Fintech trends and updates

An update on the latest fintech trends, including blockchain, open banking, PSD2 and initial coin offerings

18 September 2019
The fintech sector is driven by constantly evolving technology and a complex web of global regulation. Below you'll find our regular round-up of fintech news, trends and industry analysis.
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Fintech updates

Update posted: 18 September 2019 

By Christopher Walker

The French Resistance: France Says No to Facebook’s Libra

Facebook’s Libra cryptocurrency project faces yet another regulatory roadblock in the form of France’s Finance Minister, Bruno Le Maire.

In his opening remarks to an OECD conference, Le Maire stated that the 'monetary sovereignty of states was at stake' due to Facebook’s proposed cryptocurrency.

In particular, the Finance Minister highlighted that the creation of a virtual currency with a userbase of potentially two billion could pose a 'systemic risk' to economic stability.

The position presents a stark development from previous comments on cryptocurrencies, such as those made by Mark Carney in 2018, which downplayed the risks to financial stability due to 'crypto-assets [small size] relative to the financial system'. 

The Libra project continues face ongoing challenges, such as:

  • Concerns surrounding the threat posed to fiat currency: in particular, Libra would pose challenges to governmental control of monetary policy – in times of crisis, abandonment of the state’s currency could further exacerbate economic woes and undercut the control of central banks
  • Money laundering and terrorism: U.S. Treasury Secretary, Steven Mnuchin, has previously 'expressed very serious concerns that Libra could be misused by money launderers and terrorist financiers'
  • Consumer protection: Facebook’s corporate governance in light of the Cambridge Analytica scandal still clearly sits within the minds of lawmakers – importantly, regulators are looking for clarity over the systems that will be put in place to protect Libra’s users.

Global regulators will question Facebook in Basel on 16 September over concerns surrounding the digital currency’s scope and design.

Until these concerns have been addressed, Libra’s likely launch will continue to be delayed.

Update posted: 16 August 2019

By Paschalis Lois

German Regulator approves a €250 million real estate bond token sale

Last July, the German Regulator, BaFin, approved a sale of €250 million tokenised real estate backed bonds to be issued by a blockchain start-up Fundament. This is not the first tokenisation of real estate value, as an article by Coindesk explains. However, the same article notes that the approval by BaFin means that by virtue of being regulated, the token will be open to any retail investor anywhere with no minimum investment restriction.

The token itself is an ERC-20 token. That means it is a token deployed through a smart contract on the Ethereum blockchain. It will represent value in 5 different German properties. The token will grant its holder a 4% coupon per annum as a bond and will mature in 2033 according to the Fundament’s website. Individuals will be able to invest through Euros or ETH (the native token on the ethereum blockchain).

This move is another interesting market development, particularly at the intersection between blockchain and real estate, which is rapidly picking up momentum, and acts as an example of how blockchain technology and cryptotokens can help streamline otherwise complicated investment procedures. In the UK, HM Land Registry has been working with R3’s Corda blockchain platform to develop a solution for streamlining conveyancing and registration procedures. The effects were already noticeable when a recent simulation based on a prior real-life conveyance took 10 minutes to complete on the platform as opposed to the 22 weeks that the actual transaction took.

For more on this, or on any real-estate based blockchain applications you can speak to Will Hall or Gareth Malna.

Update posted: 09 August 2019

By Christopher Walker

Up in the cloud: the Bank of England looks to future proof fintech

The Bank of England (BoE) has called on “financial services to embrace cloud technologies” in a key report on the “Future of Finance”. The BoE has raised concerns that financial institutions are slower at adopting the public cloud than other industries. This, the BoE argues, can be explained by cautious regulators, management teams taking time to gain trust and visualise use cases, as well as the cost of migrating systems.

However, with providers such as AWS underpinning the IT systems of companies like Monzo, Coinbase or Stripe and JP Morgan’s recent blockchain partnership with Microsoft Azure, the financial world is arguably already welcoming cloud computing.

Conservative estimates reported by McKinsey have placed a combination of software as a service (SaaS) and public cloud as hosting at least 40% of banks’ workloads globally within the decade. With cloud computing set to perform a critical function within finance infrastructure, we briefly note the BoE’s comments on the potential benefits to the finance industry, as well as the challenges on the horizon.


Current cloud infrastructure presents a series of advantages as identified within the report, such as:

  • Quality: externally maintained cloud systems by dedicated providers are often beyond their in-house equivalents in terms of power, security and service maintenance.
  • Speed: data analysis tools allow firms to examine and respond to customer demand and relevant trends quickly.
  • Value: the report cites research that cloud computing may reduce IT infrastructure costs by between 30-50%, freeing up a businesses' funds for deployment elsewhere.
  • Innovation: cloud technology provides flexible and agile infrastructure, reducing barriers to entry for small players who might not be able to invest in their own secure solutions. It offers ready-made platforms for early stage companies, including fintechs, to cut their time (and cost) to market.


However, future challenges include:

  • Cyber security and resilience: although their strength provides a deeper level of threat resilience than many companies would be able to source internally, external cloud services are not impenetrable (a recent example being the hack into Capital One’s cloud affecting more than 100 million of its customers).  A combination of vendor concentration risk and the spread of reliance on these platforms for service delivery may increase the risk of a successful cyber-attack affecting a wider range of companies’ systems.
  • Control: there are concerns that cloud infrastructure will reduce regulatory ability to scrutinise banks’ IT systems e.g. in relation to access and audit rights.
  • Privacy: privacy, consent, data security and encryption of cloud services, as well as key questions surrounding liability in the event of a data breach or fair usage of the data, were noted by the BoE as critical areas where further evaluation is required.
  • Regulatory: according to a Finastra survey cited by the report, 43% of UK firms stated that “complex regulatory requirements” were a key barrier to cloud uptake. Consequently, further clarity will be needed within this field. The BoE will be following up on their report in light of the concerns above, publishing a supervisory statement this year that “[describes] the PRA’s modernised policy framework on outsourcing arrangements” with a focus on cloud computing.  Alongside the September implementation of EBA’s guidance on cloud outsourcing arrangements, this will hopefully broaden regulatory comprehension within the sector.

What next?

In its report, the BoE refers to the work of UK Finance to develop a series of practices that might enable cloud computing to scale in finance. The BoE concludes that, as part of this process for encouraging the adoption of cloud technologies, it should work with the private sector to help firms realise the benefits of public cloud usage without compromising resilience by:

  • understanding and mapping concentration risks and interoperability, as well as building expertise within the BoE
  • testing operational resilience, including to cyber-risk
  • setting standards and guidelines for cloud usage, and
  • collaborating with international regulators on a longer-term approach to cloud oversight.


On balance, whilst current progress in the uptake of cloud technologies in financial services may seem slow for some, the forecast ahead looks promising.


Update posted: 05 July 2019

By Paschalis Lois

Cryptoasset Updates – Libra hitting hurdles and CFDs to be banned?


Since our last Libra update, there have been a few developments on the regulatory front due to more substantive statements made by regulators.

Comments from across the globe…

On a global level, several regulators as well as the Financial Stability Board have warned Facebook that it will face heavy scrutiny before deploying Libra, which Facebook hopes to have up and running by 2020. In the US, the House Financial Services Committee – the body that oversees the financial services industry – has sent a letter to Facebook asking it to "immediately cease implementation plans”.  The letter goes on to state that Libra poses itself as an “entirely new global financial system that is based out of Switzerland and intended to rival U.S. monetary policy and the dollar”.

In Asia, the Indian government has been adamant in expressing its reservations with the Libra project. A block by the Indian regulators could be particularly important, as the project’s general goal is to tap into the developing and “unbanked” section of the global population. In a less definitive tone, the deputy head of the People’s Bank of China’s Payment and Settlement Department considered that Libra will require the support and supervision from central banks as well as be incorporated in the relevant regulatory frameworks.

In similar fashion, albeit not specifically directed at Libra, a letter by the Financial Stability Board’s chairman, Randal Quarles, notes that “[a] wider use of new types of crypto-assets for retail payment purposes would warrant close scrutiny by authorities to ensure that that they are subject to high standards of regulation. The FSB and standard setting bodies will monitor risks very closely and in a coordinated fashion, and consider additional multilateral responses as needed”.

In the UK, both the Bank of England, and the FCA have been vocal on their attitude towards Libra. Mark Carney, the Governor of the Bank of England, in a speech noted that Libra “may substantially improve financial inclusion and dramatically lower the costs of domestic and cross border payments” and that the Bank of England “approaches Libra with an open mind but not an open door”. The FCA’s Director for Strategy and Competition, Christopher Woolard, also noted that if Libra comes to fruition it could be a very significant component of the payment/tech industry. To that effect, the CEO of the FCA, Andrew Bailey said two weeks ago that the FCA will work with the Treasury and the Bank of England to monitor Facebook’s plans.

Jumping the hoops

Preliminary regulatory considerations in the UK, in relation to Libra, concern its potential classification as E-money as was alluded to by Christopher Woolard in his speech, given that Libra’s initial steps will be to allow for remittances between users, and micropayments. Christopher Woolard touched upon this in his speech in the context of ‘stablecoins’, which Libra purports to be. To that effect, other cryptoassets to-date attempted to be used as payment assets. Indeed Bitcoin itself, albeit not a stablecoin, was intended to be a “peer-to-peer” exchange network but has not been classified as “e-money” by any regulators in the EU. Due in part to the fact that e-money must be represented by a claim on the issuer:

  • stored electronically, including magnetically,
  • issued on receipt of funds,
  • used for the purposes of making payment transactions (as defined in regulation 2 of the Payment Services Regulations), and
  • accepted as a means of payment by persons other than the issuer.

As cryptoassets are typically issued through pre-determined algorithmic processes, as opposed to on-demand by a central issuer in receipt of funds, they would usually fail on that front. At the same time most cryptoassets are not intended for payment, or indeed are not accepted widely by third parties as a means of payment.

In any case, assuming that Libra would be classified as e-money in the UK, Facebook, and in this case, Calibra would require an e-money licence, as well as a payment service provider licence.

Taking stock from the above, Libra will likely face heavy scrutiny before its implementation. While not ordering a direct halt as in the US, the UK regulator is also putting the new cryptoasset under the microscope.


Update posted: 05 July 2019

By Paschalis Lois

FCA considering a ban of CFDs on cryptoassets

In a wider policy statement concerning restrictions on the sale of CFD and CFD like options to retail customers (see here for summary), the FCA announced its intention to publish a new consultation paper on a potential outright ban on “the sale to retail clients of derivatives and certain transferable securities that reference cryptoassets”. The FCA stated that this followed its commitment made in the UK Cryptoasset Taskforce’s final report.

To that effect, the FCA released its consultation paper on 3 July 2019 in which it looks for stakeholder opinion on its proposed ban on the “the sale, marketing and distribution to retail clients of all derivatives referencing unregulated cryptoassets that allow transferability (i.e. can be widely exchanged on cryptoasset platforms or other forum).” The underlying risks outlined by the FCA, prompting the ban, include the inability to properly value cryptoassets, risks of market abuse and illicit activity, as well as the extreme volatility of cryptoassets. The FCA also has concerns about the limited understanding of UK retail investors of cryptoassets and the nature of complex derivatives referencing them.

The proposed ban will cover CFDs, derivatives, and Exchange Traded Notes referencing some but not all types of cryptoassets. The proposed ban will also not apply to retail funds as they are currently covered by restrictive rules on the type of investments they can undertake (e.g. for UCITS and NURS funds), nor will it apply to non-retail clients.

On the cryptoasset front, the ban, will not cover:

  • tokens that are not widely transferable e.g. tokens of a private network that can only be used within that network,
  • tokens that are classified as e-money as the requirements of the E-Money Regulations will apply, and
  • tokens that are classified as ‘security tokens’ as those will be viewed as Specified Investments and will not pose the same risks to the market.

The geographical restrictions of the proposed ban would apply to ptober 2018

By Nathan Dudgeon

HM Land Registry gets serious about blockchain

Last week HM Land Registry (HMLR) announced it was partnering with software company Methods, who will utilise R3’s blockchain platform, Corda, for the second phase of the HMLR’s development project, Digital Street.

Digital Street is trying to rethink the way everyone currently buys and sells property, which sounds like a standard half-baked ICO white paper until you realise its coming from the UK government. It’s not a service, it’s an ongoing research project.

Phase one of the project saw HMLR create a small digital (and fully machine readable) property register. It then worked with numerous parts of the property industry to produce three working 'proof of concepts'. There’s more detail on these in the above link. Having 'gathered many valuable insights', HMLR launches phase two to 'focus on further parts of the buy/sell process'.

The goal of this blockchain collaboration will be to produce another proof of concept, using distributed ledgers and smart contracts, to prove that they can make another part of the buy/sell process easier.

For many, buying and selling property is high on the list of the most frustratingly slow processes to go through. It seems that there are delays at every conceivable stage of the process – from negotiation through to registration – and it will be interesting to see whether the upcoming proofs deal with more than just registration. This partnership appears to have a budget of about £750,000, so we’re expecting some good things. Watch this space!



Update posted: 08 October 2018

By Ciara Davies

Stable coin: 'a instrument for Venezuela's economic stability' or a 'scam on top of another scam'?

Venezuela has pinned all its hopes on the success of its newest currency the Petro, becoming the first nation to issue its own cryptocurrency. The petro is a stable coin, backed by 5.3 billion barrels of Venezuelan oil worth $267 billion. In a further unprecedented move, Venezuelan President Maduro announced in July that he intends to tie the devalued Venezuelan Sovereign Bolivar to the Petro.

But what are stable coins?

Stable coins are a type of cryptocurrency whose value is tied to a stable asset, such as gold or the U.S dollar. In comparison to cryptocurrencies such as Bitcoin and Ethereum, which are known for their volatility and day-to-day fluctuations, stable coins are “price stable”. This in theory allows them to be used by consumers in every day transactions – i.e. as an actual currency, rather than an investment.

All a little too good to be true?

Even if a stable coin is pegged against an inherently stable asset such as the US dollar, there are risks. Take Tether's USDT, which is pegged against the US dollar; Tether’s consistent refusal to provide evidence that it has sufficient dollars in the bank does not exactly inspire confidence that the coin is fully backed. Although for now Tether holds its 1:1 backing, commentators worry that if the market loses faith in this, USDT holders will try and redeem their US dollars and ultimately Tether will refuse. A virtual “run on the bank” situation will ensue, with the value of USDT plummeting.

This risk is even more apparent with the Venezuelan Petro. Although, it is pegged against the value of barrels of oil owned by the Venezuelan state oil company, PDVSA, the Petro is not exchangeable for the oil. With no real link to the oil that it is pegged against, the Petro is, ultimately, just an unbacked currency. Linked to this is the fact that the value of the Petro is pegged to the fixed price of a barrel of oil, which has been set at $60USD. Considering that the Venezuelan oil industry has been in steady decline, it remains a mystery how this value was set and there are concerns that the value of the oil reserves in Venezuela is considerably lower than reported. In the event that Petro holders attempt to redeem their tokens for the value of the oil reserves, they will find that this is not possible. This has led many to the conclusion, that the Petro is just a form of governmental debt, which, considering Venezuela’s ailing economy, is a very risky proposition.

For better or for worse, stable coins are now in mainstream use and in the coming months we will see other sovereign states start to issue them. Indeed, Iran and Russia have already said their governments could be interested in issuing stable coins backed by oil reserves as a way to avoid dollar transactions, allowing them to bypass sanctions imposed by the USA and the EU.



Update posted: 20 September 2018

By Ciara Davies

FCA annual public meeting 2018

The FCA public meeting took place on Tuesday 11 September 2018. It was chaired by Charles Randell, the Chairman of the FCA and Andrew Bailey, the Chief Executive of the FCA who provided his view on the issues for the forthcoming year. This was followed by a question and answer session that opened up questions to the floor. 

The application of technology and the challenges that this creates was referenced throughout both speeches. There was also a strong emphasis on accountability to the public.

One of the areas that was highlighted in Andrew Bailey’s speech was the impact of technological change and innovation. He noted that the FCA has an ongoing obligation to balance the risks that are posed by the opportunities of innovation. Cryptoassets were used as an example. He said that he is keen to see the potential of the underlying technology, but warned against the risks that are also created by these, such as by price volatility.

One of the points that Charles Randell focused on was on developments in technology and how areas like big data and machine learning are a test of regulators’ abilities to adapt. He acknowledged how technology can be enormously positive and integral to delivering financial advice, products and services. For example, with Regtech opportunities, such as in managing money laundering risks. However, there was also a great focus on the risks that new technologies can create. For example, by exposing more people to problems like online fraud and misuse of data.

Given the wide regulatory coverage of the FCA it is not surprising that Charles Randell also highlighted how new technologies can leave some customers, particularly the most vulnerable behind and how technology therefore is a ‘double-edged sword’, which the FCA must manage. He did however, highlight how the early results from the Sandbox show that it is starting to provide the intended benefits, of providing relevant products that can be tested effectively. It has also helped improve access to finance for innovators and ensured that the correct safeguards are built and developed into new products and services. 

Andrew Bailey highlighted operational risks, in particular relating to operational resilience, technological change, financial crime and data as key for the forthcoming year. In relation to data he highlighted the risks with the complexities for firms when data management goes wrong. He cited the risks around data as the fastest rising risk in the landscape.

Please use the following links to read transcripts of the full speeches:

Charles Randell

Andrew Bailey



Update posted: 08 August 2018

By Heather Musk

FCA publishes the Global Financial Innovation Network

The FCA published on the 6 August the long anticipated consultation document (PDF) to establish a Global Financial Innovation Network (GFIN) which they first proposed in February 2018. The regulators that have signed up to GFIN are: Abu Dhabi Global Market, Autorité des marchés financiers, Australian Securities &Investments Commission, Central Bank of Bahrain, Bureau of Consumer Financial Protection, Dubai Financial Services Authority, Financial Conduct Authority, Guernsey Financial Services Commission, Hong Kong Monetary Authority, Monetary Authority of Singapore, Ontario Securities Commission, Consultative Group to Assist the Poor (World Bank).

It is notable that of the regulators that are taking part there is not a stronger European presence. However, perhaps European regulators may choose to join GFIN as the consultation develops (and as such a need might intensify as the UK leaves the EU).

The consultation sets out three main functions of the GFIN:

  1. To act as a network of regulators to collaborate and share experience of innovation in respective markets, including emerging technologies and business models.
  2. Provide a forum for joint policy work and discussions.
  3. Provide firms with an environment in which to trial cross-border solutions. 

As many aspects of fintech and financial markets are international, a global sandbox enables developers of fintech to trial and develop their technology so that it works to accommodate requirements in several different jurisdictions. The consultation demonstrates that the ambitions of the GFIN have expanded from when the FCA mooted a global sandbox in February 2018.

The GFIN looks to offers an agile way of financial services regulators working collaboratively, to conduct joint work and share their experiences of financial innovation, thereby improving financial stability, integrity, customer outcomes and inclusion. It is envisaged that this may include collaborating on uses of regtech and suptech and provide a forum for certain policy debates between regulators, industry, academia and other relevant stakeholders. It has also been suggested that regulators could work together on key policy questions to inform approaches taken by regulators. However, the scheme is not compulsory and therefore the regulators taking part can opt out of cross-border trials, networks and discussions.

GFIN is proposed to be governed by a steering group that would be made up of a smaller number of members. This group would be chaired by one of the members, selected on a consensus basis, defaulting to a voting process of all GFIN members if necessary.

The consultation requests feedback on the questions posed in the consultation that include requesting views on the mission statement for the GFIN, its proposed functions and where it should prioritise activity, by 14 October 2018. This will include for stakeholders to provide informal feedback through a range of engagement actiE

  • Should we give robots legal personalities in the same way as companies? What implications would this have on the current legal system and society as a whole?
  • The fact that theroducts sold, distributed or marketed in or from the UK to retail clients (i.e. it would apply even where UK retail clients seek such providers in the EEA). It would also prevent UK brokers or platforms from providing products available in other jurisdictions to UK retail clients. However, as the FCA goes on to say, “retail clients could still seek products from a third country firm via reverse solicitation” and hence the proposed ban does not seem to apply in such circumstances.

    This comes at a time when the largest cryptoasset exchange by volume, Binance, has outlined that it intends to run cryptoasset futures on its exchange (according to coindesk). It will be interesting to see whether, following a ban by the FCA, such service will become unavailable in the UK. The FCA suggests a transition period to ensure that retail investors exposed to these products are treated fairly and consumer loss is minimised. The consultation will close on 3 October 2019.


    Update posted: 11 March 2019

    By Alex Fallon and Nathan Dudgeon

    Mastercard and HSBC bet that jingles will retain customers

    Recently, Mastercard announced 'the sound equivalent of our iconic red and yellow circles'. Mastercard's audio-only press release described how the changes will add a new dimension to their brand identity and reflect the changing way consumers interact with the world around them.

    They are not the only financial heavyweights moving into audio branding. HSBC launched its own sonic brand in January which is said to represent the next stage in its own global refresh.

    Might there actually be an industry shift in the way financial services market themselves? Why?

    What is sonic branding?

    The practice itself is not new, and had enjoyed varying success. One indisputable triumph is Intel Technology - you probably even hummed it in your head as you were reading this. Audio is a powerful way to connect to customers, and quite underused in comparison to the visual medium. But it is the growing prevalence of smart shopping which has made financial heavyweights such as Mastercard and HSBC sit up and take notice.

    It is estimated that by 2022, conversational commerce (i.e. buying something through voice controlled devices) is going to be worth $40bn+ across the US and UK alone. This has been fuelled by the growing ubiquity of IoT devices and voice-controlled speakers such as Amazon Echo and Google Home.

    Sonic branding in the financial services market

    These developments are particularly interesting in the cases of HSBC and Mastercard as they indicate a shift in focus. Previously, financial companies, especially banks, could rely on customers’ continuing loyalty (aka ‘stickiness’) but there is a lot that threatens it: from Open Banking, to massive simplification of the current account switching service. Incumbents need to 'up their game' and focus on retaining their customers through brand recognition and familiarity (among other things – one would hope that they also focus on customer UX, product quality and customer service!). 

    Sonic branding has been historically overlooked in this sector. However, the two brands have fully committed to the new approach and Mastercard, for example, intend to use the sounds in advertisements, logos, ringtones, musical scores and hold music.

    Interestingly, Mastercard is also trialling the use of a shortened version of its new sonic brand at the point-of-sale. As contactless payments become increasingly frequent it seems Mastercard has set the ball rolling on a more personalised point-of-sale experience. A similar feature is also available on Monzo where customers are alerted to account activity by a cash-register style 'Kerching' noise. This may seem frivolous but companies are desperate to stand out in a crowded market. Traditionally this was done through financial incentives and, while this remains important, low interest rates and growing commoditisation of financial services have created a new focus on brand identity. This is particularly true of the credit/debit card market where banks have switched the orientation of cards, changed the material or even, in the case of the UK-based business account app 'Anna', introduced a card which 'meows' when you make a purchase.

    The fact your bank card makes a unique sound when you use it does not offer any practical benefits. But it does say something about your provider. It says that they embrace innovation (or just ‘being different’) and that, by association, so do you.

    Mastercard and HSBC cards won't meow, sadly, but they don’t have the same brand objectives as start-ups like Anna. They have huge established customer bases and their branding is therefore focused on encouraging a familiarity and loyalty amongst existing customers which will discourage them from switching.

    Time will tell whether sonic branding is the new frontier for customer loyalty, or whether it’s just the latest attempt to avoid becoming ‘the dumb pipes’.



    Update posted: 7 March 2019

    By Gareth Malna and Jad Soubra

    Is Europe on the verge?

    Last year, the European Central Bank launched the TARGET Instant Payment Settlement (TIPS) scheme which facilitates instant pan-European payments. The scheme comes as part of the EU Commission's vision of building Europe into a global leader within the payments technology space. Addressing the third Annual Fintech Conference this week, the Commission’s Vice President Valdis Dombrovskis shared his enthusiasm for the scheme’s potential to create 'a pan-European, fast bank-to-bank payment network.' The lack of adoption within the market, however, is both surprising (given how great this technology is) and a cause for concern.

    Keen to promote uptake of TIPS, the Commission is toying with the possibility of a 'stronger regulatory push', which may be included in its review of the Payments Account Directive later this year. Whether this will bring about the Commission's ambitions for the EU's Fintech future will be an interesting development to watch.

    The vice president’s full speech can be found here.


    Update posted: 7 February 2019

    By Nathan Dudgeon

    SWIFT and Corda announce partnership

    Although distributed ledger tech may have lost the mainstream limelight to the likes of AI, that doesn’t mean there isn’t anything interesting happening. On 30 January, SWIFT gpi and R3’s Corda announced a collaboration that will get the two techs working together, with a live demo to be shown in September 2019.;

    The SWIFT gpi is built to disrupt correspondent banking, which solves the problem of how a UK bank can deal with transactions in, say, New York, even if it doesn’t have a branch there. The gpi gives each transaction a tracking reference so it can be followed through the system (which was previously a black hole), allows the sender to choose the route through various intermediary banks, see the fee levels, and keep an eye on the performance levels of each intermediary in the process (e.g. do they have a history of delaying things). The SWIFT gpi usually settles cross border transfers in about half an hour, and is basically used by all banks everywhere.

    It’s seen as a competitor to Ripple, though the differences are a blog post for another time!

    Most of the media reporting on this is recycling the following statement provided by R3:

    SWIFT GPI will integrate directly to Corda Settler, the application that allows participants on the Corda blockchain to initiate and settle payment obligations via both traditional and blockchain-based rails. This will enable obligations created or represented on Corda to be settled via the large and growing SWIFT GPI network.

    In English that means: it will be much easier for people using Corda to settle crypto transactions in fiat (‘normal money’), from all over the world, very quickly. Corda will settle the payments off-ledger through the SWIFT gpi, which is fast, secure, transparent, and very, very global.

    It’s a big move for Corda, and we look forward to seeing the demo at Sibos London in September.


    Update posted: 5 February 2019

    By Annabel Cole

    Equity crowdfunding - 5 things you may not know

    You could be forgiven for feeling slightly bewildered by the topic of equity crowdfunding. After all, since its inception in 2013, it has continued to change face and evolve from 'alternative' financing to increasingly mainstream. In this series of updates, we will de-mystify this type of investment-based crowdfunding, which can cause much confusion. Read our first post: Equity crowdfunding – 5 things you may not know.



    Update posted: 27 November 2018

    By Paschalis Lois

    The FCA recently released its final report on crypto-assets through its Cryptoassets Taskforce.

    The Report looks deeper into the types, benefits, and challenges of distributed ledger technologies (DLT) and cryptoassets. It balances their potential and addresses the short term challenges of these technologies, and then proposes appropriate next steps.

    Distributed Ledger Technology

    Potential Benefits:

    • Enhanced resilience: because it is tamper-proof and distributed, DLT offers a more secure alternative to some current methods of record keeping
    • More efficient reporting/auditing/oversight: the above lends its hand to more efficient regulatory oversight, as the relevant authorities can easily access the ledger
    • Potentially more efficient settlement processes and automated contract tools: today, most value transfers require a trusted intermediary to ensure the transaction takes place in good faith e.g. a bank, central clearing counterparties etc. DLT does not. This, coupled with the ability of DLT to employ smart contracts (software that can automate the execution of transactions), makes DLT a promising alternative to current value transfer mechanisms.

    Potential issues and barriers to adoption

    DLT may have been around a while now (Bitcoin celebrated 10 years last month), but it is still an early-stage technology. The Report recognises that DLT still wrestles with legal challenges, such as how to regulate it, the general lack of understanding, and the fact that most DLTs today work as segregated pools of data that cannot work with one another. For more information see our  introduction to blockchain.


    The highlight is that cryptoassets can be useful in capital raising and creating new investment opportunities.

    Nevertheless, the Report also underlines their risks. Firstly, users of cryptoassets are anonymised – an attractive choice for illegal transactions. Secondly, due to lack of understanding, or misinformation, consumers have been (and still are) tricked into investing in scams or considerably riskier investments than they would ordinarily choose. You'll be aware already of the news headlines about people’s huge losses.

    These problems are made worse by the fact that the market infrastructure (e.g. exchange platforms and electronic wallets that hold such cryptoassets) is still in relatively early development - making cryptoassets more vulnerable to unlawful exploitation.

    Taskforce response to DLT and cryptoassets

    In the short run for cryptoassets, the Taskforce recommends focusing on clarifying regulation on cryptoassets and raising consumer awareness. As a result, the FCA intends to issue guidance by the end of 2018 about whether certain cryptoassets should fall within current regulation. Hopefully it’ll be more specific than previous guidance, and don’t forget to see what ESMA thought about where crypto fits into MiFID regulation in our blog post on 6 November below.

    In the meantime, the Taskforce advises on continuing the support given to DLT projects, such as through the existing governmental investments in DLT and the Regulatory Sandbox, in order to reap the full benefits of this promising technology.



    Update posted: 22 November 2018

    By Gareth Malna

    Central bank issued digital currencies – protectionist solutions to a problem that may not exist

    With the publication of Discussion Paper "Casting Light on Central Bank Digital Currency" by the International Monetary Fund, the Bank of England stating that it is open to the issuance of a digital currency and the Swedish e-krona starting its pilot scheme in 2019, digital currencies are firmly on the radar of central banks. However, until further arguments are presented that demonstrate that state intervention is preferable to private innovation, we remain sceptical of the benefits of the IMF’s proposal.

    Head of the IMF, Christine Lagarde, suggests digital currencies should be the responsibility of the state, designed to (i) deal with decreases in cash usage (ii) strengthen financial inclusion, (iii) strengthen security and consumer protection and (iv) provide better privacy protection.

    But aren’t central bank issued digital currencies just a reinvention of the current banking and financial system? Recall that the advent of cryptocurrency was a libertarian move based on the premise that the financial system should be de-centralised – a purposeful design to counter the deep mistrust of the state and central banks that the original actors held following the financial crash. The IMF’s idea that central bank digital currency could supplant existing cryptocurrency is potentially the first notable move to bring crypto currencies back under the bank’s control.

    Benefits to financial inclusion

    With around 2.5 billion people in the world not using any formal or semi-formal banking or financial services, Lagarde argues that central bank issued digital currencies would be able to reach people in remote and marginalised regions where banks do not serve customers, and on this point we can see the benefit of the proposal. However, the effectiveness of any distribution of digital currencies and their ability to reach the world’s “unbanked” will be played out in the detail of each country’s individual proposal – which could still seek to limit distribution as a means of protection. Meanwhile, “private” cryptocurrencies (to use the terms of the Discussion Paper) continue to operate in such a way that anybody can access them and the IMF’s proposals do not necessarily add anything more in the context of central bank issued currencies.

    Security and consumer protection

    According to Lagarde, security and consumer protection, in the absence of cash, would also be better protected by digital currencies issued by the state as opposed to private payment providers, who would be open to cyber-attacks and glitches. The veracity of this argument is not fully clear and fails to fully describe how the current systems proposed for Bitcoin and Ether (to consider the two largest currencies) are insecure - though one could see how a state-backed currency may be less prone to value swings based on the Tweets and commentary of relatively few individuals than some of the less voluminous currencies.


    In terms of privacy, the use of blockchain makes cryptocurrency transactions public, traceable, and permanently stored on a pseudonymous basis. However, with careful use the identity of the user can be protected. Lagarde, as expected, appears to suggest that a system sponsored by central banks would look to include greater personal accountability as to do otherwise would be a 'bonanza for criminals’. Query at what sacrifice to the privacy of law abiding individuals - there is clearly a public debate to be had around state surveillance of the flow of money at a granular level.

    In summary, the IMF’s proposal begins to look less like an electronic replacement for cash and more like a distributed substitute for existing debit/credit card systems but potentially without the ability to “cash out” into fiat currency.



    Update posted: 6 November 2018

    By Alex Gillespie

    ESMA stakeholder group reports on Initial Coin Offerings and Crypto-Assets

    On 19 October, ESMA released an own-initiative report from its Securities and Markets Stakeholder Group advising ESMA on how to address the risks of ICOs and Crypto-Assets. It provides an overview of recent market developments and the regulatory treatment of ICOs and crypto-assets across 36 European jurisdictions.

    The group’s advice to ESMA is to provide level 3 guidelines or create supervisory convergence on the following areas:

    1. Interpreting the MIFID definition of 'transferable securities'

    This includes clarifying whether transferable asset tokens which have features typical of transferable securities are subject to MiFID II and the Prospectus Regulation. The group was of the view that payment tokens and utility tokens are not covered, however, since they share similar risks to securities traded on capital markets, the group recommended that ESMA raise this with the EBA and European Commission.

    On the other hand, transferable asset tokens may already be subject to MiFID II and the Prospectus Regulation depending on their characteristics and the group recommends that ESMA:

    1. provides guidance (in the form of Level 3 Guidelines) as to whether they should be considered transferable securities under MiFID II, and
    1. asks the Commission to add asset tokens which share characteristics with derivatives to the list of MiFID financial instruments.

    2. Interpreting the MiFID definition of 'commodities'

    This concept is crucial to determine whether an asset token with features typical of a derivative is a MiFID financial instrument or not. The group recommends that ESMA clarifies this in level 3 guidelines together with the circumstances in which asset tokens giving a right to a commodity are to be considered MiFID financial instruments;

    3. Interpreting multilateral trading facilities (MTFs) and organised trading facilities (OTFs)

    The group was of the view that the organisation of a secondary market in asset tokens should be covered either within the concept of an MTF or OTF and urged ESMA to clarify the definitions of MTF and OTF under MiFID II to make it apparent if this was the case and that, if so, the Market Abuse Regulation should then apply.

    4. Authorisation/Licence requirements

    Regulatory convergence/guidelines on the fact that, in all situations where an asset token is to be considered a MiFID financial instrument, persons giving investment advice on those asset tokens or executing orders in those asset tokens are to be considered investment firms and should be licenced as such unless they qualify for an exemption under MiFID II.

    5. Sandboxes

    The group also recommends that, whilst sandboxes should not be 'overly coordinated' at the European level, some coordination is necessary and it advises ESMA to set minimum criteria for the:

    1. scope, operating conditions and measures to ensure investor protection
    2. transparency to the public in relation to the same
    3. regular reporting to ESMA and to the public on the experience and operation of the sandbox and the initiatives tested within it.

    For further details, including the recommendations made by the group for the regulation of ICOs and crypto-assets, read the full report.



    Update posted: 22 October 2018

    By Nathan Dudgeon

    FCA announces fifth cohort for the Regulatory Sandbox

    The Sandbox has been a great success for the FCA’s Project Innovate – it has been emulated by financial regulators across the world, and there are various ‘global sandboxes’ emerging too. We’ve reported on previous announcements and cohorts before on this blog (just ctrl+F ‘sandbox’).

    The sandbox appears to have brought a lot of value to participants, from both credibility in their customers’ eyes and early debugging.

    Apply online, before 30 November.



    Update posted: 15 Oc Law Society has decided to launch this investigation is a testament to the significant advances that have been made in this area over the last few years. The report is an interesting read for anyone interested in AI but, most importantly, asks vital questions about how society thinks AI should best be utilised while attempting to provoke a public debate. This is clearly a world still under construction as many of the existing technologies offer limited functionality and/or require significant human training and integration before offering anything genuinely useful.

    However, as this nascent technology rapidly grows, questions about the role of AI in society will cease to be theoretical and will start to become a pressing political issue. It is better therefore, to have this debate now and start to put in place the rules behind how AI should fit within the needs of society rather than the other way round. The Law Society is aware of this and their investigation is a welcome foray into this increasingly important area.


     Update posted: 15 June 2018

    By Heather Musk

    FCA releases ‘Dear CEO’ letter on Cryptoassets and Financial Crime

    In the letter addressed to UK banks issued on 11 June 2018, the Financial Conduct Authority (FCA) warns specifically on the use of cryptoassets being used for criminal purposes. The letter acknowledges how these assets are attractive to criminals because of their anonymity and ability to move money between countries.

    The letter advises that reasonable and proportionate measures should be taken to lessen the risk of facilitating financial crimes, including: 

    • developing staff knowledge and expertise on cryptoassets to help them identify the clients or activities which pose a high risk of financial crime 
    • ensuring that existing financial crime frameworks adequately reflect the crypto-related activities which the firm is involved in, and that they are capable of keeping pace with fast-moving developments
      engaging with clients to understand the nature of their businesses and the risks they pose
    • carrying out due diligence on key individuals in the client business including consideration of any adverse intelligence
    • in relation to clients offering forms of crypto-exchange services, assessing the adequacy of those clients’ own due diligence arrangements
    • for clients which are involved in Initial Coin Offerings (ICOs), considering the issuance’s investor-base, organisers, the functionality of tokens (including intended use) and the jurisdiction.

    High-risk areas where crypto-related activities might be carried out include:

    • offering services to cryptoasset exchanges
    • carrying out trading activities for clients or with counterparties whose source of wealth derives from cryptoassets 
    • arranging, advising or otherwise taking part in ICOs.

    The FCA also elaborates that following a risk-based approach does not mean banks should approach all clients operating in these activities in the same way. Instead, because the risks associated with different business relationships in a single broad category can vary, the FCA thinks it appropriate to manage those risks appropriately.

    If you are a bank and consider that your clients may be holding or trading cryptoassets (this may be discovered by enquiring about the source of a deposit), then existing requirements for checking the source of wealth and funds are still risk sensitive. Firms should assess the risks posed by a customer whose wealth or funds derive from the sale of cryptoassets. If a firm identifies a customer is using a ‘state-sponsored cryptoasset… designed to evade international financial sanctions’, then this should be seen as high risk.



    Update posted: 05 June 2018

    By Nathan Dudgeon

    Google bans crypto advertising

    Google announced in May that it was updating its ‘new restricted financial products policy’. The policy came into effect at the start of this month, and bans the adverts of ‘Cryptocurrencies and related content (including but not limited to initial coin offerings, cryptocurrency exchanges, cryptocurrency wallets, and cryptocurrency trading advice)’.

    Facebook and Twitter made the same move earlier this year, with consumer protection as the clearly stated aim. Scott Spenser, Google’s director of sustainable ads, told CNBC in March:

    We don’t have a crystal ball to know where the future is going to go with cryptocurrencies, but we’ve seen enough consumer harm or potential for consumer harm that it’s an area that we want to approach with extreme caution’.

    Most people can agree that consumer protection is positive, so trying to prevent regular people from investing in extremely volatile products without being fully aware of the risks is also positive. On the other hand, this development is worrying because this action could be seen as going beyond Google's remit.

    It may seem like regulatory language is not developing at the same pace as technological innovation or the commercial exploitation of recent interest in crypto and token offerings. It is clear though that regulators are not just sitting idle. In the USA, the U.S. Securities and Exchange Commission actively pursues potentially fraudulent initial coin offerings. In the UK, although there is no specific regulatory framework to catch crypto assets, the Financial Conduct Authority continues to keep a watchful eye over developments. It considers that the existing regulatory perimeter is currently enough to catch those activities that are likely to be troubling from a consumer protection standpoint.

    This is why Google’s decision to act as a quasi-regulator in this context, is a potentially troubling development. Stepping in and blocking the crypto market may sound like consumer protection, but it is potentially overstepping its perceived role as gatekeeper to information.



    Update posted: 29 May 2018

    By Harry Tiara

    Rewriting the insurance policy

    Like much of the financial world, the insurance industry has been slow to recognise the growth of fintech (financial technology), regtech (regulatory technology), paytech (payment technology) and everything else ‘tech’. This is why those in the ‘insurtech’ area are making a seriously big impact.

    For example, Lemonade (an American insurer aimed at individuals) automates pretty much everything that they do, such as using Chatbots and AI to run everything from the process of purchasing a policy, through to claims management, payouts and fraud prevention. The days of being stuck on the end of a telephone waiting to speak to customer service could soon be coming to an end. In late 2016 Lemonade paid out within 3 seconds of a claim for a stolen coat - an unofficial world record!

    Lemonade is also literally rewriting the insurance policy.

    A standard insurance policy is typically 40 pages of exceptions to exceptions and jargon from centuries long gone. Lemonade’s ‘Policy 2.0’ is open source and is a standard digital policy that can be altered by users to match their own bespoke requirements. For example, home contents insurance may be $10,000, but with Lemonade this amount can be modified simply by clicking on a sentence.

    Lemonade’s aim is to be as transparent and legible as possible - and Policy 2.0 is about as transparent as an insurance policy can get. You can even read (and fully understand) it in 10 minutes without needing an actuarial degree.

    There are questions for Lemonade to answer however: Will readability be prioritised over comprehensiveness? How enforceable is the policy?

    In true fintech style, Lemonade has opened up the process for all stakeholders interested in insurance or tech to contribute their thoughts through GitHub.

    If you’d like to learn more about insurtech, register for the event that we’re hosting with BILA on 21 June 2018 Register.



    Update posted: 25 May 2018

    By Nathan Dudgeon

    FCA reviews the robo-advice sector

    On Monday, the Financial Conduct Authority (FCA) published their review of firms in the automated investment sector. Unfortunately, it wasn’t a glowing report.

    The FCA conducted two separate reviews.

    The first review covered seven firms offering automated online discretionary investment management (i.e. on an ongoing basis). This covered most of that entire market at the time of the review. The second review contained three firms providing exclusively automated retail investment advice. Again, this covered most of the market at the time.

    The FCA’s report detailed several issues, but two of the biggest were:

    • not being clear on fees and service levels. Some firms compared their services to their competitors’ without explaining the difference
    • not understanding the individual client well enough. A lot of the advice was based on assumptions, or is ‘streamlined’ (narrowing the focus to just the most relevant factors). This is acceptable in principle, but the FCA explained that ‘this means taking a proportionate approach to information gathering while maintaining the appropriate level of client protection’

    Automated investment services must meet the same regulatory standards as traditional discretionary or advisory services. The FCA’s findings include detailed references to the FCA handbook, as well as non-handbook sources like European Securities and Markets Authority Guidance. If you are a firm looking to operatvities the authorities listed in the consultation will undertake.



    Update posted: 24 July 2018

    By Tom Whittaker

    What next for InsurTech?

    Startupbootcamp, a global incubator for the tech scene, released its latest report on the changing landscape of InsurTech last week. According to the report, there are two areas that show us where startups are moving to. In this blog we draw out some of the implications.

    The focus is not just on insurance

    Any tech startups that have an expertise in data and analytics may be of interest to insurers, and vice versa. Insurers are not just interested in startups who are looking to poach their customers.

    Take two examples:

    • HealthTech companies may not focus directly on insurance, but the user-data they collect and their expertise in analysing it can be of value to an insurer and its customers in identifying risks and predicting claims.
    • In AgriTech, the near real-time data collected from crop monitoring used by farmers to improve yields, can also be used as part of a claims process to identify mitigation strategies and calculate loss.

    So when you think about InsurTech, do not just think about insurance-related startups.

    Data is key


    There is a significant increase in the number of Startupbootcamp applicants who focus on providing more (or better) data. Data can be collected from new sources, with greater precision and at a lower cost. Access to that data gives insurers the opportunity for more precise, nuanced analysis.

    Vehicle telematics for example, have existed for years but collection en masse of standardised data has been difficult. There are startups who are changing that by collecting data directly from thousands of cars and giving insurers access to all that data through an exchange.

    There is however, the risk that insurers could drown in too much data. Can it be made sense of? What if some data is missing or misunderstood? This partly explains why Startupbootcamp has also seen an increase in applicants who focus on AI, big data and data analytics.

    Into the future

    Here are a few thoughts on where the changing nature of InsurTech leads us:

    • Startups have a significant advantage – they start fresh. They do not have legacy systems that may be difficult to interface with new software, and they do not have large amounts of historic data that can cause GDPR problems. This means that they can adapt as opportunities arise.
    • Data is critical. What happens when it is unavailable or inaccurate? What happens if there is a problem with the algorithm – a flash crash? Startups and insurers need to be nimble to respond.
    • Collaboration is crucial but while ideas need to be shared, IP and key talent must be protected.



    Update posted: 09 July 2018

    By Gareth Malna and Georgia Bridgen

    The Bank of England emphasises the risks of cryptoassets

    The Bank of England’s (BoE) Dear CEO letter was published on 28 June by its deputy governor, and has all the hallmarks of preserving the status quo as far as prudential regulation of cryptoassets goes.

    The letter, issued to the CEOs of banks, insurance companies and designated investment firms warns them to take a cautious approach to the exposure of their firms to cryptoassets - no surprises there. Financial services firms have long sought to gain exposure to cryptoasset classes to seek market outperformance. The Prudential Regulation Authority however, wants to make clear that valuation is not the only risk involved as fraudulent or ill-thought-out schemes may leave firms red faced if they invest directly.

    This cautious approach seems to be becoming the norm from the regulators, including the Financial Conduct Authority, which we have recently discussed in our post on 15 June (‘FCA Releases ‘Dear CEO’ letter on Cryptoassets and Financial Crime).

    On the up side, firms operating in the fintech space should be heartened by the confirmation by the BoE that it recognises that ‘the underlying distributed ledger or cryptographic technologies, on which many cryptoassets rely, have significant potential to benefit the efficiency and resilience of the financial system over time.’ While this is not a wholesale endorsement of the current state of play, it is about as equivocal as the BoE is prepared to be on any topic and should be welcomed by anyone interested in this space.

    Meanwhile, for those regulated firms who are exposed to cryptoassets (whether directly or indirectly), be sure to apply a suitable risk-based approach to your strategies or the regulators may take a dim view of your activities.



    Update posted: 03 July 2018

    By Benjamin Boss

    Where does Ant Financial fit in the traditional financial market place?

    On 30 May 2018, Ant Financial (Ant) signed a strategic cooperation agreement (SCA) with Shanghai Pudong Development Bank, the third SCA signed by Ant for the month of May. The SCA (as with those previously signed with Huaxia Bank and China Everbright Bank) creates a partnership under which Ant provides technological support for the prevention of fraud and to assist with online risk management (including loan, transaction and marketing fraud prevention).

    Ant Financial, controlled by Ali Baba Group founder Jack Ma, has created a shared credit system and financial services platform through technology. It hosts among other things, its flagship mobile payment and lifestyle payment platform Alipay, which was integrated into the new ‘Ant Financial’ in 2014. Early 2018 saw the release of further financial information and news of cooperation agreements in China, India and Indonesia. This has led to it becoming the world’s third largest third-party payments platform, as well as the company being valued at over $100 billion for the first time.

    Firms such as Ant do not fit into traditional marketplaces or face traditional competitors but as a firm offering wealth management, lending, insurance and credit scoring, it looks set to create a new global landscape for the provision of financial services facilitated purely by opportunities created by ‘Fintech’ more generally. Whether other firms will follow suit by agglomerating various businesses under one umbrella is yet to be seen - particularly as Fintechs have traditionally looked to act in more agile ways under niche specialisms.



    Update posted: 02 July 2018

    By Nathan Dudgeon

    Are cryptocurrencies a big deal?

    Two recent reports from two major financial organisations are pointing towards cryptocurrencies being recognised as ‘a big deal’ in the mainstream.

    The Financial Stability Board’s (FSB) role is to monitor and make recommendation about the global financial system. It met on 25 June and, among other things, talked about cryptocurrencies. That is a really big deal.

    The FSB decided that crypto was not a systemic risk (yet), but the very fact it was on the agenda and will continue to be monitored is worth noting.

    ‘While the FSB assesses that crypto-assets do not pose a risk to global financial stability at this time, they raise a host of issues around consumer and investor protection, as well as their use to shield illicit activity, money laundering and terrorist financing’

    Going further, the Bank of International Settlements (BIS) – essentially a bank for central banks – thinks that cryptocurrencies have the potential to ‘bring the internet to a halt’. Breaking the internet would skip crypto straight past ‘systemic’ risk and into ‘apocalyptic’. For that to happen however, Bitcoin would have to handle all of the world’s digital retail transactions.

    Perhaps unsurprisingly, the ‘bank for central banks’ thinks that ‘the decentralised technology of cryptocurrencies, however sophisticated, is a poor substitute for the solid institutional backing of money’. It puts this down to cryptocurrencies’ prices changing too much, taking up too much computer power, being slow, being unable to scale, and relying on the majority of network participants staying honest.

    You can read BIS’ 24-page report here.


    Update posted: 26 June 2018

    By Alex Gillespie

    Artificial Intelligence and the Legal System

    Yesterday the Law Society announced the launch of a yearlong investigation on the impact of technology on the legal system. Entitled ‘Public Policy, Technology and Law Commission – Algorithms in the Justice System’ (surely a name created by a robot), the Law Society will hold three public meetings to discuss the following:

    1. The current development, sale and use of algorithms in the justice system
    2. The future of algorithms
    3. A future framework for algorithms in the justice system.

    One possible outcome under consideration will be the regulation of algorithm driven AI.

    The Law Society has also released a report on ‘Artificial Intelligence and the Legal Profession’ to encourage public debate on the issue while examining the current development and use of AI by law firms across the globe. The report includes examples of AI systems able to review non-disclosure agreements with 9% greater accuracy than experienced lawyers, robot advisers designed to provide clinical negligence advice and AI algorithms able to predict the outcome of European Court of Human Rights cases with 79% accuracy.

    The report raises a number of questions regarding limitations of AI and the impact this could have on the legal system, including the following questions:

      • What impact will technology becoming more advanced and AI increasingly being able to make decisions in place of humans, have on the transparency of the decision making process? This could have significant consequences across a number of areas of society, including the justice system.
      • How should we address the real threat posed by ‘algorithm bias’ in which AI systems learn from data containing inherent biases?
      • Does society agree that the replacement of humans by computers is preferable in every case? For example, does society believe it is acceptable for autonomous weapons to be developed which can kill terrorists without human intervention?
      • In an Internet of Things, where humans are no longer able to predict or even understand the technologies they have developed, how should liability for damage caused by these advanced technologies be assigned?
      • in this area, do not forget the various ways the FCA can help such as Project Innovate, the Regulatory Sandbox and the Advice Unit, all of which are very successful.

        Not all bad news

        It may be tempting to see the results of the reviews as bad news. However, the FCA is actually very positive about robo-advice models. The Advice Unit in particular was specifically set up to help firms develop automated advice models. The FCA’s head of strategy and competition also spoke in November about robo-advice, saying that it promotes competition and is ‘a valuable vehicle to help tackle the issues faced by those consumers who are unserved or underserved by more traditional advice models’. One of the more interesting areas for robo-advice is pensions, where it has attracted both fierce criticism and ardent praise.

        Considering the results of the review and the growth in the area, the FCA plans to do another review later this year.

        Update posted: 21 May 2018

        By Alex Gillespie

        The SEC launches the Howey Coin

        In what some might call an unconventional move, the US Securities and Exchange Commission (SEC) announced yesterday the launch of its own initial coin offering. The coins, called ‘Howey Coins’ (after the famous ‘Howey test’ for determining securities) are now available on the SEC’s own Howey Coin website. According to the website, the coins offer potential investors ‘guaranteed returns’ on their investment and can be traded either for cash or cryptocurrencies, or with participating businesses (such as airlines or hotels, etc). However, any investors that are sufficiently tempted by such a prospect and click on ‘Buy Coins Now!’ will be greeted with a page teaching investors how to spot scam Initial Coin Offerings (ICO).

        The SEC’s fake cryptocurrency is the latest attempt by a regulator to teach investors about the risk of investing in ICOs (the Financial Conduct Authority issued a similar risk warning to investors in September last year). Both the UK and US have strict legislation around the issuance and sale of regulated securities which can include cryptocurrencies, as well as on their promotion (such as the whitepaper for ICOs) and there can be criminal penalties (including imprisonment in the UK) for anyone who contravenes them. The SEC’s ICO is an innovative approach to warning investors to be alert to scams and fraudsters operating outside the law. It also demonstrates the increasing regulatory scrutiny faced by ICOs worldwide and the prospect of further action from regulators either side of the Atlantic.

        For further information on ICOs, their risks and benefits as well as the underlying UK regulatory regime, please see our article ‘A guide to initial coin offerings’.

        Update posted: 10 May 2018

        By Nathan Dudgeon

        The winner of the global AI race is not as clear-cut as you think

        Putin famously said that the leader in AI will 'rule the world'. True or not, the race between countries is in full swing. China and the USA are fighting for pole position but for some pundits on both sides, the outcome is already clear.

        The case for the USA

        For some, the USA is the clear choice. It has the best universities, the best engineers, and the most innovative private sector. One of the trends to look at when thinking about long-term technology growth is ‘patent filings’. Again, the USA is in the lead here. Do not forget that they have Google, Amazon, Microsoft and Facebook. Government support is rapidly gathering strength too – the White House is even hosting an AI summit on 10 May.

        The case for China

        For others, China will be the clear winner. It is explicit government policy that China will be the world leader in AI in both research and application by 2030. China has the knack of being able to ‘get things done’; its ‘One Belt, One Road’ policy among many others is proof of that. Not only does it have the willpower and government support, it also has the resources. AI is fuelled by data, and China has more data than any other country on the planet.

        While China and the USA command the limelight however, dozens of other countries have announced their own AI strategies.

        The case for Europe

        There's also a case for Europe. Its three point strategy will help companies get access to data, boost development, and set up centres to connect research with entrepreneurs. The secret weapon in both the UK’s AI report and the EU’s AI strategy is ethics. They are not running the race the same way the USA and China are, as Europe wants to set ethical standards that could one day be used around the world. If consumers can trust the AI applications, it will help Europe catch up and overtake the USA and China.

        So who will win the AI race?

        Update posted: 8 May 2018

        By Nathan Dudgeon

        AI: how does machine learning work?

        How do you teach an AI bot? What are decision trees and neural networks? How do machines learn? Read our article 'AI: how does machine learning work?'.

        Update posted: 26 April 2018

        By Alex Gillespie

        RBS throws down the fintech gauntlet

        The rumours were true.

        Yesterday, RBS revealed its plans to launch a new mobile-only bank in direct competition to the growing popularity of challenger banks, such as Monzo and Atom. Details are sketchy and RBS is keeping its cards close to its chest for now - there is however, no doubting RBS’s ambition. The bank has revealed a target of switching 1 million of its existing Natwest customers to its new challenger bank. This is all the more surprising given the challenges faced by RBS from coming out of the recession, including recently suffering losses as a result of the unsuccessful sale of its Williams & Glyn division.

        The announcement is a tacit recognition of the growing success of challenger banks within retail banking and other retail banks will monitor the success of RBS’s new bank with interest. The challenger bank is expected to help RBS customers make ‘significant’ cost saving and apparently will be targeted at ‘less financially literate’ customers who ‘struggle to make ends meet’. One option under consideration is for the platform to operate as an online marketplace in which customers can save by switching between financial products offered by RBS and smaller, fintech businesses. A beta version of the platform is expected to be released in Q3 of this year.

        We shall see whether RBS is able to deliver on its ambitious plans and the high expectations it has raised. If it can, expect ‘traditional’ banks to follow quickly.

        Update posted: 23 April 2018

        By Sarah Kenshall and Nathan Dudgeon

        An introduction to artificial intelligence

        As technology expands into virtually every corner of human experience, it’s clear that computers with sophisticated artificial intelligence (AI) capabilities are more than simply a sum of their chips. Read our article 'An introduction to artificial intelligence'.



        Update posted: 20 April 2018

        By Rachel Mahoney and Nathan Dudgeon

        Santander launches OnePay FX: blockchain app for retail banking

        Santander has joined the ranks of other big banks offering a blockchain based international money transfer service.

        What is the app?

        Ripple’s OnePay FX app allows customers in the UK, Spain, Brazil, and Poland to send euros across most of Europe, or dollars to the US. The attraction for customers is that they can transfer funds within a day, and the fees are lower (and clearer).

        Santander’s aim is to roll it out as an app that can be used by customers with other banks too. They also plan to add more countries to the list – and customer types (e.g. SMEs).

        How it works

        Ripple’s xCurrent doesn’t use blockchain the same way most others do. The infrastructure is public so that anyone with the right app can access it. The mechanisms however are centrally controlled – just because you have a node doesn’t mean you can validate the transactions. The ability to validate requires permission from Ripple, and those with permission are big institutions, such as banks.

        The advantage of using Ripple’s software over the legacy systems is trust and speed. The banks can pre-validate their end of the transaction (instead of having to go back and forth), trusting that it will not go ahead unless the other party also validates their end. Since Ripple only allows trustworthy institutions to be validators, everyone is happy.

        Speed is gained through both real time validation and simultaneous settlement.

        You can see a short explanatory video from Ripple themselves here.


        Santander’s move is not a big surprise considering they invested in Ripple a few years back and have been developing this solution for a while.

        Competition is also probably a big factor, like the National Bank of Abu Dhabi who offered a similar service to their customers last year. There is clear competition with non-bank providers too, like TransferWise (who triumphantly announced this week that they are the first non-bank with access to the Bank of England's real time gross settlement system). As always with blockchain, there are serious concerns about the ability to scale effectively so we’ll be watching progress with interest!



        Update posted: 17 April 2018

        By Gareth Malna

        Spate of EU activity in blockchain and AI


        Of the 28 EU member states, 22 (including the UK) have sought to flex the muscle of the single market by signing a declaration on establishing a European blockchain partnership.

        The initiative hangs on to the coat-tails of the EU Blockchain Observatory and Forum; a project that is dedicated to investing €300 million in blockchain projects. The project intends to approach blockchain opportunities in a harmonised way by developing an EU-wide infrastructure that can enhance value-based, trusted, user-centric digital services.

        The premise of the initiative is that ‘Europe is well placed to take a global leadership position in the development and application of blockchain and distributed ledger technologies which can change the way citizens and organisations collaborate, share information, execute transactions, organise and deliver services’. Each of the signatories have pledged to work together ‘towards realising the potential of blockchain-based services for the benefit of citizens, society and economy’.

        On a practical level, this means the following:

        • By September 2018 the 22 will identify an initial set of existing cross-border digital public sector services that would gain added value from the support of a blockchain services infrastructure and starting to explore other use cases.
        • By the end of 2018, the 22 will assist the commission in preparing the technical specifications of this initiative, defining the appropriate governance model and identifying other framework conditions which are essential to its success (including regulatory compliance), and to consider possible co-operation between the public and private sectors.
        • The 22 will sharing experiences, best practice and key takeaways related to the implementation of blockchain applications.

        Artificial intelligence (AI)

        On the same day, 25 member states signed a declaration on co-operation on artificial intelligence. This represents one of numerous steps on the way to a comprehensive European approach to AI and robotics. The text of this integrated approach is due to be published in the first half of this year, while the declaration itself states that the signatories will 'work towards such integration on AI in order to increase the EU’s competitiveness, attractiveness and excellence in R&D in AI', including through the exchange of ideas and best practice.

        These commitments are welcome in the ongoing development of a broader array of blockchain, distributed ledger technology (DLT) and AI applications. The hope is that with such high-level backing the outcomes will not end up being solutions looking for problems.

        From a UK perspective, it will also be interesting to see whether the critical mass that has built up in the UK’s tech and fintech sectors, will continue to play any part in cross-border digital public services applications after the UK leaves the EU. This is particularly interesting considering that they intend to launch the first cross-border blockchain actions by the end of 2019.



        Update posted: 4 April 2018

        By Nathan Dudgeon

        FCA confirms (again) that cryptocurrency derivatives are regulated

        The Financial Conduct Authority confirmed on last Friday that it would regulate derivatives. The FCA does not currently regulate cryptocurrencies but this does not mean that they cannot be used, accidentally or otherwise, in or as part of regulated products or services. A prime example of this is trading in derivatives which is a very highly regulated activity.

        'It is likely that dealing in, arranging transactions in, advising on or providing other services that amount to regulated activities in relation to derivatives that reference either cryptocurrencies or tokens issued through an initial coin offering (ICO), will require authorisation by the FCA.'

        Last year, the FCA published a warning to cryptocurrency investors, followed by another warning the following month about investing in cryptocurrency (contracts for difference).

        You can even scroll down to our 8th February blog entry to see another FCA confirmation that cryptocurrency may be regulated (and more detail on why).

        Many have argued that the FCA has not said anything new in this latest statement. In essence, this is true but these warnings are becoming increasingly concrete – with more examples that are specific and fewer grey areas. You can expect more to come in the future.



        Update posted: 26 March 2018

        Fintech strategy: HMRC publishes sector report

        By Nathan Dudgeon

        The Fintech Sector Strategy (PDF) is ‘all about the action the government has taken to make the UK the best place to start and grow a fintech business’. If you do not have half an hour spare to read the report, this UK Tech News article is a good summary.

        Interesting facts:

        • More people work in UK fintech than in New York fintech or in the combined fintech workforce of Singapore, Hong Kong and Japan.
        • Over 42% of digitally active adults now use the services of at least one fintech firm.
        • More than 20 million people in the UK make use of banking apps.

        Most articles focus on the creation of a new ‘crypto asset task force’, which does sound a lot like another one of those viral games that might break the Ethereum network. The task force is actually part of a concerted effort to lessen regulatory headaches. Another part of the report focuses on regtech and how compliance obligations can be converted to a machine-readable format.

        Fintech bridges

        One of the more widely relevant (and eagerly anticipated) announcements is that the UK is building a ‘Fintech bridge’ with Australia.

        This would be the fifth bridge, since the UK already has one with Hong Kong, South Korea, Singapore and China. The report says it will ‘minimise barriers to entry for fintech firms that wish to expand globally, and . . .] ensure that the growth potential of UK fintechs is showcased to international investors’.

        What that means in practice:

        • The FCA and the Australian equivalent (ASIC) work together. They will share information about emerging trends or regulatory issues etc.
        • The governments will harmonise a range of policies relevant to fintech. A prime example is in their Open Banking regimes.
        • Streamlining the process for fintechs trying to expand internationally
        • There will be plenty of collaborations in the private sector too; events, conferences, networking and so on.

        Update posted: 21 March 2018

        Storing (illegal) data on blockchain

        By Nathan Dudgeon

        You may have seen in the news over the last couple days how researchers have found that the Bitcoin blockchain is being used to store illegal content, like images of child abuse or hacker code you can use to break encryption on DVDs. Using a blockchain to store files other than transactions is entirely possible; in fact some tokens deliberately exist to be an alternative file storage system (like Filecoin), despite the Bitcoin blockchain not being created for this.

        How to store data on the blockchain

        When you send money using your bank, there is often a little section for you to put a description of the transaction – as long as it is just a few characters. There is a function called ‘OP_RETURN’ that does the same thing with Bitcoin, which means that people can use it to post short messages. This is a deliberate function of the network. In fact, the first ever transaction has a message that reads "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks". It is almost like a cryptic clue to blockchain’s mission statement.

        Storing much larger amounts of data was not part of the design however, and it most often involves fragmenting. This is where you have to make many transactions, each with a different piece of the data, before some clever software stitches it all together at the end.

        There is another way to store larger amounts of data where you essentially send your Bitcoin to a made up recipient (in Bitcoin language this means replacing the valid receiver keys with arbitrary data). This comes at a cost however, as there is no bank to ask for your money back. This is why it is called ‘burning your Bitcoin’.

        A 21 KB image of Nelson Mandela (which is already on the chain, by the way) would burn about $380 of Bitcoin at the current price of $8,400.

        Why you would want to store data

        While there are valuable uses for blockchain data storage, people would usually choose a chain specifically designed for that purpose. For example, there is a notarisation industry that will certify that a document exists. For larger pieces of data, you could post content free from censorship (e.g. whistleblowers) or archive memorable/historical data (e.g., there are at least six wedding-related photos currently on the Bitcoin chain).

        On the other hand, people can spread copyright infringements or commit blackmail with threats of posting private information. Interpol and Kaspersky Labs started warning years ago that you could use similar methods to embed malware into the blockchain. This has not happened yet with Bitcoin, but it only seems a matter of time.

        What has already happened however (and is all over the news), is the appearance images (and links to more) of child abuse on the chain. The consequences of this is that possession of the Bitcoin blockchain could be a very serious criminal offence, although we will have to see how the police or courts respond to this.

        Update posted: 14 March 2018

        Google bans cryptocurrency ads

        By Alex Gillespie

        At 4am this morning, Google announced that, as of June 2018, it would no longer permit advertisements which service cryptocurrencies and related content (including initial coin offerings, cryptocurrency exchanges, cryptocurrency wallets and cryptocurrency trading advice). The ban will cover both Google’s AdWords as well as Youtube.

        No reasons were given in Google’s announcement, however, the ban follows a similar ban from Google’s rival Facebook in January. At the time, Facebook explained that this was due to the fact that many companies that advertised ICOs and cryptocurrencies were not “operating in good faith”.

        It also follows the IMF’s announcement on Tuesday about the ‘peril’ of crypto-assets and calling for greater consumer protection internationally. The value of bitcoin fell 4.1% to below $9,000 following the announcement.

        This is the latest example of an established firm distancing itself from cryptocurrencies (another recent example being Lloyd’s ban on the use of its credit cards to buy cryptocurrencies) to protect themselves against commercial or reputational damage by association with the technology. It is unlikely that Google will be the last firm to do so.



        Update posted: 9 March 2018

        Cryptocurrencies and the future of money

        By Alex Gillespie

        In a speech (PDF) last week, Mark Carney set out his views on the future of money and how, in his view, this will change with the development of cryptocurrencies. Here are some key high-level takeaways from Mr Carneys speech:

        1. The role of cryptocurrencies as money: Mr Carney was upfront about the fact that in his view cryptocurrencies are “failing” as a currency and explored three key problems with the technology, namely that cryptocurrencies: (a) are poor stores of value due to the extreme volatility caused by their lack of intrinsic value or external backing, (b) are inefficient media of exchange due to their generally being slower and more expensive than payments in sterling and (c) because of these problems are virtually unused as units of account.
        2. The Bank of England’s policy towards cryptocurrencies: In addition to cryptocurrencies’ shortcomings as money, the Bank of England has wider concerns around consumer and investor protection, market integrity, money laundering, terrorism financing, tax evasion and the circumvention of capital controls and sanctions. However, the Bank of England does not wish to avoid stifling innovation or preventing the implementation of technologies that will bring future benefits to the financial system.
        3. The regulation of cryptocurrencies: In view of the potential technological benefits, Mr Carney was against general bans on the use of cryptocurrencies but instead targeted regulation so that cryptocurrencies are held to the same standards as the rest of the financial system. Mr Carney gave the following examples that the Bank of England are looking into: (a) regulating crypto-asset exchanges according to the same standards as security exchanges, (b) introducing regulations to prevent ICO’s being allowed to “use semantics” to avoid regulations and (c) clarifications to the regulatory requirements, such as for capital, of institutions which engage with or have exposure to cryptocurrencies.
        4. The future of money: Perhaps most interestingly, Mr Carney shared his thoughts on how, if cryptocurrencies as we know them are not the future, money and payment systems will change in the future as a result of the technology such as: (a) the diminished role of financial institutions as society’s preference changes towards decentralised peer to peer interactions (b) the role of distributed ledger technology and the benefits this will have on the efficiency, reliability and flexibility of payments and (c) the adoption by central banks of their own digital currencies (however, Mr Carney was of the view that this was unlikely to take place in the short term due to the technology’s existing shortcomings).

        It is interesting to hear the views of such a senior policymaker on how a not-so-distant financial system might look based on market conduct to date. It also raises an important debate about how our financial system may need to change for the benefit of society and how traditional financial institutions will fit into that given the recent advances in cryptocurrency technology. Mr Carney’s speech will interest anyone engaged with this technology or financial services as a whole.



        Update posted: 16 February 2018

        Will artificial intelligence take our jobs?

        By Nathan Dudgeon

        We looked at a PwC report on the impact of AI over the next 15 years. The results were a bit more nuanced than most – discussing which industries, which job types, and which demographics are at risk to artificial intelligence, why, and when.

        Read the full article here.



        Update posted: 8 February 2018

        FCA confirms (again) that cryptocurrencies may be regulated

        By Nathan Dudgeon

        In October last year, the Treasury Select Committee asked the FCA’s Chief, Andrew Bailey, to explain the limits of the FCA’s powers. This week they published a letter with the FCA’s detailed response (PDF).

        In it, Mr. Bailey explains a number of areas that fall on the border of the FCA’s powers, one of which is cryptocurrencies.

        The summary is that nothing has changed – crypto is still borderline.

        Why? At a very high level, the existing regulated activities and financial promotions regimes were not originally drafted with ICOs in mind. The laws point to exhaustive lists to determine whether something is regulated or not, and digital tokens are not expressly referred to in the lists. We think this is partly why so many people (mistakenly) believe that all ICOs are not regulated in the UK.

        Remember, however, that tokens’ functions vary widely. Many digital tokens perform the same or similar functions to financial instruments which do fall within the list of regulated investments.

        The FCA has previously warned that “depending on how they are structured, some ICOs may involve regulated investments and firms involved in an ICO may be conducting regulated activities”. They noted that some ICOs show parallels with IPOs, private placement securities, crowdfunding, futures, options, or collective investment schemes. All of which are very much regulated.

        This latest letter from the FCA merely confirms the status quo, for now.



        Update posted: 2 February 2018

        Lessons on building cyber resilience from the FCA

        By Alex Gillespie

        Cyber security has become an increasing concern both for individuals and businesses over the years. We have already seen one large cyber security scare in 2018 with the threat posed by ‘Meltdown’ and ‘Spectre’ both being widely reported in the media. With Open Banking coming into effect it is unsurprising that cyber security is very much in the FCA’s focus.

        On Friday, Robin Jones, Head of Technology, Resilience and Cyber at the FCA, gave a speech setting out some salutary lessons the FCA has drawn from previous cyber attacks over the years and offering guidance to firms around improving their cyber resilience. By way of illustration of the dangers, according to the National Cyber Security Centre there were over 1,100 reported attacks in the last 12 months alone (590 of which were regarded as ‘significant’) and there are more than 10 cyber attacks in the UK every week.

        Consequently firms should understand the dangers and make efforts to build their resilience against such a threat. The FCA expects firms to follow the basic principles of ‘resilience’ – being not only that firms can protect themselves against attacks and identify potential threats and their own vulnerabilities, but also that they can detect attacks that have been successful and know how to respond and recover from them.

        According to Mr Jones, there are three key lessons that firms can take away from some of the last year’s high profile cyber attacks. These are:

        1. Address the basics: Cyber attacks typically exploit well-known vulnerabilities in systems. Wannacry is one example of where the attack could, for the most part, have been prevented if the NHS had carried out some basic security practice.
        2. Detect attacks, stop them spreading and have robust contingency plans: The best way to mitigate an attack is to have a back-up. Firms should consider and identify their tolerance for the systems or data being made unavailable due to a cyber attack.
        3. Ensure any contingency plan includes a communications plan: Know how to get hold of key people and contact staff, consumers, suppliers and authorities. Firms should ensure that they have plans in place prior to any attack, rather than trying to create plans at the same time as reacting to an attack.

        Ultimately, the FCA expects firms to have strong governance procedures in place and show visible leadership in the event of an attack. According to the FCA, firms should understand their key assets and their back-up arrangements. They should be in a position to know what is important and the means for protecting their customers from any theft (most attacks exploit the simplest vulnerabilities and therefore following basic cyber-security practices will go some way to addressing this).

        Firms should exhibit a good security culture whereby senior leaders and staff alike are alert to potential threats and trained to follow good security practices. Systems should also be put in place whereby passwords are regularly changed, systems access limited to only those that require it, etc.

        Of course, this speech will be helpful both on a practical level and, for authorised firms, to help better understand the FCA rules pertinent to cyber-security. Read the full speech.



        Update posted: 19 January 2018

        Baidu releases blockchain as a service platform

        By Nathan Dudgeon

        Baidu aren’t the first huge company in China to launch blockchain as a service. In fact, both Tencent and Ant Financial (part of Alibaba) already have blockchain services in the market.

        What is blockchain as a service? Firstly, you’ll need to understand blockchain – start with our article, or this YouTube video.

        Blockchain as a service is, generally speaking, where a company (like Baidu) creates its own blockchain system and hosts it on the cloud. This blockchain is a foundation, or a template – and you can build stuff on top of it.

        So instead of setting up your own blockchain, which costs a lot of time and resources, you might go to a blockchain service provider, like Baidu, and use theirs for a subscription fee. Companies will come in, use Baidu’s technology, and shape it into whatever specific purpose they choose. Baidu will no doubt have plenty of their own pre-made models to allow you to start immediately.

        It’s the same idea as Dropbox – for many companies this is far cheaper, better-made, secure, and easy-to use than creating their own in-house file sharing system.

        So what is Baidu actually offering? “Efficient and low cost traceability and trading, ideal for digital currency, payment and settlement, digital ticketing, bank credit management, equity proof and exchange-traded securities, insurance management, financial auditing and more.” Elsewhere, Baidu have said they want to use blockchain in AI, driverless cars and distributed computing.

        People have noted that this is fairly generic, but that’s a common practice in the market at the minute. Apparently the whole platform has been built in-house, which is different to most other providers – commentators wonder whether this means it’s a private ledger (i.e. it is invitation-only, but probably also takes less of your computer power to run).



        Update posted: 17 January 2018

        PSD2 and Open Banking: finally here

        By Nathan Dudgeon

        The Payment Services Directive (PSD2) came into force this week. You might have noticed news stories about how credit card surcharges are ending, or an increase in ‘strong customer authentication’.

        Open banking is probably the biggest change brought by this new law. Banks can now share your data with third parties (on receipt of your permission), and these can ‘plug in’ to your bank via an API to bring extra value. Interesting times are ahead; will the banks adapt or just become ‘dumb pipes’? (See this article in The Times. Please note, you will need to register/login to view.)

        You can also read our Guide to Open Banking or Understanding the new Payment Services Regulations



        Update posted: 15 January 2018

        Lessons from the KodakCoin

        By Alex Gillespie

        On Tuesday 9 January 2018, Kodak became the latest firm to seek to raise capital from an initial coin offering (ICO). At the CES2018 convention, Kodak announced plans to use the Ethereum blockchain to create a digital platform for photographers to monitor and protect their photographs from IP infringement. Once launched, customers will be able to purchase photographs over the platform using its own digital currency, the ‘KodakCoin’. According to Kodak, the platform will record a cryptographic record of all photographs purchased through it.

        On the day it was announced Kodak’s share price rose by 119% but it has also faced criticism from many commentators on the proposal, particularly because KodakCoin and Global Blockchain Technologies Corp made an immediate $2 million investment into the cryptocurrency (subscribing for all 8 million KodakCoins available at the first stage of the pre-initial coin offering).

        Many commentators have expressed concern at the considerable interest shown by investors in a platform that has not even been launched yet, akin perhaps to the frenzy shown by investors during the 17th century TulipMania, and an aspect of ICOs that the FCA has already expressed concern about in the UK. We have previously noted the FCA’s concerns about ICOs after it publically voiced concerns about a general lack of investor understanding in the products and a lack of substance behind many ICOs.  

        Commentators have criticised the proposal for being vague and even flawed. For example, the ICO will only be available to ‘accredited investors’ earning more than $200,000 in income or with a net worth of £1 million (to avoid the ICO being registered with the SEC) creating considerable problems for a platform allegedly intended to be used by the mass market. Other commentators have argued that there is no need at all for the use of cryptocurrencies and blockchain for what is, after all, a proposal for a central database to record ownership supported by a web-trawler to identify cases of IP infringement.

        The industry criticism should also be viewed in the general context that Kodak was only recently saved from bankruptcy and since the announcement had an ever falling share price. Kodak’s business and the problems that led to its falling share price (principally its failure to keep up with digital technology) do not appear to have changed beyond speculative proposals for the KodakCoin.

        Of course, time will tell and the resurgence of a fading household branch is a great thing. However, it is clear that Kodak has a long way to go to convince its detractors (and perhaps the regulators) as to the viability of this project. We wait to see whether this could be the next KodakMoment.



        Update posted: 27 December 2017

        Tandem gets a banking licence, again

        By Nathan Dudgeon

        Earlier this week, the PRA gave Tandem permission to acquire 100% of Harrods Bank Limited.

        This is big news. Tandem will finally have a banking licence, again – they did have one at the start of 2017, but lost it after failing to secure funding from a Chinese conglomerate in March (as reported in the Financial Times).

        The deal is due to complete sometime in the new year, and Tandem will get £80 million of capital, access to a full banking licence and 10,000 savings and mortgage customers (plus tens of thousands of Tandem co-founders are already on the waiting list). The licence means Tandem will be able to offer their current accounts and finance other business activities with the deposits (such as offering loans).

        Buying a banking licence is a fairly unusual way to get one – banks are rarely put up for sale and there are still regulatory hurdles to jump before you can buy one, which is why this news comes months after Tandem’s announcement of the deal. Another alternative is to become an ‘appointed representative’ – where someone who is already authorised agrees to take responsibility for your performance of that regulated activity, usually for a considerable fee.

        To find out more about setting up a bank, have a look at the Bank of England’s new bank start-up unit, or you can always reach out to us.



        Update posted: 18 December 2017

        The FCA gives feedback on DLT

        By Alex Gillespie

        There was, I think, little to surprise in the FCA’s feedback statement (PDF) to its discussion paper on distributed ledger technology (DLT) which, in the rapidly changing world of fintech is arguably a surprise itself! There were no radical new policies or initiatives or proposed changes to the FCA Handbook just a confirmation that “our current regulatory requirements appropriately reflect our strategic objectives” and a commitment for further engagement with fintech, both domestically and internationally.

        Despite the lack of any headline changes, the statement itself had the quiet confidence of a Regulator that is slowly getting to grips with the rapid changes to financial services brought about by fintech and DLT. The FCA engaged with participant feedback on topics ranging from digital currencies, smart contracts, regulatory reporting and financial crime (among others). Most of all, the statement primary reaffirmed the FCA’s ongoing commitment to engage with UK fintech as a ‘technology-neutral’ observer and highlighted the benefits which DLT offers to financial services as well as the shortcomings that need to be resolved.

        My main take away from the statement, is that the FCA has rightly identified initial coin offerings (ICOs) as requiring closer scrutiny. The FCA mostly reiterated the concerns it gave in its consumer warning from September 2017 – that these are high risk investments little understood by the average investor – but also included a ‘regulatory considerations on ICOs’ annex to address widespread confusion as to the regulatory requirements behind an ICO (including when they are ‘regulated’). This should be compulsory reading for anyone considering launching an ICO.



        Update posted: 12 December 2017

        Madrec, MiFID II, and Ethereum: both complicated and excellent

        By Gareth Malna

        There is only a matter of weeks until the date that MiFID II takes effect, bringing with it the swingeing changes to the regulatory landscape that many compliance officers in the financial services sector have been working towards (and, perhaps, dreading) for the better part of two years. But, with a sense of inevitability, the world continues to turn and the big winners from the changes are likely to be those institutions that provide the tools to ensure compliance.

        Step forward UBS, which with help from Barclays, Credit Suisse, KBC, SIX and Thomson Reuters has launched the Massive Autonomous Distributed Reconciliation platform (Madrec); an initiative based on the Ethereum platform to make the reconciliation of counterparty data a much simpler, automated, process. 

        From a brief review of articles and blog posts reporting on the launch of Madrec it is clear that media commentators are struggling to understand exactly what the project does and why it is important, so we have set out our take on it below.

        Without Madrec, banks (such as UBS) which make transactions in financial instruments for their clients are required to clear transactions on trading venues. This is done on a transaction-by-transaction basis and requires a physical review of the trading contracts in order to check the veracity of data being reported by the counterparties before the transaction can be cleared and regulatory reports filed. In order to effect that checking process banks rely on their own processes and data sources, taking external reference data from a number of sources without any agreed standard. 

        As of 3 January 2018, MiFID II will require all parties to the majority of financial transactions to obtain and maintain a unique identification code for the purposes of increasing transparency about exactly who is actively participating in transactions in the market. That unique code is a Legal Entity Identifier (LEI), which has to date only been required of trading venues under certain European regulations – notably the European Market Infrastructure Regulation (EMIR – which imposes requirements on derivatives transactions) and the Market Abuse Regulation (MAR – dealing with illegal trading behaviours).

        Pre-Madrec, banks acting for counterparties will be able to use the LEIs of the counterparties to identify and carry out checks on those counterparties using the bank’s standard data sources – a manual and potentially time-consuming process.

        In a post-Madrec world, banks will be able to use the permissioned platform (which is based on smart contract technology) to automatically reconcile in real-time the information pertaining to each LEI against consensus baseline information. Any deviations in the reported information from the consensus could then be highlighted and resolved where necessary.

        Suddenly the compliance burden is reduced and firms are free to use their resources to focus on the business of running their business rather than relying on inefficient processes to meet their regulatory obligations.

        This is clearly what the times should look like – use of available technologies in a manner that facilitates regulatory compliance and transparency at a reduced time and cost burden. The only question is, who else will step up to the plate to benefit from the regulatory changes that are afoot?



        Update posted 8 December 2017

        Bitcoin benefits: save hay while the sun shines?

        By Nathan Dudgeon

        Every news agency on the planet is talking about how bitcoin passed the $16,000 mark last week. The articles are full of people lamenting the fact that they deleted their bitcoin, or spent it all years ago and didn’t become millionaires. The pages are also full of dire warnings against bubbles.

        Something from CoinDesk caught our attention this week, because it argues for bitcoin benefits beyond simple profit.

        Marc Hochstein says:

        “Off the top of my head, I can name three social useful functions of bitcoin: its censorship-resistance; its judgment-resistance; and the topic of this essay, its deflationary quality, which rewards saving for tomorrow rather than splurging today.”

        In short, he argues:

        "Bitcoin encourages people to be wiser with their money, to think before they spend, to plan ahead and not act so much on impulse."

        Why? Because there are a finite number of bitcoins – once we’ve finished mining them all there will be no more. As bitcoin becomes more popular/widespread, the price rises, and a government can’t ‘print’ more money to water down value. If the value of your money increases as you hold it, you’re going to think a lot more carefully before spending it, and are incentivised to think long-term. The article argues that this will cause a shift away from “the culture of conspicuous consumption, of shopping as therapy”.

        This is especially so for young people, whereas in contrast:

        “More typical is the short-termism that, at its most destructive, led Wells Fargo to set impossible sales quotas for its retail bankers, motivating them to create millions of unauthorized accounts and ultimately resulting in massive fines and brand damage.”

        We enjoy a good debate here at Burges Salmon so we think it’s important to highlight ‘a reasoned response from the other side’, regardless of whether we agree or not. If you’re interested in reasoned arguments against what some call ‘ICO mania’, take a look at Preston Byrne’s content.

        For me, it is easy to say that you are patiently waiting for long term gains when your investment’s value rises meteorically every week. A more worrying thought is if bitcoin is a bubble, then when it bursts and those who bought high lose out, you’ve instead taught the exact opposite – they should have made the most of the short term gains while the sun was shining. That’s a point we can definitely agree on; short termism is rarely a good thing.



        Update posted: 8 December 2017

        FCA regulatory sandbox: Cohort 3 announced

        By Nathan Dudgeon

        The FCA have published an update on the third and fourth cohorts of their very successful regulatory sandbox.

        There were 61 applications for cohort 3, and 18 made it through the selection process. They’re all listed on the website for you to have a look, but big players include Nationwide (robo-advice) and Barclays (regtech), and the rest cover everything from cybersecurity and insurance to investment management and AML.

        In particular, the FCA has given some encouraging news regarding the location of the latest cohort:

        In the sandbox’s first phase, a majority of the firms were London-based with only a few from other parts of the UK. As the FCA continues to increase its regional engagement in emerging FinTech hubs, encouragingly, the proportion of regional firms has increased in each subsequent cohort. Over 40% of firms invited to test in cohort 3 are based outside London, compared to 35% in cohort 2 and 25% in cohort 1.” 

        Cohort 2 includes Bristol-based Moneyhub.

        The sandbox is very popular and applications are being accepted for the fourth cohort now. Deadline is 31 January.



        23 November 2017

        The Autumn Budget and fintech

        By Alex Gillespie

        For those of us engaged with the UK’s burgeoning fintech scene, there was much to be pleased by in the Autumn Statement. Fintech and new technologies as a whole are increasingly seen by the government as part of the answer to the UK’s future and the uncertainties of Brexit. If you didn’t manage to catch the budget itself, one of the key policies (for fintech at least) was the government’s plan to unlock over £20 billion of investment to support the growth of innovative firms over the next 10 years. This, the Chancellor said, will be achieved by:

        1. Establishing a new £2.5 billion investment fund incubated in the British Business Bank and designed to co-invest with the private sector to generate £7.5 billion of investment.
        2. Doubling the annual allowance for those investing in knowledge-intensive companies through the Enterprise Investment Scheme (EIS) and the annual investment those companies can receive through the EIS and the Venture Capital Trust scheme. The government expects this will unlock £7 billion of investment.
        3. Investing in fund of funds in the private sector, with the initial wave of investment seeded by the British Business Bank. There will be up to three waves of investment to support up to £4 billion investment.
        4. Backing new and emerging fund managers through the Enterprise Capital Fund programme established by the British Business Bank, expected to unlock £1.5 billion.
        5. Backing overseas investment in UK venture capital through the Department of International Trade, which is expected to unlock £1 billion of investment.

        On top of this, the government has announced several other policies to support UK fintech, such as to invest £21 million of the next four years for the expansion of Tech City UK and to support regional tech companies. Other benefits include supporting challenger banks by making PRA capital requirements more proportionate for eligible smaller banks as well as the creation of a new £10 million Regulator’s Pioneer Fund to help regulators develop innovative approaches to help get new products and services to the market.

        Of course (as with any Budget), the devil will be in the detail and execution of the proposals – we look forward to seeing them in action.



        20 November 2017

        Artificial Intelligence and ethics: just because we can, should we?

        By Nathan Dudgeon

        Just a couple weeks ago, a panel at Bristol TechFin 2017 led a discussion on the ethics of creating AI which might evolve into something you can’t understand. Just a few days ago, New York University officially launches ‘AI Now’ an institute dedicated to understanding the social implications of artificial intelligence. Creepy coincidence or a sign of the times?

        We think it’s a sign of the times, and one of the biggest for us was that the keynote was from a lawyer (a Supreme Court Justice, no less) – someone whose job is to be risk-averse.

        “At its most ambitious, AI’s promise is to serve as a framework for improving human welfare to make the world more educated, more interesting and full of possibility, more meaningful, and more safe. But once we overcome some technical problems that are more likely than not to get easier to deal with every day, we’re in for more than just a world of change and evolution. We’re in for some discussion of what it means to be human.”

        “Tonight we gather not because we know how to answer that question, but because we realize – using different words, perhaps – that change is coming.”

        An adaptation of the keynote was can be found on Quartzy.

        It will be interesting to see what, if anything, the Institute covers on the financial services industry specifically. We definitely think that more discussion and more awareness is good – after all, collaboration and transparency are (often) hallmarks of the fintech world.

        It may also provide useful assistance for politicians and regulators when making proactive and proportionate laws or regulations for the future. Here in the UK, the FCA are especially innovative and proactive when it comes to working with industry and understanding new technologies and industries – for example, the FCA’s foray into Model Driven Machine Readable regulation (yes, based on R3’s Corda distributed ledger tech) that Burges Salmon is taking part in as a legal Subject Matter Expert.



        15 November 2017

        UK Financial Services after Brexit – ECB criticises bank relocation plans

        By Alex Gillespie

        The European Central Bank (ECB) released an article on the Brexit-related relocation plans of UK banks. The article criticised the relocation plans of banks to EU member states as setting up ‘empty shells’ or ‘letter box banks’ and stressed that banks within the EU needed to have sufficient substance locally. The ECB warned that:

        1. Banks should not seek to transfer all market risk to a third-country group entity. Some risk should be managed by the EU bank locally, with local trading capabilities and risk committees. The EU bank should also trade and hedge risks with diversified counterparties not just with their own group.
        2. It was concerned by banks’ plans for ‘dual hatting’ whereby employees carry out roles for multiple group entities, particularly where the employees would be primarily located outside the EU. This would have the effect of diluting the local governance and autonomy of the EU bank.
        3. In the event of a transitional period being agreed, banks must nevertheless set out clearly what their plans will be, commit to them and explain how and when they will be carried out.

        Comment: Almost immediately following David Davis’ call the day before for greater collaboration and a new partnership between the UK and EU, the EU has announced plans to exert greater authority over UK banks operating in Europe than had initially been expected. The most immediate issue for UK banks will be committing to contingency plans before the outcome of the Brexit negotiations have been determined.



        14 November 2017

        UK Financial Services after Brexit – David Davis makes a speech

        By Alex Gillespie

        The travails of the UK financial services industry continued this week as the UK and EU jostled over the industry’s future relationship with Europe after Brexit. On Tuesday, David Davis, the embattled Secretary of State for Exiting the European Union gave a speech on the financial services sector post-Brexit relationship with the EU. The speech was positive and optimistic for the future of the industry as Mr Davis reminded the audience of London’s historic strengths and that it was the world’s leading financial centre.

        Mr Davis warned of the potential risk to Europe of the Brexit negotiations leading to the fragmentation of its financial services sector. To avoid this the UK and EU should look for a ‘new balance’ between both sides, which should achieve three things:

        1. protecting financial stability
        2. ensuring consumer protection
        3. supporting the existing co-operative system for cross-border financial services.

        These objectives were in the interests of both sides and would give clarity and certainty to businesses across Europe.

        Mr Davis also disclosed that the government sought to include UK financial services in its two year transition period, during which UK firms would remain subject to EU regulators and agencies. A ‘carrot’, widely publicised by the media, was the government’s plans to introduce an Immigration Bill intended to give UK businesses greater flexibility over the mobility of their workers across the continent.



        14 November 2017

        FCA warns consumers of risks of cryptocurrency CFDs

        By Guinevere Wentworth

        The FCA has released a consumer warning on contracts for differences (CFDs) with cryptocurrencies, which are being heavily marketed at consumers. CFDs allow a consumer to speculate on the price of an asset by investing only a portion of its value. Both the potential profit and the risk are large and money can be lost very quickly so that money may end up being owed.

        Cryptocurrency CFDs are extremely high-risk, speculative investments and the FCA highlights four main concerns:

        1. the price volatility of cryptocurrencies
        2. the large levels of leverage
        3. the high charges and funding costs
        4. the likelihood of pricing not being transparent.

        It warns that only experienced and sophisticated investors with knowledge of the risks should invest. 

        Comment: CFDs are regulated and investors should check that the firm is authorised if offered the opportunity to invest in a CFD or are considering one. This does not mean that losses from trading, however, are protected. Firms offering CFDs should make sure that they are authorised and prepared for MiFID II while also making sure that they only promote CFDs to appropriate investors.



        13 November 2017

        Concerns over ICOs raised by ESMA

        By Guinevere Wentworth

        The European Securities and Markets Authority (ESMA) has released two statements on the risks of initial coin offerings (ICOs). Read our introduction to ICOs.

        The first statement (PDF) reminds firms involved with ICOs that they need to assess if their activities are regulated. If they are then they need to ensure that they comply with relevant EU legislation, such as the Prospectus Directive, the Markets in Financial Instruments Directive, the Fourth Money Laundering Directive and the Alternative Investment Fund Managers Directive, and any relevant UK law.

        The second statement (PDF) is aimed at investors. It flags the key risks associated with ICOs, such as the risk of losing the whole of an investment, that there may be flaws in the technology, the lack of information provided to investors, that there may be no exit option and that there is no protection offered to the investor if the ICO is unregulated.

        Next steps: Firms involved with ICOs should make sure that they are aware of the regimes in place and what their obligations are, while investors should carefully consider where they invest. If you have any questions on this area, please contact our fintech team or your usual Burges Salmon lawyer.

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