INTENDED TO BE INVESTMENT ADVICE.
TOP 5 TRADING TOKENS
DEEP BRAIN CHAIN (DBC) DBC is trying to build a blockchain based neural network training platform to connect the computers across the planet. The token running on the platform will be called DeepbrainCoin and will be utilising the smart contracts of the NEO platform. The project is designed to improve the functionalities of the smart contract with the help of a decentralised AI driven network. The goal of Deep Brain Chain is to provide a more efficient and cost-effective way forward for AI development. Every computer supplying computational power to the worldwide decentralised network will be rewarded with DBC coins as a currency of compensation. Such a high level of computational power nature with thousands of computers, will also assist to develop highly scalable neural networks at low cost. This will reduce the difficulty faced by many companies with AI use cases for implementing the technology, spurring adoption of AI is an add-on. The team is led by Fend He, the developer of China’s first voice assistant. The project has got enormous potential to grow with the leveraging of the two most hyped technologies in the world. uTFT
DISCLAIMER: THE ARTICLE REFERENCES AN OPINION, AND IS FOR INFORMATION ONLY. IT IS NOT INTENDED TO BE INVESTMENT ADVICE. Elastos is one of the first internet Nebulas has been in the spotlight Ark aims to PURPOSES push the adoption Ravencoin’s objective is clear and operating systems which will of a number of investors since of blockchain technology simple - creating and transferring be using blockchain technology its mainnet launch at the end by making a platform where digital assets on a blockchain to verify the identities of users, of March. Nebulas is a selfbusinesses and users can platform. The project was applications, and machines. evolving blockchain platform build their own blockchains. developed from an open-source The operating system will be that functions as a search engine The project comprises of fork of the original Bitcoin code running on the Raspberry Pi for blockchains as well as Smart Bridges which separate with a specialised use case. Its operating system, on Internet of means of production of DApps. blockchain platforms from x16r algorithm is being crafted Things devices and on mobile The platform incentivises the Ark core platform, alternate specifically to combat top-heavy devices. The project has three development of DApps and programming languages to make mining pools and ASIC mining separate repositories for each smart contracts to facilitate blockchain development for equipment. Ravencoin didn’t of the segments which are contributions to the network. various developers comfortable, hold an initial coin offering (ICO) NANO the project DECRED namely Elastos.OS,AETERNITY Elastos. Based in Singapore, and GOLEM push-button deployableDIGIBYTE and doesn’t keep any RVN in a Nano, formerly called Platforms for Dapps have Golem is seen as a decentralised DigiByte is a rapidly growing Decred is a self-funded, RT and Elastos.NET. use in thiswas RaiBlocks, foundedwants in 2017 by Hittersworld blockchains to allow easily public fork Ark founders’ pool. community-based The team is based to overcome fought to be The successful supercomputer to blockchain, which can and open the formerly shortcomingsworked of top inpeopleand competitive market and AeternityXu all to earn by protect suchUsers blockchain platform, which is of blockchain will remove the who createmoney projects. Ark digital is information in the USA. and businesses cryptocurrencies like Bitcoin has left many such out companiesGoogle’s nothing, andon combining data, currency, assets, or other to similar other competitors elongated schedules carried Search and Anti-frauddoing operating a DelegateasProof of are allowed create totheir own and Ethereum. Nano also uses behind and succeeded. With such computing power. It was founded kinds of information. It’s been like Ethereum and NEO. The by intermediaries and make the needteam. coreAcyclic of Graph) Nebulas’in Poland Stake consensus algorithm. Theshopkeepers tokensinat the the expense some of by a few DAGThe (Directed competitiveness, platforms by Julian Zawistowski, used by companyof was founded like IOTA, but its own novel to have unique team released first Netherlands companies Bitcoin core developers who internet ecosystem muchfeatures morein theirarchitecture iswith Nebulas Rank,and the company was its launched in 2016 to paytheir RVNincoins. Ravencoin has technique called a block lattice. to compete for bettera ranking alpha product called Brass in27 2016. Hong Kong since 2015. setcommunication out to develop a currency automated platform and secure. The algorithm that ranks with a team of spread across also built active Each Nano user will get their own services than similar giants like If you are a contributor in Golem’s Jared Tate, tired of Bitcoin’s which can never be hijacked or company raised $94 million in its blockchain entitiesecosystem, the world. released the test related layers above their token-based blockchain called an ‘accountEthereum and Neo. Aeternitydifferent you can They lend spare shortcomings to speed, dominated by a few centralised which they can contracts, modify funding rounds. Thethe blockchain as DApps, smart netcomputer versionpower of Ark allow the transaction provides unique feature ofsuchchain’, space and to thein December founded DigiBytesystem in 2013.to The authorities. The environment in according to their requirements. increasing the scalability byaddresses, network to helpthe handle complex company didn’tparticipants gain much Decred is very democratic, network of Elastos is designed to and many more. After 2016, first version of the interact and as they This means the blocks in their taking the smart contracts offcomputations and tasks. Its initial popularity back then compared to treat every community member support the main chain with each its developmental phase in Q1 main net in March 2017, and communicate securely and part of the blockchain can be chain. The smart contracts will be use case can be seen with giant its competitors. The scenario and or team member equally. ‘updated’ the users themselves DApp gettingrunning authorisation itschannel2018, the by company has gonemedia launched the second version of changed privately. project on a privateof state and animation companies its adaptations in favorThe This is one ofwhich the main reasons after verifying the match in network between the partieslive only like Pixar whichnet has 2000 of DigiByte in later years. Itclosest was the communitywith has grown own sidechain. The team is based online with its Mainnet 1.0. the main in November 2018. comes to compete the sender’s and the receiver’s in the contracts. computers set up worldwide to the first company to implement to where it is today. It uses a in China andinvolved has been working The company’s long-term goals The roadmap still has a payment Ravencoin is Bytom. Ravencoin amount. Few risks attached to this render the frames of their movies. a segwit and has had 5 hard forks combination of PoW and PoS The blocks are notthe added, they closely with project NEO include and Bitmain, enhancing platform’s plugin, push button is an opena source the threats frominclude Companies like Amazon and IBM blockchains, since then. This made DigiByte in its project consensusand mechanisms. are updated or replaced by a use of The multi-partyscalability to support heavy loadsbuy thousands ofArk computers to machine faster andtoa moreis decentralised 60 percent of the mined coins forming the regulations, “G3 of China”. and the virtual currently working without a new block with a DPOS model channels, security, and naiveness system. It has a dedicated to the mining community, project is designed to give users of transactions, creating subchainsell the be computational launched in power the future. Ark is delegated team.goOne of the Board of consensus. This structure of the technology. But with the at high price premiums. Golem community with 100,000 nodes 30 percent to the staked helps Nano to achieve latency, complete ownership control direct Members has community, worked for scalability and and hybrid consensussupport and zero-knowledgeaims toinacquire thiscompetition market with with spreadLisk, across the planet. DigiByte and Bill 10 percent scalability, energy-efficiency, models assets it uses,which the benefitsproof integration. uTFT a decentralised and more pricecan add blocks in just seconds, to the Foundation developer community. of their digital Wanchain, ICON and Bitshares. and15Melinda Gates and a lack of fees. Other plans in outweigh the risks. Aeternity environment. as compared 10 minutes in DCR is the cryptocurrency brings in direct competition to was Nano’s roadmap include pruning friendlyHowever, theAdding use of Smart to and founded Dubai’s Bitcoin founded by Yanislav Malahov, to this network, developers can Bitcoin. DigiByte also wants to of Decred’s network, with of its chain, development of giants such aswho EOSis and Ethereum. Bridges is what differentiates Conference. generally try of 21 said to be one of the early also build dapps on this platform, keep itsArk blockchain flexible to Projects a maximum supply light wallets, enhancing the minds in the cryptocurrency which with will also increase the usage platforms. incorporate changes occurring million. The token is mineable uTFT other blockchain to cover a lot of problems with block explorers, and helping the space. He gathered a team of of its GNT tokens. This token will in the market, to the keepcrypto it usableindustry and isand focused uTFT end on up ensuring unbanked population around the very experienced individuals act as any medium of transaction for all sectors of the economy. decentralisation and security globe. The company was launched cooking half-baked solutions. and has brought this project to or reward in the network. DigiByte’s token has similar roles in the platform. The company in 2015 by Colin LeMahieu as a uTFT where it is today. Aeternity had Currently, 1 billion GNT tokens assigned in the network as they has a well-organised future, low-latency platform to execute
TOP 5 TRADING CRYPTOS
a successful ICO in 2017 and has shown tremendous progress since then. It is available to be traded on all the major exchanges now. Trading volumes have been low since January, however, this is due to the market’s plunge and not something for which the project is responsible. In the 3rd quarter of 2017, the price of AE was about $0.55 and then $5 in May of 2018, which is an gain of 800 percent. The prices faced a downward trend after this peak, but the community is still hopeful to see a great ROI in the future.
P2P transactions. XRB tokens, the cryptocurrency of Nano, was first distributed in October 2017. 90 percent of Nano’s trading activity is observed to be on Binance and 80 percent out of this in BTC/XRB pair. The company also released its wallet, functional on mobile, desktops, and as hardware. If the company keeps to its roadmap path, there may be a day when people will be buying their frappuccinos using Nano wallets and tokens.
are in circulation, out of which 82 percent are distributed to the crowd funders, and only 6 percent among the team. The GNT token started its journey from $0.01, rose to $0.68 and fell back to $0.20 during the crash. The team has a few partnerships in hand but nothing significant. This project’s USP is its concept and its market. With more exploration of use cases, growth in its network, improved marketing strategies, and better partnerships, Golem has the potential to reach heights which they have claimed to reach in their vision and whitepaper.
Research provided Research provided by Novum Insights by Novum Insights Novum Insights unpicks the sub-sectors that use the Novum Insights unpicks the sub-sectors that use latest thinking in Blockchain, Cybersecurity, AI and IoT, the latest thinking in Blockchain, Cybersecurity, AI with a database of ICO’s. and IoT, with a database of ICOs.
generally have been usually in other cryptocurrency ecosystems, which are serving as a medium of transaction, rewards, fees, and encouraging developers to set up their businesses. The company will mine 21 billion tokens in the course of 21 years and has already mined 8.1 billion so far. Their first milestone is to reach 2000 txs/second mark set by Visa. The token has shown turbulent trends since its inception. The prospects remain optimistic as the team is advancing with its DigiByte Foundation, DigiByte gaming, technological developments, partnerships, and community developments. Digibyte can be a cryptocurrency to keep an eye on the longer term, if the steps of the mentioned advancements are taken in the right direction.
with plans to implement the majority of the new innovations happening on the blockchain. These innovations include the development of a stakeholder controlled DAO, decentralised control of development funds, implementation of the lightning network, and enhancements in governance and privacy. Decred wants to be an example in the market, making these innovations implementable. The project is working in the right direction and the progress will inevitably be seen in the coming future. The team seems to be focused on their tasks and have proven to produce magnificent returns when the mentioned plans come to life.
To find out more To findInsights’ out more from from Novum Novum Insights’ Top Ten ICOs, please Top Ten Tokens, share your please details share your using Yoti details using Yoti.
Feb 2019 I 9
DIGITAL ASSETS THE FIN TECH TIMES
Digital assets: Why do we need them? The US equity market is one of the most regulated and valuable in the world, but dependant on only a handful of players, which if compromised, say by a cyber-attack could wreak havoc on the world economy. Jonny Fry, CEO TeamBlockchain LTD explains how digital assets on blockchain will offer greater security, liquidity and investment exchange and growth potential for both high net and smaller traders Nearly all the stocks and shares in the US are owned by Cede and Co… WHO, you may ask? All the rights investors think they have to dividends and votes are dependent on their broker who in turn relies on an outfit called The Depository Trust Company that holds the shares in a nominee called Cede and Co. It is this outfit that has all the investors’ rights, so imagine the brouhaha if it was hacked or some other calamity fell upon it! It is amazing to think that just a few decades ago, the New York Stock Exchange would shut down every Wednesday to process trades and settlements via couriers on bikes, physically carrying stock certificates between buildings on Wall Street! This “Paperwork Crisis” lead to a stock market crash in 1968, when the volume of stocks traded rose to 15 million shares per day. About 100 brokerages failed as America ceded its shareholders to intermediaries. Following the crisis, the Depository Trust Company in 1973 was created and then followed the National Securities Clearing Corporation (NSCC) in 1976, when these two merged in 1999 to create the Depository Trust and Clearing Company (DTCC). This signified that the digital era had come to Wall Street. However, progress has been slow and the USA like many other global equity markets suffer from the same outdated bureaucratic, largely paper-based systems still today. Cede and Co holds $30 trillion in shares and settles more than $1 quadrillion in trade value annually. However, equity trading failed to fully digitise the end-to-end process. Pre-trade order routing and electronic trading of securities had become extremely low cost and frictionless, but the same improvements have not arrived to impact on clearing, settlement and custody. Are nominees peculiar to just the USA? If you think Cede and Co’s holdings are large, take a look at DTCCEuroclear, which holds over $57 trillion of assets and settles over 90 million trades day for 140 counties.
How Blockchain and digital assets could help DTCC-Euroclear could face competition from blockchain if we continue to see bonds being issued on blockchains as was witnessed with BBVA in 2019. Given the claim that issuing bonds on blockchain could reduce the issue cost by over 50%, this could open up the bond market for smaller bond tranches and smaller companies. This is because using a blockchain to issue bonds potentially removes the need for an independent custodian, as there is a record of the issuer and holder held in a cryptographic manner on hundreds if not thousands of computers. Furthermore, these records can only be altered if the relevant parties agree. Having a digital ledger could be a huge benefit for regulators as they would have an accurate, up to date record of what is owned by whom. If the assets themselves were digitised, then it could be possible to only allow buyers that are authorised to own certain assets to trade. For
10 I Feb 2019
example, private investors with limited funds are not often allowed to invest in what are classed as high risk assets such as futures and options and many derivatives. If these assets were digitised, it would be possible for the investor’s status to be checked before a trade was carried out, so removing many of the existing post trade compliance suitability analysis. Blockchain-based digital assets have emerged to solve a number of problems enabling greater transparency, proxy votes, and dividend distributions, based on the number of minutes that securities are held for. They allow for individual ownership and enable instant settlements so there is no counterparty risk, eliminating potentially billions of dollars in intermediary fees. We are starting to see digital exchanges being launched that will allow the trading of digital assets 24/7/365, not like some existing exchanges that open for a few hours, five days a week! New investors There are currently over 2 billion Muslims living in countries that have young fast growing populations, so it is significant that we have seen blockchain technology being adopted in Islamic countries. Emirates Islamic was the first Islamic bank to use blockchain technology as early as 2017, integrating the technology into cheque-based payment processes, so improving their authenticity and aiming to reduce the potential for fraud. The UAE-based Al Hilal Bank became the world’s first Islamic Bank to complete a sukuk transaction on the blockchain in Abu Dhabi. A sukuk is an Islamic financial certificate, like a bond, that complies with Sharia’h (Islamic) law. Having a range of digital assets that are investable under Islamic law not only will make them appealing for this sizeable market, but also enable companies to raise capital from these potential investors and fast growing economies. Increasingly younger investors, millennials, are more digitally savvy and do not want existing service providers like stockbrokers and to discuss their financial affairs with their local bank. They are looking online, often via their phone for accessible digital services. This demand was dramatically seen in 2017 and 2018 when we saw Initial Coin Offerings (ICOs) raising capital from thousands of small investors globally. Digital exchanges offer the potential to embrace these new younger investors. It is going to be harder for the existing national regulators to stop their citizens trading in multiple jurisdictions and getting exposure to a much wider selection of investments that typically have been the preserve of institutions and the super-rich. So what sounds more appealing? – “invest in a UK large cap growth fund” only to discover that typically 66% of such funds will not outperform the FTSE 100 index. At the same time being charged 1%+ p.a. compared to an index fund and you can only buy or sell the fund once a day. Alternatively – “invest in a basket of commodities that are required for electric car batteries”. If you believe that electric cars are going to be more popular in the next few years, then we are going to need more commodities to make these batteries. Currently, it is almost impossible for a private investor to have exposure to physical commodities as most funds invest in companies that mine commodities not the actual commodities themselves. An Electric Car Battery digital security could be linked to a basket of commodities, then bought and traded 24/7/365 on your mobile phone! Umm, where can I buy this? Back office challenges It is well known that company registrars i.e. the firms that keep a record of who a companies’ shareholders are, are usually wrong all day while equity markets are trading. Indeed, it is only at the end of the day when the stock market closes, will the registrar know who the shareholders are in any given company. In August 2017, in the US the Delaware General Corporation Law was changed, so that shareholder registers and trades could be held electronically on distributed electronic ledgers, referred to as blockchains. If there were a real time digital record it would be possible for all parties including the regulator to see who the actual owner of a security is, when it was bought, and for how much. As opposed to the current situation where the majority of all shares are held by a nominee. To give you an example Facebook’s 50 day average number of shares traded is 27 million, which is equivalent to over $3.6 billion of shares traded a day. Yet if you look at the number of shareholders Facebook has it is only 3,967 Class A common and 52 shareholders for its Class B stock. Despite the fact it has over 25,000 staff! The reason is that the majority of Facebook and other US quoted companies like IBM, Microsoft, Apple and
UK quoted companies like Shell, HSBC, Barclays have their shares held by nominee companies. Why compliance may drive change Financial services companies are drowning in never ending compliance regulations, with a staggering $780 billion annually being spent on compliance.
Source : www.fenergo.com/press-releases/global-financial-institutions-fined-$26-billion-for-aml-kyc.html
Clearly change is required and having a series of out dated legacy systems, procedures and controls are not able to cope with our ever increasing digitised economies. A dramatic example was the resignation of TSB’s CEO in 2018, when the bank experienced IT challenges resulting in customers unable to access their bank accounts. Blockchain could be used to improve regulatory reporting in terms of transparency, data quality and governance, identity management, authentication, as well as KYC and suspicious activity reporting. Currently these are time-consuming processes, requiring significant paperwork and involving numerous entities, resulting in high costs. Typically, customers must provide documents issued by government institutions or trusted companies to banks to verify their identity. However, banks can increase their eﬃciency by using blockchain identity solutions. Customers could have a single cryptographic identity, which they could share with the institutions when they want, making onboarding of new clients far cheaper and faster. Combining blockchain with artificial intelligence would allow regulators to interrogate digital data and run “What if scenarios” to try and identify where there are stresses in the market and potential vulnerabilities to the financial system. They could set up smart contracts to alert them if breaches have occurred i.e. rising customer complaints, or funds that had too much exposure to certain assets or a bank that was close to breaching its solvency margins. Using blockchain technology, shareholders could once again have a direct link to the companies they own shares in and be given rewards and perks for their loyalty of ownership. While on the face of it is attractive to remove intermediaries and slash costs, using new technology ought to be used to improve risk management controls and avoid bigger potential headaches for tomorrow. What next? One good example of how Digital Assets are being embraced is the launch of the DX-Exchange which is a NASDAQ powered Digital Asset exchange. It is backed by Bloomberg and is a European Union regulated cryptocurrency exchange based in Estonia offering tokenised securities (digital assets). The platform will allow traditional and cryptocurrency users to invest in actual stocks and each token will be backed by equities on a 1:1 basis, issued via smart contracts. So enabling investors the ability to buy and sell “leading” public companies listed on the world’s biggest stock exchanges including NASDAQ, New York Stock Exchange, Hong Kong and Japan, i.e. companies like Google’s parent company Alphabet, Facebook, and Amazon. This will allow investors to trade real stocks 24/7 in a secure and compliant trading environment, without having to wait for markets to open. This, in turn ought to mean there’s more liquidity in the market, which if proved correct will further fuel interest in Digital Assets. Digital assets can offer exposure to bonds equities, property commodities i.e. almost any asset class and can be traded more efficiently. Whether you are an investor looking for a new opportunity or a company seeking new investors Digital Assets are surely worthy consideration.
ICO JURISDICTION: MALTA THE FIN TECH TIMES
E&S Group: Talking transformation and tokenisation in Malta Directors at E&S Group, Dr Christian Ellul and Karl Schranz spoke to Zoya Malik, managing editor TFT to shed light on the regulatory forces behind the growth of fintech in Malta and the services E&S Group provides in support of entrants to the industry ZM: How is Malta government incentivising fintechs in terms of ‘ease of doing business’, sandbox initiatives and regulatory initiatives?
CE: Malta has seen a number of influential and successful companies, most of which currently operate as crypto exchanges with their offices based on the Island. They chose Malta not only because of the positive laws on DLT exchanges, but also for its advantageous tax system. Upon receipt of a dividend, shareholders of a Malta company may claim a refund of all, or part of the Malta tax paid, on such income. On the other hand, the Malta Gaming Authority (MGA) has recently launched a sandbox framework that accepts Virtual Financial Assets, including Virtual Tokens that make use of the Innovative Technology Arrangements within the gaming industry. A sandbox in the gaming industry provides such companies to accept cryptocurrencies within this sector. The role of the sandbox is to provide investor protection and address issues of saleability. This sandbox is set to be implemented in January 2019 and will end in October 2019.
ZM: What is your advice to Fintechs regarding the risk appetite of banks in Malta when securing partnerships? KS: Although Malta has positive and well-regulated laws regarding DLT and Fintech, banks are still rigid in accepting such new technologies. Since Malta has been dubbed the ‘Blockchain Island,’ it is expected that fintech and DLT companies are in synergy with banks within the regulatory environment. But as yet, banks still need to widen their risk appetite to recognise the IT infrastructure, and establish a healthy and trusting relationship with DLT operators and assist them in opening bank accounts, allowing Fintech companies to fully operate in Malta.
On the other hand, banks are now familiar with e-money and PSPs and have processed and performed necessary compliance procedures for over 40 licenced electronic money and payment services companies to date. Now with the new legislative framework in place, it is expected that crypto will provide the same level of certainty to banks, helping in securing a relationship with other cryptocurrency companies.
ZM: How are you advising your Fintech clients in terms of their IP protection? How strong are IP laws in Malta? What more is needed to tighten the regulatory framework? CE: Fintech clients should protect their IP by registering their patents in Malta or at a community level. IP law in Malta has been set up during the 90s, which in turn regulated the Maltese copyright, patents and designs and trademarks protection law. When Malta joined the European Union, it had to follow relevant EU IP laws such as the European Patent Convention (EPC), the Patent Cooperation Treaty, the WIPO Copyright Treaty and the WIPO Performances and Phonograms Treaty. Malta IP laws serve to protect and safeguard the rights of the company whilst not having its intellectual property rights violated by other persons.
ZM: How closely do you advise banks in terms of compliance reporting on new fintech driven operations? What are these new compliance areas? KS: Fintech companies are becoming more like traditional financial institutions by means of having greater regulatory expectations and regulatory compliance, which is also required. In return, banks are subject to perform KYC procedures required for each user on the blockchain. Moreover, banks need to categorically perform various regulatory procedures over Fintech companies in line
with Anti-Money Laundering (AML) procedures. Banks also need to undertake all necessary compliance procedures before opening their bank account.
ZM: What is your opinion on the economic environment for new cryptocurrencies entering the local market in 2019? CE: Although the market is slowly deteriorating, there is a good chance it will gain a steady pace in 2019. Education regarding cryptocurrencies has been widely accessed, with many companies, students and entrepreneurs investing their time to learn more about this new source of money. Universities around the world have also started to offer courses for graduates interested in learning more about what cryptocurrencies have to offer. This has spurred much interest worldwide. Countries such as Venezuela have also created a virtual national currency, experimenting with a new source of payment currency using blockchain technology.
ZM: What legal advice and services can E&S Group offer on an ICO, including writing white papers for ICOs and preparing firms for licencing? CE: E&S Group offers an array of services regarding ICOs. Our main focus is to advise ICOs throughout their project. Since the new Virtual Financial Assets Act (VFAA) was enacted in November 2018, Maltese law requires ICOs to register with the Malta Financial Services Authority (MFSA).
ZM: What business sectors are launching operations on blockchain in Malta? What advisory is required for such blockchain activity? KS: Foreign businesses choosing to operate on blockchain in Malta are majorly iGaming companies, betting companies, crypto exchanges and online payment solutions. Companies looking to undertake an ICO or STO in Malta need to abide by the country’s laws which were enacted in November 2018. Such enterprises sign off a form for a Financial Instrument Test
with the assistance of a licensed VFA Agent licensed by the Malta Financial Services Authority (MFSA). Companies which are expecting to launch their offering will need to pass the Financial Instrument Test as required by the MFSA.
ZM: What should Fintechs consider in terms of crossborder provision, products and services i.e. in terms of currency exchange controls and cross-border operations? CE: Traditional financial law is now harmonised between the European Union member states and facilitates crossborder operations of European companies. With regards to the Virtual Financial Assets Act (VFA), common European directions have not yet been formulated. An enterprise which is granted a license in Malta is authorised to operate within Maltese territory, as well as in other states, under the condition of being compliant within the laws of their respective jurisdictions.
ZM: What is the uptake in client fees charged in BTC by your company? CE: Our firm accepts BTC from our clients. In fact, around 10% of our clients use Bitcoin to pay for the services we offer. On the other hand, during March 2018, E&S tokenised its services using ESTS tokens, becoming the first firm world wide to tokenise its service.
Feb 2019 I 11
WEALTHTECH THE FIN TECH TIMES
DIGITISATION AND THE PERSONAL TOUCH Erich Borsch, COO of aixigo AG financial advisory software provider talks to TFT about the corporate’s offerings, working in tandem with clients willing to innovate and benefit from aixigo’s plethora of digital “value added services”.
30,000 transactions, 10-year history) can be analysed in milliseconds. TFT: How will digital wealth management develop over the next three to five years? Erich Borsch: In the digital business, customer experience is the focus. If a customer does not enjoy a differentiated experience, the customer shuts off faster than we can think. Innovation has become the standard over recent years, requiring new and improved features from our digital helpers. And it’s also about relevance, not just with pretty animation, rather coupled with relevant information. As a financial services industry, we no longer only compete with each other, but with all other sectors that attract the digital attention of our customers. Our goal must be to get two minutes daily digital attention from the customer. Two minutes a day, in which they interact with our offers. If you want to be a player in the digital business, your delivery systems have to meet two requirements: Speed and flexibility. And these are also the key criteria for the wealth management industry to flourish over the next few years.
TFT: Kindly summarise aixigo’s business model. Erich Borsch: Through 19 years of experience in portfolio management software, we have made a steady evolution “in the mind” of the client and focussed the benefits of the application for the client. We understand that banks’ IT divisions need to be heavily involved right from the start. By involved, I mean that the banks’ IT can “play along” in the design and during the ongoing development process. Our product catalogues include: Portfolio Analytics & Reporting Service Infrastructure, Digital Portfolio Management, Advisory Services and Risk Engine. TFT: What advantages or added value do you offer to your customers? Erich Borsch: First and foremost, we address the problems financial institutions may have in reinventing themselves. We assist them in creating a transformation process for the automation and digitisation of investments. With our innovations, we enable financial institutions to offer digital “value-added services” to new customer segments that may not have previously experienced this. aixigo has further expanded the features of the High Performance Portfolio API. It accepts large amounts of data as a raw material of legacy systems, refines them quickly and flexibly into relevant information and makes them available to all customer systems. The aixigo API currently comprises almost 100 services. Each of these services is individually configurable via call parameters. For digital asset management, the API provides all the processes and functions required for a bulk business. Thus, the asset management service becomes suitable for the masses and is no longer reserved for just very wealthy clients. The flexibility of the REST API enables financial services providers to innovate their own digital customer experience. This can be via apps, chatbots or voice interfaces. High performance means aixigo’s API services can efficiently serve millions of portfolios within minutes. Even extremely broad portfolios (>
TFT: What importance will personal advice or branches have in the future? Erich Borsch: Personal advice will continue to be an important component. But for sure, much of the personal advice will be communicated through other channels in the future. Digitisation is able to establish personal contact with the same emotions as you know from a face to face conversation. Especially as the current generation is extremely used to digital contact with its service providers. I therefore see a good future for personal advice, if the digital channels are able to bring customer experiences and an added value that feels comfortable and secure. It becomes much more difficult for the branch. TFT: What are the biggest challenges for WealthTechs in general and for aixigo in particular? Erich Borsch: As I said earlier, the key factors for WealthTech’s technology will be speed, flexibility and mass suitability. These are the absolute prerequisites for gaining acceptance in our target group for digital services in wealth management. aixigo’s task is to further expand these criteria based on the current Wealth Management Platform. The basis and foundation of the aixigo high performance portfolio management system
aixigo is one of the largest independent provider of software for financial service providers in Germany, Austria, Luxemburg and Switzerland. We oﬀer the fastest wealth management platform and enable innovation leaders in digitalising all aspects of the personal investment business. We truly believe in digital portfolio management – a concept to be adressed by the market in the very near future. It is our accession to support you in realising such innovations. Our platform oﬀers a futureproof architecture, as well as all business functions.
Itˈs easy from now on
TFT: What investment is aixigo making towards clients’ data protection and against security breaches? Erich Borsch: Our API gateway supports OpenID authentication and authorisation via an OpenId provider. This security layer can be integrated into LDAP, ActiveDirectory or custom solutions. Data changes are identifiable by user and timestamp in the database. Audit logging is provided for in backend services. No data is stored on the client side. All service components can communicate via SSL/TLS encrypted connections. We provide encryption on the database level, i.e. it is possible to encrypt predefined sensitive database columns. Intermediate data streams only contain these encrypted fields. In the REST API, this data can be decrypted and delivered in plaintext in the REST response. TFT: How do you ensure cyber security through your partner networks (and open APIs)? Erich Borsch: The platform authorisation is based on a role/right model. The role assignment to users can either be defined via an administration interface in the platform itself, or it can be integrated into your authorisation infrastructure via our OpenID provider component. Users can be added by tenants. Each user is assigned to a role. Individual rights are assigned to roles. uTFT
What it does
Who we are
Start Digital Wealth Management
is the “aixigo wealth management platform”. It consists of two parts. The Data Integration Layer and the API Services. The combination is unique and works like this: The Data Integration Layer takes large amounts of data as a raw material of legacy systems (no matter which), refines them quickly, as mass suitable and flexible, into information and provides this data across all customer systems. This means that proven systems can remain with the banks. With our platform, we record the data, process it in such a way that nothing stands in the path of digital delivery. Specifically for projects this means: One-time data integration, then any available position digitally. As the cost side for banks will become increasingly important in the future, enormous costs for the banks can be saved in this way. That is because they can keep their existing systems and from this platform, banks have every opportunity to offer personalised digital value-added services.
Use our expertise for your digital portfolio management or your personal financial management.
From decision to documentation, we digitalise every aspect of portfolio management. In order to give you a brief overview, you can find a list and explanation of our APIs in the following. Analytics Real time insights into portfolio without restricting your work by precomputed data. Our wide range of analytics supports day-to-day jobs as well as business critical tasks. Risk Portfolio management is risk management, our powerful risk engine delivers historical and projective analytics in real-time. Asset Management Manage model portfolios to define appropriate asset allocations for your wealth management or advisory service.
aixigo‘s Digital integration Layer – How does it work? aixigo oﬀers a modular platform for development of portfolio management and advisory software solutions. The platform is the basis for all aixigo software projects and consists of diﬀerent modules which can be added or removed at any time and adjusted individually. The high performance engine provides complex functionalities not only for mass operations for a variety of customers but also an extremely low single-request latency in scenarios such as analytics, securities account monitoring or rebalancing. Standard modules oﬀer high performance APIs and
plug-in interfaces in order to allow robust and flexible adaption to customer needs. The keywords are Data Integration, Data Aggregation, Multi Custody, Multi Entity, transaction based and superfast processing. We do not compete with the existing core banking system of the bank, we integrate all existing data and provide refined data for flexible further processing.
Digital Wealth Management
Business Process Engine
PMS Core (Positions, Transactions, Analytics etc.)
Data Interfaces (Service/Batch)
aixigos high-end software platform combindes all modules to ensure a customized solution
12 I Feb 2019
Customer Management From risk profile to individual constraints, there is a lot to know and to take into account when handling a portfolio. Rebalancing The adaptation of the individual customer portfolio to your model portfolios is the core process of any digital portfolio management. We oﬀer you various ways to do this. Order Management No digital order – no Digital Wealth Management. The capability of eﬀiciently generating and monitoring orders is crucial to any succesful digital investment service.
API Gateway (REST/SOAP, Security)
Monitoring Millions of portfolios can be monitored, making sure that the individually chosen service fulfils your customer’s needs and the regulatory requirements easily.
Reporting Reporting has become an obligation, but it really represents an opportunity. A portfolio “story” can be interesting, insightful and delivered customer friendly. aixigo AG Karl-Friedrich-Straße 68 52072 Aachen | Germany
+49 241 559709-0 email@example.com www.api.aixigo.com
REGULATION THE FIN TECH TIMES
FINTECH INNOVATION – IS REGULATION A SIGNIFICANT BARRIER?
Suchitra Nair, Director EMEA Centre for Regulatory Strategy, Deloitte
Suchitra Nair, Director at Deloitte and the EMEA Centre for Regulatory Strategy, talks about how regulation will impact tech innovation and offers her opinion on barriers, the future of tokenisation and the balance between innovation and market/investment security in the age of blockchain. TFT’s CEO Katia Lang sat down with her at the recent Fintech Connect 2018.
KL: What is your role at Deloitte and what challenges does it seek to address?
SN: I am the lead on technology innovation and regulation in Deloitte’s EMEA Centre for Regulatory Strategy. Our team looks at the relationship between technology innovation and regulation from many different angles and writes thought leadership papers for the benefit of our clients and for the broader fintech ecosystem. We examine what effect regulation and/or other barriers have on the adoption of innovative technologies such as Blockchain, AI and cloud computing technologies. We also look at how regulation may open up the market and facilitate technological innovation and competition. For example, PSD2 and open banking is a classic example where the regulator has given authorised third parties the right to access customers’ banking transactional data, subject, of course, to customers allowing it. Another example is the regulatory sandbox - in the UK for instance, the FCA created an opportunity for firms to test their business model to understand both the regulatory and commercial impact. Such an approach fosters competition. In fact, having written a paper on the FCA sandbox, we know that there are instances of a few businesses that would not have existed, had they not been through the sandbox.
Another aspect of my role is to think about how technology innovation may shape regulation and supervision in future. For example, if firms and third party app providers are doing more on behalf of the consumer using personal data. Customers are happy to share their data for specific purposes but increasingly, we see from reports in the mainstream press that consumer expectations around the use of their data may not match those of the firm. As a result of technological innovation, regulators are taking a closer look at issues such as ethics and pricing. Our team also regularly engages with industry, whether through one-to-one conversations with firms or through industry forums. I also work closely with Innovate Finance, which is the trade association for FinTech.
KL: Distributed ledger technologies (DLTs) can create ICOs, which many say is a questionable thing, and now DLTs are creating a new wave of tokenisation or digitalisation of assets. Is regulation a barrier to tokenisation? How would tokenisation be regulated when, for example, even real estate securities can be digitised?
SN: I don’t think that regulation is the main barrier to tokenisation – A major custodian did a trial over two years ago with a distributed ledger firm. At a conference, they shared many of the lessons learnt and challenges around scale, existing processes and security. This was interesting because they didn’t highlight regulation as a significant barrier. The challenge has always been to achieve a more cost effective, more efficient, more secure solution than the existing one. Sometimes it isn’t the technology or regulation that’s preventing these solutions from coming to the market, but the underlying processes in terms of how industry practices work, that slow down the data flow. So, even if you tokenise the security the issue remains that someone has to maintain custody of it i.e. you need a custodian. Effectively, you’re not reducing the cost of becoming more efficient because, even though the title may have moved to the blockchain, the physical document has to move and also needs to be validated. However, many people are looking into this now and a solution may not be too far off.
Regulation will be applicable to the regulated activity. Using a token as a technological enabler will not change the regulatory requirements or expectations. There is of course a broader debate happening around how a token will be categorised and regulated if it is a crypto asset. If the token is similar to a security, it is likely to be regulated in some markets such as the US and UK.
KL: So, the tech itself didn’t resolve the issue? Isn’t it then about building something on top?
SN: I think people are still trying to develop a viable use case for a “permissionless DLT” in financial services so the question of can we have enough security to do really critical trades, i.e. trades that can move the market and affect price volatility and shares etc. remains. Security, scalability and governance are real concerns with some types of permissionless distributed ledgers. On the other hand, “permissioned distributed ledgers” are getting more traction, where you have a small group of selected validated players using the technology. They may be able to transact quicker over a distributed ledger and people are getting more comfortable with that but, to make it successful, a number of other elements need to be addressed, especially governance and security. Simple things such as if someone loses a private key, then who is going to re-issue it? If there is an error on the distributed ledger which is meant to be immutable i.e. you can’t change the records, then how can you rectify a genuine error in the first place? These things can happen when you get humans interacting in the system. Eventually, from a regulatory perspective, the focus will be on the regulated activity that you perform, and whether you can perform it in a safe and secure way, irrespective of the technology that you use.
KL: What, therefore, needs to happen in the future for tokenisation to become mainstream and for everyone to be able to create a liquid asset and bring liquidity to the market?
SN: As I said before, regulators are typically “technology neutral”. If you are merely tokenising something and using a distributed ledger to move that token around then the regulator will look for robust controls and governance. The regulator is also
interested in large third-party technology providers providing critical activities for regulated firms. For example, if a distributed ledger company became the platform for millions of regulated trades going through, then it becomes systemic and if there is a failure or significant error, then the whole market may move in terms of price. Market integrity and stability are key for the regulator, so, at this time, regulation per se is not a barrier. As soon as one or two players start becoming critical to the regulated ecosystem then they will gain regulatory scrutiny - we are already seeing this in the case of third party cloud providers. The sheer implementation challenge to move to a new technology at scale cannot be ignored in this debate. For example, when you practically tokenise thousands of pieces of paper whether they are real estate deeds or equity shares in a company, the execution risks and costs are significant. When it’s a permissioned ledger, visibility and governance of the risk are potentially better, but it gets trickier when it’s a permissionless distributed ledger due to the number of players. In either application, governance and accountability need to be clearly defined not only for the activity but also for maintaining the underlying technology on an ongoing basis – this clearly can be challenging in a permissionless, decentralised system.
KL: So, will decentralisation prove to be a problem rather than a solution?
SN: I think it is difficult to generalise here as, from a regulatory perspective, it is the use case – the regulated activity and the scale of it – that will drive the regulatory requirements and expectations. It is important to recognise that some regulators are themselves experimenting with distributed ledger technology to use it as a supervisory tool for areas such as digital regulatory reporting. Therefore, they are not viewing the technology or decentralisation as a “problem”. The technology clearly has to prove itself to be superior to the existing infrastructure and operate in a safe and secure way. Once we find reliable solutions to these issues, distributed ledgers and AI technology will undoubtedly transform the way banking and finance currently work. uTFT
Feb 2019 I 13
FINTECH FOR GOOD THE FIN TECH TIMES
Nationwide’s OB4G challenges fintechs for prosperity Nationwide has set a challenge for the fintech community to develop open banking technology that helps improve the lives of one in four UK households who are financially squeezed – equivalent to 12.7 million people. Zoya Malik, managing editor TFT spoke to Phil Gosset about Nationwide’s objectives and investment into the Open Banking for Good Challenge (OB4G) and how he views the programme’s winning technologies and partnerships will help stretch household incomes to benefit the community and industry at large
ZM: What is Nationwide’s objective in partnering and funding the Inclusive Economy Partnership (IEP) or Open Banking for Good Challenge? PG: We want to support and encourage firms to deliver digital services aimed at helping those who are financially squeezed. According to the Money Advice Trust, as many as 12.7 million people are one financial shock away from real difficulty, and an increasingly more fluid job market leading to ever more fluctuating incomes only compounds this. The aim of the Open Banking for Good challenge is to bring together fintechs and charities to make a real difference to people’s lives through the development of apps and services that utilise Open Banking, to create scalable solutions to the widespread financial capability issues, experienced by the most financially vulnerable. ZM: What is the criteria for selecting fintechs and for funding their R&D for apps to support Open Banking and financial inclusion? PG: As a member-owned organisation we have a social purpose, and Open Banking for Good places a premium on innovators who use Open Banking to achieve social good as well as financial good. We have worked closely with charities and partners to define real problems that people face and that are addressable through Open Banking. In detail, we focussed on three main areas that are the most tractable using Open Banking and which are outlined in the Open Banking for Good challenge document, namely: supporting debt advice charities in creating income and expenditure statements, helping people with irregular income manage these fluctuations, and empowering people to manage their money more effectively. There are four distinct application paths which are suitable for applicants whose concepts are at different stages of maturity, and that provide the lowest barriers of entry depending on that maturity. These range from Explore, where Nationwide will work with applicants to explore if a kernel of an idea can be developed into a testable concept, to Invest, for applicants that have built and tested their product and are seeking investment and a ready user-base.
14 I Feb 2019
Phil Gosset, Senior Innovation Manager, Nationwide
ZM: What are financial literacy issues in the UK and how can fintechs support banks in assisting customers’ money and debt management? PG: Both the OB4G Challenge document and the report published jointly by Nationwide and the Money Advice Trust found three key areas where fintechs could use open banking to help solve financial literacy issues: • Income smoothing – an increasing number of people rely on irregular income streams, and open banking has the opportunity to ease the administrative load on people and support flexible forward planning. • Income and expenditure – Open Banking provides an opportunity to support debt charities in gathering income and expenditure from users that are experiencing financial difficulty. • Money management and help – there’s a huge opportunity to use Open Banking to create solutions that help people practise and embed better budgeting, spending and savings habits. ZM: How will Nationwide encourage positive change in their customers’ finance management and still remain profitable? What are the priorities?
PG: We don’t look to profit from any poor financial management of our members. We are a member owned organisation and we believe in supporting members to improve their financial management. We believe members want to manage their money better, and that they value our efforts to support them in doing so. ZM: What will be critical financial concerns of UK households in 2019? PG: The economic outlook is unusually uncertain, and we expect a squeeze on household budgets. The public is on balance more pessimistic than optimistic about the economy and their own finances, with a particular concern around the rising costs of goods and services. Our own Spending Report found that 80% of people have seen bills increase in the past 12 months, particularly around utilities, council tax and food costs. Some UK households may see these changes as challenges. ZM: What are types of innovative solutions and apps that banking and finance customers can look forward to in 2019 in assisting them in their decision-making with regards to their savings and investments, borrowing and debt repayments? PG: In 2019, we’ll see more and
more use of data and analytics to provide personalised information to customers. For example, at Nationwide in 2018 we launched MoneyWatch, a function on our app that provides our members with insight into their spending habits. We believe this type of function will become increasingly common over the next year. ZM: How much investment and funding is Nationwide committing to the programme and what’s in it for Nationwide and the industry at large? PG: Nationwide is putting forward £3 million to encourage fintechs to take part in this programme. We’re doing this because we believe that society at large should have the opportunity to benefit from Open Banking. More generally we believe that the more people understand about how to manage their money effectively, the better for the financial services industry as a whole, including us. ZM: Once launched, what’s the road map to help these apps scale up and reach Nationwide’s audience and on-boarding and capturing new segments? PG: There are four distinct application paths, suitable for applicants whose concepts are at various stages of maturity. Whether they have a great idea that needs
exploration and development, or they have a tried and tested product that needs investment to help scale it up, there’s an application path to suit. 1. Explore: For concepts that are not clearly defined but contain the kernel of a great idea. Nationwide will work with applicants to explore if it can be developed into a testable concept and enter the Develop path. 2. Develop: For well-understood concepts with a clear development and testing approach. The duration of this scheme is three months and the funding available will provide half of the person-hour cost for the duration of the scheme. 3. Accelerate: For ideas that are fully formed but are neither fully developed nor tested. This pathway lasts for six months and support will include providing access to a team space and incubation team, access to additional skills such as design or technical capabilities as required, access to users for exploration and evaluation, along with full funding of the person-hour cost. 4. Invest: For applicants that have built and tested their product and are at the stage of seeking investment and a ready user base. This will be handled on a case-bycase basis. uTFT
REGULATION: TOKENISATION THE FIN TECH TIMES
2018 was the year of ICOs in the news and a cryptocurrency crash following the sell-off of the most cryptocurrencies from January 2018. After an unprecedented boom 2 years earlier, bitcoin market capitalisation fell below $100 billion from 2017. Perhaps even worse than the falling prices is the uncertainty over where crypto’s headed next. Kate Goldfinch, reporter at The Fintech Times asked experts Julia Shtabska, Head of Blockchain Practice, Nikita Novikov, Associate and Oleksandr Synytsia, Junior Associate at Juscutum Law Firm to elaborate on what they see as the next big trends in blockchain and the crypto industry and what to expect regulatory-wise in 2019.
Changes in regulation for cryptocurrency in 2019 What awaits the cryptocurrency market in 2019? Development of cryptocurrency related financial instruments, establishment of highly liquid platforms through institutional exchanges, tokenisation of securities, corporate rights, and enterprise operations are some of the activities from a list of innovations that we expect from the cryptocurrency market in the upcoming year. Here is a roundup of 2018 and expectations in the market for virtual assets in 2019 Global Trend on Money Laundering and Terrorism Financing prevention
Definition of “virtual currency” had been introduced by the fifth EU Anti-Money Laundering Directive (AMLD). Now, a cryptocurrency-oriented business that falls into the category of obliged entities under the AMLD 5 has to conduct customer due diligence measures and report relevant EU state authorities about suspicious transactions. New regulation covers two types of cryptocurrency business: • providers engaged in exchange services between virtual currencies and fiat currencies; • custodian wallet providers (cryptocurrency wallets that provide services to safeguard private cryptographic keys on behalf of its customers). Most of the companies whose business is subject to AML directive regulation have already implemented comprehensive AML policies, as well as control instruments over the Anti-Money Laundering/ Combating the Financing of Terrorism (AML/CFT) procedure. In the Directive, the motive for such regulation was described as follows: “Such monitoring would provide a balanced and proportional approach, safeguarding technical advances and the high degree of transparency attained in the field of alternative finance and social entrepreneurship.” Also, in October 2018 Financial Action Task Force (FATF) amended one of its main documents The FATF Recommendations on its international standards on combating money laundering and the financing of terrorism & proliferation. The FATF recommendations contain definitions of terms such as “virtual asset” and “providers of services in the field of virtual assets”, as well as measures that countries should apply to providers of services in the field of virtual assets to counter money laundering and terrorist financing. According to the FATF recommendations, persons or entities engaged in the exchange, transfer, safekeeping, and offering of virtual assets shall be the subject of strict monitoring and AML compliance control.
Julia Shtabska, Head of Blockchain Practice
Nikita Novikov, Associate
Oleksandr Synytsia, Junior Associate
Exchange, Gibraltar Stock Exchange (GSX), London Stock Exchange and Australian Securities Exchange announced their plans for security tokens trading infrastructure development. An interesting alternative to traditional stock exchanges on the security tokens market could be ATS (Alternative trading systems) platforms in the USA or the MTF (Multilateral trading facility) in the EU. Such famous STO platforms as Templum and tZero are ATS platforms authorised by the SEC. Financial instruments and cryptocurrencies
A global trend on the introduction of registration rules for cryptocurrency exchanges and wallets 2018 was the year of regulation. Most innovative legislation was established in Malta and Gibraltar. Also, Estonia remains one of the friendliest jurisdictions for distributed ledger technology (DLT). Malta. The Parliament of Malta has adopted three new legislative acts, designed to attract blockchainrelated companies from all over the world. Gibraltar. In 2018, a new regulatory DLT framework came into force. According to this, Gibraltar companies that provide services using blockchain technology are required to obtain the appropriate license from the Financial Services Commission (GFSC). It is important to mention that the regulation adopted in 2018 is already being implemented on cryptocurrency exchanges, where GBX and Huobi have already received an official license from the state regulator. Estonia. Over 2018, the Estonian government has issued more than 900 licenses related to virtual assets activities. Thus, the Estonian Ministry of Finance intends to amend the AML legislation to tighten the compliance for crypto exchanges and custody wallets. In 2019, we will see how the financial supervision authority will monitor the crypto business registered in Estonia. A new reality for DEX: In the US, DEX (decentralised exchanges) is equated to ordinary exchanges. By the end of 2018, SEC using the EtherDelata case had debunked all the myths about the inapplicability of US legislation requirements on a securities trading to DEX. A platform that offers trading in digital asset securities and operates as an “exchange” (as defined by the federal securities laws) must register with the Commission as a national securities exchange or be exempt from registration. SEC emphasises that no matter how the platform classifies itself and what technologies or algorithms are used, it should be recognised as an exchange under US laws. Now crypto-anarchists will not be able to escape from the regulations under the “DEX” banner. Service Providers for STO and Exchange for ST (security tokens) Last year many platforms providing a wide range of solutions for STO were created. Securities trading is a strictly regulated activity making it necessary for platforms not only to comply with strict KYC / AML procedures, but also to obtain the relevant licenses / authorisations from the local regulator. Throughout 2018, many traditional institutional stock exchanges turned their attention to security tokens trading. SIX Swiss Exchange, Malta Stock
The trends set in 2017 and 2018 continue. Cryptocurrencies are increasingly pouring into the global financial system, and respectively, many traditional financial instruments are entering the cryptocurrency market (like futures contracts or options). Futures. In 2017, the world observed the launch of bitcoin futures on the US CBOE exchange. This year, the largest US stock exchanges NASDAQ and the NYSE are planning to start trading bitcoin futures subject to the approval of such actions by the Commodity Futures Trading Commission (CFTC). ETF. In 2018, the entire crypto community expected to launch Bitcoin-ETF. To launch such product, US exchanges need to obtain approval from the SEC. Throughout 2018, different platforms unsuccessfully tried to receive a favorable decision from SEC. Most likely, the launch of Bitcoin-ETF will happen during 2019. ETP. While in the US the SEC is still considering applications for the launch of ETF, the analog of the American Bitcoin-ETF - Amun Crypto ETP appeared in late November on the SIX Swiss Exchange. Swaps. In December 2018, OKEx, cryptocurrency exchange located to Malta and launched its new product - Bitcoin Perpetual Swap. Forecast for the cryptocurrency market in 2019 In terms of strategy, global regulatory approaches will follow three directions: 1) Decreasing the barriers which are facing DLT investors (Malta, Gibraltar, Switzerland); 2) Adopting and enforcing new regulatory provisions to secure governmental influence (China, Russia); 3) Observance of sustainable practices and laws to maintain financial stability and protect consumer rights (USA, UK). Also, in the light of last year’s trends, the following trends could be anticipated in 2019: • Strengthening of AML / KYC compliance requirements for all cryptocurrency market participants; • STO infrastructure and its licensing requirements development; • Development of hubs and sandboxes under the control of local regulatory bodies in different jurisdictions; • Introduction of risk analysis guides and policies by banking associations or regulators for crypto-related business bank account opening (like SBA in 2018); • Development of new financial instruments for crypto; • Development of global principles of cryptocurrency regulation by international and regional organisations; • Establishment of highly liquid virtual assets trading platforms through traditional institutional exchanges; and • Tokenisation of securities, corporate rights, and business operations.
What is the next big thing for crypto? Pavel Kravchenko, founder at Distributed Lab In 2019, one of the most important niches in the blockchain will be occupied by assets tokenisation (traditional assets -> digital assets). Despite the fact that the process of transferring asset management to the digital plane is accompanied by an enormous amount of difficulties and limitations, its need is very important for the modern world, a world in which everything seeks to adopt a digital form or at least to have a direct connection with the digital world. Data tends to become digital in nature, many processes also take place in digital form or are initiated using digital signals. That is the situation with value today. Values also need to be considered and managed. And tokenisation is a process that directly implies the transfer of value management to the digital plane. Moreover, to provide the modern system with the necessary mechanisms for storing and managing asset rights, blockchain technology is the most suitable.
Dominic McCann, CEO of blockchain technology business Interbit 2019 is going to see the birth of more distributed, safer, cheaper computing from edge, 5G and mesh, meaning that blockchains and all operating systems will have to adapt to be able to support applications run on these distributed environments. To support this new generation of digital infrastructure, and to successfully transition from theoretical examples to practical deployment, we will see the adoption of multi-blockchain architectures. Interbit enables businesses to build networks comprising many blockchains to provide the benefits of blockchain while solving the inherent limitations. Users are able to segregate data between discrete chains, ensuring only the relevant parties have access to data, and enforcing privacy at architecture level. By dividing the network into millions of lightweight chains, known as megachain, Interbit will scale horizontally and guarantee high performance with network growth. uTFT
Feb 2019 I 15
Get Daily Fintech News & Analysis thefintechtimes.com
16 I Feb 2019
DIGITAL SECURITY THE FIN TECH TIMES
INTERNATIONAL TOKENISED SECURITY EXCHANGE PLATFORMS……. ARE INVESTORS EVER GOING TO EMBRACE THIS? Alternative Asset Security ‘tokenisation’, is a major shift in Asset funding, promising improved transactional efficiency and wider access to larger markets. But technology alone is not enough. Investors want confidence and trust in the underlying assets, states Jeffrey Sweeney, Chairman and CEO, US Capital Global. The Goal – Attracting Wider Interest in Alternative Assets It is estimated that seventy five percent of the the multi trillions in worldwide wealth is held by persons over 60 years old, the baby boomers. The private investment market (including the bulk of alternative assets) is now somewhat larger than the public market, but ‘dry powder’ (uncommitted capital) at $1.7 trillion globally exceeds annual deal volume. How can this vast store of wealth be put to work to grow economies and provide retirement income for investors? Acceptance of Alternative Asset investments in later growth stage companies and highly valued assets, through blockchain enabled Security Tokens can provide a solution to this problem. There is much talk about the need for widely accepted Security Token (STO) exchange platforms and investment in valuable Alternative Assets on those platforms. In the US, these markets are called “Alternative Trading Systems” or ATS, which we will use as the reference here. These are Securities and Exchange Commission (SEC) regulated platforms owned and operated by FINRA Registered Broker Dealers and allow primary as well as secondary sales of Alternative Asset securities, either electronically or conventionally. Currently modest acceptance of digital trading is almost entirely limited to cryptourrencies, which do not require an ATS as they are generally considered Foreign Exchange or Commodities. Less than 7% of US investors hold some cryptocurrencies and over 75% say they will never invest in that asset class. But we are not talking about cryptocurrencies here, we are discussing private securities issued via STOs. What is it going to take to gain wider acceptance of Alternative Asset STOs? The Technical Focus – Adoption of Digital Securities & DLT in Private Placements Security Tokens / Equity Tokens, as distinguished from utility tokens are generally treated as equivalent to traditional securities by regulatory authorities. Digital Securities include shares of ownership, income streams (fractionalised loans or derivatives), etc. and includes private and public market offerings. Distributed ledger technology (DLT) is a consensus of replicated, shared, and synchronised digital data geographically spread across multiple sites, countries, or institutions. “Digital securities have the same rights, preferences and privileges as traditional securities of the same class, but settle differently than traditional securities. Digital securities are uncertificated securities, the ownership and transfer of which are recorded on a proprietary ledger that will be publicly distributed. The validity of publicly available copies of the
proprietary ledger can be mathematically proven utilising cryptographically-secured distributed ledger network technology.” (Source: SEC tZero filing). Security tokenisation can facilitate greater efficiency and visibility, wider access and additional liquidity. To deliver this promise, the fintech industry is working on a number of technical hurdles, the specification of smart contract terms, new procedural definitions (e.g., methods of digital custody), multi-jurisdictional enforcement of KYC/AML provisions, and developing secondary market interoperability. The Real Core Issue – Building trust in the marketplace…. Perhaps the better question is not about wider acceptance of STOs, but what it is going to take to gain wide acceptance of Alternative Investments regardless of how they are held, paper or digital. Is the option to trade in a secondary private securities market and that offer of liquidity in an illiquid market really the problem? Perhaps it’s not just about the technology. We have been here before, e.g., crowd-funding with general solicitation, and ICOs, but the broader market of investors wants trust in the underlying assets, their documentation, and management. It is essential that mature regulated market practitioners integrate professional standards, with the emerging technology, to be able provide that trust. Beyond technical execution, the trading environment must be able to demonstrate these elements: 1. Assets need to be easily verifiable as to high value 2. Assets must be of a minimum value, similar to the hurdles to get on public exchanges such as NASDAQ 3. The offering must be a regulated security 4. The offering must be diligenced and issuer representations verified by a financially regulated firm in good standing (in the US a Broker Dealer). 5. The selling platform must be regulated properly for its domicile To be sure, the emerging fintech platform developers must solve the technical issues such as digital security custody, and secondary market interoperability. But to provide the trust that will satisfy investors, the platform providers must work with the professional practitioner ecosystem [issuer, broker-dealer, KYC/AML, custodian, transfer agent, fund management, RIAs, investor, etc.] to elaborate business practices. This suggests the real key issue is that traditional forms of professional practice and self-regulation of the private securities industry must extend to offer ‘digital security best practices’ that are accommodated by the new STO platforms. uTFT
Jeffrey Sweeney, Chairman and CEO, US Capital Global
Some key technical implementation questions and issues for STOs Digital security platforms offer an environment to execute smart contracts, but what terms go into the contracts, how does this change current practices (e.g., ‘custody’), and how do these platforms work together. Here are a few of the issues of the transformation to digital securities. 1. What are the terms that should be incorporated on-chain as best practice? Many current consortia efforts are underway to define exhaustive smart contract terms to be comprehensively incorporated into each blockchain transaction (e.g., Hyperledger, Corda). But establishing these semantics is a major effort and there are those that doubt the near term success of generalised smart contracts. [It certainly is possible to encode highly standardised contracts for niche applications]. OTOH to fulfill the Digital Security promise of improved secondary market liquidity, Digital Securities need at least to incorporate the terms of restriction of transfer (e.g., KYC/ AML restrictions [number of shareholder restrictions, ROFR clause, restricted time period, voting requirements for any secondary sales, etc.). Further to ensure that these terms are executed the secondary trading needs to be done on a ‘permissioned blockchain’, where restrictions on the ownership of the security can be enforced, rather than unrestricted general exchanges. 2. How does the custodian function change, what are the implementation options? In traditional security sales there is provision for a custodian to hold shares privately or in a ‘street name’. The owner does not have to take physical delivery of the shares, and future transactions are not delayed by physical transfer. How does DLT change this? One simple argument is that the share owner holds the keys to the wallet containing the digital share and this constitutes the equivalent of ‘self custody’. But more fluid markets are based on intermediary transactions and certain classes of investors (e.g., funds) require a custodian function. Also trading one share is not very risky, But there are already some serious operational security issues around very large volume cryptocurrency transactions. A currently popular technical mechanism is to implement custodian services on ‘multisignature’ tokens, where the custodian or transfer agent has an additional signature and the transaction scheme may require 1of2, 2of2, 2of3 signatures etc. to transfer. Other providers are implementing more traditional schemes of auditable custody rules, but where the broker-dealer, custodian and exchange are linked. 3. ATS / Secondary Market Interoperability The viability of digital secondary markets has yet to be fully demonstrated. Most current implementers are concentrating on captive secondary Alternative Trading Systems (ATSs), where you are trading security tokens issued for that platform, or wrapping the existing security in a new smart contract ‘token’ specific to the ATS. This or course significantly restricts the liquidity promise of digital secondary markets. An interoperable token specification that supports secondary trading is the desirable future and there is some work going on, In the short term standardised trading semantics as mentioned in Q1, might enable efficiency in listing a digital security on an independent ATS BUT in any case Model 2 (standardised terms with quick API wrapping for an ATS) may represent the most pragmatic on-chain/off-chain design balance to be ready for future interoperable secondary markets and is readily ingested for any near term captive/proprietary secondary markets. Interoperability is an issue not just for secondary market liquidity, but across the full ecosystem (e.g., issuer, token specification (e.g., DS, R-token, ST20), token issuance platform (eg., Ethereum), token architecture (eg., ERC20 vs. ERC23), KYC/AML services, custodian, compliance and reporting, broker-dealer, attorneys, smart-contract semantics, cap chart and shareholder management, secondary trading platform). 4. Consideration of international inter-jurisdictional accommodations / mapping Where there are regional jurisdictional differences, these have been reflected in the implementation of industry standards and smart contracting semantics. For example, the ST-20 token, developed by Polymath, incorporates a verifyTransfer function to ensure each transaction complies with any coded US regulatory restrictions. How can these requirements be mapped to a ERC-223 token (e.g., Neufund), and vice versa, to ensure both US and EU compliance?
Feb 2019 I 17
BLOCKCHAIN: HR THE FIN TECH TIMES
HR calling: A decentralised professsional passport TiiQu is a platform that uses blockchain technology to create an immutable digital “passport” as verified proof of an individual’s professional trustworthiness. Laura Degiovanni, CEO, TiiQu and organiser of Trustless Ecosystems meetups, speaks to Zoya Malik, managing editor TFT about the need for industry knowledge sharing to drive HR transparency and authenticity over DLT, towards a more meritocratic order of selection ZM: You talk of trustless ecosystems over blockchain? Is this not a bit of a misnomer, isn’t it more about distributed trust?’ LD: I would rather say that distributed trust in the blockchain space is Laura Degiovanni, referred to as more parties Founder and CEO, contributing a brick to TiiQu the collective building of trust, while trustlessness refers to the environment where parties have no need to trust each other or a central authority, because the system itself guarantees the desired outcome. Distributed trust is action. Trustlessness is the state of the environment. ZM: What are your trustless ecosystems meet ups all about? Who is attending and what are their main concerns? LD: Over 1000 ICOs in 2018 plus $3.9 billion in VC capital raised in the first three quarters of 2018, have made “blockchain” a buzzword and ushered huge expectations, sometimes not supported by a true understanding about the challenges and benefits associated with blockchain implementation. Gartner suggests that we are currently experiencing the “trough of disillusionment” begging the question, is this based on lack of scalability of projects or on the lack of understanding? Trustless Ecosystems meetups are about knowledge sharing on the daily challenges about building on blockchain and the benefits of DLT adoption. In the series of Trustless Ecosystems meetups on January 24th was the topic of scalability with Gary Nuttall start-up founders Kumar Gaurav from Cashaa, Piers Ridyard from Radix and entrepreneurs operating in the DLT space, along with Alpesh Doshi from Fintricity. Our meetup groups are currently active in London and Berlin. These communities are mainly made up of tech and business people involved in the blockchain space, willing to enhance understanding, facilitate collaboration and foster future adoption of blockchain-based systems. The “learning from real experience” side of our events is what makes people signup. By targeting topics related to challenges both in the tech implementation and / or in market development across
18 I Feb 2019
all industries, we put together very diverse panels and interesting exchanges. ZM: What problems are you trying to solve through TiiQu? LD: TiiQu’s purpose is to remove guesswork from individuals’ claims and enable instantaneous trust based on real verified facts instead of subjective opinions and gut feeling. We envision a globalised market where establishing business, work and learning relationships is a fast and meritocratic decisionmaking process. We fight against a fake certification industry that is worth $1.3 billion and we are compelled to action by the survey conducted amongst 6000 HR professionals that found that 46% of employment candidates lie on their CVs. To achieve this goal, we have brought together a set of technologies corresponding to our values of transparency, democracy and fairness. The CertiiF allows issuance of tamper-proof certificates on blockchain by a click, the open source VERiiF enables anybody to instantaneously verify integrity and veracity of such certificates and the TiiQu platform calculates individual’s TQ score, which is derived from verified claims and is designed to express in a value between 0 and 1000, the degree to which an individual’s claims can be trusted. We envision a future where certification of claims is the norm and verification is as easy and instantaneous as switching on a light. You turn on the light to guide your way and secure yourself, to reach your destination quickly by minimising risks so the world of certified and verified claims is like switching the light on in the business world, it enables trust in interactions and trust underpins successful economies.
can partner with financial services: proofs of knowledge and competence of financial advisors and skills assessments. Under Art 25(1) of MiFID II, an EU directive was introduced at the beginning of 2018, an additional requirement for the knowledge and competence of staff on providing information or financial advice to customers. Investment firms must ensure that all-natural persons who provide investment advice or information to their clients, have the necessary knowledge and competence. This applies to those who provide information about investment services, structured deposits, financial instruments or ancillary services. Adopting a standard for issuing proofs of knowledge – the CertiiF – and an open source standard for verification – the VERiiF – authorities would benefit with a significant layer of transparency, would be able to monitor progress and accelerate compliance to the directive, making the information about an individual’s competence verifiable by the customer as well. Not least, the MIFID II directive states, “The national competent authority requires a firm to demonstrate the knowledge and competence of relevant staff. Member States will set their own standards. Firms shall be required to show how their relevant staff meet these standards”. When different skills assessments need to answer the same directive and provide a valuable fair rating about knowledge and competence, it may be a challenge to come to guarantee harmonic application of the directive across the industry. TiiQu is developing an advanced AI skills assessment tool with a sophisticated rating system that could significantly enhance the harmonisation and objectivity of industry’s assessments.
ZM: How will TiiQu services partner with banking and finance interests? LD: Apart for the obvious adoption of TiiQu in the HR space, I am planning two additional cases where TiiQu’s technologies
ZM: How does CERTiiF work to satisfy Proofs of Work for the banking and finance industry? LD: The employment certificate is an integral part of the employment relationship and should thus be delivered to
each employee upon termination of their employment. It is also the company’s duty to issue an intermediary certificate at the employee’s request. CertiiF is the right solution, the system connected to payrolls that automates issuance of such proofs of employment and liberates the company from validating claims of ex-employees in the future; in fact the employee will be able to share his/her proof of employment with prospects and prospects will verify veracity and integrity of such certificates via the online VERiiF without losing time in long processes or paying third-parties any verification services. Not last, in a context where the specific role covered by an employee significantly determines the suitability of that employee to provide a specific service, a proof of employment linked to payrolls (where the role is obviously clearly stated), may help to predict suitability. ZM: How can trustlessness on blockchain assist with your HR services within banking and finance’s talent gap and hiring? LD: The increasing competition from financial technology companies is disrupting the way traditional banking has been conducted so far. This is not just about technology but also extends to operations, HR, culture and other facets of the industry. In addition, regulatory requirements continue to increase. Groups need to guarantee the right people, in the right place at the right time. Very often corporates need to transfer resources within the same group and or to extend services provided from external experts to other entities of the same group. The risk of transferring or adopting wrong resources in the banking and finance sector may cost failure of a project, at the same time, transferring sensible information about an EU employee’s or contractor’s performances, represents a GDPR breach. TiiQu allows creation of “trustless” subecosystems where an individual’s data and tracked performances and achievements gathered in a GDPR compliant professional passport, facilitate companies’ decision-making and individuals’ professional reputation management. ZM: How will the concept of meritocracy create a level playing field for hiring and transition the talent gap in a fast-growing digital marketplace? LD: It’s all about allowing members of that marketplace to choose each other based on facts that are verified and not just opinions and apply a fair evaluation to veracity and trustworthiness of facts and sources. Meritocracy in the TiiQu
ecosystem is about keeping the focus on the professional sphere only and about applying the same criteria to any member of the platform without any kind gender-ethnicity or status prejudgment. New generations want to be in control of their future and data; themes like fairness and transparency are crucial in their decision-making process and they are ready to contribute to systems they believe in, as long as they see themselves adequately rewarded. It’s not about money, it’s about providing them something that facilitates their personal growth in values and skills. Accelerated growth of a global marketplace relies on creating the pre-condition for users to actively contribute and benefit from its transparency and trustworthiness. ZM: How can your services over blockchain disrupt with KYC requirements for banks and customer profiling? What will be the impact? LD: We have been asked to explore the application of the TQ score to fundraising platforms. In fact, the TQ score is calculated using a modular hierarchical weighted averaging system comprised of multiple sources of truth. The 4 nodes, Identity, Verification, Reputation and Performance are fed by multiple sources of truth - among such sources are identity checks systems. We work against the implementation of sources and estimate this will be an ongoing process and look with interest to collaborating with governmental institutions that provide digital access to information, useful to proof trustworthiness of individuals. ZM: What are TiiQu plans for partnering in the smart economy? LD: TiiQu has been defined as the glue for many identity, education and matching systems built on blockchain. Our three technologies CertiiF, VERiiF and the TQ score are designed to interact with projects and services that are built on other blockchains. We are actively working towards valuable partnerships with those projects that are aligned with our code of ethics. I truly believe it’s time to turn on the light, foster accountability and facilitate the independence of individuals, for the benefit of the global economy as a whole. uTFT
Adopting a standard for issuing proofs of knowledge – the CertiiF – and an open source standard for verification – the VERiiF – authorities would benefit with a significant layer of transparency...
THE FIN TECH TIMES
Disruppng trillion dollar markets With DAPPS for businesses. Modex is launching a Smart Contract Marketplace that allows for easy, user friendly access to smart contracts. Companies can easily ﬁnd Smart Contracts that meet real-world needs, are already audited and secure, without having to scout developers and manage one-oﬀ development projects. Modex plans to make deployment of Smart Contracts signiﬁcantly easier, faster and more cost-eﬀeccve, speeding up blockchain technology adoppon. Feb 2019 I 19
PAYMENTS THE FIN TECH TIMES
WE’VE BROKEN THE INTERNET! Paul Rodgers, Chairman, Vendorcom and regular columnist at The Fintech Times highlights the profound impact PSD2 and payments security will have on the payment industry and to retailers’ and merchants’ business models over 2019
Paul is Chairman & Founder of European payments community, Vendorcom; Mentor at fintech accelerator, Level 39; and Member of the UK Payments Systems Regulator Panel; provided the secretariat for the All Party Parliamentary Group on Payment Systems in the last session of the UK Parliament and is European Evangelist for the World Wide Web Consortium (W3C).
20 I Feb 2019
“We’ve broken the Internet”. These bold words seemed shocking at first when one of Vendorcom’s foremost e-commerce merchant members made the pronouncement, at a recent Payment Security & Risk Management Forum. He went on to reveal a catalogue of frankly astounding areas where, from a fintech and payments perspective, we are risking both the integrity of remote commerce and the basis of trust that we need from citizen consumers, if digital transactions are to develop in commerce. My view of how the fintech world and regulatory environment is serving retailers and the wider merchant community is bleak as we go into 2019 and head for the third decade of this century! Security, in the merchantconsumer payments ecosystem, where I’ve spent most of my time since setting up Vendorcom in the rollout of chip & PIN in 2003, has advanced considerably in the past 15 years but we’re still, relatively speaking, at an embryonic stage when it comes to providing fitfor-purpose payment systems that can safely and securely be used by everyone. Traditional payment methods have evolved from very simple, analogue methods and have been digitised in the same way as early computers that simply provided faster adding machines or put a screen where the paper and ribbon were on a typewriter. Computing came a long way in the 50 years from 1955 to 2005, before it really added to true economic productivity. even though we thought we were realising the full benefit at each intermediate stage PCs in the late 1980s/early 90s and the dotcom boom of 2000. I am becoming increasingly convinced that unless we move to a distributed, networked, standardised model for digital transactions in general and payment security in particular, as we have for global electricity systems and cloud computing architectures, we will fail to deliver the full benefit of digital identity authenticated transactions to citizen/consumers, service users, and national economies. Lack of standardisation of payment security processes/
protocols and the inconsistency of messaging that goes out to citizen/consumers around payment security, identity and authentication credentials will continue to create confusion and result in low levels of uptake of novel solutions and add risk to the payments sector as a whole. A collaborative approach is essential to ensure that the challenge of educating citizen / consumers and socialising a ubiquitous digital transaction security message is owned by all and forms part of the basic facts of life in a developed economy. The payments sector, especially card schemes and banks, have been able to determine payments security and authentication protocols, e.g. chip & PIN, 3D Secure and PCI (payment card industry, in the past two decades. Their role in that regard is coming to an end where, whilst they will continue to have some input, it will be the technology interface providers in telecoms, entertainment, automotive, domestic appliances and public kiosks that will own the route to securing all interactions of the citizen / consumer, including payments. I expect to see organisations like Haier, Electrolux, LG, Samsung, Apple, Lexus, Volkswagen, Mercedes, Sony, Miele and other consumer-preferred brands take the lead in transaction security. The best opportunities for the main protagonists to collaborate globally are presented by the World Wide Web Consortium in their groups on Web Authentication and Web Payments or their workshops on Strong Authentication and Identity. Coming back from the brink It might not be the most popular thing to say in a fintech article, that frankly, in the first instance, it’s less about technologies than a need to improve general levels of awareness of risk and an appreciation of the basic steps that the citizen / consumer can take to protect themselves. There’s also a need to reexamine the complex contract between payers, payees, the providers of payment channels,
payment instruments and sources of funds. For a long time, in merchant-consumer payments generally - and in card-based payments particularly – the payer has been absolved of all risk and that has created a flabby, risk prone ecosystem that lacks the motivation of mutual risk. Probably the most inspiring initiative today is Sir Tim Berners Lee’s ‘Solid’ project which aims to radically change the way web applications work today, resulting in true data ownership as well as improved privacy. I recommend anyone working in the payment security and wider digital transactions field to engage with this. It is encouraging that Mastercard, as an established fintech company, is one of the sponsors of this initiative. There is a wealth of other small changes that are emerging in the payments ecosystem that have the potential to make their own small contribution to overall security and integrity. I believe that initiating and accepting payments on consumer devices is the mature market model for merchant to consumer payments and will put more control into the hands of the payer. AI, biometrics, and massively-multifactor authentication will also add value, as we see more access to networked authentication models that are now emerging. It’s all about evolutionary transformation – over a generation (or two)! Regulatory developments such as Open Banking and PSD2 promise much and, taken together, have the potential to be transformative in banking and payments for businesses, citizen/ consumers and the economy as a whole. The real challenge as national economies deploy open banking frameworks is how to release the full potential in a coherent programme of transformation. We could do well to learn from the work of economist and Professor Emeritus & Senior Fellow at Stanford University’s Institute for Economic Policy Research, Paul A. David who, in 1990, described the “special difficulties in the commercialisation of
novel technologies that need to be overcome before users can benefit…” This echoed the work of Robert Solow, Professor of Economics at MIT who said in 1987, “You can see the computer age everywhere, but in the productivity statistics.” The current fintech fetish that promotes the dogma of disruption as a primary motivator already rings hollow and discordant with what we know delivers true economic value and productivity at a national scale. Transform by all means, but ’disrupt’ is an ugly and inappropriate word for trusted infrastructures of national economic importance. As I see the current landscape, my assessment would be, “I can see fintech fever everywhere, but in the productivity statistics.” There are opportunities for all and it will be those neo-fintech start-ups who collaborate with the traditional fintechs who will ultimately gain market traction and build successful, sustainable businesses. Those who shout loudest on the basis of narrow, short-term, vested interest and have a very limited perspective of needs of the service users (who might deploy their solutions and even less empathy with the end users - the citizen/consumers who might adopt and apply their innovation in their daily lives), provide little more than will-o’the-wisp distractions to those who are journeying towards a bigger destination, on this challenging road. We are in a state of transition and, in the real world, it will take 10-15 years to reach maturity of deployment by merchants and adoption by citizen consumers. One of the most potent examples of how we are disrupting when we should be transitioning is the imminent enforcement (from 14th September 2019) of the Regulatory Technical Standards for Strong Customer Authentication which will be, for ecommerce, mobile and remote payment acceptors, the biggest single catalyst for change in the payments ecosystem since chip & PIN. The main challenge is that the market and economy is ill-prepared for such a momentous change. Most merchants are unaware that this
is even on the horizon despite EBA consultations over the past three years and, together with a lack of authoritative, credible responses from most payment processors, issuers and acquirers, it is brewing into a perfect storm for a GDPR-style free-for-all that will be catastrophic at a national economic level, undermine confidence in payment systems and has the potential to take ecommerce check-out, back to the dark ages of the 1990s. Rather than say we’ve broken the internet, I think it is more accurate to say that we are at risk of breaking commerce on the internet – both through ignorant regulation and unrealistic kneejerk responses by the fintech and paytech sectors. If we get it wrong, as we seem to be currently, this time next year we may not only be talking about the death of the high street! uTFT
Lack of standardisation of payment security processes / protocols and the inconsistency of messaging that goes out to citizen / consumers around payment security, identity and authentication credentials will continue to create confusion and result in low levels of uptake of novel solutions and add risk to the payments sector as a whole.
TOKENISATION THE FIN TECH TIMES
Ensuring compliance in tokenised securities Security Token offerings (STOs) can take the form of any traditional financial security, be it an investment fund, equity, debt and performs that same offering, but does so using blockchain technology. Luc Falempin, CEO Tokeny describes STOs multiple benefits over traditional securities and the impact of compliance in the growth of STOs as a digitised asset. STOs are by definition securities and are subject to the same rules and regulations that govern securities yet offering multiple benefits while over blockchain to automate existing processes, reduce operational costs, increase liquidity and enable a greater transfer speed of ownership. STOs address a key issue that Luc Falempin, has surrounded blockchain CEO Tokeny and specifically cryptocurrency and Initial Coin Offering (ICO) projects over their inception, that being compliance. It’s no secret that up to 80 percent of ICO projects have turned out to be fraudulent or Ponzi schemes. The need for compliance and regulation to enter the crypto, or ‘alternative asset industry’, is needed now more than ever. STOs are legally required to adhere to rules and regulations in the jurisdictions in which they are issued. As each jurisdiction differs one from another, for example an accredited investor in the US is different to one in Europe, the question arises, what’s the framework to ensure compliance from a technology point of view? To overcome these fundamental idiosyncrasies, Tokeny has created the T-REX, the token for regulated exchanges. There are three key pillars to these tokens, the identity management system, a set of validation certificates and the transfer manager. These three components essentially allow issuers to access a decentralised validator to control transfers and ensure
investors meet the obligations in each jurisdiction the tokens are distributed in. Another key element to note is that the files are completely open source; that way Tokeny contributes to the ecosystem and ensures we are staying loyal to blockchain’s initial vision of, ‘one source of truth’. Identity Management System As mentioned previously, a security token offering is an issuance of a security, and is therefore subject to the exact same stringent governance. In particular, its distribution has to follow aspects related to KYC rules, therefore identity management is key to implement such compliance on the blockchain. As the ownership of a security token is registered on the blockchain, we believe it is also necessary to track the token’s ownership in order to prohibit illicit transactions on the blockchain. To do this, in the T-REX, there is a link created between the wallet address and the identity to manage rights through a contract directly on the blockchain. Of course, we need to ensure the privacy of those identities to satisfy personal data related regulation, so we only store the validation certificates checked and issued by trusted parties (for example, KYC, government and legal entities). Linking an investor’s wallet to this identity adds significant value to stakeholders in the security token market. There have been many stories of investors losing their keys and therefore their access to their wallets. By verifying that his on-chain identity fits with the off-chain identity (personal data), the issuer can burn the lost tokens and mint new tokens on the new wallet of the investor.
Set of validators The ICO boom last year represented a clear advancement in innovation, and provided a new channel by which capital can flow more freely and from a much wider group of investors than has ever occurred before. These were performed using the ERC-20 token, tokens that are fungible, usually nonpermissioned, that can be transferred easily on the Ethereum blockchain. Created by Fabian Vogelsteller, the ERC-20 includes a smart contract which defines and implements the basic characteristics of the token i.e. its name, symbol, total supply etc. However, identity checks were not required with ICOs, which has led to many scandalous offerings and a lot of people losing their money. Enter the ERC-725 (Identity) and ERC-735 (Claim Manager) standards. These standards define a commonly accepted identity and claims management model for creating, maintaining and populating identities on the blockchain. Performing KYC and AML checks is a must for any project that intends to follow proper governance and comply with regulations. ICOs in the spirit of good practice) and even more STOs (by
law) definitely need to implement strong KYC and AML procedures. Using these standards, Tokeny has built features into our smart contracts to only allow interactions from well identified, reputable persons. The claims attached to an identity contract facilitate the emergence of a web of trust between token issuers, third party claim issuers and the party holding the identity contract itself. This revolutionises the slow and cumbersome validation checks we see today, and makes the process more efficient. Transfer Manager The transfer function of the smart contract essentially calls the validator to initiate checks on the identity of the receiver to ensure that his identity holds the necessary permissions, such as KYC, AML and sovereign identity checks, the identity in question is approved and the transfer of the tokens is validated and executed. If not, the transfer is rejected and an error message is displayed detailing the issue/s and the necessary steps to get the missing claims. uTFT
Feb 2019 I 21
INSIDE STORY: BREXIT THE FIN TECH TIMES
Better regulate than never! Insight on the Brexit omnishambles Nestled amongst talk of machine learning, digital risk management and blockchain feasibility at December’s Fintech Connect 2018, there was one persistent little issue tiptoeing off of every tongue. The 3-tonne elephant in the conference space was, of course, Brexit and its implications for fintech as well as finance. Matthew Dove, TFT Digital Editor reports Mitigating the potentially devastating power of Britain’s exit from the European Union is proving to be quite a challenge. Good job then that Dr Joanna Perkins from the Financial Markets Law Committee (FMLC) was on hand to cast her learned eye over the elephantine problem. From deeply inauspicious beginnings, Brexit has escalated into a full-scale omnishambles with misleadingly bescribbled battle buses and UKIP bluster making way for the kind of premium parliamentary fudge, Farrah’s of Harrogate would be proud of. Since the postponement of the December 11th vote on Theresa May’s embattled Chequers deal, fear, uncertainty and doubt have trickled down through the fintech ranks and with the March 29th deadline looming ever closer, that’s not good. That’s not good at all... The water surrounding Brexit has become so muddied of late that even the robotic Chancellor has started to malfunction. In October 2018, when pressed on the urgent need to address the technological challenges of a frictionless Irish border
post-Brexit (which at time of going to press remains a woefully neglected issue), Phil “The Spreadsheet” Hammond appeared to panic before proffering vaguely, “There is technology becoming available (…) I don’t claim to be an expert on it but the most obvious technology is blockchain.” Whilst such succinct and emotive oration surely ranks alongside Dr King’s, “I don’t claim to be an expert on dreams” speech, at this stage, we need more than broad brush strokes and incoherent techno waffle (thanks though, Phil. Good effort!). So, what specifics do the next couple of months hold
22 I Feb 2019
for fintech’s development and regulation? Over to Dr Perkins for a slightly more focussed approach… Speaking to an uncharacteristically full, and notably attentive, room for such events, Dr Perkins framed the question as a “movable feast” in her opening remarks, and one which could yield a plethora of outcomes. In the talk that followed, she essayed six key areas of Brexit impact risk:
Picture credit: Matthew Dove
1. Policy divergence As a leading member state, the UK is used to being in pole position regards incoming regulation, as outlined by Dr Perkins.”What would normally happen, as happened in the case of bank resolutions and banking ring fences, is that the UK would develop its own model for European law and try to sell it to Europe.” By the end of March this year though, the UK will not only be out of the driving seat, it won’t even be allowed in the car. According to Dr Perkins, the UK will have little to no influence over continental developments in emerging areas of fintech like cryptocurrency. “Even if the FCA in collaboration with the Bank of England and HM government were to develop a comprehensive model of regulation for crypto assets, they would probably not be able to, as things stand, sell it to Europe.” Policy-wise, the implications are clear. Whilst Brexit promises less interference in UK affairs from Europe, it almost guarantees that new British approaches to fintech will remain as just that,
British approaches. Furthermore, should the UK remain under the withdrawal agreement for the next two years, it faces the prospect of having to “domesticate any regime which is developed and implemented in Europe” without recourse. 2. Heightened uncertainty If well-established sticking points like the customs union or the Irish border continue to perplex, then it’s no surprise that the issuance of ICOs etc. is causing headaches. Dr Perkins was quick to cite that under the EU’s legal umbrella, fledgling innovations like cryptocurrency and decentralised clearing services, as well as extant investment and payment initiatives, are already subject to shifting legal sands without adding the upheaval of the UK’s exodus to the mix. She described the intricacies of existing fintech legislation as being in a state of “ongoing uncertainty which is really only determinable on a product by product basis” before adding that, “These questions are already complicated enough without Brexit. When you add to all that questions about the processes by which the UK domesticates EU law in the process of withdrawal and whether the UK will need adequacy and equivalence standards, in Europe, for market access, then the questions become that much harder.” 3. Regulatory collaboration Few will have failed to notice that the information age has brought with it a truly global economy and a tech industry which can oft times be accused of
Picture credit: Banksy
paying mere lip service to the rules of nation states it considers largely redundant. It could even be argued that the rise of an inordinately wealthy digital jet-set was one of the factors which fostered the chagrin of Brexiteers in the first place. Nonetheless, Brexit will do little to stem the tech tide and, according to Dr Perkins, it will only serve to put the UK out of step with an increasingly frictionless Europe. She pointed out that, “a lot of models for financial services regulation in the EU depend on establishing regulatory colleges” which in turn rely heavily on seamless international collaboration. The emergence of cryptocurrency was once again cited as a contentious sector where Fortress Britannia might find itself hopelessly isolated, especially if the new asset class becomes as economically significant as many suspect it will. “Crypto assets are, by definition, a soft-border business in that they’re borderless and it’s very likely that, as players come to dominate the market, they will be considered to be systemically important in both regions” 4. Authorisation Global banks aren’t hanging around to see whether Theresa May and co. can deliver a satisfactory deal, they’ve already got one foot out the door. Some have begun shifting elements of U.K.- based operations to trading hubs within the EU, and are recruiting additional staff locally. “Passporting” services between these Sceptred Isles and the Federalist mainland is not going to happen; the EU has made as much plain. Like that similarly leaky vessel, the Mary Rose, May’s vision of a “bold and ambitious free-trade agreement” - where the UK’s financial elite can “phone it in” from Cheapside - barely made it out of Portsmouth harbour before unceremoniously sinking. It was left to Dr Perkins therefore, to confirm the long-held suspicion that banks and fintechs will most likely have to join the queue with all the other services hoping to find a European market. “Many fintech providers are also the providers of established financial services which clearly fall within the regulatory perimeter and require authorisation.” Gaining EU authorisation is by no means a swift process either and a lengthy wait could prove fatal for some SMEs and startups as well as being a major inconvenience for the big boys. “Some financial services firms will inevitably consider relocating and applying for authorisation, which some people don’t know is an up to two-year process and so there’s a difficulty about doing it in a rush to avoid a loss of commission.”
5. Data protection Cloud storage and data protection could also have regulators reaching for the aspirin in the coming months despite detailed guidelines being issued by both the FCA and the EBA (European Banking Authority). Data protection is proving an especially sticky wicket, as Dr Perkins explained, “Data protection has been a key focus of the Brexit negotiations and if you look at the withdrawal agreement, and the explanatory notes provided by the government, you’ll be surprised at how much is devoted to data protection issues. There needs to be a smooth transition and the smooth transfer of some personal data between jurisdictions for both commercial and regulatory reasons, otherwise a lot of activity will grind to a halt. One of the things that Brexit will throw into sharp relief is the question of whether both regions trust one another’s data protection regimes as a guarantee of sufficient safeguards for the protection of personal data.” It seems that in the case of truly ubiquitous concepts like data protection, the “regulatory equivalence” everybody keeps on about will need to be a basic requirement and not just an ideal. Whether or not the UK government and the EU are capable of such lofty collaboration remains to be seen, but it’s not looking good, is it? 6. Gibraltar The Rock of Gibraltar finds itself integral to Brexit negotiations both as a British Overseas Territory and as a conducive spot for fintech innovation, specifically with regards to its relaxed stance on distributed ledger technologies (DLTs) and cryptocurrency trading. “As well as being a prospective fintech hub, Gibraltar is also in the eye of the Brexit storm”, Dr Perkins asserted, not that that seems to have worried legislators unduly as the protocol referring to the rocky headland in the withdrawal agreement has, “quite a lot of words devoted to it but in the end there’s very little clarity.” Quel surprise! Perhaps the issue would be better served by allowing a thousand Barbary apes the opportunity to clack away on a thousand typewriters until March 29th to see if they can come up with anything better! Dr Perkins ended her “canter” through the Brexit meadow by offering a modest affirmation, “We should be in no way frightened of regulation in this area because so often in the past it has proven to be a badge of quality for service providers.” As the UK lumbers ever closer to that fateful cliff edge, carried by the force of its own inertia, one begins to wonder how many badges of regulatory quality it will take to break its fall... uTFT
INSIDE STORY: BREXIT THE FIN TECH TIMES
Barclays Likes This: Legacy Giant Takes a Leaf Out of the Facebook With the line between finance and tech becoming increasingly blurred, it’s no surprise that Fintech Connect at the Docklands’ cavernous ExCel centre featured a fair amount of crossover and repetition. However, the FTT was shocked to find that not only are bankers starting to sound like techies, they’re starting to dress like them too. It’s hard to believe that these jovial fellas, casually bestubbled, in Converse AllStars and sports coats were the same mob who, a mere ten years ago, festooned in Saville Row chic, brought the world’s economy to its knees! They’ve clearly had time to think about what they did and mend their ways, as well as update their wardrobes. So, what else, besides the chinos, have the dinosaurs of Cheapside been pinching from Silicon Valley? The Barclays’ rep on day two of the conference was Ruchir Rodrigues, who strode on to the stage just after moderator Anette Broløs’ opening remarks to tell a rapt audience all about how the banking behemoth had become the “UK’s Largest Fintech” (I know, it was news to me too!). The bank’s managing director of digital and open banking then proceeded to proudly reel off his employer’s myriad high-tech credentials; • 90% of all the bank’s transactions are now digital • It has 10.6 million active digital users • As well as 5 million digital-only customers
To complete what Rodrigues referred to as a “Virtuous Circle” (Steve Jobs himself would be proud of that one), Barclays’ loan approval process has now been reduced from “6 Days” to a positively millennial “6 Clicks.” Catchy! Suitably impressed by all the big numbers, I waited patiently for Rodrigues to outline his bold new vision for the future of his bank and for the “digital transformation” of banking in general. His answer though, had a rather familiar ring to it… Apparently big data is where it’s at and Rodrigues managed to parrot everyone from Mark Zuckerberg to Vladimir Putin as he asserted that ‘he who controls the data, controls the future!’ As if to reassure us that Barclays are already well ahead of the curve in this department, he noted that interactions with the Barclays app have leapt from 83.3 million, in 2012, to 1.8 billion today. All that poking, tagging, liking and agreeing might equate to a veritable goldmine of harvestable data but using “interactions” as a metric of success also smacks of the “engagement figures” oft quoted to quantify the popularity of tweets, blog posts and cute cat videos. Whilst no one will begrudge Barclays the borrowing of a page or two
Bon Anniversaire, Bitcoin! Ten Years of Crashing, Hashing, and Cashing In On January 9th 2019, the world’s first fully digital decentralised cash system, Bitcoin, celebrated its tenth birthday. On the same day the European Banking Authority (EBA) released its annual report on the new breed of financial instrument which Bitcoin has given rise to; the so-called crypto-asset. Matthew Dove, Digital Editor, The Fintech Times reports For ten long years, the established centralised authorities of legacy finance and neo-liberal governance have come under fire from all angles and opposition has come in numerous disparate forms; European populism, the Occupy movement, Brexit and, of course, Bitcoin itself. Strange times indeed are these in which we live and that’s without mentioning Donald Trump! In January 2009, a global financial crisis was in full swing. Banks had bet big on subprime mortgages and lost. Tranches of toxic debt had been packaged in the form of CDOs (collateralised debt obligations), given triple-A ratings and sold with wild-eyed zeal. Between 2004 and 2007 alone, $1.4 trillion worth of steaming CDO was dumped onto the open market. Credit default swaps (CDSs) were issued to insulate the banks from their own lunacy and when their main insurer, AIG, ran out of money, it was the taxpayer’s turn to foot the bill. The bailout ran into the trillions (it’s thought to be at least 16 and counting). All the while, in some hidden corner of cyberspace, a bloodless revolution was taking place. It started with a one megabyte bundle of information called a block, forming the first link in what would become a global blockchain. On this genesis block its elusive creator, Satoshi Nakamoto, had paraphrased a newspaper
headline to commemorate the occasion. It read, Chancellor on brink of second bailout for banks. (Source: The Times 03/Jan/09). With these words, the world’s first cryptocurrency was born. Published in October 2008, Bitcoin’s whitepaper lays bare with technical clarity Nakamoto’s vision, “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
out of Facebook’s, well… book, it appears wholesale theft is afoot here. Not only is their approach unoriginal, it seems vaguely inappropriate for a financial services provider to be measuring its market dominance in the same way that a sixth-former rates the popularity of their holiday photos. Furthermore, the last time I checked, most people would prefer less interactions with their bank and not more. If the future of banking is digital, then surely it will need to become invisible and seamless, not an attention seeking InstaNuisance.
Perhaps I’m being too harsh, as these are truly uncertain times for the once strident banking brigade but it seems to me that slapping an emoji on a bank vault does not a fintech make. Just because tech giants like Alibaba and Amazon are plotting moves to establish banking services, it doesn’t necessary follow that the big banks should commit themselves to returning the compliment by becoming social media companies! uTFT
Bitcoin establishes a trustless exchange of value at the expense of third-party systems, there are no banks, no accounts and no borders. No personal information is sought nor required. There’s nothing for Facebook to harvest, GCHQ to scrutinise, Equifax to lose and nothing for Goldman Sachs to chop up re-package and sell on. Or so we thought… At its inception Bitcoin stood as a rejection of centralised authority, the middleman had had his turn and he’d screwed the pooch. However, ten years on and the leaderless network and its imitators are finding themselves being welcomed into the fold whether they like it or not. Formal regulation of crypto assets in Europe has been limited and local but probably won’t stay that way for long. The EBA’s report confirms as much stating, “some crypto-assets/activities do not appear to fall within the scope of current EU financial services law and are highly risky, as identified in this report, risks arise with regard to consumer protection, operational resilience, and market integrity. Moreover, the proliferation of legislative and supervisory actions at the national level, driven by consumer protection considerations, gives rise to risks for the level playing field. For these reasons, in this report the EBA advises the European Commission to carry out a cost/benefit analysis to assess, on a holistic basis, whether EU-level action is appropriate and feasible at this stage to address the issues identified.” The middleman hasn’t faded into irrelevance either, in fact, he’s diversified! Cryptocurrency trading is a $120 billion market
with the middleman taking a commission on every sale. You can now buy Bitcoin futures, stablecoins and asset-backed cryptocurrencies. Bitcoin exchange traded funds (ETFs) are on their way too. Crypto-assets, specifically the class referred to as investment tokens by the EBA and known as security tokens elsewhere, are set to feature heavily in the tokenisation of 2019. Distributed ledger technology upon which Bitcoin is built - allows for the digitisation and fractionalisation of all manner of assets which, in turn, opens the door for secondary markets which claim to, “unlock liquidity and provide broader market access.” If you think this is all starting to sound a little familiar, you’re in good company. Warren Buffett once called CDO-squared derivatives, “weapons of mass destruction” and has since poured similar scorn on Bitcoin by calling it, “rat poison squared.” The bitter irony of such a close comparison goes some way to illustrate how far the use of Bitcoin has diverged from its original remit. The cryptocurrency is now perhaps better known as a speculative store of value, than as a revolutionary payment system. With the hopeless fudging of Brexit, the predictably woeful reign of Donald Trump and the bastardisation of Bitcoin into a regulated financial instrument, the last ten years may be better remembered the reassertion of the centre rather than any attempts to undermine it. uTFT
Feb 2019 I 23
PEOPLE THE FIN TECH TIMES
Real Estate Consortia Tokenised North American Real Estate…. why would we do that? Teresa Grobecker, founder of Real Estate Consortia (REC) and Senior Vice President at US Capital Global met Zoya Malik, managing editor at The Fintech Times STO event to talk about her business uses for the tokenisation of real estate and how blockchain will shake up real estate as an asset class for the future
Teresa Grobecker, founder of Real Estate Consortia (REC) and senior vice president at US Capital Global
24 I Feb 2019
What’s a Real Estate Token and why? I’m sure everyone appreciates how complicated real estate deals can be, selling agent, buying agent, referrers, listing, title validity, closing… lot’s of parties, and behind the scenes multiple databases and registries. Tokenising the property is a gateway to increased visibility into it’s provenance, value and related multi-party transactions, This can benefit everyone from the seller trying to improve the perceived value of the property, to the buyer seeking complete knowledge and the various parties who have earned commission and referral revenue. For example, in the US, 30% of real estate transactions are referrals and $20 billion of referral revenues are untracked, can’t be tracked. Real estate tokens, smart contracting and blockchain transactions can help track and harvest this revenue. What lead you into a career in real estate and into digital technology? Right out of business school I worked in financial services then started my digital real estate brokerage in 2012, which is still active today. While operating in the sector, I noticed that a lot of other fintech innovations were missing from the real estate industry and because I am passionate about improving the real estate experience for professionals and clients using technology, I started Real Estate Consortia, my third real-tech project. I’ve never worked on a project that had gained such traction with large industry players as quickly and at such scale as this project. I think it’s essential to have the industry specific expertise to understand all aspects of real estate transactions as a broker and from the management and sales perspectives, and also as an owner of investment properties. REC innovative products come from solving pain points where improvements are massively overdue. I love feeling purposeful and helping fellow realtors do their jobs better and more efficiently, using technology. What was your objective in partnering with US Capital Global and what will be the synergies for both companies? I viewed USCG as thoughtleaders in the space of blockchain technology as it applies to real enterprise solutions, especially
in fintech and real-tech. I sold my earlier Real Tech company, Grobecker-Holland, to USCG in 2018 and they also took a substantial stake in REC at that time because they have tech, enterprise, and investor expertise which is invaluable. One of the things real estate agents need is a real-tech platform that efficiently tracks real estate referrals to provide more transparency, increase professionalism and provide a better customer experience. REC leverages the blockchain to do this efficiently and we envision being the industry standard for virtually all real estate referrals. What are your plans for extending reach to overseas markets and especially the UK real estate market? REC is partnering with the world leaders in international real estate and information technology that see the need to track real estate title records outside the United States. We believe that partnering with these firms instantly expands our footprint. REC aims to be the international standard for referral sharing and real estate blockchain data. How will you tackle existing operational and regulatory hurdles in these markets? To expand internationally, we have to research each government’s rules and existing infrastructure for title and land registry. Where there are existing systems, we will partner with local municipalities to incorporate their data. In areas where records are incomplete, we will work with local government and stakeholders to help improve the data. We envision that emerging countries will appreciate the REC title token because of the enhanced security, reliability, and transparency for taxation and reduced land disputes. What are opportunities and concerns in blockchain technology adoption for the real estate industry and homeowners? There is a huge opportunity for REC blockchain technology since we have first-mover advantage in tokenisation of the asset. Some of the largest real estate enterprises have been exploring blockchain for years. Since REC has already tokenised each property in the United States using blockchain and existing land records, REC truly is the frontrunner. We realise that
the technology is a bit advanced for the average homeowner, but thankfully, our technology doesn’t have to be marketed or dealt with by the homeowner as blockchain. The title token is the underlying technology that powers the data and web-user experience, but the user interface is conventional best-practice. The realtor receives training on the REC referral platform, but there again it is an elegant and user-friendly experience. When the homeowner claims the title token, or identifies his property as connected with the token the homeowner then has increased visibility into the chain of title and receives special offers from lenders and real estate servicing companies. As the homeowner becomes more engaged with the REC title token system, the owner is encouraged to securely store all property improvement records, contracts, title, deeds and other important disclosure documents in the REC data room. The owner is incentivised to share this data: the more information that’s provided, the higher the property’s provenance score becomes. If the owner is a more private person, then the owner doesn’t have to engage the REC system or can choose what data to share. The realtor and other relationships affiliated with the property can still be recorded on the REC title token without the owner engagement. The two functionalities can operate independent of each other, but converge via the realtor relationship with every property. The communications that can be built up between a homeowner and realtor on our system create a strong relationship and profile for the property. This profile tracks the property’s history and value that deepens its currency and relevance in the market. I believe in the adage, “When you list, you last” – this means if you own the inventory in the market, you will always have buyers. What are perceptions towards blockchain technology and sharing of personal data by industry specialists and homeowners? Interestingly, when I spoke in London about the title token I kept getting asked if I needed government approval to mint the title tokens for the entire country. People were shocked that in the US this
is merely seen as another real estate data aggregator. I think that legal and market research needs to be done as we enter into any market so that we are in compliance and build goodwill with the local stakeholders. When local authorities and regulators see that the REC title token augments existing data and that we are willing to share with the governments, I’m confident that regulators will be willing to work with us. Industry specialists are definitely interested in the functionality of the REC platform. They see the platform as a real tool that will help them provide value to clients and generate more revenue. We are committed to many aspects of our tokenisation to be open source and confidentially available to governmental agencies, lenders, and others. You talk of creating a digital home identity. What information is required to make a property attractive and sell able? The REC title token is your property’s digital identity. It combines a myriad of public and private data sources, including information from the property owner. The information that the owner uploads, such as property updates, additions, owner verification, current mortgage and tax payments all contribute to an increased provenance score. The higher the score, the more attention the real underlying real estate asset will get on the title token portal. What will be the take up of your token in terms of referral business in 2019? What are concerns from the real estate stakeholders and market regulators? REC plans to go live with strategic partners in 2019, especially the banks that want to move distressed assets through the REC Realtor network. Given the potential softening of the real estate market and increase in interest rates, we are already seeing an uptick in distressed sales and we know that realtors will want to access this inventory. Regulators are increasingly scrutinising the way these referrals are distributed and we offer a more compliant and efficient way to do this. Even with a relatively modest first year penetration this is a massive book of business. We are currently pre-enrolling agents onto the REC platform and seeing very high adoption rates. When we go live, we plan on marketing in earnest to the realtor community, both to the agent and the broker populations. REC will track these referrals using the title token and lookup portal for referral revenue disbursement. Luckily, there has been a massive focus on blockchain at the national level by the National Association of Realtors (NAR), Real Estate Standards Organization (RESO), and the Mortgage Bankers Association (MBA) MISMO groups, so REC feels empowered to move forward in this space. Over the past
decade, these organisations have rapidly become pro-technology and are actively exploring blockchain solutions. What type of inventory in the UK could go onto blockchain? What would be opportunities? The UK has really impressive land title registries, so we would love to access these systems for referral tracking (permission based of course with the local government). We also have had some discussions with tracking rentals, leases and referrals of renters to real estate agents. Given the USCG footprint in London, REC is very excited to meet and explore these options. What is the talent gap in your industry for digital take up? What needs to be done about this through academia, skills gap training and incentivising a new generation of developers and industry operators? REC has hired a NAR super-agent trainer to create and teach realtors how to use the REC title token and referral platform. We plan to offer training for each stakeholder cohort demographic to create a streamlined and enjoyable experience for all participants. What other sectors can benefit from your token model? How will you market to those sectors in the future? The REC title token can track lending and title records as well as referrals in the real estate industry and in other industries. The REC title token is being deployed first in the residential real estate market, then REC will incorporate commercial real estate leases and sales. From here, we can track referrals in other industries, especially very practical applications in the fin-tech space where USCG has industry touchpoints. What qualities do you need to successfully grow your business and lead in a new era of digital technology? REC is built on a really strong team. Everyone comes from successful careers in their respective domains, including real estate, technology, finance and banking, and we respect each other for our diverse talents. Appreciating each other and letting each member shine in their own way is critical to success. I’ve never been into micromanagement; I work with ethical, smart, effective professionals who all share the same goals and aspirations regarding REC and life overall. At the end of the day, our interests are all aligned and we appreciate each other’s contributions. Life is really short and I work really hard. It’s important that I’m improving the lives of my co-workers and clients. I enjoy knowing I’m moving the needle in the right direction. uTFT
TRADE FINANCE THE FIN TECH TIMES
FINEON Exchange: Redefining trade finance as an asset class AI is powering the trade finance industry in new and innovative ways, paving the way for FINEON Exchange’s marketplace for exporters to match with bank and non-bank funders. The trade finance industry’s pressing search for liquidity is garnering institutional investor interest that will transform trade finance into a new asset class. Zoya Malik, managing editor TFT caught up with Michel Kilzi, MD FINEON Exchange about the platform’s value proposition that will offer solutions for emerging market exporters and investors to find new markets to increase their bottom line Trade finance as an asset class is growing in interest for both institutional investors and the banking and finance sector, as they look to increase yield, diversify and fill unmet funding gaps. Global risks in trade finance for short and long term products
are particularly low compared to other segments with lower default rates on performance guarantees. This presents an enticing prospect for all concerned but begs the question that, in the digital age, what shape can trade finance take as an asset class? FINEON Exchange, based in Luxembourg, has developed a revolutionary platform of a multipurpose marketplace, catering for European exporters seeking to get finance for sales into developing and emerging markets. With an emerging markets global trade finance gap estimated at USD 1.5 trillion (Global Trade Report, Euler Hermes 2019), the potential for FINEON Exchange is bright. Set to be launched by the end of Q2 2019, the platform seeks to improve cash-flow and optimise working capital through the utilisation of innovative structured trade-finance for exporters and financiers. Matchmaking is the
name of the game, firstly for exporters to access the best deal possible in finding a bank or a non-banking institution to fulfil its financing needs and, secondly, in providing financial institutions with a marketplace offering deep market intelligence on clients’ risk profiles and finance requirements. Michel Kilzi, Managing Partner, FINEON Exchange anticipates the marketplace will create a win-win value ecosystem that supports receivable finance, receivables securitisation programmes and a scoring/rating system. He says this will allow “industry stakeholders to collaborate, appealing to exporters, funders, scoring agencies and insurers. “We also have strategies in place to partner with countries’ Chambers of Commerce as well as export and credit agencies.” FINEON Exchange’s customer on-boarding registers financiers’ lending criteria on rating and scoring, on types
of business and their ceiling with the needs of potential partners. Kilzi states, “We are providing the same standards of KYC and AML data as stipulated by regulators and a market intelligence register for quality deals for funders in required geographies and specific jurisdictions, with best receivables. Exporters receive top notch information on export financing and increase sales by issuing their exposures.” Artificial Intelligence’s supremacy for trade finance growth is in its power to drive consolidation and scale in a market place, to speed up access and exchange of critical and hitherto disparate information across a centuries old marketplace and modus operandi. FINEON Exchange’s marketplace platform will provide exporters with necessary security and information protection relevant on their transactions and give banks more visibility in the market by product and geography, rendering them with a strengthened overview on supply-chain trends to discover leads, according to their credit appetites. Kilzi explains, “With our multisided platform we will be solving a real problem in export finance requirements and doing that at speed.” An example of FINEON Exchange’s marketplace business intelligence in action is when a
Image credit: FINEON Exchange
well-known European exporter approached FINEON Exchange to source potential funders for its exports to an emerging market; FINEON Exchange approached a Swiss bank, who was already familiar with the exporter but had not expected that such exporter was increasing its exposure into that specific emerging market; when both were matched, the Swiss bank showed great interest in the deal and ended up financing the exporter in record time. FINEON Exchange’s emphasis on AI investment bolsters the platforms proposition with roboadvisory that can guide exporters from the onset of their journey. This is to position the exporter to benefit from the highlyautomated and well-standardised information that creates desired
financing structures to fit the exporter’s strategy and appetite and formulates relevant credentials on all stakeholders, to speed up home to market processes. Funders (banks and non-banks) and insurers too, will benefit from real time trade finance market intelligence by sector, commodity and also provide a granular visibility into the different supply chains across geographies, products and services. FINEON Exchange’s real-time marketplace will drive compelling stakeholder collaboration, raising Trade Finance’s profile as an attractive asset class for investors. uTFT
FEBRUARY 8-14, 2019
Feb 2019 I 25
CEO INTERVIEW THE FIN TECH TIMES
Secret Sauce of Payments Success - Paybase Anna Tsyupko, CEO, Paybase spoke to Katia Lang, CEO TFT about her drive for enabling platform and crypto businesses succeed with their niche payment services through Paybase’s API driven solutions
Anna Tsyupko, CEO, Paybase
KL: Anna, tell us about Paybase? What is the main idea behind it? AT: There are a huge number of businesses that are being underserved due to the legacy technology and legacy thinking of the payments industry. Firms that need to route payments between multiple parties, as is the case for effectively all businesses in the booming gig/sharing economy, are not receiving the payment flexibility that they need. This results in many businesses having to alter their business model just to accept payments, and sadly, many businesses failing to reach market. The core principle of Paybase is that this should never be the case. We have built a solution centred on flexibility, which raises the bar of what payments can and should do. KL: What is unique about Paybase? How does it make the world better? AT: n the most simple sense, we’re allowing businesses to build better products. There are no other payment providers offering what we are - the chance to truly leverage payments as competitive advantage. As an example, we’ve had a fashion marketplace come to us that wanted to instantly reward social media influencers for driving sales to their site. We’ve had an equipment rental platform that needed to perform due diligence on its customers, as opposed to just its merchants, to be able to insure the items listed. These firms came to us as other payment providers told them that their ideas were not feasible. That is how we make the world better - we allow innovative ideas to flourish in an area where they have been held back for too long. KL: You mostly work with platform business clients. But why are cryptocurrency companies so keen to work with you too? How do you work with them? AT: What many cryptocurrency businesses need is fiat-to-crypto interoperability. Our solution is totally API driven, meaning that the crypto business does not need
26 I Feb 2019
to handle the resource-intensive task of manually reconciling payments. Furthermore, we operate as the legal custodian of customer funds, meaning that we take on the responsibility of all regulatory obligations relating to the customer in terms of fiat funds issued. In essence, the payments automation and level of regulatory cover that we’re offering cryptocurrency businesses allows them to operate their business with substantially more ease. KL: Was it essential to become FCA regulated? Has it been very tough? AT: Yes, you have to become regulated to be an electronic money institution and to offer the functionality that we do, we need the ability to issue eMoney. I won’t sugarcoat it, the process is not an easy one. But this is not a complaint - it should be that way. There is a lot of regulation surrounding payments and rightly so. When dealing with money, there can be no room for errors or weaknesses in securities. Ultimately, it benefits you and your consumers, so whilst it is tough, it’s wise to embrace the regulation. Thankfully, as we are regulated, we can absorb all of this responsibility from our clients, allowing them to focus on running their business. KL: You got so far already, and are on-boarding your first six clients! Very impressive. What has been the biggest challenge so far? AT: Remaining calm and steady throughout the journey as a business. I believe state of mind is the most important thing in successfully running a business as you need clarity and calm to think things through strategically. Sometimes you face unexpected setbacks, so that ability to remain cool is what will enable you to approach things from a different angle and find the best solutions moving forward. KL: What are the main steps for Paybase in the near future? AT: Primarily, to expand into Europe, which we aim to do later
this year. Whether we leave the EU with a deal or not, Paybase is in an equally strong position to help businesses grow across Europe - we are excited about the challenge! Aside from that, we’re continuously speaking to interesting new businesses and we’re looking forward to onboarding many more in 2019! KL: What are the main trends in the Payments sector for 2019 as you see them? AT: I think that when PSD2 and Open Banking were introduced in January 2018 people expected too much too soon. It was always going to take some time to adopt, but I think that’s exactly what will happen this year. I’m particularly excited to see the PISP functionality become more mainstream and provide an interesting alternative to the checkout experience for customers. Secondly, I think more firms will begin to view compliance as an enabler for business, as opposed to an inhibitor. However, this is dependent on fintechs being flexible enough to offer ways to leverage operational and regulatory practices - such as improvements to due diligence processes or risk management, for example. Finally, there will be a greater appreciation of the need for crypto-fiat interoperability. The idea that crypto is the enemy of traditional payment systems is becoming increasingly irrelevant - more and more businesses will look for ways to bridge the gap between more established and more novel payment methods. KL: Your main piece of advice to other fintech CEOs? AT: Unless you have a vast amount of resource, it’s important to be reasonable with how much you attempt to take on. If you’re B2C, focus on customer-centric aspects of business, such as marketing and product market fit, and get a third-party to provide parts of your backend (payments being a good example of that). If
you would prefer to build out that type of infrastructure yourself, go down the B2B route. It may be tempting to try and do it all, but each aspect you take on will produce unforeseen challenges that can really slow you down. Fintech is a very exciting space, but you need to choose your areas of focus in order to build best of class products. Kl: What is your reason for creating this company? What would make you most proud? AT: Before founding Paybase I worked in investment management and we had a fintech company in our portfolio. In that type of role, you need to not only know everything about the company, but also the nuances of the industry. I was able to see the limitations there were in payments and felt that there was a real opportunity to innovate and improve the sector. What makes me most proud is seeing how excited our clients become by the fact that we can provide exactly what they need - no compromises, no fuss. It’s a great feeling being recognised as a business enabler - one of our clients called us their ‘secret sauce’ which is incredible! uTFT
THE FIN TECH TIMES
Global RegTech investment grew 2.5x in 2018 Global RegTech investment grew almost five-fold between 2014 and 2018. An increase of 48.5% CAGR, in terms of capital invested, has seen funding grow from $923.4m in 2014 to $4,484.5m in 2018. Funding doubled between 2014 and 2017, before jumping to just under $4.5bn in 2018. Funding in 2018 was bolstered by large transactions with SenseTime, a facial recognition solution provider, raising over $2.2bn across three deals. When we exclude the $2.6bn that SenseTime raised across 2017 and 2018, global RegTech funding still grew from $1,467.6m to $2,264.5m during the period. This increase was partly due to there being as many as 11 transactions valued above $50m last year. Exiger, a New York-based provider of financial crime compliance and risk management solutions, raised $80m of Series A funding from Carrick Capital Partners in Q3 2018. This was one of the largest deals of the year and will enable Exiger to accelerate its growth by continuing to build out and acquire differentiated technology and technology-enabled solutions. Checkr, a San Francisco-based automated background checking solution provider, raised a $100m Series C round led by T. Rowe Price, which was one of the largest transactions in 2018 outside of SenseTime’s funding rounds.
More than $6.2bn has been invested in RegTech solutions that address KYC and AML since 2014
An analysis of the capital invested in RegTech companies according to the area of regulation addressed by their solutions reveals which pieces of legislation appear to be causing the most problems within financial institutions and are thereby deemed to offer the most attractive opportunities for investors. Just under $10bn was invested in RegTech companies between 2014 and 2018, with 34.5% of this invested in companies providing KYC solutions. AML follows with 28% of the capital invested, GDPR takes third place with 13.1% and MiFID II in fourth place with 6.4% of total investment. KYC and AML regulations have dominated the RegTech landscape due to their cross-industry applications and heightened expectations from regulators. China’s regulatory landscape has also been evolving, with the People’s Bank of China paying greater attention to AML initiatives. Much anticipation and uncertainty surrounded GDPR, which was implemented in late May 2018, given the strict penalties for non-compliance. BigID provides enterprise protection and data privacy solutions, and the company raised a $14m Series A round in Q1 2018, in the run up to GDPR implantation, then closed a $30m Series B round led by Scale Venture Partners in June 2018. Basel III, PSD2, Solvency II and AIFMD take 5.4% share of the total investment combined, with ‘other’ legislations accounting for the remaining 12.6%.
The data for this article is sourced from the RegTech Analyst platform. More in-depth research, data and analytics on investments and companies across all RegTech subsectors and regions around the world are available to subscribers of RegTech Analyst at www.RegTechAnalyst.com ©2019 RegTech Analyst
Feb 2019 I 27
THE FIN TECH TIMES
28 I Feb 2019
ACCOUNTING THE FIN TECH TIMES
2019: A year in the life of cryptoassets Jon Dawson, senior manager, haysmacintyre
Senior manager at haysmacintyre, Jon Dawson, projects on the regulatory impact on cryptoassets and robo advisory & AI entering the mainstream of financial services discourse in 2019
In 2018 we saw the market cap of cryptocurrencies plummet, ICOs tarnished by a lack of regulation and number of frauds, and Monzo valued at more than 500 times its annual income (valued at $1bn in December 2018). In one of the world’s fastest growing and ever-changing sectors, here are five developments I forecast for Fintech in 2019.
Regulatory focus A Cryptoasset Taskforce comprising the FCA, Treasury and Bank of England published a report in Q4 2018 calling for “robust regulation” of cryptoassets and proposed recommendations for regulation within institutions, financial services and within the public sector. I expect this will trigger reams of regulation which will in turn enable the financial institutions to start making serious moves in the sector. HMRC kindly provided us with some holiday reading when they released their guidance for cryptoasset taxation for individuals late last year, a summary of which appears below.[*] HMRC have suggested they will follow this up with guidance for businesses and companies and I expect we will see this issued soon.
The growth of STOs Security Token Offerings (STO) are set to take off in 2019 and if the regulation is put in place (see above), we can expect some of the banks to adopt the technology, opening up a more transparent marketplace for assets, such as equities. In a world where you no longer receive a share certificate when purchasing shares, the concept of a decentralised ledger keeping record of stock ownership could make sense. Expect then to see the growth of secondary markets, as we see the blockchain community adopting government security regulations.
Brexit Many believe that Brexit won’t have a significant impact on the Fintech community given the UK’s infrastructure, government support and level of investment in the space. I’m inclined to agree, although the UK leaving the EU could lead to differences in financial services regulation with both positive and negative results. If the big financial institutions move overseas as they are suggesting they might, will this impact the Fintech start-ups trying to sell to these institutions? I don’t know the answer to that yet, but by the end of 2019, we will have a much better understanding of whether London is still the Fintech capital of the world, whether we’re in the EU or not.
AI and robo-advisers making it mainstream
In 2018 we saw the Regtech sector use AI in KYC and anti-money laundering software to make processes more efficient and we’re expecting to see increased application of AI and robo-advisers within the financial services sector this year. We’ve only brushed the surface of AI within the investment management space and I expect that in 2019, we will see more products being made available to the market which will allow man and machine to work in tandem.
Public investment We’ve seen crowdfunding grow significantly over the last three years and I believe there will continue to be a place for crowdfunding to allow the public to invest in unlisted companies. However, I expect to see a significant development in 2019 whereby several crowdfunded companies provide a profitable exit opportunity to original investors by going through an Initial Public Offering (IPO). To date, most Fintech companies are considered ‘start-ups’ with the focus being on the product, scaling application and network rather than profits. There are now more sufficiently mature companies with management teams and investors who have a focus on profits, making them much more suitable for listing onto an exchange.
*HMRC Guidance on Taxing Cryptocurrencies for Individuals On 19 December 2018, HMRC broke their silence and issued guidance for individuals on the tax treatment of cryptoassets. The key points from the guidance appear below.
Capital Gains Tax (CGT) • If individuals hold cryptoassets for capital appreciation in its value, or to make a particular purchase, then they will be liable to pay CGT when they dispose of the cryptoasset. • A disposal is considered a transfer between one type of cryptoasset to another, the transfer of a cryptoasset to fiat currency, the use of cryptoassets to pay for goods or services or giving away cryptoassets to another person (other than your spouse). • Normal CGT rules apply and hence there are allowable costs when calculating the gain/loss (transaction fees, advertising costs, valuation costs etc). • Specific rules apply to situations where the same cryptoasset has been disposed of and acquired within a 30-day period. This is referred to as the “Bed and Breakfast” rule. • Similarly, specific guidance is provided around ‘Blockchain forks’ and (and with most matters referred to here) you should seek advice from your tax adviser in this scenario. • If an individual disposes of cryptoassets for less than their allowable costs, they will incur a loss. Certain ‘allowable losses’ can be used to reduce the overall gain, but the losses must be reported to HMRC first. • If an asset is considered to have lost its value or have negligible value, then an individual may make a claim to HMRC stating the asset, amount the asset should be treated as disposed of (which may be £0) and the date of deemed disposal. A ‘negligible value claim’ treats the cryptoassets as being disposed of and re-acquired at an amount stated in the claim. • Losing a private key does not count as a disposal for CGT purposes.
However, a negligible value claim could be made if there is no prospect of recovering the private key or accessing the cryptoassets in the corresponding wallet. • Being the victim of fraud of theft is not a disposal for CGT purposes as the individual still owns the assets, thus a loss cannot be claimed for CGT. However, if there is no realistic opportunity to get the assets back then a negligible value claim may be appropriate.
Cryptoassets as a form of salary • Individuals are liable to pay Income Tax and National Insurance on cryptoassets which they receive from their employer (as a form of non-cash payment). • If the cryptoasset is a Readily Convertible Asset (ie if trading arrangements exist), an employer must deduct and account to HMRC for the Income Tax and National Insurance contributions due through the operation of PAYE, based on the best estimate of the cryptoassets value. • Employers do not have to operate PAYE on payments of earnings that are not RCAs (readily convertible assets). The individual must declare and pay HMRC the Income Tax due on any amount of employment income received in the form of cryptoassets. • The taxable amount where the asset is not an RCA is the best estimate of the cryptoassets’ value at the time acquired, which may be hard to define if no ready market for the assets. • Any subsequent disposal of the cryptoasset received through employment may result in a chargeable gain for Capital Gains Tax with the amount subject to income tax being the deemed cost of the asset.
Cryptoasset traders • Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a ‘financial trade’ in itself. • If it is considered financial trading then Income Tax will take priority over Capital Gains Tax and will apply to profits (or losses) as it would be considered as a business. Detailed guidance is provided on this subject here - https://www.gov.uk/government/collections/ cryptoassets - and should be referred to if it’s considered that an individual is financially trading.
Other important considerations • Individuals are liable to pay Income Tax and National Insurance on cryptoassets which they receive from mining, transaction confirmations or airdrops, unless the person did not do anything in return for benefitting from the airdrop. • Cryptoassets will be property for the purposes of Inheritance Tax. • HMRC does not consider cryptoassets to be currency or money so they cannot be used to make a tax relievable contribution to a registered pension scheme. • HMRC does not consider the buying and selling of cryptoassets to be the same as gambling. In the case of a specific tax issue, it is recommended that professional advice is sought either from your usual professional adviser or from haysmacintyre’s Fintech experts at firstname.lastname@example.org. uTFT
How often are you speaking to your accountants and tax advisors? We’re here to help! haysmacintyre understand the challenges Fintech scale-ups are facing and offer our clients year round support. Your trusted partner through growth Structuring international expansion
Management accounts, budgeting and cashflow forecasting
Share incentive schemes
Tax breaks including (S)EIS and R&D tax credits
For further information visit www.haysmacintyre.com or email@example.com Feb 2019 I 29
AI & ROBOTICS THE FIN TECH TIMES
Driverless Finance and the non-linear journey SEI Wealth PlatformSM UK Solutions Director Helen Oxley describes her concept of ‘Driverless Finance’ to Zoya Malik, managing editor of TFT, and how AI will transform the wealth management industry as it seeks to answer transitional and multigenerational segment demands for growing and securing wealth in an evershifting digital world
Helen Oxley, UK Solutions Director, SEI Wealth PlatformSM
30 I Feb 2019
Zoya: What is “Driverless Finance?” Helen: The concept behind Driverless Finance is to create an environment whereby our finances “manage” themselves in the most efficient and costeffective way based on our individual requirements and the degree of support we allow the driverless entity to have. Driverless finance is enabled by the use of technology with a fundamental reliance on advanced AI to create a micro-personalised financial ecosystem. For the technophobes and privacy-conscious who insist on not having a digital footprint when it comes to managing their wealth, they will still be able to manage their own finances with or without a financial adviser. Think of it as the choice between sitting in the back of a driverless car and conceding complete control for your journey, and sitting in the driver’s seat and deciding when you want to drive or switch to a driverless option, for example when parking. We envisage a future where technology platforms like ourselves can bring together data from banks, existing policies, borrowing history, and even an individual’s social media data to allow individuals to create their own tailored profiles and financial plans. The most granular data needs to be accessed to make that profile as precise as possible and the use of it efficient and expeditious. For example, insurance companies are looking at fitness data, which can assess heart rate, activity levels, exercise, sleep and stress levels, to provide tailored solutions for clients. The same kind of unique risk profiles can be used across our finances. For instance, the same data that insurance companies use to predict longevity can also be used to calculate retirement drawdown requirements. So, effectively, we are seeing the convergence of financial services with information from these myriad sources of data to
create all-encompassing solutions. The entity that drives this data-rich solution could be a big bank or a big disruptor like Amazon, who already have the infrastructure to continually analyse and provide critical information. As a concept, Driverless Finance is attractive to a great number of people because it supports any life journey (i.e. attending school or university, a car purchase, mortgage application, marriage, divorce, retirement, illness, etc.) Life’s journeys are no longer linear; therefore, providers must evolve to better support the complex life choices the end client has to make. Technology must aid individuals to remove emotional decisions from the analysis and cater for continually optimised investment decisions, especially in view of the devolved nature of pension, retirement and succession/inheritance planning. As a result, and by way of example, millennials who do not necessarily prioritise going to university immediately after school can get a job and study later in life with the potential to borrow against their own savings/ investments to finance this, if that is the most optimal position at the time. This model will employ data science to help solve their financial journeys. This group is also less interested in money, more likely to take sabbaticals throughout their working lives and are ready to make significant changes, as and when they want. On the other hand, older people who want to embrace technology recognise that, generally, there are very few strategies that cater for the “unexpected” in later life, such as divorce, serious illness or even a longer working career. All of these eventualities can, of course, have huge financial implications. Zoya: Which segment of clients will Driverless Finance (DF) impact and how will you educate and change traditional notions of investing? Helen: Driverless Finance crosses all segments of clients, whether you are wealthy or less so. DF will help enhance value by reducing costs across the board and creating compound marginal gains by optimising tax wrappers, removing emotional decisions and procrastination – all of which help clients to achieve their goals. If we
all had the time, knowledge and wherewithal, we would be much more efficient with our finances. It is expected that most of us will live longer and will need more to fund our retirement. Therefore, the load on us to support our retirement will burden us for longer. Driverless Finance enables those with less money to manage their needs and goals efficiently, but also helps the more wealthy clients optimise their finances. It is likely that the more wealthy clients will operate a hybrid model that encompasses technology and human advice. As for the question of education, the point of driverless finance is that the technology removes the need for us all to understand complex financial products. Encouraging people to make use of what’s out there could come from the challenger banks, such as Monzo who deploys currency cards with preferential foreign exchange rates being embraced by groups of people, especially millennials. SEI is specifically looking to support its existing target market by deploying technological advancements to personalise client investments and optimise their tax positions. The focus is around our portfolio management solution, which will allow each consumer to have a personalised solution within a specific risk appetite. We have also created a Centre of Excellence in AI and a Centre of Excellence for blockchain. This should allow us to uniform operations, streamline our processes and create significant reductions to backoffice time and risk, (i.e. removing manual work will reduce risks and human errors.) Our clients will see improvements over execution lines and be able to service a greater number and range of their clients. We will partner with other fintech companies to enhance our services and contribute to the next generation of wealth platforms. Zoya: What are unique digital footprints in terms of an individual’s wealth? How will new tech calculate for this? Helen: The financial footprint really starts with bank account data and patterns that can be studied and classified at a granular level, so providers can analyse unique risk level. There is a lot of allocation around spending.
Challengers can see how and what a client has spent at different stores, and soon they will know what a consumer is buying, especially if reward cards are used. They will also look at an individual’s emotional footprint, such as ethical preferences. For example, you may be a vegan and not want to invest in companies or products experimenting on animals. We can know your investment preferences, vet that into a model portfolio and still manage the risk profile. In the past, managers were doing financial analysis on spreadsheets; now, we can run algorithms on an individual or a group, and as a result, interchange assets in the mix. Zoya: How will the advances in AI, robotics and blockchain advance the wealth management industry and how is SEI investing in these capabilities? Helen: We see this as the bifurcation between back-office and front-office functions. Blockchain will uniform processes in the back office across the industry, helping to reduce risk and cost. Alongside this exercise, we can bring the cost savings to the front office and adopt big data and AI to help provide our clients with a better service. At a more granular level, AI can be utilised to proactively support the end client. Our clients will be able to nudge their clients with that data in addition to the data they collect from other systems. The benefit will be more personalised relationships with clients en masse, and as the system matures and learns, the more support and efficiencies it can create for the end clients. Zoya: How are challenger organisations and fintechs competing with the wealth advisory industry? Helen: A lot of companies see the challengers and fintechs as competitors; but on average, an advisor can effectively only look after around 200 clients with full advice per year. If the industry can collaborate to bring about Driverless Finance, advisers can adopt this technology to provide a much broader and integrated service for their clients and cater for a much greater number of clients, thereby growing their businesses.
Zoya: How will digital technology democratise access to wealth products, advisory and funds for a larger audience? Helen: Simply put, by stripping out the costs. If we can facilitate micro-investing in a cost-efficient way by deploying blockchain, lowcost payment processing solutions and fully-automated digital identifiers, you can give many more people access to the same solutions available to the wealthy.
Life’s journeys are no longer linear; therefore, providers must evolve to better support the complex life choices the end client has to make.
EVENTS & BOOKS THE FIN TECH TIMES
6-7 February, 2019 European Blockchain Strategies Conference Sweden Join this 2-day conference edition of Blockchain Strategies event to dive deeper into the world of Hyperledger technology. Gain a competitive edge to your business with winning strategies shared by our keynote speakers. The conference will cover a wide range of blockchain hot issues with intensive focus on the adoption phases of the technology. managementevents.com
8 -14 February, 2019 London Blockchain Week London Blockchain Week are an early pioneer of Blockchain events and have always maintained a community feel. This year, they’re keeping the vision going while introducing more community content. Expect around 3000 participants to take part throughout the week. The main conference will be held at Grange Tower Bridge Hotel in the heart of London. As always, there will be evening receptions, workshops and a blockchain Hackathon. thefintechtimes.com/event/london-blockchain-week
8 - 14 February, 2019 2nd Annual Payments Forum, London The Center for Financial Professionals will host the 2ndAnnual Payments Forum. The two day summit will review the latest updates, opportunities, challenges and future outlook for payments across the financial sector. The summit aims to bring together industry professionals and peers to provide a platform for thought leadership, networking and idea sharing. www.fintechconnect.com
15 February, 2019 Finovate Europe, London Cutting-edge fintech demos, real-world applications provided by business leaders, hundreds of financial institutions passionate for change, all will be under one roof. New for 2019, a deep-dive Summit Day on AI and Open Banking, a new world-class venue, and an AI-powered meeting app to help you connect with the people who matter to you. finance.knect365.com/finovateeurope
14th March, 2019 TechNOVA AI, London Spoken to a chatbot before? Wondered how a machine learning algorithm can become a data analyst? Thought about how humans and robots work together? This event will highlight how these key themes are being explored and experienced across different industries including banking, insurance, investments, utilities, transport, retail, logistics and many more. marketforcelive.com/technova/events/artificial-intelligence
12-13 March, 2015 Counter Fraud in Insurance 2019, London Hear from industry leaders in a day packed full of exclusive fraud debates, including topics such as AI, data analytics, customer transparency, cross-industry collaboration and more. Deep dive into the current challenges facing counter fraud insurers. Explore holistic approaches to anti-fraud measures. Together with insurance fraud experts, learn how to strengthen internal anti-fraud operations as well as discuss the emerging threats that have arisen in the digital age.
13-14 March, 2019 TOKEN2049, Hong Kong TOKEN2049 organises the premier digital asset event in Asia where we explore in-depth, the growing crypto ecosystem. We are shining a light on the global developments of this new asset class, while taking a unique and widening perspective on the token industry and its opportunities.
Five Book’s To Get Ahead: Creativity By Jake Courage, co-founder of the edtech company 42courses.com and avid reader, author & car fanatic Often what separates the good from the great in business is the ability to be creative. The challenge is that most people don’t believe they can be. There are many myths surrounding creativity and this is the biggest. The reality is, creativity is like a muscle. The more you use it, the stronger it gets. Another misnomer is that for something to be really creative, it must come in a flash of inspiration. The truth is that any ‘eureka’ moment is, in fact, the result of a tried and tested process.
The good news is that this process can be learnt by anyone: there is no mystery surrounding where brilliant ideas come from. They are the result of combining many different concepts in the brain, marinating them in the subconscious; then finally they appear as if by magic in the shower. In a world increasingly reliant on artificial intelligence, creativity is one of humankind’s last remaining advantages. The following books will help you unleash your creative superpowers.
Creativity, Inc.: Overcoming the Unseen Forces That Stand in the Way of True Inspiration by Ed Catmull & Amy Wallace In 1986, Steve Jobs bought a little known animation studio. Ever the visionary, he was betting on the future of computer animated films. Together with Ed Catmull and John Lasseter, it was renamed Pixar Animation Studios. It eventually became responsible for some of the most successful animated movies of all time including Toy Story, Finding Nemo, and Monsters Inc. The company grew fast and, with it, came the challenge of keeping their creative spirit intact. Creativity is about challenging conventions and breaking rules and as organisations grow, this is often killed by the developing bureaucracy. Catmull was in charge of making the creative process run smoothly and allowing it to continue to flourish regardless of Pixar’s size. This book offers an enjoyable guide to any organisation that values the power of creativity and wants it to continue to thrive.
Hegarty on Creativity: There Are No Rules by John Hegarty Sir John Hegarty is one of the UK advertising industries most famous figures. He co-founded the advertising agency BBH in 1982. The company enjoyed huge success, launching the famous tagline for Audi ‘Vorsprung durch Technik’ along with many award winning campaigns including Levi’s, Lynx/Axe deodorant, Johnny Walker, and Xbox. Hegarty’s amusing and easy going nature comes through clearly in this terrific book. It’s fun to read, accessible and peppered with some great stories. It’s not heavily advertising focussed, so the lessons are relevant for anyone trying to get an edge in any industry.
The Art of Creative Thinking: 89 Ways to See Things Differently by Rod Judkins Judkins is a lecturer at Central St Martin’s, one of the world’s pre-eminent art schools. It’s alumni include Lucien Freud, Antony Gormley, Stella McCartney and Alexander McQueen. Packed full of stories that shed light on the processes of some of the greatest creative thinkers from the worlds of writing, music, architecture, painting and technology, Judkins shows us how each of us can learn from them. The Art of Creative Thinking contains a great deal of practical wisdom and some wonderful anecdotes of creative breakthroughs that led to the invention of frozen peas, some of Picasso’s masterpieces and The Simpsons.
Where Good Ideas Come From: The Natural History of Innovation by Steven Johnson Ever wondered where good ideas come from? Steven Johnson did and his excellent book attempts to answer this elusive question. Looking at examples as diverse as Darwin to Apple, he separates out the seven common factors that appear at moments of originality. These include the benefits of collaborating, looking at other industries for inspiration and the importance of timing. Johnson is a seasoned storyteller with ten other books to his name, all of which are well worth reading.
It’s Not How Good You Are, It’s How Good You Want To Be: The World’s Best-Selling Book by Paul Arden Paul Arden was a creative director at the famous advertising agency Saatchi & Saatchi. He’s recognised as the talent behind saving the fortunes of British Airways and seeing it become ‘The World’s Favourite Airline’ as well as producing highly creative campaigns for a wide range of brands. This easy-to-digest book is packed full of wit and wisdom. It’s a must read if you want to get ahead in life or business.
To see the full list of upcoming events in London and around the world, visit thefintechtimes.com/fintech-events/
Can’t wait for the books to arrive? Try a master class in Fintech, Behavioural Economics, Problem Solving, Sleep, Social Media and many more. Head to the website and click on a course title. The Fintech Times readers get 25% off with the code ‘FintechTimes25’. Have you enjoyed other books on AI? Please get in touch via firstname.lastname@example.org Feb 2019 I 31
YOU WOULDN’T BE
HERE THE FIN TECH TIMES
IF YOU WEREN’T
LOOKING FOR BETTER TECHNOLOGY
Maintaining multiple legacy systems only works for so long before the drain on profits and efficiency pulls your technology too far behind. Let us handle the investment in keeping tech on the cutting edge so you can focus on building business. Discover the power of integrating SM people, process and technology with the SEI Wealth Platform.
Learn more. www.seic.com/seiwealthplatformuk 020 3810 8000 This information is issued by SEI Investments (Europe) Limited, 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR which is authorised and regulated by the Financial Conduct Authority (FRN 191713). 32 I Feb 2019
Quantum computing could well prove to be the most seismic technological shift since the Turing machine, but it’s also so widely misunderstoo...
Published on Feb 1, 2019
Quantum computing could well prove to be the most seismic technological shift since the Turing machine, but it’s also so widely misunderstoo...