Loan marketplace: Mintos tops £6m on Crowdcube- CEO Martins Sulte shares insight into Platform Operations

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Mintos is a marketplace for peer-to-peer lending that allows users to invest in loans granted from non-bank financial institutions (Loan Originators). Mintos specializes in consumer lending and facilitates loans both with and without buyback guarantee. Since their launch in 2015, Mintos has seen high growth rates and today they are one of the most popular choices for both new and experienced P2P investors.  Mintos does not charge any fees to investors and makes most of its money on commissions they receive from lending platforms. Mintos operates a secondary marketplace where a 0.85% charge is assessed for selling a loan.

https://www.crowdfundinsider.com/2020/11/169296-loan-marketplace-mintos-tops-6-million-on-crowdcube-ceo-martins-sulte-shares-insight-into-platform-operations/

Outfund raises £37m in debt and equity

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Outfund’s mission is to bring the fastest, easiest funding solutions to high potential online companies across the UK. For the last few months, they have been building their product and funding our first companies. Outfund was launched out of personal experience. Their team is made up of former founders, startup vets and fintech specialists. They all experienced the stress and workload of VC raises and bank loans, as well as the pain of giving away a stake in their businesses. They knew businesses needed a better way to fund their growth: a simpler, faster and fairer way. A solution that turns fundraising from a full-time job into a low effort task and lets founders focus on growing their business. They use a funding revenue finance model and advance you a cash injection that can scale from £10k to £1m, based on the company’s needs.  It’s not a loan and the company does give up any equity. The money raised can be used to grow for example expenditure on online ads, inventory, salespeople. The company repays the funds and a small flat fee with a share of revenue over a fixed period.  The company can apply in in minutes, receive up to £1m growth funding in days, pay a flat fee with no equity dilution or personal guarantees. Therefore, the repayment occurs out of revenue earned. They specialize in online businesses in E-commerce, D2C online retail, subscriptions, B2B SaaS and Marketplaces.

They are working to grow the amount of capital they can deploy so they can deliver more and larger funding advances. They are also upgrading their product to give their customers more insights on how they can best use their funding. 

https://www.finextra.com/pressarticle/85353/outfund-raises-37m-in-debt-and-equity

London based Pigment raises £19.3m to help business with it next generation business planning platform

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Pigment is business forecasting platform and avoid the painful experience of using error-prone spreadsheets and inflexible software to forecast the future of a businesses. Instead of a rigid annual planning process, Pigment’s platform allows users to take control over their business data – presenting an intuitive, full-spectrum view of the company that allows users to play with multiple future scenarios in real-time through charts, simulations and continuous modeling.IN

London based fintech Updraft raises £16m to make credit cards redundant

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The Updraft app automatically connects to your existing bank accounts and credit cards using Open Banking APIs and then uses AI to send you alerts when you’re at risk of overspending on your account.If you do overspend, instead of your bank automatically giving you an overdraft, Updraft offers to replace your expensive overdraft with a lower interest loan thus reducing your interest costs. Updraft also offers a free credit report and credit score service, as well as tips on how you can improve your credit rating.

Pocket money app gohenry raises $40m for US push

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There’s an account for adults and linked accounts for your kids. All are easily managed online or through the mobile app. Your children get their own gohenry debit cards, which come with unique parental controls. Kids can only spend the money that’s on the card, so there’s no danger of debt or overdrawn accounts. You can open an account online in minutes and will receive your child’s card in 7 working days. You can make one-off transfers to motivate your children after having successfully completed certain tasks or set up an automatic weekly payment for their pocket money. You can also choose where the card can be used, as well as being able to block and unblock it whenever you need to. With tasks, savings goals and giving features that encourage good money habits, you can set your child up with financial proficiency that will carry through to adulthood.

https://www.finextra.com/newsarticle/37112/pocket-money-app-gohenry-raises-40m-for-us-push

UK Fintech Pockit scoops £15m funding and cements partnership with Railsbank

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With the intention of supporting people who believe that they have been short-changed by their traditional banks, Pockit helps underserved and low-income U.K. customers manage their money with a bank account they can open in two to five minutes. Pockit offers its 500,000 customers a full U.K. bank account into which they can pay in their salary and government benefits, deposit cash at 30,000 PayPoint locations across the nation and are given a debit card to use for spending for 99p a month. Everything is managed through the Pockit app or their website, which its CEO explains is the core product that customers can use to send money to 35 countries.Pockit currently serves low-income earners across the country “unlike a lot of other fintechs which have large hubs in London, a large proportion of its customers are outside the UK. Around 25 percent are new arrivals to the country and the rest of their customers being U.K. nationals.

Wood pyres are being piled up high, with EU regulations stacked upon them. It’s bonfire night come early – with European red tape in place of the Guy. That may be the wish of some, but it is not the wish of the banking sector.

London is Europe’s financial centre, funding business across the continent. That isn’t just good for European growth and jobs, it is good for the UK. Mainland European companies want access to London’s deep and liquid capital markets, and having major European banks based here is good for British businesses which want access to their specialist services.

Banking is the UKS biggest export industry by far, winning work from across the EU and bringing it back here, creating jobs across the UK – two thirds of them outside London. Without the exports from banking, our national trade deficit would be twice as big.

The only way to guarantee that UK-based banks (both British and foreign) can still provide the financing the European economy needs is for the UK to retain full access to the single market. If we start stripping away European financial services legislation, we are less likely to get single market access. It is not just that banks will no longer be able to sell certain services to European customers – the whole financial ecosystem is interconnected, and stripping away one regulation can have widespread consequences.

Tearing up EU regulations ahead of consultations on our future relationship would also send out the message that we are trying to gain a competitive advantage over those we are negotiating with. It will make them far less likely to make any concessions on the things we do want.

The brutal fact of the matter is that we will need as much negotiating capital as possible. This isn’t just because the UK is one country and they are 27, but that the negotiating process is stacked against us. As soon as the Government triggers the Article 50 application to leave the EU, then if we don’t get agreement on the terms of exit within two years, we will leave the EU without any agreements at all in place (a so-called “naked exit”), and revert to World Trade Organisation rules.

We need to stay committed to retaining existing EU regulations, and implementing those that have already been agreed, such as MIFID 2, which governs the rules on selling securities. We also want to ensure that forthcoming EU legislation is transposed into UK law, such as the fourth EU anti-money laundering directive, which is due to go to a vote in Parliament.

London is currently hailed as the global centre of fintech. This should come as no surprise, as it is by tradition a financial centre, with most of the leading banks operating in the European and African markets headquartered in the capital.

Similarly, leading disrupting actors such as Funding Circle, Transferwise, Nutmeg, and Mondo have chosen London as their home, creating a stimulating ecosystem that other fintech startups can benefit from. The British capital currently hosts 17 of the top 50 fintech companies in the world (Currency Cloud, Revolut, Property Partners, GoCardless, Elliptic, Bankable, Ebury, iZettle to mention a few), and it is the biggest existing cluster of successful fintech companies, ahead of San Francisco, which is the home for 16 of these startups.

There are a few issues on both sides of the argument.

Will London manage to maintain its leading position in the fintech space?

YES — London will remain the leading fintech hub

1. London already possesses the infrastructure and the know-how. Leading on online access to financial services, it also benefits from high levels of internet connectivity and superfast broadband. A diverse capital, London attracts worldwide talents, with more than 44,000 individuals currently working on the most innovative projects in the fintech industry – more than in New York City or San Francisco.

2. Policy-makers will ensure future policies favour the ecosystem, with the adoption of initiatives such as the Innovative Finance ISA (tax-free interests for loans arranged through P2P lending). With compliance regulations already more flexible than in the US, the UK will strive to balance necessary regulations without constraining innovation: the FCA launched in May a regulatory sandbox to provide tailored authorisation processes to accelerate innovation. The financial authority plans to release its conclusive regulations on fintech in 2017 after an initial white paper.

3. Finally, London benefits from an un-replicable strategic position. Geographically situated between Europe and the USA, two of the current most mature and organised markets in the world, London offers fintech companies access to two streams of capital. More than half of all fintech investments in Europe are centralised in London with £357m poured in fintech start-ups in 2015, and London has recently seen the multiplication of new tech funds such as Santander (£60m), Index Ventures (£328m), Google Ventures (£76m) and Axa Ventures (€230m) focusing on innovative financial technologies. Furthermore, London-based fintech startups have the potential to capture a highly attractive combined total market of 900 million potential customers.

BUT — London will face increased challenges

1. Brexit – Whether the UK votes to exit the European Union on June 23rd remains to be seen. If such is the case, it should not kill London’s fintech industry. An exit would however bring much uncertainty. The flow of investment could be reduced in the short term and the currency devaluation would be unfavourable for investment and operations. An exit will undeniably impact the UK’s attractiveness for young talent who can currently freely travel. More importantly, the UK could be excluded from the Digital Single Market and SEPA. Several highflying fintech companies have expressed concern, and declared they could relocate their headquarters.

2. Competing fintech hubs are rising in peripheral markets. In the rest of Europe, Africa and Asia, new centres of financial innovation are emerging. Ambitious entrepreneurs are driving technological leapfrog in Berlin, Zurich, Tel-Aviv or Shanghai, challenging London’s central position. Out of the top 100 fintech companies identified by H2 Ventures and KPMG in 2015, 42% were non western, with 20% established in the EMEA region. While Asia possesses capital to deploy and a huge market size, Africa hosts incredible talent and an attractive market growth which will support the establishment of new fintech centres.

3. As a result, international venture capital will be redeployed to these new centres. While London currently benefits from strong streams of US investments, it will increasingly compete with other centres. Already, the Asian tech scene is garnering significant investment, with $4,8 billion raised at the beginning of 2015. Asian VCs currently deploying a large part of their capital in other markets with reroute investments to support challengers (the Chinese fintech startups ZhongAn, Qufenqi) in their local markets, which will ultimately redefine the geographic flow of capital.

This note identifies those European and international legal frameworks concerning intellectual property rights that are unaffected by Brexit and those that may cease to apply in the UK when it withdraws from the European Union unless specific arrangements are put in place. It is one of a series of GTM Alerts designed to assist businesses in identifying the legal issues to consider and address in response to the UK’s referendum vote of 23 June 2016 to leave the EU.

The sections below address the potential impact of Brexit on: (1) trade marks and designs, (2) patents; (3) copyright; (4) enforcement and licensing of IP rights; (5) exhaustion of IP rights; (6) UK’s membership of WIPO; and (7) the impact of Brexit on the application of EU law in the UK.

EU Trade Marks and Community Registered Designs Affected

Brexit will not affect UK national trade mark or design registrations. The UK Intellectual Property Office (UKIPO) will continue to grant UK national trade mark and design registrations as before. UK trade mark and design law is unlikely to change significantly in the short term, but may diverge from EU law over a longer period of time. It is likely, however, that there will be an impact on the UK’s membership of the EU Trade Mark (EUTM) and Community Registered Design (CRD) systems. It is currently possible to obtain EUTMs and CRDs that cover the UK as well as the other 27 EU Member States. For rights that were obtained pre-Brexit, it remains to be seen what effect any negotiated transitional arrangements will have on the UK portions of such EU-wide rights, however they could be automatically converted into rights that cover both the UK and the remainder of the EU, saving rights owners time and cost. For applicants wanting to obtain trade mark or registered design protection for the 27 remaining EU Member States and the UK after Brexit has become effective, it seems likely that they will have to apply for an EUTM/CRD and file separately in the UK as well.

Patents Largely Unaffected

UK patent law is based on national legislation in the guise of the Patent Act 1977, so the key legislation will not change due to Brexit.

The UK will remain part of the European Patent Convention system, as it is not a part of the EU’s apparatus. This means that it will still be possible for applicants to apply for European Patents which designate the UK centrally via the European Patent Office. Any European Patents which applicants have obtained pre-Brexit and which cover the UK will also be unaffected.

European Commission proposals for a European unitary patent, providing patent protection across most of the EU, and a new Unified Patent Court with a central division in Paris and sections in Munich and London, were targeted to take effect in 2017 after ratification by the EU Member States involved. The UK has not yet ratified the Unified Patent Court Agreement and is under pressure to do so in order for the proposal to proceed. However, unless a mechanism can be found to preserve the UK’s continued participation post-Brexit, this would be short-lived, and the London section of the court is likely to be moved elsewhere.

Copyright Largely Unaffected

For businesses whose key assets are copyright works, Brexit is unlikely to affect UK copyright law in the short term.

UK copyright law is partly based on international conventions, which will likely remain unaffected byBrexit. It is unlikely that the UK will repeal its main copyright legislation (the Copyright Designs and Patents Act 1988), and so it will retain EU law influences derived from, inter alia, the EU Copyright Directive and decisions of the Court of Justice of the European union (CJEU).

In the longer term, UK copyright law might begin to diverge from EU law. This is because post-BrexitCJEU decisions will not bind the English courts and the UK will not have to implement future EU copyright legislation. However, such divergence may depend on the extent to which the UK courts choose to be mindful of CJEU decisions and other sources of EU law in developing and implementing UK copyright law.

Enforcement and Licensing of IP Rights

It is likely that pan-European remedies (such as injunctions) will no longer be available in the UK post-Brexit. This will necessitate separate applications to the English courts to obtain remedies that will cover the UK.

In terms of licensing of IP rights, businesses should review the provisions of their intellectual property licenses for the implications of Brexit. Terms that are likely to be affected include choice of law (although the UK’s rules are similar to the EU rules and respect any agreement as to applicable law), the territory of the license granted, and the licensed rights themselves. The impact of Brexit may necessitate license terms to be amended or negotiated.

Digital Single Market (DSM)

The EU Commission has initiated a DSM strategy that is designed to bring the EU’s single market into the digital age. This strategy is to be implemented by the introduction of future legislation, such as the draft Geo-Blocking Regulation and draft Portability Regulation. The draft Geo-Blocking Regulation prevents online traders from refusing to sell goods or services (excluding audio-visual and copyright protected content) to customers on the grounds of their geographical place of residence, nationality, or place of establishment. The draft Portability Regulation provides that EU consumers can access online content from their mobile devices when away from their Member State of residence for the purpose of leisure, travel, business, or study.

If the UK were to adopt the “Norway model” and remain part of the EEA post-Brexit, these draft Regulations would apply to the UK once they enter force. If the UK adopts the “WTO model”, then the draft Regulations would not apply to the UK.

Exhaustion of IP Rights

Where goods have been placed on the market in the European Economic Area (EEA) by the owner of a trade mark, distribution rights under copyright or a registered design, or with their consent, the owner is barred by the principle of exhaustion from preventing further dealings in those goods (unless there are legitimate reasons for doing so).

The principle of exhaustion of IP rights is designed to encourage free trade in the EEA. How far these principles will apply post-Brexit depends on the model chosen for the future relationship between the UK and EU. If the UK were to adopt the “Norway model” and remain part of the EEA post-Brexit, there will be no impact on the principle of exhaustion. However, if the UK adopts the “WTO model”, the principle of exhaustion would cease to affect the UK. This would mean that UK trade mark, copyright distribution or design rights could be used to prevent goods first sold in the EU from being sold in the UK, and vice versa. This could lead to a reduction in parallel trade between the two markets, as well as price differentials for the same goods between the two.

WIPO Membership Unaffected

Brexit will not affect the UK’s status as a member of the Geneva-headquartered World Intellectual Property Organisation (WIPO), set up under the WIPO convention of 1967 as a self-funding agency of the United Nations. It provides a global forum for intellectual property (IP) services, policy, information, and co-operation among the 188 UN Member States.

EU Law Continues to Apply in the UK until Brexit

The UK has not yet left the EU. It will remain a member of the EU, and EU law will continue to apply in the territory of the UK until Brexit, for some time, for the following reasons.

Before exiting, the UK needs to go through the exit procedure set out in Article 50 of the Treaty on European Union, starting with notification to the European Council of its decision to leave the EU. The new UK Prime Minister, Theresa May, appointed on 13 July 2016, has clearly stated that, while “Brexitmeans Brexit,” there should be no rush to serve the Article 50 notification. She and David Davis, the Secretary of State for the new government department in charge of managing Brexit, have supported the view that notification should not take place before the end of the year. Following their recent discussions with Mrs May, German Chancellor Angela Merkel and French president François Hollande have both accepted that the UK needs time to prepare for exit negotiations, although they have also stressed that the UK’s Article 50 notification should not be unduly delayed as this would not be in the interests of the EU or UK economies.

While the situation remains fluid, it is expected that the next few months will see the UK establishing its preferred negotiating position on the terms of its exit from the EU and its preferred model for its future relationship with the EU, before notification in early 2017. This timetable should also allow sufficient scope to resolve a number of actions in the English High Court, aimed at ensuring that the government does not serve the Article 50 notification without first giving Parliament the opportunity to vote on it.

When the notification is made, it will trigger a two-year, extendible period of negotiation with the EU on the UK’s terms of exit only. At this time, it is not clear if negotiation of new arrangements with the EU will be conducted in parallel, or at a later stage. It is clear, however, that the UK intends to start negotiating trade terms with non-EU countries as soon as possible.

To read more about the timeline for Brexit, please see our previous GTM Alerts, “Brexit: The Timeline” and “Brexit: Progress Report One Month In”.

Further information on issues related to Brexit can be found here.

After Libor, the market has come under intense scrutiny and faced allegations of manipulation. It has been alleged that traders at major banks shared information in order to manipulate benchmark rates. Around the world, than 40 dealers have been sacked or suspended from global banks following claims of rigging abuse.

London is the biggest market in global foreign exchange with the largest proportion of daily trades.

The UK’s Financial Conduct Authority (FCA) has already launched an investigation into foreign exchange manipulation allegations along side the US Department of Justice.

In February, the FSB, which is chaired by the Governor of the Bank of England Mark Carney, said it was assessing foreign exchange benchmarks as part of its on-going probe of short-term interest rate benchmarks it was asked to conduct by the G20 last year. The FSB set up a sub-group to lead the investigation which is co-chaired by Paul Fisher, director for markets at the Bank of England.

Last week Mr Carney hinted that tougher rules were on the way. “Merely prosecuting the guilty to the full extent of the law will not be sufficient to address the issues raised,” the Governor said in a speech. “Authorities and market participants must also act to re-create fair and effective markets.”

Martin Wheatley, the boss of the FCA, has warned that, on the basis of the allegations, the rigging problem could be “every bit as bad as Libor.”

In April George Osborne told the Treasury Select Committee that the allegations of foreign exchange manipulation were “potentially very serious”. He added: “The Treasury has an overall responsibility for the integrity of Britain’s financial markets and I suspect this is something we are going to be hearing more about in the next few years.”

A spokesman for the Treasury said: “A key part of the government’s long term plan is building stronger and safer banks that can do more to support Britain’s consumers and businesses. Ensuring confidence in the fairness and effectiveness of financial markets is central to this, which is why we’ve taken action to reform LIBOR, and why we’re now using the lessons we have learned here to inform and shape the important ongoing global debate on benchmark reform.”

In case you have just returned from Outer Space- the UK Government has announced that it is holding a referendum on 23 June 2016 on the question:

“Should the United Kingdom remain a member of the EU or leave the EU?”

In the meantime, whilst the UK decides whether to Brexit or not, the EU Commission is taking a “business as usual” stance.

A forthcoming European Commission consultation on the key differences between insolvency and early-restructuring regimes across the EU was one of the measures announced in a speech by Commissioner Jonathan Hill at the European Banking Authority’s  5th Anniversary Conference on 5 February 2016.

The Commission will consult on the key differences between insolvency and early-restructuring regimes across the EU. By the end of 2016, the Commission aims to introduce legislation to address the most important barriers to the free flow of capital, building on national regimes which work well. Work on national options and discretions will also continue in order to avoid differences in rules that stand in the way of competition and trade across the single market. The UK will only get the full benefit of any changes if we vote to remain in the EU.

In any event, the UK will still be in the EU when the Recast Insolvency regulation comes into force on 26 June 2017. Even if the result of the UK referendum in June 2016 is in favour of Brexit, the procedure for leaving (which is set out in Article 50 of the Treaty of the European Union) requires the UK to give two year’s notice to leave- so June 2018 at the earliest.

The irony cannot be lost of the fact that the UK is due to hold the rotating presidency of the EU Commission for 6 months from July to December 2017, which could be interesting if the UK votes forBrexit.

Click here for further information on the issues which will arise from  a Brexit for Lenders and Restructuring Professionals:

Singapore is reviewing the rules for venture capital firms as it attempts to draw more capital to the country’s financial technology startups, according to the head of Singapore’s central bank.

Though Singapore rivals other major fintech centers such as Silicon Valley, London or New York in terms of startup activity and innovation, it still lags behind in terms of the firms’ access to capital, said Ravi Menon, managing director of the Monetary Authority of Singapore.

“I think we can solve our financing problems, because of the rate we are encouraging VC funds to set up here, and we are also reviewing some other regulatory requirements that we place on VC funds,” Menon said. “We just started the review so I can’t say more, but hopefully this will facilitate more of them to come here,” he added.

Singapore is trying to encourage investment in financial technology to boost its role as a regional banking hub. Last year, MAS set up a FinTech & Innovation Group to promote the sector, hiring former Citigroup Inc. banker Sopnendu Mohanty to head the in-house unit. The central bank has also committed to invest S$225 million ($167 million) over five years in fintech projects.

Menon was speaking at a Wednesday event to launch a new MAS initiative, known as “Looking Glass,” which is aimed at helping entrepreneurs build their businesses with help from regulators, lawyers, bankers and others. “Money is one thing, but how does the entrepreneur navigate the system?” Menon said.

The MAS wants to improve the flow of capital to entrepreneurs, but it is also mindful of the opposite danger, that local startups are flooded with funds, a process that typically leads to inefficiency and mis-allocation of capital.

“We don’t want too much money chasing too few ideas, we need to be mindful of that,” Menon said. “Civil servants can be better at giving money, but you can’t tell a startup how to run a business, you need people who have run a business to tell them that.”

It appears that the United Kingdom will exit the European Union as a result of the vote taken in the so-called Brexit referendum. Although the full impact of Brexit is hard to predict, it appears that its effects on United States trade relations may be limited.

Article 50.1 of the Lisbon Treaty provides that any “Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.” Of course, withdrawal is easier said than done. Article 50.2 details the exit procedures which start with a notification by the UK to the EU of its intention to leave the EU. The EU and the UK then, under Article 50.2, negotiate an exit agreement. The exit then becomes effective on the date of the Agreement or after two years, whichever is sooner, unless that period is extended by mutual agreement. Given these provisions, it seems clear that Brexit will be unlikely to take effect until something close to two years from notification at the earliest.

Brexit, even when it becomes effective, will not have an impact on US tariffs on goods imported from the UK. The rates set forth in column 1 of the Harmonized Tariff Schedule, which currently apply to imports from the EU, would continue to apply to products from the UK. The UK is a member of the World Trade Organization, independent of the European Union’s membership, and so the most-favored nation (“MFN”) obligation that the US has with respect to tariffs would continue to apply to the United Kingdom and keep current tariffs in place. (Anti-dumping margins, such as the preliminary margins imposed on March 1, 2016 on cold-rolled steel products from the United Kingdom, would not be affected.)

After Brexit, the United Kingdom would be able to set its own tariffs on imported goods. Whether these tariffs would be greater than those imposed currently by the EU on non-EU products is not certain. The UK will still be bound by its WTO MFN obligations, so it can’t impose higher tariffs on the United States than it imposes on other MFN members. Given this restriction, it seems unlikely that the United Kingdom will significantly raise its tariffs after a Brexit agreement with the EU goes into effect.

Probably the most significant existing trade agreement between the United States and the European Union is the US-EU Air Transport Agreement of April 30, 2007, sometimes called the Open Skies Agreement, which provides, among other things, that all airlines of the parties can obtain landing rights in the territories of the other parties. As with the WTO, the United Kingdom is an independent member of this Agreement along with the EU, so it does not appear that Brexit would affect or require renegotiation of this Agreement.

The most significant prospective agreement with the European Union is the Transatlantic Trade and Investment Partnership (T-TIP). Unlike the Air Transport Agreement, T-TIP would be between the US and the EU alone and not with the individual member states of the EU. (Although the text of any drafts of the T-TIP have not been made publicly available, the negotiations have been between the EU and the US, not with representatives acting on behalf of the UK or any other member state.) Brexit would appear to exclude the UK from participation in T-TIP.

Nigel Farage and other Brexit proponents have stated that Brexit would open up the ability of the United Kingdom to negotiate its own trade agreements with the rest of the world. The extent to which the United States will engage in separate trade negotiations with the UK after Brexit becomes effective over the next two years is unclear.

with Circle, a FinTech company backed by Goldman Sachs. Bitcoin (the internet’s most popular cryptocurrency) and blockchain technology is thus back in the news.

However, a plethora of financial markets legislation must be overcome to bring this type of ‘decentralised currency’ to any market. With the worldwide regulatory hurdles and costs surrounding the transfer of money and traditional payment systems, blockchain and Bitcoin are poised to become the next major disruptor in the banking sector.

Source: Cliffe Dekkey Hofmeyr

On 2 June 2016, the European Securities and Markets Agency (“ESMA”) published a discussion paper on the application of distributed technology (“DLT”) to securities markets. ESMA’s paper does little to shed further light on the European financial regulator’s stance on the emerging technology. Instead, it sets out an objective view of the uses, risks and challenges associated with the use of DLT and invites interested parties to respond.

DLT (also known as “blockchain”) is perhaps best known as the technology behind bitcoin, although in recent years it has captured the interest of the financial services industry based on its ability to create immutable, universalisable and secure records of asset ownership through its use of decentralised databases. Used in conjunction with auto-executing so-called “smart contracts”, commentators and investors are excited by the potential for DLT to radically disrupt established players across a range of potential applications.

ESMA suggests that the most likely use-cases for DLT in financial markets will brought about via “closed” or “permissioned” ledgers (distinct from the “open or “public” ledgers popularised by cryptocurrencies), in particular for post-trading functions. In particular, alongside general cost, security, efficiency and availability benefits, ESMA speculates that DLT has the potential to transform the following spaces:

• Clearing and settlement – by improving the speed and efficiency of certain financial transactions and reducing the role of intermediaries;
• Records of ownership – by changing the way in which asset ownership data is stored and used, including depositary / registrar, custody and notary functions; and
• Reporting and oversight –by providing immutable, “real time” data to both companies and regulators.

The discussion paper isn’t a one-sided treatise on the benefits of DLT, however. ESMA highlights the challenges of its implementation, which include scalability, interoperability both between market participants and with current infrastructure and the limited recourse mechanisms inherent in more autonomous processes. Interestingly, it suggests that DLT’s possession-based methodology may make it less well-suited to recording certain types of financial arrangements such as margin finance and short-selling.

It also touches on a range of risks which it suggests will need to be overcome in order to increase regulatory confidence, including privacy concerns, challenges associated an inherently trans-jurisdictional technology, operational risks relating to the interconnectedness of the market via DLT leading to greater risk leverage and competition concerns driven by the fear that some players will be left out in the cold by the system of “permissioned” ledgers.

Source King & Wood Mallesons