Where Finance Finds Its Future

In late March 2021 a path to liquidity and growth opened in the security token markets. The Private Markets Digitization Steering Group (PMDSG), a group of banks, financial market infrastructures, technology vendors and FinTechs formed under the umbrella of Global Digital Finance in the spring of 2020 went public with a specification that will make inter-operable blockchain networks a reality for the first time. FINP2P is a protocol that allows investors to execute token trades on one network and settle and custody them in another, irrespective of whether the networks are built on Ethereum or Corda or any other blockchain technology. This portability could be the decisive breakthrough that capital markets blockchain needs to spark exponential growth. Dominic Hobson spoke to Anthony Woolley, head of business development at Ownera, an institutional-grade blockchain network for security tokens, who doubles as co-chairman of the PMDSG. Hosted on Acast. See acast.com/privacy for more information.

Crypto-currencies are already an established asset class in the wealth management industry. A number of adventurous wealth managers and private banks have developed crypto-currency brokerage and custody services for high net worth and ultra-high net worth clients. The decision in November 2020 by Ruffer Investment Management to invest £550 million in Bitcoin as a hedge against unstable monetary conditions marked a further step in the steady march to respectability of leading crypto-currencies. The interest of wealth managers in security tokens, an evolution of the blockchain network technology that underpins crypto-currencies, is now rising sharply. As with hedge funds, wealthier investors are the natural pioneers of innovative investment techniques. They also own illiquid assets, such as real estate, fine art and collectibles, whose value tokenisation can realise – without the owners necessarily losing the pleasure of use. Tokenisation is also well-adapted to investment with predictable cash flows and environmental, social and governance (ESG) credentials, such as renewable energy projects. Private banks and wealth managers can profit from tokenisation by structuring token issues, investing in tokenisation platforms and acting as brokers or lead brokers on them, providing safekeeping and custody services to holders of tokens, managing and administering token investment funds, and selling data for the development of indexed and derivative products. They can generate revenues in all these areas without having to take any principal risk. However, token investing is still at an early stage of its development, and many private banks and wealth managers are reluctant to engage with an asset class they continue to associate with the Dark Web, the ICO bubble of 2017-18, the DeFi bubble of today and the various defalcations that have taken place at crypto-currency exchanges. This Future of Finance webinar, the second in our series exploring the impact of technology on wealth management, will ask whether wealth managers risk missing an opportunity whose the time has come or losing their reputation and possibly their clients’ money as well. Hosted on Acast. See acast.com/privacy for more information.

RegTech is one of the more predictable targets of the FinTechs. The sheer volume of additional regulation imposed on the financial services industry after the financial crisis of 2007-08 demanded automation. Not just to contain the costs of data collection and reporting but to mitigate the risk of compliance failures leading to fines and reputational damage as well.By 2018, a decade after the acute phase of the crisis, 11 major global banks alone had paid US$216 billion in fines for various breaches and misdemeanours. The banking industry as a whole had paid more than US$345 billion by then, according to Deloitte. No wonder Deloitte also found that compliance expenditure by banks had risen by 60 per cent since the financial crisis, and was still rising.Regulations are not static, of course. Deloitte reports an average of 220 regulatory revisions a day, so keeping up with the changes alone is an onerous task for regulated firms, especially if they are operating in multiple jurisdictions, each with its different rules.In reality, old-fashioned software-as-a-service (SaaS) from the Cloud plus application programme interfaces (APIs) to facilitate data exchanges have proved equally effective as enablers of regulatory automation. They can, for example, populate a regulatory report for checking prior to delivery to a trade repository.RegTech is maturing. It is finding useful applications and starting to consolidate. Yet it continues to resist tidy definition. Deloitte divides a current total of 412 RegTech firms it monitors into five high level categories – Compliance, Risk Management, Identity Management and Control, Regulatory Reporting and Transaction Monitoring – which help to make sense of a broad range of activities. Hosted on Acast. See acast.com/privacy for more information.

Peer-to-peer platforms are one of the many promises of the blockchain age. More than one has emerged in the giant foreign exchange (FX) markets, as entrepreneurs look to wean institutional and corporate users of the FX markets off their habit of paying too much to banks by netting buy-side trades before going to market. But FX HedgePool, founded by former State Street and BBH currency management veteran Jay Moore, has a specific focus: the predictable monthly and quarterly currency hedging activities of asset owners and managers looking to protect assets and share classes from adverse movements in exchange rates. He told Dominic Hobson why the firm chose to specialise, and why banks as well as buy-side firms gain from what HedgePool does. Hosted on Acast. See acast.com/privacy for more information.

Trade documentation and trade finance are notoriously fragmented, manual and poorly digitised. So it is not surprising that Tradeshift, a San Francisco headquartered supply chain digitisation company, has expanded rapidly since its origins in Copenhagen in 2010. As it solved one set of data flows it grew naturally into the adjacent areas and is now a multi-faceted provider of a B2B marketplace, a transaction management platform, and a provider of both payments services and financing. Its ambition is to encompass companies of all sizes, everywhere, bringing all the work of the world on to an efficiently connected digital network. Dominic Hobson spoke to co-founder Gert Sylvest about the inspirational effects of blockchain on the shape of the business and the blurring of the lines between flows of data and flows of value. Hosted on Acast. See acast.com/privacy for more information.

Artificial intelligence (AI) is not yet what its pioneers imagined or what its detractors fear. At the moment it is no more than a branch of computational statistics, which looks for correlations in large vats of digital data through brute force processing guided by algorithms. That it is producing useful findings and outputs is not in question. Most of the apps we use would not exist without it. But at times it feels as if only Ray Kurzweil is keeping alive the dream of building an artificial mind. So it is refreshing to encounter a data scientist inspired by neuroscience. Francisco Webber, co-founder and CEO of Cortical.io told Dominic Hobson how banks and insurers are using his firm’s technology to read unstructured data such as emails and contracts. Hosted on Acast. See acast.com/privacy for more information.

The banking industry in the United Kingdom is so consolidated that it is not surprising the Treasury and the Bank of England identified competition as the most urgent need in the wake of the great financial crisis of 2007-08.Metrobank has had a banking licence for more than decade now. Monzo (2015) and Starling Bank (2017) are the best recognised followers and fellow banking unicorn Revolut (2015) finally applied for a banking licence in January 2021.If the multifarious payments and other apps fostered by the Open Banking initiative launched in January 2018 are added – there are over 300 of them – the United Kingdom retail banking market looks highly competitive.In reality, it is not. The Big Four banks (Barclays, HSBC, Lloyd’s and RBS) still own 75 per cent of current accounts. The same is even more true of small and medium-sized businesses (SMEs). The Big Four own 85 per cent of business accounts.An Open Banking Initiative survey of 500 SMEs, published in December 2020, found half were using open banking providers, but only because the Pandemic necessitated on-line banking service. Less than one in five (17 per cent) even of these SMEs had also switched their bank account.The Bank of England has identified a funding gap of £22 billion for the 5.94 million SMEs in the United Kingdom, which currently obtain 84 per cent of their debt from banks. Few are able to shop around. In fact, one reason SMEs do not change their bank is that their chances of being rejected for a loan by a new provider are 50 per cent higher.Unlike Germany (which has more than 400 full-service Sparkassen savings banks and more than 1,100 full-service cooperative Volksbanks) or the United States (which has 5,700 full-service community banks and more than 5,600 credit unions with assets of more than £1 trillion), the United Kingdom is dominated by publicly listed banks.The first signs of structural change have now appeared, in the shape of new banks that believe they can lend with confidence to SMEs on the basis of tacit (and often local or regional) knowledge as well as the increasing volumes of hard data available in a rapidly digitising economy.In theory, new banks with a good understanding of how to lend to SMEs will not only increase the supply of credit to SMEs, but increase the resilience of the banking system as a whole by broadening the size and type of bank, and make the structure of banking less pro-cyclical.This Future of Finance webinar will explore with the leaders of some of the new banks, and with experts from countries with more diverse banking systems, whether it is not technology and data alone, but local and regional knowledge and relationship banking, that can build a more resilient, responsive, stable and innovative banking system for SMEs. Hosted on Acast. See acast.com/privacy for more information.

The investments in Bitcoin by Ruffer and MassMutual may have caught the headlines, but crypto-currencies are becoming a tool for corporate treasurers to manage their liabilities as well as a source of capital growth for asset managers. Near-zero to negative interest rates and repeated central bank interventions are encouraging a more adventurous approach in the corporate as well as the retail markets. Whether this will end well cannot be known, but treasurers certainly need safe ways to trade and even safer ways to custody the assets, and the conventional banking industry is not rushing to provide them. Rob Gaskell, partner at Appold, the London-based emerging technology advisory and investment company, shared with Dominic Hobson his view of the risks and opportunities. Hosted on Acast. See acast.com/privacy for more information.

Security tokens are coming. In fact, they are here already, and have been for a while. Though most of the security token offerings (STOs) in the last three years were hard to distinguish from Initial Coin Offerings (ICOs), several corporates and banks (Banco Santander, Bank of China, BBV, Daimler, Deutsche Bank, Société Générale) have tokenised bonds or loans on public as well as private blockchain networks. Hosted on Acast. See acast.com/privacy for more information.

The blockchain era has spawned a great deal of innovation, but its most lasting impact might well lie in the fact it forced us to think more imaginatively about data. A decade ago, every business wanted to be the next Facebook or Google, by selling its data to third parties. Today, the coming businesses are those which have grasped that data naturally belongs not to corporations but to consumers because, once consumers wake up to that fact, a lot of apparently successful businesses are going to be seriously discomfited. One person who has mapped a future in which computers steaming data are the constant companion of consumers is David Shrier, author, futurist, co-founder and CEO of Esme Learning Solutions, and professor of practice at Imperial College Business School. He spoke to Dominic Hobson about the role of data in trust, identity and democracy, the future of the financial services industry, and how to forge a successful path into a future in which everyone is connected by computers and informed continuously by algorithms processing streams of data. Hosted on Acast. See acast.com/privacy for more information.