Around the world, cryptocurrencies are coming under regulatory pressure, but some exciting developments have come out of the UK in the past few weeks.
The British Treasury announced that it intends to bring stablecoins under the Financial Conduct Authority's (the UK regulator) remit if used for payments as part of a broader plan to make the UK a hub for digital payment companies.
In January of last year, the British Treasury consulted on whether and how it should regulate crypto assets. Given that stablecoins have a stable value linked to traditional currencies or assets like gold, the Treasury's view that they have the potential to develop into more mainstream usage; therefore, regulating stablecoins would ensure they are used safely by the public.
The FCA has come under widespread criticism in recent months for stifling the innovation of FinTech – an industry in which the UK supposedly wants to be a leader. But as crypto is quickly becoming more widely adopted, delays in implementing regulation is causing the UK to fall behind on this ambition. For example, in the US, stablecoins are already being used to facilitate trading, lending, or borrowing other digital assets. As a result, they are moving to craft regulations to support faster, more efficient, and more inclusive payment options.
The move to regulate the industry comes at a crucial time for the UK economy. Rishi Sunak, Chancellor of the Exchequer, said in his statement:
"We want to see the [cryptocurrency] businesses of tomorrow – and the jobs they create – here in the UK, and by regulating effectively, we can give them the confidence they need to think and invest long-term."
What is the proposed regulation?
While no official regulation has been published yet, the British Treasury published a response to consolidation and called for evidence, which considers the following:
- An amended e-money framework that can deliver a consistent framework to regulate stablecoin issuance and the provision of wallets and custody services.
- An amendment to Part 5 of the Banking Act 2009 to include stablecoin activities to apply in cases where the "the risks posed have the potential to be systemic, and so the threshold for the Bank of England supervision is met".
- An amendment to the Financial Services (Banking Reform) Act will mean stablecoin-based payment systems will be subject to appropriate competition regulation by the Payment Systems Regulator.
What does this mean for crypto in the UK?
Establishing a regulatory environment for stablecoins used as payment allows market entry to support innovation while ensuring regulatory standards apply for the customer's benefit, market integrity, and stability. Ultimately, the regulation intends to safeguard and protect the customer, and organisational and reporting requirements will herald the need for self-regulation.
For the UK's FinTech sector, this is a welcome move and will give the UK a fighting chance to uphold its approach to financial services and future technology innovation by ensuring effective competition continues. It also marks a more serious consideration of the crypto industry, with more announcements coming in the forthcoming months.
That said, the proposed regulation comes with a disadvantage to financial promotions. Firms designated as regulated stablecoin service providers will not be able to act as Section 21 approvers of financial promotions. These businesses will not be able to promote investment opportunities to potential investors who aren't certified as high net worth individuals or sophisticated investors.
What does the future hold?
This announcement is a pivotal and exciting moment for the future of crypto-asset payments in the UK, and regulation is a crucial enabling factor for the industry.
The UK will be able to attract and retain top FinTech innovation and support its plan of becoming a global hub for digital payments by attracting talent from across the globe. The government will be paid dividends in driving investment in UK FinTech and adding to the value of the exchequer.
About Joaquin Ayuso de Paúl
Joaquín Ayuso de Paúl serves as Head of Nium Crypto. Joaquin’s work focuses on expanding the business into the crypto, investment and lending sectors. He is a firm believer in leveraging the core of Nium’s current offerings to provide new avenues for users. His passions also drive him to explore the NFT, web3 and blockchain spaces.
Prior to Nium, Joaquin co-founded and served as CTO of Tuenti, a private social network often referred to as the “Spanish Facebook”. He also founded Kuapay, which developed a secure, mobile, payment method platform in Chile and Colombia. He also recently co-founded Rayo, a digital bank for immigrants in the US, which launched in 2021.
Keith Bedell-Pearce, Chairman of 4D Data Centres, here looks at what’s hot in savings and investment FinTech and makes six forecasts for the future.
Financial technology, an ugly duckling with modest beginnings in the back offices of fund management and insurance companies, has now emerged as the black swan called FinTech.
Covering everything financial from pay-as-you-drive insurance (and, scarier, pay-how-you-drive) to crypto-currencies, FinTech is now one of the hottest properties for VCs from Silicon Valley to Shoreditch’s Tech City.
FinTech is not just a single disruptive technology but an entire range of digital processes that are set to transform the historically staid world of financial services.
There are three aspects of FinTech that promise to be disruptive game changers in the UK savings and investment market. Here’s an overview of what that market looks like:
Because of regulation that somewhat ironically came in on the heels of the deregulation of UK financial markets known as Big Bang 30 years ago, there are now high barriers to entry into the UK savings and investment market in terms of increasingly tough and rigorous regulation of the conduct of financial services businesses. This is coupled with equally rigorous capital adequacy requirements.
Big Bang brought about enormous change in how business in the City was done but in an area where God has always been on the side of the big battalions, after some innovation in the late 80s and early 90s, in the last 20 years there has been little real innovation. Product-driven marketing is still the rule in practice despite every provider protesting that the customer comes first. All this is now going to change.
Big players collaborate with FinTech start-ups
The first driver for change is the realisation of incumbent players that almost everything in their store cupboards is past its sell-by date. The nearly complete adoption of digital technology by everyone who has money to save and invest (and lots of people who don't but would like to) means that if the incumbents don't adopt a new approach, they will lose their share of the most profitable sector of the UK economy. The next generation of savers, today’s Millennials, don't have the money to save but when they do, they will expect to manage their money on a hand-held device and will naturally gravitate to the providers who will give them the app to do this.
Although they wouldn’t admit it publicly, many of the big players in the savings and investment market now recognise that they have neither the in-house culture nor the expertise to drive the revolution in the way they run their businesses required to continue to be a market leader in the FinTech digital age.
The answer for the more innovative of these big players is to enter into collaborative arrangements with FinTech start-ups and specialist FinTech consultancies that do have the vision of innovative, low operational cost, customer-focused offerings. Examples are BNP Paribas linking its own Luxembourg-based incubator with ecosystem players Partech Shaker and Paris-based NUMA. Deutsche Bank has a partnership with startupbootcamp FinTech in New York. This is a trend with growing momentum. There seems to be more start-up link-ups and partnerships involving product providers in continental Europe and the US than here in the UK even though many of the start-ups and specialist FinTech consultancies involved are based in the UK.
For the start-up, such partnerships offer a slice of the main action which would be out of reach because of a lack of capital and regulatory know-how.
Blockchain morphs into DLT
The second major driver for change is the almost universal attempts of the world's major banks to harness the huge potential of blockchain technology. Except they no longer call it “blockchain” (presumably because of its association with crypto-currencies) but the much more respectable name of “Distributed Ledger Technology” or “DLT”. Such is the interest in the revolutionary potential of DLT, a global consortium of major banks has been formed in what is called the R3 DLT initiative.
Leaving on one side bitcoin, the original key application for DLT in FinTech was seen as so-called “smart contracts” focused on the front end of transactions in securities markets but it soon became clear that DLT could have relevance to the entire delivery chain of both conventional banking and the savings and investment market. For example, slow and inefficient back office functionality could be replaced by DLT- based processes resulting in major reductions in cost. This applies to fund management businesses as well as banks.
The defining characteristic of DLT is its inherent security of its self-reconciling, immutable distributed databases which also counters targeted cyberattacks and fraud on centralised digital ledgers. Another plus point is it operates in near-real time.
As well as the R3 DLT initiative, most of the major banks in the developed economies have major DLT projects. Some are now moving from the proof of concept phase to practical implementation. Examples are Calastone, a global funds transaction network, with its first phase proof of concept completed in June 2017 and BBVA who claims “first real life implementation” of Ripple’s DLT system.
DLT has the potential to bring about a revolution in the savings and investment market and many other areas of commercial activity as significant as the invention of the world wide web.
Open API the engine of change
The third FinTech driver for change is the Linux-based open Application Programming Interface, generally known as “Open API”, which enables third-party access to banks’ customer data. For the banks, this could be an opportunity to monetise their customer data although there is resistance from some banks, particularly in the US, on the grounds of security and confidentiality.
The technology will enable potential customers to access third-party services within the banking ecosystem. There would also be an opportunity for banks to provide white label offerings to third-party product providers and distributors to access the banks’ customer data.
A UK Open Banking Working Group has been created to facilitate open API. The Treasury is apparently supportive of this innovation and said it would legislate “if necessary”. The working group states “Open Banking will mean reliable, personalised financial advice, tailored to your particular circumstances, delivered securely and confidentially”. At present, giving advice with these characteristics involves long (and therefore costly) fact-finds and this process in practice is a major barrier in the UK to the seamless delivery of online savings, investment and pensions products. If Open Banking delivers what it promises, the effect on both product design and delivery will be as far reaching as the impact of Big Bang on the City 30 years ago.
These are already some implemented examples of open API such as (perhaps not surprisingly) Silicon Valley Bank’s open banking platform “Banking as a Service” and the German online bank, Fidor. There are a lot more known to be in the pipeline and for once, this a technology where Europe might have the edge on the US.
Six forecasts for the future
Our forecasts about the impact of FinTech on the savings and investment market are:
- Core savings products for asset accumulation and income streaming will continue to evolve slowly until Open ABI goes mainstream.
- Platforms will continue to play key role in selection of products and client retention with DLT progressively, enhancing speed and security.
- Advice is key bottleneck in digital delivery; chatbots and robo-advice is likely to appeal to Millennials but they are not yet in the savings groove. Once they are in the groove, the killer app will be on a hand-held device.
- Technological innovation with most front-end impact will be Open ABI but full implementation is probably at least 5 years away.
- Open ABI once implemented will be a major catalyst for savings’ product innovation.
- DLT will have very significant impact on back office costs, security and customer experience and be at a bank or fund manager near to you soon.
One final bit of advice, for those who are involved in savings and investments products, marketing or distribution, now is the time to start networking with the FinTech geeks. They hold the key to the future of this fundamentally important part of the UK economy.
Dr Stavros Siokos is the Managing Partner of Astarte Capital Partners - a specialist alternative co-investment platform with a focus on the real assets space. The company, whose team is spread between London, NYC, Zurich and Sydney, identifies and partners with experienced real asset operators, establishing institutional standard specialist asset management businesses in niche real asset strategies that target private equity-type returns. Astarte’s team combines their experience of building multi-billion niche asset management businesses with the know-how of established real asset operators with strong track record in the specific sector. Astarte’s target is full alignment of interests and transparency with only success-based fees. Here Dr Siokos talked to Finance Monthly about the future of international finance and Astarte’s beginnings, achievements and goals for the future.
How did your career path lead you to your current role as a Managing Partner at Astarte Capital Partners?
I was originally educated as a Computer engineer. My first two degrees were pure Computer Engineering while my Ph.D. from the University of Massachusetts focused more on Financial Engineering. Structured approach to the solution of any problem was the best skill that my education gave me. My non-academic career started as a quantitative analyst at Salomon Brothers (later Citigroup) in the mid-nineties. I quickly became managing director, responsible for the global portfolio trading strategies and all pension fund solutions. This period of my career was the best education that I ever received.
My career on the sell side lasted for almost fifteen years. Before the crisis, I decided to move to the buy side, recognizing that the sell side was ready to move into a different stage where entrepreneurship was to be challenged. Later on, I became the CEO of a small boutique asset management firm where, together with the team, we managed to build innovative alternative investment platforms and grow the assets exponentially – from a few hundred million to several billion within a few years. All the above was achieved by raising long term capital from global institutional investors. In early 2015, we decided to create a new platform, based on an innovative and disruptive model. We managed to establish this ambitious plan within a few months.
As a co-founder of Astarte, how did the idea about the company come about?
As an entrepreneur, I am constantly trying to expand my horizons. Our initial goal with Astarte was to create something that was fairer to the investors and will have a significant impact in the world of investing. We were eager to bring together the best professionals under an umbrella of full alignment and transparency. For a number of months, we worked on identifying the optimal team and the fairest structure for co-investments, and the outcome of this hard work was Astarte.
What have been the company’s biggest achievements in the past two years?
For a newly established firm, no matter how experienced the team is, the first couple of years are very challenging. I’d say that our first big achievement is managing to stay on track, since building an innovative and disruptive business in a highly competitive environment is a challenge. However, we managed to launch the firm by simultaneously attracting top talent, long term capital and excellent deal flow, which I think are the key components of any asset management business. Currently, I’m delighted to say that we are in a position where all the important ingredients are in place.
What is your vision for the future of Astarte? What do you hope to accomplish in the next three years?
Our aim, although quite ambitious, is to establish Astarte as one of the leading co-investment platforms for niche real assets. We hope to see private capital working smarter and fairer in the future, with Astarte playing a significant role on this.
What is your brief outlook on the future of international finance?
We are living in an ever-increasing regulated environment where restrictions and regulations are creating a very controlled environment that supports large firms and kills entrepreneurship. Margins are shrinking and opportunities are reduced. Thus, it is my belief that in a decade the asset management market will only consist of huge players and a limited number of niche strategy participants.
