Where finance meets technology, interesting things continue to happen.
In such a fast moving and innovative sector, each fortnight brings a host of new stories, but the themes are often recurring. How will banks (central and challenger) and big technology firms interact with digital currency and blockchain – and how will others respond? In this update, we’ll explore reactions from the World Economic Forum to Mastercard to the wider public, as well as our own insights as fintech accounting specialists.
The future of blockchain
The blockchain community is still reflecting on Bitcoin enthusiast Andreas Antonopoulos’ comments at last year’s Blockstack Summit about how astounded he is that “people still try to follow this idea of … one coin to rule them all. One chain above all else … The data just doesn’t support that hypothesis.”
As more and more blockchain use cases and solutions are built, if they are unable to operate together the full power of blockchain cannot be unlocked.
We share the view that there will not be one blockchain that ultimately defeats all others, so there is a problem that needs solving.
The best defence against ever-increasing fragmentation that we can see is more standardisation within industries and across geographical and economic areas.
Another problem then becomes apparent: technology is moving so fast, it is moving faster than standardisation or regulation can. At least for now anyway!
Libra’s loss
Talking of global payment systems, Facebook has big ambitions for its Libra project, suffering a setback when founding member Mastercard pulled out in October last year. Ajay Banga, Mastercard’s CEO, has now gone into detail about his reservations.
As the world becomes more global in terms of travel and technology, building fragmented financial systems on a national level is illogical. Large-scale financial crime and money laundering activities are also often cross-border. Therefore the idea of a global currency is in theory sound.
However, there were deep concerns about data integrity and compliance around the Libra project that could not be overcome. In addition, the idea that Libra would be a financial inclusion tool, but you had to have a Facebook Calibra wallet with merchants still receiving fiat currency, were incompatible in Mastercard’s eyes.
For a currency to be anywhere close to global status, employees would need to be paid in it, merchants would need to accept it and people would need to think in it. It looks like the USD is safe in its position as the closest thing to a global currency.
Big tech and digital money: the public’s perception
In further bad news for Libra, a survey carried out for the Official Monetary and Financial Institutions Forum has found sceptical opinion towards, and lack of confidence in, a digital currency issued by the biggest search engines and/or social media companies. 51% of respondents believe that central banks would be able to command public confidence if they were to issue a digital currency.
It surprised us that this figure was as low as 51% and it seems that the next two most popular choices were payment service providers and commercial banks. In reality, we think it’s unlikely that a public body would get to the point of a Central Bank Digital Currency (CBDC) issue without significant input from the private sector, so a combination of central banks and payment service technology providers would make sense.
If there has been one good thing to come from the Libra project, it would be the forcing of central banks’ hands into taking a more close and expedited look at a CBDC.
Central banks and digital currency
The topic of CBDCs featured in a great panel discussion from the World Economic Forum: Creating a Credible and Trusted Digital Currency. Although it took place in January, it’s still available here and well worth watching.
Facts we found particularly interesting:
- 80% of central banks are engaged in CBDC work
- A number of central banks expect to deliver a CBDC within three years
- Focus appears to be on retail (i.e. straight to consumers) and not wholesale via existing banks
This really would be exciting to see and a game changer for financial inclusion, providing access to markets for everyone. Cross-border payment costs would be significantly reduced and there would be a real opportunity to identify and hopefully eliminate illicit finance.
N26 says no; Revolut relocates
Turning from central banks to challenger banks, the past few weeks have been interesting for some of the better known ones.
N26 withdrew completely from the UK market, citing uncertainty about the regulatory framework post-Brexit. However, we suspect this had more to do with the small number of UK users (just 200,000) and slow take-up making UK presence unviable.
Meanwhile, Revolut is looking to double its headcount in Ireland as it moves its European payment operations from London to Ireland (and Lithuania) to ensure it can continue to service its 7 million European customers. To service its western European clients, it will obtain an e-money licence (EMI) in Ireland.
Whilst the impact of Brexit on the financial services sector remains somewhat unknown, Revolut have taken the step to mitigate against any potential impact, such as loss of access to certain European markets or functions from London. This is also likely to be a move to protect the planned new service line of offering credit products to customers.
Brexit, not fintexit
Despite these moves by N26 and Revolut, it seems it is not all bad news for UK fintech. A report from financial services regulatory consultancy Bovill cites 1,400 FCA applications from European firms, with 1,000 intending to open their first UK premises.
An influx of new firms would almost certainly mean more investment in tech as firms battle for a competitive edge and increased profitability.
The head of the FCA’s International Division has also been highlighting continued common priorities with the EU post-Brexit, implying that the rules may differ but will still have common substantive outcomes.
One thing the FCA seem keen to continue is their engagement with the ever-changing technology businesses in the sector. This can only be good for fintech. It will certainly be interesting to see how things develop over the rest of the year.
For more on how we can help fintech businesses, take a look at our fintech page or contact us using our enquiry form.
You can also read our previous fintech news roundup here.