Where Finance Finds Its Future

Traders active in the cryptocurrency and decentralised finance (DeFi) markets have long found the operational infrastructure of the industry frustrating. Settlement of trades is slow and expensive. Worse, settlement requires them to be fully funded. To alleviate the costs and complexity, the obvious solution is to create closed circles of trustworthy counterparts. Several providers now offer services along these lines but the San Francisco-based Bosonic Network goes further. Bosonic offers a service that is designed not only to eliminate counterparty, credit and settlement risks in digital asset trading but to preserve the benefits of netting and even offer its users access to credit as well. Dominic Hobson, co-founder of Future of Finance, asked Rosario Ingargiola, founder and CEO of Bosonic, to explain in detail how the service works. Hosted on Acast. See acast.com/privacy for more information.

A presentation by Dr Ian Hunt on his recently published paper, Digital Issuance - An Optimal Model for Digital Assets and Transactions, was followed by a discussion with an expert panel and the members of an invited audience, moderated by Future of Finance co-founder Dominic Hobson. Margin pressure exerted by institutional investors and passive investing means asset managers must cut costs but the methods used over the last 30 years – computerisation, outsourcing and offshoring – are no longer sufficient, partly because of rising regulatory costs. The asset management industry needs to move on to a new operating model.  If the asset management industry fails to adopt a new operating model, it risks being displaced by the Decentralised Finance (DeFi) industry. Despite reputational issues and a recent loss of value, DeFi protocols have experimented successfully with alternative models of capital-raising, trading and investing, and are attracting interest from asset managers. A further challenge facing the asset management industry is set by unavoidable generational change. Baby Boomers which saved via pensions, funds and housing are being replaced by Millennials and Gen Z, which are not only digitally native but alienated from all existing financial services providers, as their enthusiasm for tokenised forms of finance proves.  Tokenisation offers a new operating model. Instead of assets (such as securities) and cash (as payment) being moved between buyers and sellers by a complex eco-system of exchanges, brokers, clearing houses (CCPs), custodians, central securities depositories (CSDs), registrars and paying agents and their computer systems, tokens move between nodes on a network. Ultimately, finance is about the transfer of value through time. Its essence can be reduced to flows of value in which an asset is a purchase of future flows of value (an investment by investors) and a liability is a sale of future flows of value (an issue of equity or debt by an issuer). Financial services exist to facilitate exchanges between investors and issuers. It follows that intermediaries that facilitate exchanges of futures of flows of value between issuers and investors must add value or they will become vulnerable as forms of transactions costs only. In principle, tokenisation can dispense with intermediaries altogether, with issuers and investors holding self-servicing tokens on their nodes only.  Tokens differ from conventional financial assets. A conventional equity offers an uncertain promise of capital appreciation and dividend income. A fixed rate bond offers a certain income and a promise of redemption. Mutual funds are more like bonds than equities. What tokens offer is something simpler: a pledge to deliver a particular flow of value in the future. These pledges of future flows of value are made by token issuers to token investors. There are two variants. The first is a “native” token that exists in digital form only (as Bitcoin does). The second is a “title” token or a tokenised underlying analogue asset (such as a company share or a building or, in the case of a Stablecoin, cash and near-cash financial assets). Fulfilment of pledges of future flows of value can be automated by building intelligence into a token, making it a “smart token”. For example, when the date arrives to make a transfer of value such as a dividend or interest payment or rights issue or redemption, it triggers the token to deliver other tokens of the requisite value to the node of the holder of the pledge.  Hosted on Acast. See acast.com/privacy for more information.

According to Willis Re, there are around 3,000 self-proclaimed InsurTechs at work in the world today. The age and size and funding and technologies of InsurTechs is so various, and the range of activities they pursue so immense, that it is difficult to comprehend which innovations are working and which are not. The use of video and telemetrics, such as the admission of photographic evidence and sensors in motor insurance, attract headlines. But the sales and the funding tend to go to larger and more established firms, including more or less conventional insurance companies and software as a service (SaaS) vendors engaged not in reinventing the industry but in grinding down the expense ratios of the incumbents. Most InsurTechs have lowered the expectations they set at the height of the blockchain boom of 2015-18 and now seek partnerships with or acquisitions by the incumbents. Blockchain-in-insurance persists, but largely in collectivised or infrastructural forms, and as private or permissioned rather than public networks. It is artificial intelligence (AI) algorithms, capable of extracting information from growing repositories of digital data and learning from it, that are now seen as the crucial innovation in an industry which has relied since its inception on the quality of the data it can obtain. But even in the (ostensibly, no-brainer) case of data, the insurance industry seems stuck between the narrow focus of InsurTech specialists and the daunting and ever-increasing immensity of the data available. What is required to break the stasis is a fundamental re-conceptualisation of the industry to alter the incentives of both the insurers and the insured. At the moment, insurers assess risks not as problems to be managed but as financial opportunities. Policyholders, on the other hand, treat insurance as a less-than-honest product and an invariably negative customer experience. For them, it inhabits a twilight zone that lies somewhere between a necessary evil and an occasion for fraud. A true and durable InsurTech revolution would reverse the polarity of this negative dialectic. It would use data to understand the real needs of customers, as opposed to the cover which people are obliged to purchase for contractual or governmental reasons. The industry would then put a price on covering in their entirety the probability and impact of the risks that customers ought to cover - and then invite those customers to pay the premiums for a superior product. This Future of Finance webinar will review the impact of InsurTech on the insurance industry and ask whether the industry needs to re-think the fundamental principles by which it operates before it can be transformed by new techniques and technologies. Hosted on Acast. See acast.com/privacy for more information.

The future of blockchain now hinges more than ever on moving beyond crypto-currencies to create the universe of decentralised products and services that almost all characterisations of Web 3.0 endorse. These products and services will make use of the smart contracts pioneered by the entrepreneurs that created the Decentralised Finance (DeFi) and Non-Fungible Token (NFT) markets and which are now building the security token and Metaverse markets as well. The success of products and services built on smart contracts ultimately depends on the ability of the smart contracts to use Oracles to access off-chain sources of price and other data quickly and securely. This is the challenge that SupraOracles, a business established on the basis of academic expertise in 2018, intends to meet by building super-fast Oracles on a high-performing blockchain infrastructure. Dominic Hobson, co-founder of Future of Finance, spoke to Heslin Kim, chief strategy officer and co-founder of SupraOracles. Hosted on Acast. See acast.com/privacy for more information.

Liquidity in privately managed assets is hampered by a lack of reliable and timely data about asset values. If value is hard to discern, privately managed assets are more difficult to buy and sell, harder to use as collateral and suffer from a less favourable accounting treatment. It is also difficult to develop secondary markets in which the assets can be traded. A distributed technology such as blockchain is well-adjusted to capturing, validating and then distributing data scattered across multiple databases, within as well as between institutions. It enables Inveniam to deliver the data needed to value private managed assets regularly, frequently and reliably without the need to centralise it in a single data warehouse.The data garnered by Inveniam is used by orthodox valuation agents such as Cushman & Wakefield, CBRE, Houlihan Lokey, Mercer and others to mark privately managed assets to market on behalf of their buy-side clients. The data enables the valuation agents to provide a faster, more frequent and more reliable valuation service to their clients. Where privately managed assets such as real estate, infrastructure and private equity can be marked to market daily, weekly, monthly or quarterly, by an independent third party and at low cost through the use of technology to retrieve and process data from widely distributed and highly variegated systems, two-sided markets can develop to facilitate price discovery.Accessible, reliable data improves valuations and makes two-sided markets possible, but liquidity ultimately depends on the engagement of market-makers with tokenised asset classes. They have already engaged with the cryptocurrency markets and can be expected to engage with the security token markets once issuance volumes gain sufficient momentum.The emergence of two-sided markets on blockchain-based networks will attract issuers of privately managed assets and funds invested in privately managed assets in tokenised form, because better functioning markets will lower the cost of raising and servicing capital (for example, paying dividends). Estimates indicate savings of between 20 and 50 basis points.Real estate will pioneer the tokenisation of privately managed assets in the United States because the impact of more accurate, frequent and independent valuations in reducing the capital financial institutions must allocate to the asset class is so dramatic. Similar benefits will accrue to holders of infrastructure and private equity investments as well.Reliable valuation data also cuts the cost of fund accounting or calculating the Net Asset Value (NAV) of a fund. If the cost of the NAV is borne by the fund, it lifts returns. If it is borne by the management company, it widens margins for general partners (GPs). With independent valuations, it also becomes easier to post fund units as collateral for margin loans.In the United States, the Decentralised Autonomous Organisations (DAOs) that issue tokens to raise funds and use smart contracts to service the tokens are now obtaining formal legal recognition. Three states have granted DAOs legal status and the leading jurisdiction for publicly traded corporations (Delaware) is expected to follow suit. Hosted on Acast. See acast.com/privacy for more information.

SDX, the digital arm of the Swiss stock exchange, has launched an income-generating crypto-currency staking service for clients of the private banks in Switzerland. Owned and operated by a separate entity within the group, the Cloud-based service enables holders of crypto-currencies to collect a yield on their portfolios by staking their assets to claim the rewards for validating or attesting blocks of transactions. Dominic Hobson, co-founder of Future of Finance, asked Alex Smith, Crypto Product Lead at SDX, what services SDX is providing for clients both now and in the future, how it is managing the recent volatility and the unavoidable risks and what adjacent opportunities it is exploring for the future. Hosted on Acast. See acast.com/privacy for more information.

FQX is a blockchain-based issuance platform for tokenised debt. Founded in Zurich in 2019, the start-up has invested as much time and money in the legalities as the technology and can now offer issuers near-certainty over the status of their security token offerings in legal and regulatory terms across six jurisdictions. The initial focus is on short-term corporate debt, with the aim of normalising the digital registration, issuance, transfer and trading of generic eNote tokens before expanding into longer term instruments and secondary market trading. Once established, the company believes the savings on issuance costs will encourage issuers to use the FQX eNote structure for public issues and private placements, for long-term financing as well as short-term debt, and for repeated returns to the capital markets. Built on a Solana layer 1 blockchain, FQX has also pioneered Stablecoin debt, with an issue denominated in the USD Coin (USDC) for the Hong Kong and Singapore-based crypto-currency lending house Babel Finance - collateralised by Solana coins (SOL). At FQX, Dominic Hobson, Co-founder of Future of Finance, spoke to Benedikt Schuppli, Co-Founder and Co-CEO, and Daniel Killenberger, CTO.  Hosted on Acast. See acast.com/privacy for more information.

Concordium is a Layer 1, Proof-of-Stake blockchain with its own cryptocurrency. So far, so normal. But Concordium also has a fascinating twist: it incorporates digital identification functionality at the level of the protocol. If predictions of the eventual universality of digital identity are even half-fulfilled, this feature will give Concordium an edge over other Layer 1 blockchains as the digital economy makes use of more efficient, privacy-protecting methods of customer due diligence. The company has raised US$50 million from a small group of investors, whose number includes Lars Seier Christensen, co-founder and until 2016 co-CEO of Saxo Bank, who has identified blockchain as a forcing house for entirely new ways of doing business. Concordium also benefits from its relationships with Aarhus University in Denmark and ETH University in Zurich, where academic researchers are working not only technical issues but also on the governance issues which have plagued Proof of Stake blockchains. Dominic Hobson, co-founder of Future of Finance, spoke to Kåre Kjelstrøm, a veteran of Travis Kalanick start-ups Uber and Cloud Kitchens, who is now chief technology officer at Concordium. Hosted on Acast. See acast.com/privacy for more information.

10xbanking is not your average provider of Cloud-based banking Software-as-a-Service (SaaS). The company is the brainchild of former Barclays Group CEO Antony Jenkins, who has since leaving the British bank in 2015 embraced the idea of transforming the industry by full digitisation of its infrastructure and operating platforms. 10x has raised more than $252 million to its Series C in June last year, giving it the capital backing (and in some cases the business) of BlackRock, J. P. Morgan Chase, Westpac, Nationwide Building Society, Ping An and the Canadian Pension Plan Investment Board. If 10x can succeed in its ambition of digitally transforming major incumbent banks its management believes it cannot fail to deliver for the neo- and challenger banks that have used their freedom from legacy technology to chip away at the revenues and franchises of long-established financial institutions. Dominic Hobson, co-founder of Future of Finance, spoke to Leyda Glyptis, now Chief Client Officer at 10x, but who was previously CEO of the 11:FS Foundry and a veteran of digital innovation roles at BNY Mellon, Qatar National Bank and Sapient. A full transcript of the interview is available below. Click on any question to be taken to the point in the interview where the question is answered.  Hosted on Acast. See acast.com/privacy for more information.

The peer-to-peer system of cash outlined by Satoshi Nakamoto in his famous paper of October 2008 did not mention regulators or regulations. But its ambition of dispensing with trusted third parties did mean jettisoning regulated financial institutions. Nearly 14 years on, only the irreconcilable libertarian wing of the Blockchain industry still considers regulation of cryptocurrencies to be unthinkable. Major cryptocurrency intermediaries are getting regulated already. Two of the major cryptocurrency exchanges (Coinbase and FTX) have multiple regulatory licences and even Binance has secured a licence in France and applied for licences in Bahrain and Dubai. Likewise, of a list of 100 digital wallet custodians, 42 have secured or applied for regulatory licences. Nor is it true to say any longer that cryptocurrencies are unregulated. The Financial Action Task Force (FATF) extended Know Your Client (KYC), Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT) and sanctions screening obligations to the cryptocurrency markets as long ago as October 2018. Grumbling by cryptocurrency brokers and exchanges about the application of the Travel Rule – which obliges them to share identifying information about buyers and sellers of cryptocurrencies – is merely the latest instalment of this long-running set of obligations. Suspicious Activity Reports (SARs) now have to be filed. Besides, regulators are losing patience with the seemingly unending series of scams, hacks and thefts of cryptocurrency. Since hackers made off with US$500 million of Bitcoins from Mt Gox back in 2014, thefts of cryptocurrency have remained a constant. According to Chainalysis, thieves stole $3.2 billion worth of cryptocurrency in 2021 and another US$1.3 billion in the first quarter of this year, most of it from Decentralised Finance (DeFi) protocols. Chainalysis reports an average of 66 crypto-currency thefts a year since Mt Gox. But thieves are not the only people taxing retail cryptocurrency investors. Almost all the rewards of cryptocurrency trading go to professionals, including via pump-and-dump schemes. So it is not surprising that regulators are clamping down on the sale and distribution of crypto-currencies. Singapore has been particularly vocal about discouraging sales of cryptocurrencies to retail investors but the United Kingdom is now pondering similar restrictions. In emerging market economies, cryptocurrencies are used routinely to bypass capital controls or evade tax. Hosted on Acast. See acast.com/privacy for more information.