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Brexit is not the death knell for UK FinTech

There is no doubt that Brexit was a shock to large parts of the UK business community. This is certainly the case in the financial technology, or FinTech, sector.

FinTech is a catch-all term used to describe the exploding number of technology companies – both startups and established firms – building products and services to improve and transform financial services. It has become a significant industry, attracting over 25 billion US dollars in investment globally in 2016. Since FinTech arrived on the scene the UK has been one of this nascent industry’s clear leaders.

After the referendum this position is no longer secure, and UK FinTechs are concerned. As someone who, through his work, has come to know the UK FinTech scene quite well, I can understand.

Here are what UK FinTechs are particularly worried about when considering their post-Brexit future:

Talent. By far the most pressing concern for UK FinTechs is the future of their workforce. Both finance and tech are highly globalized, internationally oriented industries, dependent on an international talent pool. In a report last fall Innovate Finance, the non-profit organization that represents UK FinTechs, noted that the founders of almost a third of its members were non-British. (It also noted that over 40% of workers in Silicon Valley are foreign born, underscoring just how global tech talent really is.) Anything that restricts access to skilled people will hurt UK FinTechs.

Access. Brexit represents a break with the UK’s largest trading partner – a significant market of over 500 million people. As part of the EU, UK FinTechs requiring a financial license enjoyed easy access to this market through a process known as passporting, by which a UK-based license is generally enough to do business in other EU countries. The UK government has said it will ensure full access to the EU post Brexit, but the Europeans have been more reticent on the subject. Any loss or increased difficulty of access will be a blow.

Investment. While global investment in FinTech has been rising, it has slowed down in the UK lately, mostly due to Brexit-fueled uncertainty. It’s too early to say if this a long-term trend. Yet there is no doubt that if confidence in UK FinTech is eroded, that would make it less attractive for foreign investors. An exit from the EU also likely means the loss of EU-based seed funding for VCs and startups, which has been a useful source of support for innovation in the past.

 

Time to act

 

What can the UK and its FinTech community do? There are several things.

First of all, the government should ensure the country remains open to tech talent and tech entrepreneurs no matter where they hail from – for example by relaxing visa requirements for skilled workers. It can also do more to nurture home-grown tech talent through education and skills policy.

Though it will be easier said than done, during the Brexit negotiations the UK government should do its best to assure its financial services companies, including FinTechs, maintain access to the European market. Failing that, the government should concentrate on making it as easy as possible for UK FinTechs to enter from the outside. One way is to harmonize UK financial services data standards with those coming into force in Europe.

The UK government should also do what it can to ensure UK FinTech startups have access to VC and other early stage funding, particularly if EU-based sources, like those currently supplied by the European Investment Fund (EIF), dry up. It can do this through tax and other policy, including strengthening the role of the British Business Bank (BBB).

 

The road ahead

 

To be clear, I am not saying that Brexit has sounded the death knell for UK FinTech. Quite the contrary: there will doubtless be opportunities as well as challenges.

Outside the larger EU framework, the UK government might have more room to introduce FinTech-friendly regulation or pursue policy to make it easier for these firms to find financing. It would also find it easier enter into bilateral agreements with other countries. If the UK can for instance get closer to the US administration on the FinTech topic, bringing each country’s FinTechs and investors closer together, UK FinTechs would no doubt profit.

The shock may also prove to be a catalyst, pushing UK-based entrepreneurs and tech talent to work harder to produce the increased efficiencies and lower costs that FinTech promises.

But there is no doubt that Brexit has upended the apple cart. As long as the current uncertainty remains, concern is more than warranted.

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Mr. Trump, Don’t Miss The FinTech Boat

This blog post first appeared in Nasdaq.

While every new US administration promises change, the Trump administration has been touting more radical doses of it than most. This includes a promise to increase the competitiveness of American industry by rethinking many of the laws and regulations that currently govern it.

From what it has said so far, the administration seems particularly focused on manufacturing. There are other areas however where the US has a chance – through forward-looking policy – to make significant gains in competitiveness. One of the most promising in my opinion is financial services technology, or FinTech.

For those not familiar with it, the term FinTech is used to describe the digital revolution currently taking place in financial services. As with similar revolutions in other sectors like music, this one is characterized by fundamental disruption caused by technology companies from outside the industry.

Products like Apple Pay or Google Wallet are only the most obvious examples of tech companies trying to take a bite out of banking. Other technology mainstays, like Microsoft, IBM and even Facebook, have set their sights on financial services as well. We have also seen an explosion of FinTech startups around the globe along with significant venture capital investment.

The rise has been meteoric. In the seven years from the financial crisis to the end of 2015 the value of the FinTech industry grew from virtually nothing to close to 20 billion US dollars. According to Business Insider, FinTech grew by another 15 billion dollars in the first six months of 2016 alone.

It is a very exciting time. Thanks to the disruptive new technologies these firms are working on, we can expect a financial industry that is far more efficient, safer and more client friendly than the one we have now. Among other things, prices for banking services will drop, while bank customers gain many more options and better tools for managing their money.

Banking regulators around the world have recognized this potential. Many are going out of their way to harness it. They are working with FinTechs to understand the new technologies and so craft sensible regulations for them. Many are taking a proactive business development role by supporting FinTech ecosystems in their jurisdictions.

While banking regulators in the UK and Singapore have been in the vanguard, this is a global phenomenon – observable from Sydney to Moscow and Beijing to Bern, Switzerland. Unfortunately, even though American Fintechs as well as banks are themselves very active, regulators in the US lag behind.

It’s not that they haven’t been paying attention. The Federal Reserve and the SEC have both been researching an important new technology called blockchain, one of the key innovations in the FinTech space. The Office of the Comptroller is considering introducing a special FinTech license to smaller companies to help foster innovation. But compared to what it is going on elsewhere, this is too little and it is moving too slowly.

On the campaign trail President Trump touted his strong business focus. To keep up, his administration should take a cue from jurisdictions like the UK and Singapore and adopt policies to further support and develop the FinTech ecosystem in the United States.

What can US regulators do? Plenty.

They can set up regulatory “sandboxes” where innovative companies can try out new technologies and products in ways that are safe both for them and the system. They can relax rules for financial innovators. US regulators can invest in in-house teams focusing on digital financial innovation, and appoint Innovation Officers to give industry a clear point of contact and support. They can open, or support the opening of, Fintech laboratory or innovation spaces, like the now-famous Level39 in London or the new LATTICE80 in Singapore. They can also look to more closely cooperate with other regulators through bilateral agreements, as many of their foreign peers have already done.

There is much to be gained. The US remains the world’s largest financial services market as well as the global leader in digital technologies and innovation. Yet its position cannot be taken for granted. Particularly in the heavily regulated banking industry, governments have an important role to play in either hindering or fostering progress.

We already have a negative example of how this can work. The bitlicense introduced by New York State, meant to control cryptocurrencies, arguably put a damper on innovation in New York in the key blockchain technology mentioned above. (Blockchain is the technology behind bitcoin and other cryptocurrencies; it has very significant, and absolutely legitimate, potential uses in banking and many other areas.)

The federal government would do well to consider this when it looks at other relevant areas of FinTech. Take artificial intelligence, or AI. From automated trading platforms to so-called robo-advisors, AI is set to profoundly transform financial services (as much else in our world). That makes it one of the most important technologies in the FinTech toolkit.

The US has a clear advantage here: American companies already invest billions in AI, and US universities remain on the cutting edge of research in the field. With the right regulatory and legal support, I think the US could become the world’s leading hub for AI in banking. That would go a long way to cementing the US’s role as a leader in FinTech in general.

This will have the advantage not only of creating a supportive, forward-looking FinTech environment in the US. It will also create new, forward-looking jobs as bank tellers are transformed into data scientists and high-end software developers.

This last point is very important. We must keep in mind that automation will bring structural change to most if not all service industries, and to a great deal of manufacturing as well. This is a process that will be hard if impossible to stop. If the current administration can shift labor capacity and skills from the old world of banking into the new, it will go a long way to ensuring a continued leading role for the American financial services industry. That can only be to the advantage of those who work in it.

Artificially protecting old jobs, on the other hand, removes the pressure on industries to digitize and modernize. In banking, this would be a boon to those other jurisdictions that are currently supporting their FinTech communities, and give them great leverage in the current technology race. This cannot be in the administration’s, or the country’s, interest.

The winds of change are blowing through financial services. The new administration should trim its sails accordingly, and not miss the boat when it comes to the future of FinTech in America.

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A public or private blockchain? New Ethereum project could mean both

This blog post first appeared in American Banker.

A fierce battle is underway to define the future of blockchain, with multiple types of public and private networks all competing. So when I read about industry efforts to build a corporate version of Ethereum — which is more commonly thought of as a public blockchain platform — I am intrigued.

Development is in the early stages, but if a viable enterprise Ethereum emerges, it could be a strong contender for that blockchain standard crown.

An enterprise version of Ethereum could be used almost immediately to build robust, large-scale private blockchain implementations in almost any industry or for almost any purpose. More importantly, because of Ethereum’s roots as an open-source, public blockchain, an enterprise Ethereum would be equally well suited to eventually building global, freely-accessible and consumer-oriented business platforms.

Public versus private

I strongly believe the future lies in such open, decentralized platforms, and that Ethereum is an excellent candidate to make that future a reality.

As has been pointed out elsewhere, Ethereum is a highly attractive blockchain implementation for business and has already garnered a great deal of enterprise interest. This is because Ethereum is readily available, easy to learn and use, and also fully programmable — or, as it is known, Turing complete. Therefore, developers can adapt the technology for any business purpose. Individuals, companies, consortia or even whole industries can easily build their own platforms on top of the public protocol.

To date, adapting the public-network technology for corporate platforms has however been slow. Execution has not yet been possible for a number of mostly technical reasons. To understand why a viable enterprise Ethereum would be so compelling, we need to look at those reasons in some detail.

One of the fundamental distinctions in the blockchain world is that between permissionless and permissioned chains. A permissionless blockchain, like the original one for bitcoin, is an open platform. Anyone can join. Permissioned blockchains, meanwhile, are restrictive. Some authority must grant access.

When bitcoin burst onto the scene, the enterprise community quickly understood the potential of its underlying blockchain technology. But it also quickly saw the limits in the business environment of the kind of public, permissionless distributed ledgers the bitcoin blockchain represented. Such limitations related to speed, security, privacy, cost, lack of programmability in the original bitcoin blockchain. The list goes on. Many of these issues are a result of the functionalities needed to make a public blockchain viable (for example, the consensus mechanisms that prohibit cheating).

By controlling access to only allow trusted users onto the platform, developers can sidestep many of these problems. As a result, we have seen Ethereum used for various kinds of private, permissioned chains in any number of individual projects or in larger consortia like R3 CEV or Hyperledger Project.

But while permissioned chains make sense from a security and confidence perspective today, the picture looks different down the line.

Going with the flow

For one thing, private chains are not as scalable as public ones, which can be a major limitation. Take a use case like trade finance or a global loyalty points scheme. You don’t want to limit these to an inner circle of members. Rather, you want to make it as easy as possible for the largest number of entities or users to connect. Public chains — open to all — are more flexible in this regard.

A privately owned chain is also reliant on the skill, expertise and continued investment of its owners. That means cost and effort to build. It also means potential risk for clients of being tied to the decisions — and perhaps the mistakes — of the developer. Private chains also generally mean private standards; therefore, they may not be as interoperable as public ones.

The enterprise Ethereum project seems to be a serious effort to deal with these issues by bringing the public, open consumer side of the equation together with the business side. In doing so, a community of some 10,000 Ethereum developers around the world — a group with profound experience developing the platform as well as working in a decentralized environment — could unite with the traditional business/enterprise development community. This would be a powerful mix, and would correspond with other broader important trends in the blockchain community.

I believe distributed ledgers will tear down information silos. As a result, the line between what is enterprise and what is consumer will fade, as will the lines between different industries. We get a hint of this today with the weakening of the information silos separating supply chain management and trade finance.

Centrally managed platforms dedicated to a single sector will struggle to cater to such environments. Open platforms are more flexible; therefore, they are better able to handle and facilitate cross-industry usage of information and services as well as integration of different types of entities and users.

As the Internet of Things matures and billions of devices come online, we will see an explosion in the sheer numbers of entities needing to interact. Private, permissioned platforms will have problems handling such large-scale hyper-connectivity. Open platforms that are easily accessible and extensible by the community are more suited to this kind of world.

The sky is the limit

Increasingly, I believe that a decentralized model is the only way to manage and transact in a highly distributed world of the kind taking shape today – and that we will end up with some kind of public cloud environment for enterprise blockchains, as for much else. It won’t happen overnight, but the signs point that way.

If this seems farfetched, remember that there were similar discussions in the early days of the internet. Back then, some said AOL should be the global platform precisely because it was private, more secure, and so on. But the open standard won out in the end.

We will have to wait and see what comes out of an enterprise Ethereum project, if anything. But I think it’s something to keep a close eye on. If it can be made to work, enterprise Ethereum has a real shot to become an open, global blockchain standard.

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