Entrepreneurs try flying the Security Tokens plane while the plane is still being built

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This post, the 3rd in a series of 4, is written by Sheldon Freedman, a fintech and funds lawyer at Hassans in Gibraltar. Click here for last week’s post in this series

Editors note: the question of jurisdiction is in many entrepreneurs’ minds as we read headlines such as “SEC Charges EtherDelta Founder Over ‘Unregistered Securities Exchange”. Entrepreneurs (and the incumbents thinking about how to disrupt before being disrupted) know that timing matters and that Security Tokens are coming. They also know that flying the Security Tokens plane while the plane is still being built is scary and dangerous.

A security token is issued digitally on the blockchain, backed by tangible assets such as shares in a company, real estate or rights to cash flows. Security tokens are digital assets subject to securities regulation, with compliance required in the issuer jurisdictions as well as in investor jurisdictions – from initial offering by the issuer to all secondary trades among investors.  The path to issuing a security token is a long, uncertain, innovative process with advisors, lawyers, exchanges, platforms and regulators, as issuers are breaking into new regulatory territory, applying conventional securities laws to revolutionary security tokens. The regulatory situation currently is confusing because the incipient security token ecosystem is evolving. Regulators who are trying to find their way lack experience, with no model example to look to.

Editors note: in law, precedence is everything. It is very tough to be guided by precedence when everything is changing as something totally new and disruptive such as Blockchain appears.

The task of securities regulators is well known to facilitate the orderly, productive functioning of securities markets and to protect investors with fairness practices, disclosure and qualification thresholds. However, with the advent of electronic financial systems, global finance has become comprehensively regulated by laws and procedures pertaining to anti-money laundering, sanctions and anti-terrorist funding.

Editors note: some might see regulation as designed to protect consumers/retail investors. That is what it says on the tin. Some might cynically say regulators have been captured by incumbents who seek protection from disruptive new entrants (i.e. that regulation is designed to prevent innovation). Sheldon points to the concern of regulators – anti-money laundering, sanctions and anti-terrorist funding.

To appreciate the sheer comprehensiveness of this regulation, one need only remember one example – the experience of banking organization HBSC, which this writer represented as counsel. Originally known in 1865 as “The Hongkong and Shanghai Bank”, HSBC Holdings plc is today the largest bank in Europe, a global roll-up of banks headquartered in London.  Operating out of 3,900 offices in 67 countries, HBSC is the world’s 17th-largest public company, with the Americas, Asia Pacific and Europe each representing approximately one-third of its business. HSBC is the largest bank in Hong Kong and prints most of Hong Kong’s local currency in its own name. HSBC has frequently been named the world’s most valuable banking brand by industry rankers.

In the early 2000’s, as HBSC and other major institutions embarked on sprees of acquisitions of valuable global banking businesses, compliance with the relatively new anti-money laundering laws was not primarily on the minds of acquirers, who were in fact acquiring regulatory liabilities with businesses they were acquiring.  In 2012 HSBC was the subject of anti-money laundering enforcement hearings in the United States Senate Permanent Subcommittee on Investigations. HBSC was investigated for deficiencies in its anti-money laundering practices, which gave HBSC a permanent hangover from years of acquisition partying. The Senate subcommittee found HSBC had transferred $7 billion in drug crime-related funds from its Mexican to its US subsidiary, was disregarding terrorist financing links and was circumventing U.S. safeguards to block transactions involving terrorists, drug lords and rogue regimes. In one instance, “two HSBC affiliates sent nearly 25,000 transactions involving $19.4 billion through HBSC’s U.S. affiliate accounts without disclosing the transactions’ links to Iran. The Justice Department charged, “HBSC officials repeatedly ignored internal warnings that its monitoring systems were inadequate”, exposing the U.S. financial system to “a wide array of money laundering, drug trafficking, and terrorist financing.” 

The Senate subcommittee also found HBSC provided financing and services to banks in Saudi Arabia and Bangladesh that were tied to terrorist organizations, while also clearing $290 million in “obviously suspicious travelers cheques” that benefitted Russians “who claimed to be in the used car business.”

Furthermore, the investigation showed how the bank’s regulator, the Office of the Comptroller of the Currency (OCC) failed to take a single enforcement action against HSBC despite numerous violations by the international bank.  Among them, failing to monitor $60 trillion in wire transfer and account activity, a backlog of 17,000 unreviewed account alerts regarding potentially suspicious activity, and a failure to conduct anti-money laundering due diligence before opening accounts for HSBC affiliates.

Editor’s note: incumbents, thinking about how to disrupt before being disrupted, are even more nervous than entrepreneurs about falling foul of regulators. Banks are licensed by governments. Having that license taken away is an existential threat.

Dozens of countries now adhere to their own anti-money laundering directives, and are additionally obligated by muscular international instruments and standards deploying sophisticated IT systems for anti-money laundering data collection and analysis, such as United Nations conventions against narcotic drug trafficking, organized crime and corruption, and FATF (the Financial Action Task Force on Money Laundering) formed by the G7 countries.

Editors note: in an era of increasing protectionism and nationalism, expect these regulators to get tougher. I will carbon date myself by saying I have an old passport, pre-Thatcher era, which has a stamp in it saying that I was approved by the Bank of England to take GBP50 out of the country. That story won’t sound so strange to our subscribers in China or India or other countries with exchange controls.

Security tokens and blockchain technology, with their opaque digital representations, high speed of transacting and decentralized record-keeping, present fierce challenges to anti-money laundering, anti-terrorist financing and economic sanctions efforts, demanding even higher standards of regulation than conventional securities. 

Due to the stigma that has attached to a stampede of low quality ICOs to date (most ICOs have been cryptocurrencies), there is an apparent emerging convention to term the issuance of security tokens “STOs” to distinguish issuances of security tokens from issuances of cryptocurrencies and utility tokens. 

Jurisdictions regulate STOs under their existing securities regimes, which are not sufficiently comprehensive or evolved to provide clarity to issuers, investors and regulators.  Innovation and improvisation are now the domain of intrepid issuers aiming to fashion a regulatory path with regulators, or to stealthily rely on existing exemptions.  Prof. Bhaskar Krishnamachari of the University of Southern California observes: “We are flying an airplane while we are still building it”. 

Editors note: entrepreneurs seeking to seize the day with early-mover advantage want to know whether the plane lacks seat-back entertainment (boring but safe) or lacks hydraulics (will crash unless pilot is really good and a bit lucky). The short answer is a) all startups have risk b) get good navigators to minimise that risk.

The US Securities and Exchange Commission (SEC), recognized global leader in securities regulation, has not offered anything regarding security tokens.  Security token issuers are attempting to effect conventional registrations with the SEC or to rely on Reg D exemptions and new crowdfunding provisions. It is not surprising the SEC has been slow to act.  A large organization with six independent divisions and 25 offices, sharing financial regulation with several other US agencies (CFTC, FINCEN, IRS, state regulators, etc), the SEC simply has not yet addressed security token offering regulation.  However, the SEC recently announced on October 18 the establishment of The FinHub, the SEC’s Strategic Hub for Innovation and Financial Technology tasked to address new distributed ledger-enabled securities. The FinHub replaces and builds on the work of several internal SEC working groups and is intended to serve as a resource for public engagement on the SEC’s FinTech-related issues and initiatives, including STOs. 

The FinHub will be staffed by top industry experts, led by Valerie A. Szczepanik, Senior Advisor for Digital Assets and Innovation and Associate Director in the SEC’s Division of Corporation Finance.

The current situation is confusing and the ecosystem itself is evolving. Jurisdictions are trying to find their way, while there is no example to look to.

A small number of STOs are taking place in USA, such as:

  • Indiegogo – shares in Colorado resort (Aspen Coin)
  • Spin – electric scooter offering 125 million for investors to share in revenue
  • Blackmoon Financial Group -security token which tracks its lending fund

In the EU, similar to USA, STO issuers are seeking registrations and relying on conventional exemptions.  In the EU, exemption may be available for offerings of less than 1mm Euro per year, offerings to less than 150 people per member state, and to qualified sophisticated investors.

A UK example of a current STO is The Elephant (tokenized private equity platform).

A small number of STO’s are taking place in light-touch regulatory jurisdictions, such as Switzerland and Singapore, but these are smaller markets and their rules are not widely accepted by major countries.  Examples of STOs being carried out in Switzerland:

  • SwissRealCoin – Switzerland’s first real estate coin
  • Nexo – fiat loans
  • Lykke – offering security tokens representing equity in Lykke (which is building a financial asset marketplace)

An STO example in Germany is Brille 24 (eyewear).

An STO example in Lithuania is security tokens representing equity in Desico (which is building a financial asset marketplace)

Surprisingly absent in security tokens is South Korea. Despite being innovators in so many areas of blockchain, South Korean regulators currently seem more focused cracking down on bad ICOs than enabling compliant STOs.

Editor’s note: the Etherum ICO in 2014 was the Napster moment for the Securities business. Napster was free and illegal. Then in 2017, entrepreneurs went for the ICO gold rush, using the Ethereum platform. Like with Napster, the regulators cracked down. But market demand finds a way to leverage disruptive technology. The STO market awaits something like iTunes or Spotify – cheap (not free) and legal. It hears the music and wants to buy it.

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Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.

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Africa’s M-Pesa’s landmark deal with Western Union and their global ambitions

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Africa’s poster child for financial inclusion, Safaricom’s M-Pesa, signed a landmark deal with Western Union earlier this week. The deal would give M-Pesa access to Western Union’s mighty distribution network and banks across 200 countries.

M-Pesa’s journey started in 2007 when Safaricom launched the product for its customers in Kenya. It has seen tremendous growth in some African countries, and not-so-impressive uptake from other parts of the continent. The customer base in Kenya alone is about 17 Million, and Tanzania and South Africa are markets where they have their foot print.

M-Pesa’s expansion beyond Kenya and Tanzania have not been without challenges. Their slow growth in South Africa especially was a disappointment, primarily because of the regulatory landscape, payment infrastructure inter-operability issues and customer awareness were seen as key issues.

That didn’t stop M-Pesa from going Global though. They have a presence in India, through a partnership deal with ICICI bank and also in some parts of Europe. However, they haven’t been able to replicate their African story elsewhere.

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Since the beginning of this year, M-Pesa seem to have revisited their strategy in going global. They have focused on making the most of their existing account holders in Kenya and Tanzania, and providing them financial services that go beyond borders.

“Essentially, how we will do it is look at mapping of customers we have today where we see customers transacting or making calls,”

– Paul Kavavu, Head of M-Pesa New Business Ventures

In order to do that, M-Pesa had to meet global regulatory standards around Anti-Money Laundering and Terrorism Financing. They seem to have done that well now, and are on a roll in signing partnerships with several global financial services organisations.

They had signed up partnerships with Moneygram and WorldRemit four years ago, but that deal largely focused on inward transactions to Africa. The recent deal with Western Union allows Kenyans to send money abroad from their mobile phone.

That opens up major opportunities for M-Pesa to expand globally through its partner channels. Safaricom charge a commission of Sh100 for remitting up to Sh5,000 to a Western Union agent and Sh500 for more than Sh35,000. While this is on the lower end of the pricing spectrum, it should give them the opportunity to grow.

M-Pesa signed a deal with Paypal earlier this year to exploit the market in India, where they also had tie ups with Vodafone. With global players looking at the Africa opportunity, M-Pesa should be able to script their growth story beyond African shores. In the last 6 months, M-Pesa revenues jumped 18.2% to Sh35.52 billion from Sh26.20 billion a year earlier.

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Its good to see African super stars going global, and their success beyond borders will be a case study in itself. However, I believe, the rest of Africa is more of an opportunity for M-Pesa. Their understanding of the continent, clubbed with recent improvements against regulatory standards, should give them a good chance to look at rest of Africa. There are many leap frog moments to be had in Africa, and M-Pesa is perhaps best positioned to make them happen.

 

Arunkumar Krishnakumar is a VC investor focusing on Inclusion, a writer and a podcast host.

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Insurtech Front Page Weekly CXO Briefing – Agitation

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The Theme last week was InsurTech action from China

The Theme this week is agitation. The  insurance industry is rattled. This week we bring you three stories that show customers, InsurTech ventures and  incumbents all agitated; but all for different reasons.

For more about the Front Page Weekly CXO Briefing, please click here.

For this week we bring you three stories illustrating the theme of Agitation.

 Story 1: Some life insurers unsure they can get results from digital

Extract, read more on Digital Insurance:

“Life insurers are still lagging other industries and even lines of insurance when it comes to leveraging data in the enterprise, including on the sales side, according to a report from RGAX.

Nearly a third said it is too expensive to introduce or expand digital marketing efforts, mostly because their companies aren’t equipped to recover the cost, RGAX found.”

The survey was conducted among small-to-mid size life insurers who hope to create a breakthrough with the help of digitalization. The cruel reality is that there is a high capital barrier for them to go through first.

Story 2: Customers Vote: State Farm or Lemonade?

Extract, read more on Insurance Thought Leadership:

“A recent social media dust-up between renters and homeowners insurance technology upstart Lemonade Insurance and old-line insurance industry stalwart State Farm motivated us to look at what their respective customers are saying about their experiences with the companies.

A little context: State Farm recently aired a television commercial poking fun at technology-focused entrants to the marketplace. Specifically, the commercial made fun of the use of bots (artificial intelligence) used to process claims.”

State Farm probably just wanted to stress the importance of real-person agent. But it got interpreted in another way. It could mark a significant moment of agitation between incumbents and startups.

Story 3: Marsh rolls out social unrest insurance coverage

Extract, read more on Life Insurance International:

“Marsh has introduced a standalone social unrest insurance plan that offers financial protection to businesses in event of losses.

The product, which is underwritten by Chaucer, provides coverage of up to $20m for denial of entry/leaving a property caused due to terrorism, protests, civil unrest and strikes.”

When it comes to agitations among regular people, it’s good to see we can seek insurance for help.

When the whole industry is on a fast track, some may be afraid of being left behind, some may worry that their efforts are made in vain. Thus agitation appears. It could be a good thing for customers if agitation induces more innovation, and more discounts.

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Zarc Gin is an analyst for Warp Speed Fintech, a Fintech, especially InsurTech-focused Venture Capital based in China.

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

 

There’s a new UK business banking kid on the block!

News hit the wires in the past 24 hours that the NatWest division of Royal Bank of Scotland was backing a new SME banking provider, Mettle.

The new bank will have to strengthen its resolve to crack the market, especially knowing two other providers have already launched in this space – Coconut and Tide.

Coconut’s features include a tax estimator, automatic expense management and helpful tips about what is and isn’t claimable from the taxman – always a minefield to navigate for new business owners.

Tide’s features include ‘the world’s fastest business loan’, with £15,000 in short term credit available in under 2 minutes, through a partnership with iwoca.

While Mettle’s full list of features aren’t known yet, it will follow the trend of its peers in offering in-app card control plus simple invoicing and bookkeeping features from the palm of your hand.

What’s interesting is these new banks aren’t necessarily only eating into the territory of high street retail banks – they’re also encroaching on cloud accounting software vendors like Xero, Wave and MYOB. Bringing these two worlds together is something the platforms have been a little slow to deploy, at the app level. For many freelancers and SMEs, being able to manage everything from you mobile is increasingly preferred.

The announcement of Mettle comes as RBS gets its £775 million ‘RBS Alternative Remedies Package’ in full swing. The fund was mandated part of the government’s bailout measures during the GFC.

Ironically (or maybe not so ironically!) one component of the fund is directed towards establishing an Incentivised Switching Scheme – to help RBS SME customers to switch to alternative banks or lenders. It’s not clear if Mettle would qualify as an alternative or not, given its backed by NatWest. Pretty clever if it does.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.

Machine Learning for RIA loyalty and customer engagement; by Morgan Stanley

 

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Wealth management and AI is a natural combination. Standalone Fintechs, innovation labs of incumbents and of financial services IT providers, are all somehow working on this (3 types). There is another war of talent going on this area too. All three types of Financial services providers are looking for Data scientists and competing with all other industries (commerce, life sciences, and manufacturing). The market is tagging experienced conventional quants as AI experts. Public companies (mainly banks) are competing for tech branding.

I realized that I have not written about Morgan Stanley as much as Goldman or JP Morgan. Of course, this is not deliberate. I am well aware of the heads on competition between which of course is accentuated from business media. Look at the headlines during this reporting season and you will undoubtedly get a sense of this short-term pressure that public markets and the quarterly cycles, inflict.

What caught my attention this time about Morgan Stanley, was the release of the new version of the so-called “Next Best Action” system to the 16,000 RIA of MS. This system has been around for several years but as a rule-based system suggesting investment options for advisors and their clients. A system that every single bank with a wealth management offering has and that we all as clients wonder which is “best” (as if that is the right question in the first place since none of these rule-based systems could be customized).

Morgan Stanley’s “Next Best Action” is using Machine Learning to support advisors in increasing engagement. The success of this tool will be measured by its effectiveness to enhance the dialogue with the client whether it is through in-person meetings, phone calls or pure digital channels.

Like me, most of us are sick and tired of emails with pdf attachments of several analysts covering Alibaba (that I care about accumulating) and not knowing how to make sense of that. All of us, are realizing that only because of KYC stringent requirements, advisors look to incorporate our life events and goals into an investment proposal. Morgan Stanley’s “Next Best Action” system is using ML to advise clients on what to consider based on life events. For example, a client had a child with a certain illness, the system could recommend the best local hospitals, schools, and financial strategies for dealing with the illness. The system monitors and learns from the reaction of the client to the “Recommendations” and based on the client responses, improves the quality of ideas each day.

In a way, the system thinks for the advisor on a daily basis and presents relevant information and continuously improved recommendations. The advisor has a choice and can send customized emails and texts to clients. The system in a few seconds finds the clients’ asset allocation, tax situation, preferences, and values.

The system is empowering the advisor and this is where the potential of widespread adaptation lies. Never forget that tech adoption is always more of a cultural issue rather than a technical one. In machine learning, the more the system is used the better the next best actions are.

If the community of the 16,000 Morgan Stanley advisors make the “Next Best Action” their ally, then MS will have an edge and a loyal army taking care of their clients.

This is not about disintermediation. ML can build loyalty for the intermediaries servicing clients and at the same time offer continuously better advice to end clients.

This not some version of robo-advisory focused on best on-boarding and low fee execution. It is enhancing a hybrid wealth management offering in a way that offers a cutting-edge (value) to those using Morgan Stanley as a platform provider (i.e. the advisors) and the end clients.

Morgan Stanley has established its tech center in Montreal – Montreal Technology Centre. It has grown to 1200 tech employees focused on innovation in low-latency and electronic trading, cloud engineering, cybersecurity, AI/machine learning, and end-user technologies.

Barron’s reports that it took MS about 6yrs to develop the “Next Best Action”. The main KPI is customer engagement.  The other five variables monitored are: cash flow, brokerage business volume, new advice clients, the level of banking business, and account attrition.

Morgan Stanley draws from million conversations to build its AI

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer.

Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.

Blockchain Weekly Front Page: Top VCs investing during crypto bear market

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Last week our theme was “Bridges across the Chasm to the Pragmatists.”

Our theme for this week is “Top VCs investing during crypto bear market.”

For more about the Front Page Weekly CXO Briefing, please click here.

A new study published last month, showed an increase in VC funding in cryptocurrency and blockchain projects. Almost $4 billion was raised during the first three quarters of 2018 by cryptocurrency and blockchain startups, a 280% increase compared to 2017.

Last year, ICOs raised $5.5 billion, but during 2018 we’ve been seeing a shift to private sales. Initial Coin Offerings have slowed down. In April 2018, we had 129 ICOs raising around $600M, down from 215 and $1.2B in December 2017. In terms of dollars, we see a similar downward trend, excluding Telegram‘s private sale and the year-long EOS ICO.

The cryptocurrency industry has realized that raising money from professional investors, like venture capital, hedge funds and other strategic investors can offer more advantages, in comparison to small retail investors. Also, ICOs have become an expensive proposition, with legal, marketing, and advisory expenses. Venture-funded private sales can cover expenses, before the ICO sells its token to raise cash for the company.

The potential impact of blockchain technology spans far beyond digital currency. With the security tokens heating up, traditional investors are acquiring tokens outright with pre-sales, SAFT contracts, and taking equity positions in blockchain companies before an upcoming ICO. Pre-sale rounds are held before public ICOs, offering discounted tokens to early investors.

While both traditional fundraising and ICOs have pros and cons, traditional investors have always been a great way to raise funds, as startups are put to the test to meet the standards and scale in order to go to the next level. While public ICOs have democratized how startups raise money, retail investors that participate in ICOs can be more demanding, seeking to make a quick buck on their investment.

Blockchain is attracting huge investment, with the big boys all over the place.  Household names like Andressen Horowitz, 500Startups, Future Perfect Ventures and angels like Tim Draper, Naval Ravikant, Roger Ver, and Barry Silbert have shown a continued and growing interest in funding blockchain projects. Some, like multi-billion dollar VC Andreessen Horowitz announced a new $300 million fund, specifically focused on digital assets like cryptocurrencies and blockchain startups.

In an interview to CNBC, Albert Wagner of Union Square Ventures said: “Investors are rationally pouring a lot of money into this sector, because I think people are seeing the winning blockchain here might be worth a trillion, or a couple of trillion dollars.”

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Earlier this month, CryptoKitties raised $15 million to build more blockchain cats. The investment was led by Venrock with Google’s GV and Samsung Next joining in.

Coinbase added another $300 million of investment at a valuation of over $8 billion, to accelerate the adoption of cryptocurrencies and digital assets. The round was led by Tiger Global Management, with Y Combinator Continuity, Wellington Management, Andreessen Horowitz, and Polychain also joining.

StarkWare, an Israel-based blockchain specialist which commercializes a zero-knowledge proof system, raised $30 million from high profile names within the cryptocurrency ecosystem, including Consensys, Coinbase Ventures, Intel Capital, Pantera, and Sequoia.

Most VC companies are looking for ways to get their feet wet. While traditional investors understand that cryptocurrency can be a rollercoaster ride, they also understand the opportunity cost of ignoring cryptocurrencies and blockchain is just too high. In a blog post last November, Russ Wilcox a partner at Pillar VC summed up well: “Today’s blockchain is like the Model T: an early, crude product that marks a profound change to come.”

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Ilias Louis Hatzis is the Founder & CEO at Mercato Blockchain Corporation AG. He writes the Blockchain Weekly Front Page each Monday.

We are about to enter the Cambrian explosion era of Security Token platforms

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This post is written by Sheldon Freedman, a fintech and funds lawyer at Hassans in Gibraltar. Security Tokens is a big, complex subject that requires legal, technical and commercial  knowledge. We found that rare combination in Sheldon Freedman, member of the Bars of New York, Ontario (Canada) and Israel, former FINRA-registered representative, and asked him to write a 4 part series, because Daily Fintech’s job is to explain complex subjects in an engaging way. This is the second post. Tune in (subscribe by email) to get the the rest of the series over the next 2 weeks.

Editors note: we are pleased we asked a lawyer to write these posts.  The technology is already here. The need has been here for a while (entrepreneurs want an easier way to raise early stage capital). With the crazy ICO market of 2017, the pendulum swung too far in the opposite direction, making it a lousy deal for investors and in many cases an illegal transaction. Maybe with Security Tokens we get the balance about right – quick easy capital raising that is legal and with adequate protections for investors. What is needed to make that happen is a) easier compliance with securities regulations b) an ecosystem of service providers who will help investors to separate the wheat from the chaff (find the quality offerings). That is  more about law and finance than technology, although the tech platform that empowers those securities lawyers and finance engineers will likely become dominant.

Bitcoin is an electronic currency built on blockchain, secured by cryptography.  Ethereum is an open-source, public, decentralized platform on the blockchain supporting the deployment of centralized applications.   Ethereum was created in 2015 by former Bitcoin Magazine co-founder, Vitalik Buterin, and Gavin Wood. 

Ethereum was built as a decentralized platform for the sole purpose to construct an electronic currency, which anyone could use.  Early adopters suddenly discovered by late 2016 that tokens could be created on Ethereum.  Now in 2018, a revolution is underway to tokenize all types of the trillions of dollars of assets, from pure financial assets (equity, debt, derivatives) to real estate to paintings to intangibles like copyrights by creating and exchanging tokens having the characteristics of securities.  The revolution is being waged by finance engineers, securities lawyers and blockchain technologists.

Ethereum innovated “smart contracts”.  Smart contracts are computer protocols that define the terms governing contracts and automatically enforce contracts in effecting transactions over the blockchain, creating certainty, transparency, decentralization and disintermediation of facilitators like legal advisors, notaries, escrow agents. “Decentralized applications” now provide for payment, operational crowdfunding platforms, gambling, and identity verification systems.  The “Ethereum Virtual Machine” is a runtime environment for smart contracts – a giant environment a giant environment for building bigger and more powerful smart contracts – allowing any user or developer to create applications.

Editors note: there are other platforms for running Smart Contracts but it is fair to say that Ethereum is now the standard against which competing platforms are judged.

Once security tokens are created or issued, the main principle is ownership: the purchase and exchange.  Thus the era of security tokens spawned by technological innovation is largely the domain of financial actors, and, accordingly, subject to the regulation of financial services, the most stringently regulated industry in all countries. Many industry experts estimate the development of tokenized securities now commencing is an elemental mix of 20% technology innovation and 80% regulatory compliance innovation.      

Todays’ security token issuing platforms primarily run on Ethereum, such as Polymath, providing end-to-end processing including management of the security tokens.  The Issuance and exchange of securities tokens can be effected by anyone utilizing existing platforms.   The adoption and proliferation of security token issuance and exchange are currently delayed by the enormously complex barrier of developing efficient securities compliance solutions.  In the weeks and months ahead, many state-of-the-art platforms are scheduled to launch which will provide vastly improved functional integration and automated, high-level compliance. 

Editors Note: the final post in this 4 part series will focus on where the puck is headed.

We have lived many decades under strict regulation of consumer banking, where banks effectively had a monopoly on centralized consumer finance from money transfer to savings accounts to credit cards and loans.  Disruptors such as Revolut and TransferWise have innovated with advanced, integrated technology and complex compliance mechanisms to breach barriers enabling the displacement of banks from consumer finance for the first time. Though barriers in the securities industries are much higher, they will likely be overcome by the innovation of technologists and financial service crowdfunders tokenizing securities.  Fuelled by the enormous scale of injected capital generated by crypto currency, these innovators will leap over traditional securities industry players, with Main Street disrupting Wall Street.

Editors Note: news about new securities token platforms will be emerging soon. The Daily Fintech model is to offer insight on public domain information, so we will wait until they are announced. This post gives you the context to understand these upcoming announcements.

 

Next week’s post will look at various jurisdiction regulatory regimes that govern the issuance and exchange of security tokens. Stay tuned

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Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.

Watch this space. Subscribe to Daily Fintech to get the most signal with the least noise

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Finastra’s Open Banking Readiness Index – DBS takes Asia top spot

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Finastra recently released their open banking readiness index along with a report  on how banks in Asia have performed against certain criteria. Its not surprising that of the five dimensions that Finastra has set for open banking readiness assessement, DBS bank have topped two. DBS, in my view, have been one of the more innovative banks.

The assessment was done across Banks that together constituted 60% of assets in Asia, so its a fairly good indicator of where banks are.

Now a deeper dive into the index and the criteria:

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APIs are the future, and we have heard that time and time again. The key pillars of the frame work are focused around how banks have prepared to

  • Adopt APIs
  • Integrate with Fintechs and other third parties
  • Manage and mine data internally
  • Monetise data
  • Be innovative

These are fairly broad criteria to assess the readiness across various aspects of producing, managing and sharing data around the value chain. The coverage, in my view, is comprehensive. And purely based on the framework used, it can clearly be replicated across Europe and other parts of the world, to see who the global leaders in open banking are.

On the breadth of coverage, I would have liked better insights on standardisation across APIs. Open banking is great, but when there are some standards that banks can agree on amongst themselves, and conform to them, that would help downstream firms and systems consuming their data.

However, the depth of the assessment is really what could be invaluable. Each of these pillars have left some points unanswered. Let me go through some points I would have liked to have better clarity on.

While adoption of APIs internally and externally is a key metric, I believe awareness around open banking is pretty low amongst the consumers. Shouldn’t readiness factor-in the efforts that banks have put in to raise awareness amongst consumers?

The following are the points that API adoption assessment covers. While this report is all about the readiness of banks for open banking, adoption should lead to something meaningful. And that would be customer uptake.

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Also, establishing partnerships with Fintechs and integrating are broadly covered. But what we define by partnerships need to be clarified.

Many startups that are approved for open banking have access to Banks’ APIs. But are still miles away from doing anything meaningful with it. Again, the end customer is forgotten here.

Banks have more to do than follow up with these downstream businesses and ensure end customers are benefited. But regulatory framework that approved these Fintechs to use Banks APIs, should have taken some kind of customer metric as a criteria- to me that is readiness where the entire value chain is considered.

One argument is that, it is a pure bank readiness report, and has nothing to do with customers. But there are times where the report talks about integration with the developer community, apps builders, and also with third party service providers, so why not customer uptake too?

For example, the number of live third party applications that actively use a bank’s APIs could have been a good metric.

Another point on the data readiness of banks, where data security and governance are key criteria. In all my years of experience with systems in banks, I know the quality of data is generally very poor. I have worked in environments where a highly critical report has 150,000 manual adjustments in its underlying data. And this is so common place – at least used to be, not long ago.

If banks automate data of poor quality using APIs, and claim readiness over data security and API infrastructure, that would be like lipstick on a pig.

There is no point in securing, sharing or making business decisions on low quality data. This problem is generally amplified in parts of a bank where there are lingering legacy systems. While accuracy of data is taken into consideration, when banks are tested for data readiness, data quality will need to be the number 1 criteria.

It almost feels like the framework has allowed the most topical data problem (information security) as the number one criteria – to me, it is not.

Data monetization models are well thought through. However, how some of those models would help create better (cheaper) products for the end consumer is something banks should start thinking about. And more importantly, how those monetization models will be communicated to the customers in a transparent fashion, is pretty critical in a #facebookIsDead era.

In summary, the report does a great job of providing a view of how open banking can drive innovation within banks. While I have pointed out some minor areas across the framework used, my biggest criticism is that, the customer seems to have been forgotten even in this report – yet again.

Readiness can be about infrastructure readiness, process readiness, or business model readiness. But the so-what needs to be the final readiness score – it has to be about how soon it will benefit customers.


Arunkumar Krishnakumar is a VC investor focusing on Inclusion, a writer and a podcast host.

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Insurtech action from China

Actions around China

The Theme last week was Tech giants are serious about insurance

The Theme this week is Insurtech action from China. The Chinese market is a fast growing one for InsurTech. It can be enlightening to see, compare and learn from the Chinese market. We look at 3 news stories illustrating this theme. These stories illustrate actions made by China, from China and for China.

For more about the Front Page Weekly CXO Briefing, please click here.

For this week we bring you three stories illustrating the theme of Insurtech from China.

Story 1: Insurtech is the future infrastructure of insurance, says ZhongAn CEO

Extract, read more on Reinsurance News:

“A joint report by the recently-launched Fintech Research Institute of China’s largest online-only insurer ZhongAn and the financial advisory firm KPMG claims insurtech will enable a more efficient, compatible, balanced and humane insurance ecosystem.”

This is more like a perspective by China (Zhong An), but it is a perspective based on actions in motion. Zhong An has been building its multi-industry ecosystems including auto service, consumption, financing etc. since its founding. Ecosystem is all about partnerships and collaborations, and InsurTech is the core of those partnerships.

Story 2: China’s Attention to Israel Smart Vehicle Market Creates Insurtech Opportunities

Extract, read more on The Times of Israel:

“The Chinese auto industry is yearning for smart-car technologies. In December 2017, the National Development and Reform Commission, China’s chief economic planning agency, revealed a three-year plan highlighting the development of the smart cars industry as a national priority. Without a doubt, by 2020 one in every two new cars sold in China, the world’s leading car market, will be an intelligent one.

Despite popular hype pertaining to autonomous cars, most people don’t understand how highly dependent these cars are on a sense of place. This means that if the map the autonomous car is relying on to navigate is wrong, then the autonomous vehicle is bound to make mistakes as well. French mega insurer AXA for example, is one of the many car insurers tackling this issue.”

The causality chain is a little long here. In short, the promotion on electric cars in China can create new business opportunities for auto insurance and InsurTech can be a big part of it. This is actions from China.

Story 3: Munich Re strikes Insurtech partnership with Plug and Play in China

Extract, read more on The Intelligent Insurer:

“Munich Re has partnered with Plug and Play, a Silicon Valley-based accelerator and corporate innovation platform, to collaborate with emerging Insurtech startups in China.”

Actions for China. Munich Re has been cultivating in Chinese market for a long time. Plug and Play just started its InsurTech program in China this year. They are tapping into Chinese InsurTech from all aspects from accelerating startups, sharing innovation with incumbents etc.

As a market, China has great potential both in individual business and corporate business. As an innovation base, Chinese InsurTech is equipped with mobile Internet features. Either way, it is an attractive destination for global insurance industry.

Zarc Gin is an analyst for Warp Speed Fintech, a Fintech, especially InsurTech-focused Venture Capital based in China.

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Is cryptoeconomics the key to better DD on ‘hard basket’ investments?

The more I think about due diligence, the more flawed I realise it is.

Not because the act of due diligence itself is a bad idea – it’s not – but more that the process and steps that are taken to achieve it are so outdated and inefficient.

As an example, let’s consider a pension fund, who decides to invest in a mid-size businesses in the airport space. They might choose to do this as an experiment, or because they are being encouraged from a political/social perspective to deploy more capital into the business sector, as banks retreat. Rather than hand out the cash to private equity, this one they do direct.

In this instance, there are likely to be a few consistent factors.

  • It is highly likely the pension fund has never invested in the space, therefore has no internal due diligence experience
  • We can imagine the ticket size will be relatively small, compared to traditional investments
  • The cost to upskill the internal investment team, or hire consultants will impact ROI more than traditional listed equity investments, harming the deal optics

If we assume the project was run well, then once due diligence is completed, some very good and useful intellectual capital will now exist inside the fund. However given it’s not every day an airport goes out looking for investment, that intellectual capital is likely to sit unused, gathering dust.

Not terribly productive.

But surely there is another way? I mean, if AirBnB can help us rent out spare rooms, is there something similar that could help a fund ‘rent’ out its knowledge?

And if we take this one step further, who’s to say the investment team needed the knowledge at all in the first place – could they have simply rented it from others to start off with?

Investing in businesses is often deemed a due diligence problem. It’s getting worse, as the rate at which new business models are emerging is increasing, and digital complexity is compounding. The gap between traditional bankers and even fintech lenders, private equity firms and VCs will continue to grow – so long as we keep the same in-house model of due diligence. No man is an island. Or more aptly, no fund.

I think there may be a solution, powered by the crowd and underpinned by cryptoeconomics. There is a powerful collective wisdom in the market, that simply needs to be structured in a way that aligns incentives correctly throughout the entire process.

For those more complex, finicky deals, that just fall into the ‘too hard basket’, there must be a better way forward.

I will be in London from the 26th of November to 29th. If you would like to connect drop me a line on Twitter, or connect with me on Linkedin!

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.