by Ulyana Shtybel, Co-founder and Vice President at HighCastle
The growing number of ICOs, in excess of 2000 per month, highlights the unsatiated demand for financial technology innovations and projects that offer new solutions for existing problems. This keen interest in the ICO model also demonstrates that project founders and investors are looking for simple, fast solutions that will allow them to increase their efficiency and profitability. The current Capital Markets structure does not provide a solution that would offer easily accessible liquidity to private companies.
Philip Millar, Executive Director at HighCastle explained:
“Given the ever changing landscape Governments of many countries are having to evaluate new fundraising ICO models. In some jurisdictions, new ICO regulation is being introduced, whilst others are seeking answers within the existing regulatory framework. The UK FCA generally take a technology neutral approach, considering the activities they facilitate and the firms carrying out these activities. In the UK, clear and robust legislation is already regulating crowdfunding, with identical requirements for fundraising in crypto and fiat currencies encompassing projects and investors when listed on platforms licensed for “arranging deals in investments”.
Not only does the UK clearly diversify fundraising types (donations, rewards-based platforms, equity crowdfunding), it also has a very attractive tax incentive model for investors, allowing them to invest up to 70% of their potential tax liabilities into British start-up projects. The same initiative can serve as an incentive to declare crypto assets and pay taxes with the understanding that at least 70% of this tax can be offset under the SEIS / EIS program.
The UK has a strong tradition in promoting the development of new companies under the auspices of the UK jurisdiction and the development of financial innovations. The FCA sandbox was implemented as a reliable method of monitoring and assessing the potential impact and benefits of new solutions for the market. The provision of a sandbox test environment for 3-5 months enabled the FinTech start-up community to verify its technology under the supervision and advisory oversight of the FCA – with an emphasis on the use of blockchain.
Developed in the UK, Open Banking Standard had the original intention of allowing people to switch easily between bank accounts and thus increase competitiveness within the banking sector. However, as part of this process, new tools have been developed that provide transaction analytics, portfolio management, payments, and other services in partnership with banks enhancing the operations of traditional banks. This potentially provides access to the banking system for those who are currently unable to access banking services.
Fintech start-ups which can provide complementary services or solve critical issues in banking operations will motivate and drive banks to develop banking APIs, this has already been done to a certain extent on a partnership basis, and with PSD2 this will become compulsory.
UK-based fintech startups pulled in $564 million of venture capital investment in the first six months of the year, more than half of which originated from outside Britain. Investment in UK fintech topped pre-Brexit levels in the first half of 2017. As highlighted during the Fintech Connect Live Conference, Simon Hardie (Managing Director of Eurasia Insights) commented: “Brexit won’t change London’s fintech position”.
The regulation of innovative finance in the UK remains favorable, and European investment regulatory requirements are unlikely to change with regards the freedom of movement of capital. Whilst the dynamic will no doubt shift as the final Brexit agreement between the UK and Europe takes shape, the overriding view is that financial services will continue to be front and center as a key element of the UK economy. There is no belief that this will materially change.
Regulation follows the demand of an emerging market, and the emerging market can only be achieved by the development of an infrastructure that supports the incubation process. There are currently over 205 incubators and 163 accelerators active in the UK, the top 50 of which are working specifically with the fintech industry (Founders factory, Fintech Innovation Lab).
Accelerators combine the best mentors from the London banking, financial markets and financial corporations who are looking to work with complementary fintech solutions as partners and initiators of these accelerating programs. However, not all financial institutions are following this trend and necessarily see the need for transformation.
Nevertheless, and unsurprisingly, there are participants from large banking groups that already support and promote the development of accelerated programs for companies that offer financial solutions, either stand alone or through integration with the bank itself through its API.
Barclays, BNP Paribas, Deutsche Bank and others of its peers have chosen for themselves this path of obtaining innovative technologies and solutions through partnerships with start-ups and, in some cases inevitably, their ultimate acquisition. This path for the digitalization of banking services appears to be a cheaper, more efficient and productive way to lead this development rather than through the internal development of such innovation.
Some more progressive banking groups are looking at the PSD2 requirements as a potential competitive advantage which could lead to expansion of their businesses and services. Others are adopting a more placid approach to these changes preferring to ignore the possibilities and only considering the threat. For small banks the more logical route would be to partner with FinTech start-ups through the development of their APIs
In the banking sector, there are 4 main types of open data:
Commercial banks data:
1. Personal clients’ data transmitted with the consent of the client according to PSD2, such data is used in client services to improve customer experience and attract new clients.
2. Statistics (big data) of banking institutions that can be used by partner start-up in depersonalized form to provide analytical recommendations to the bank and assist them in making decisions.
Central Banks data:
3. Datasets of the central bank – open statistical databases of the Central Bank on the banking system and individual banks, intended for startups to create macroeconomic analytical services
4. Big data of the central bank – which may be used for internal analytics of the Central Bank to create models, compliance checks etc.
The Bank of England Fintech Accelerator focuses on finding and partnering with start-ups that offer useful solutions based on the big data of the central bank. In the vision of the Bank of England, Fintech Accelerator blockchain technology is interesting, particularly from the creation of a blockchain-based KYC / AML database for checking counterparties and bank customers.
As Sasha Ivanov, CEO & Founder of Waves highlighted during the Bloomberg Hypeledger event in December 2017:
“The next year 2018 will be huge, like 1991 for the Internet, banks will have first fiat transfers on the blockchain. Banks are taking a lead to integrate with fintech startups and they will take a lead to accommodate blockchain technology into banking business”.
The Bunker’s Fintech Sandbox is another great partnership and technological opportunity for fintech startups. The Sandbox offers a secure, flexible, online space that entrepreneurs can use to develop their fintech product and ensure that it satisfies all the necessary compliance and security regulations.
The UK is a capital of Europe for fintech “unicorns” – companies that are valued at $1bn (£780m) or more. These have a combined valuation of $18.5bn, according to a report by the technology investment bank GP Bullhound. The UK has a significant focus on the development and relocation of prospective technological start-ups to carry out business in the UK. The UK Department of Trade promotes these opportunities around the world highlighting the programs that the UK has to encourage development start-ups to choose the UK – Tax Relief, SIES, EIS.
As a demonstration of their commitment to this area of financial innovation in 2018 the Chancellor of the Exchequer announced in his budget an action plan to unlock over £20 billion ($27 billion) for financial innovation over the next decade, focussed on the following:
- Establishing a new £2.5 billion ($3.3 billion) Investment Fund based on the British Business Bank. Over £7.5 billion of investment will be supported by co-investing with the private sector.
- Expanding the budget to £7 billion ($9 billion) of new investment in high-growth firms through Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).
- The British Business Bank will seed investing up to £500m ($670m) in three waves in a series of private sector fund of funds, unlocking a total of up to a total of £4 billion of investment in private capital.
- Supporting at least £1.5 billion of new investment by backing first-time and emerging fund managers through the British Business Bank’s established Enterprise Capital Fund programme.
- Expected to drive £1 billion of investment in UK venture capital by backing overseas investment through the Department for International Trade.
- Launching a £85m National Security Strategic Investment Fund to invest in advanced technologies in the national security sector.
Leon Saunders Calvert, Adviser at HighCastle, Global Head of M&A and Capital Raising Propositions, Thomson Reuters commented that:
“With London acting as a center point in global financial markets, it is a magnet for talent and skills which cut across both technical and financial expertise, a combination which is needed to drive innovation, efficiency, and disruption in financial services. Access to venture capital and other sources of funding also enables fintech start-ups with potential to have a reasonable chance of success. This is coupled with a comparatively advanced set of regulatory institutions, who are aware of the need for legislation as it pertains to ICO’s, cryptocurrency, use of blockchain capability and online financial marketplaces such as crowdfunding, in order to allow for market evolution but to manage it with care. Reproducing these building blocks elsewhere is not easy and it would seem unlikely in the very near future that London would lose its place as a leader of fintech investment and innovation.”
Crowdfunding legislation in favour of blockchain-based investment platforms
In the UK, the FCA’s financial regulator is particularly committed to FinTech start-ups using Blockchain technology and the provision of transparency in transactions and operations of the platform, while providing FCA access to relevant financial information that is subject to financial monitoring (technically it is implemented through the provision of a regulator with the blockchain node). That is why the FCA created their Sandbox and opened it for applications in June. The sandbox allows companies to test innovative products, services or business models in a live market environment while ensuring that there is adequate protection. The sandbox has supported 50 companies from 146 applications received over the first two cohorts.
Britain remains home to the leading and largest financial conferences, including Fintech Connect Live, which unites RegTech, InsureTech, BlochchainFinance and other panel streams, and discussions on a number of topics, including the unchangeable ledgers and speed-of-light settlement in cross-border payments and trading. Every day in London, there are exclusive events taking place, which are now focussing attention on the digitalization of assets and fiat currencies in the coming months of 2018.
This gives rise to the opportunity for innovative fintech companies to present game-changing solutions, such as SmartNotes from HighCastle, a blockchain-based financial tool that solves the critical issue for traditional online investors and crypto investors that being proper cross-border trading and diversification between private, public securities and tokenized assets.
HighCastle (https://highcastle.co), a blockchain-based investment marketplace, which is managed and operated by HighCastle Group LTD, the UK.
HighCastle – is the biggest investment marketplace and discovery tool for alternative investments. HighCastle already provides access to 6 242 projects with a combined 3.3 billion in value.
HighCastle provides professional investors with the opportunity to discover worldwide investment opportunities – private companies, funds, properties, bonds and a variety of other alternative investments. HighCastle`s API sources these opportunities from technology-enabled online platforms, investment firms and other trusted channels. HighCastle has developed revolutionary “SmartNote” solution, a blockchain-based financial instrument, which combines DLT with securities-backed notes, to empower private and public businesses to raise capital by issuing tradable tokenized securities.