11 minute read
The Dawn of the Fintech Era
One of the more interesting recent developments in the world of finance these past few years has been the proliferation of fintech applications, including cryptocurrencies and the rise of non-fungible tokens, or NFTs. While the use of fintech products like crypto vary widely, researchers at the Schulich School of Business took a deeper dive to understand the implications of a more fintech-aligned economy.
BITCOIN: THE NEW GOLD In March of 2021, cryptocurrency darling Bitcoin — dubbed “digital gold” by some — punched through the $60,000USD trade price level for the first time, leading some investment experts to label the sky-high rise as a speculative bubble.
It was around that time when two Schulich researchers — Irene Henriques and Perry Sadorsky — revisited some groundbreaking research they had conducted in 2018 that examined whether Bitcoin could replace gold, the traditional hedge against inflation, in an investment portfolio.
The two Schulich Professors of Sustainability and Economics found that their original findings still held true, and that the digital currency remained a good replacement for gold as a safe-haven asset in an investment portfolio. The authors concluded that “Bitcoin is a viable new alternative asset class that can profitably diversify risk.” Henriques and Sadorsky are just two of a growing number of Schulich faculty members carrying out research in the emerging field of fintech, the term coined to describe the integration of technology into financial services products in order to enhance their use and convenience or lower their cost. Examples of fintech include everything from mobile payments and digital wallets like Apple Pay to Robo-Advisers and crowdfunding through companies such as Kickstarter and GoFundMe.
But the biggest and best-known example of fintech is cryptocurrency, thanks in large part to Bitcoin and the slew of other crypto coins that have followed in its wake, including Dogecoin, touted by Elon Musk, and Litecoin, a peer-to-peer Internet currency that enables instant payments to anyone in the world.
During the past year, cryptocurrencies finally broke into the mainstream and shook up the investment world, gaining both traction and Bay Street credibility with the globe’s first Bitcoin exchange-traded fund launching on the Toronto Stock Exchange. The year was filled with news about traditional banks stating that they would hold and issue Bitcoin on behalf of their asset-management clients, while Mastercard made headlines when it said that it is planning on integrating Bitcoin and other cryptocurrencies into its payments and banking platforms.
“When the financial incumbents get interested in cryptocurrencies, they are clearly seeing it as a potential threat to their business,” says Henriques. “Banks and credit card companies are essentially intermediaries, and the purpose of blockchain, of which Bitcoin is an application, is essentially to eliminate intermediaries.”
IRENE HENRIQUES and PERRY SADORSKY, Schulich Professors of Sustainability and Economics, found that their original findings in 2018 still held true, and that the digital currency remained a good replacement for gold as a safe-haven asset in an investment portfolio.
EXPLORING THE WORLD OF CRYPTOCURRENCY DERIVATIVES
Melanie Cao, Professor of Finance and Director of Schulich’s Master of Finance Program, is tackling cryptocurrency from a completely different angle: trying to find a reliable way to value digital currency derivatives in order to boost trading.
She recently co-authored a study on the valuation of Bitcoin options, a type of derivative product that allows investors to speculate on or hedge against the volatility of an underlying asset — typically a stock, but in this instance a cryptocurrency.
Cao and co-author Batur Celik, a Schulich PhD candidate, delved into Bitcoin options because there didn’t exist what Cao calls “a rigorous valuation framework that models the behaviour of cryptocurrency prices and the values of derivatives on cryptocurrencies in a consistent and uniform fashion.” “The Bitcoin derivatives market has grown steadily since its inception, but the total trading volume relative to the total market cap is still small,” says Cao. “The lack of a widely accepted valuation model might be one of the reasons why. So, the main objective of our research paper was to propose a sensible valuation model for Bitcoin derivatives in the hope that a valuation framework could help stimulate more trading in Bitcoin derivatives.”
DECONSTRUCTING BLOCKCHAIN
The underlying technology that enables all of these cryptocurrency transactions is blockchain. Irene Henriques describes it this way: “Blockchain is to Bitcoin as the Internet is to email.” And one of the country’s leading academic experts in blockchain is Schulich’s Henry M. Kim, Associate Professor of Operations Management and Information Systems and Director and co-founder of the blockchain.lab at York University. Kim is currently the co-lead on an interdisciplinary York University-wide “Digital Currencies” research project involving academia, the Bank of Canada, and financial institutions to investigate Central Bank Digital Currencies (CBDCs), Bitcoins, and other digital currencies. He is the co-organizer of the Fields Institute Lecture Series on Blockchain, which has hosted world-renowned speakers, and the IEEE Conference on Blockchain and Cryptocurrencies.
“As part of this research, we’ve initiated a collaboration with the Bank of Canada to study Bitcoin adoption in Canada,” says Kim, who holds crypto assets in his own personal investment portfolio. “We’re also collaborating with Stats Canada to explore how CBDCs can mitigate underprivileged communities’ exclusion from traditional financial services, and we’re funding student and post-doctoral research into stablecoins — cryptocurrencies that aim to provide greater price stability and are backed by a reserve asset — as well as Bitcoin energy consumption and cryptocurrency pricing, among many other related topics.”
“The Bitcoin derivatives market has grown steadily since its inception, but the total trading volume relative to the total market cap is still small. The main objective of our research paper was to propose a sensible valuation model for Bitcoin derivatives in the hope that a valuation framework could help stimulate more trading in Bitcoin derivatives.”
MELANIE CAO
Professor of Finance and Director, Master of Finance Program
Kim has published several research papers this past year related to blockchain. One of his papers, “Business in the Front, Crypto in the Back: How to Be a Blockchain Startup in Fintech,” provided an in-depth analysis of the blockchain start-up Novera, a Bitcoin tracking fund that received over $1 million in venture capital — thanks in part to its motto of, “Business in the front, crypto in the back.” The motto encapsulates how the company managed the dichotomy of working in the highly regulated world of finance while pursuing innovative and disruptive blockchain-based products and platforms.
Other topics explored by Kim’s recent research include: examining how blockchains can be key enablers of residential energy trading systems (RETS) by allowing them to participate in virtualized energy markets with the potential to reduce peak demand; identifying and analyzing four different types of hybrid blockchain architectures — a key issue for enterprises looking to address issues related to blockchain interoperability; and how to set up cryptocurrency incentive mechanisms and operationalize governance.
Bank of Canada to study Bitcoin adoption in Canada. We’re also collaborating with Stats
HENRY M. KIM
Associate Professor of Operations Management and Information Systems
BORED APES AND CRYPTOPUNKS
Another blockchain-based product that has caught fire outside the cryptosphere are Non-Fungible Tokens, better known as NFTs — unique digital files stored on a blockchain that can be sold and traded and include everything from an illustration to a piece of music.
Most of the excitement surrounding NFTs today revolves around digital arts, sports icons, and pop art collectibles. Even Christie’s, the buttoned-down leader in high-end auctions, has gotten into the NFT market, as have superstar athletes like Wayne Gretzky, who has launched his own line of NFT collectibles.
“The last year saw tremendous growth in NFTs,” according to David Rice, Associate Professor of Marketing and Executive Director of the School’s Future of Marketing Institute, a Schulich think tank.
Rice, who is examining the phenomenon from a marketing perspective, notes that investors are spending millions of dollars annually on popular NFTs like the Bored Apes and CryptoPunks. The Bored Ape Yacht Club is a collection of 10,000 Bored Ape NFTs, which the company describes as “unique digital collectibles living on the Ethereum blockchain.”
“While many people think of NFTs as just super expensive pictures or JPEGs, marketers are rapidly recognizing the value of NFTs,” says Rice. “NFTs are built around community, and marketers are now creating NFT ‘Smart Contracts’ that are enhancing brand loyalty programs that grant owners access to exclusive experiences. We believe this trend will expand significantly in the next few years. Someday soon, ownership of your car, an airline ticket, or even your University credentials may be represented by an NFT.”
For more information on NFTs and the Future of Marketing, visit the Institute or follow their work on Twitter: @thefuturemktg.
David Rice, Associate Professor of Marketing, is examining the phenomenon from a marketing perspective.
ROBO-ADVISING: HIGH EFFICIENCY AND LOWER COSTS
Thanks to analytics and AI, RoboAdvising is providing algorithm-based asset recommendations and portfolio management that have high efficiency, lower costs and none of the built-in biases that come with human decisionmaking. In other words, the highly specialized software replaces the work traditionally performed by a wealth manager or investment advisor.
Several Schulich faculty members in the School’s Finance Area have leveraged their financial acumen to launch their own fintech advising companies. For example, Finance professor Pauline Shum Nolan is CEO and Co-founder of Wealthscope, a cloud-based fintech company that leverages data and finance expertise to provide investment and retirement analytics. Finance professor Moshe A. Milevsky, meanwhile, is a fintech entrepreneur with a number of US patents and computational innovations in the field of retirement income planning. The best-selling financial author founded a fintech startup focused on insurance products that was acquired by CANNEX Financial Exchanges, which enables financial institutions to automate the application processing and administration of bank and annuity products in Canada. Whether it’s automated RoboAdvisors or blockchain-based digital currencies, fintech is reshaping the finance industry and disrupting the competitive landscape. In the process, fintech is creating boundless opportunities for a new generation of entrepreneurs and producing a myriad of new tech-driven products and services that are adding greater convenience, ease, and wealth to our lives. Helping to illuminate and better understand the fledgling fintech industry — as well as chart new directions for moving forward — is the cutting-edge research coming from scholars such as those here at Schulich. *
Finance professor
PAULINE SHUM NOLAN
MOSHE A. MILEVSKY
Aiming to bridge the traditional world of accounting with the digital financial revolution taking place today, Schulich partnered with the Chartered Professional Accountants (CPA) of Ontario to create the CPA Ontario Centre in Digital Financial Information.
The Centre intends to develop digital financial expertise and disseminate research in the field of digital accounting. Dean Neu, Professor of Accounting at Schulich, is the Director of the Centre.
As an accounting scholar, Neu uses big data to study social accountability in his research and is committed to understanding not only how accounting is used in the public sphere but also how it can be used to facilitate social accountability. “The use of big data contributes to our understanding of the potential — and the limitations — of accounting in encouraging social accountability outcomes,” says Neu.
The Centre has held two webinars for accounting practitioners that looked at accounting through a digital lens. One of the webinars, “Using Data Analytics and Social Media to Measure Off-theBooks Intangible Assets,” featured Gregory Saxton, Associate Professor of Accounting at Schulich. Saxton’s research uses Big Data and data analytic techniques to analyze nonprofit organizations, corporate social responsibility, and the capital markets. Saxton and Neu teamed up to co-author a research paper that examined the trajectory of Twitter-based social accountability conversations and the potential for the emergence of a longer-term social accountability user network. As the basis of the research findings, the Schulich professors used machine learning and data analytics to code and analyze nearly 300,000 tweets associated with the release of The Panama Papers in 2016, which revealed the tax avoidance schemes employed by politicians, wealthy business people, and sports stars.
Saxton argues that, beyond building an understanding of the drivers of citizen accountability networks, the results also carry insights for business leaders, particularly those in large companies being “cancelled” by social accountability networks: “If your company is being targeted by these social media networks, you need to appreciate who these key network players are and what values are motivating them to mobilize against you.”
DEAN NEU
Professor of Accounting and Director of the CPA Ontario Centre in Digital Financial Information
