Category Archives: FinTech and Alternative Finance

Reasons Why Toronto Tops Financial Technology in Canada

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NCFA Guest Post | June 27, 2017

Canada ranks highly in terms of innovation, and the adoption of sophisticated technology. For example, mobile technology increased at a rate of 23.63% (year-on-year) in 2015, and the rapid advances in mobile technology are being adopted by many industries across the board. In 2014, a study indicated that 55% of Canadians owned smartphones. Fast forward to 2015, and the penetration rate of smartphones reached 68%. This increase represented a 23.63% uptick – remarkable by all standards.

Most Canadian smartphone owners own multiple devices, with the mean number of smartphones per person at 2.12 in 2014. That number increased to 2.37 in 2015, an increase of almost 12%. Across Canada, the demographics with the strongest growth in smartphone, tablet, and phablet ownership were the 25 – 34 age group and the 45 – 54 age group. This indicates that an increasing number of established people are buying into the tech scene, and this is helping to propel Fintech across all 10 provinces in Canada.

The smartphone revolution has filtered through social strata and demographics, and now impacts Canadians across the spectrum. It has become an indispensable part of daily life, and Canadians are turning to these mobile devices over traditional PCs, laptops and notebooks. From social media to banking, communication and work, mobile technology has evolved at a rate of knots. Between 2014 and 2015 for example there were increases in smartphone usage across the board. The most notable increases are with online streaming, online shopping, navigation, videos, apps, paying bills, checking the weather, applying for a business loan, communicating via social media, and reading the news. It makes sense that Fintech is an integral component of the mobile experience.

Canadian Banks Adopting Fintech

Canadian banks have not wasted a beat when it comes to cutting costs and increasing their efficiency. Fintech companies abound in Canada, and they provide innovative solutions at a fraction of the cost of traditional banking. Banks across Canada are implementing Fintech technology to stay ahead of the pack. They realise that they run the risk of losing business to the non-bank sector if they don’t adopt this technology. Multiple Canadian banks have developed their own proprietary Fintech systems, including Scotiabank with its Digital Factory which now serves 23 million clients across Canada.

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A San Francisco-based Fintech company – Ripple Labs – has partnered with Scotiabank, National Bank of Canada, RBC, CIBC and BMO to expedite international money transfers utilising blockchain technology. Various Fintech accelerators have also been launched to develop the bustling Fintech industry in Toronto. An example of how big financial technology is in Toronto is evident with the $30 million capital raised for start-ups by Ventures.

Toronto Fintech is Rapidly Gaining Prominence

Toronto is an integral component of the Canadian Fintech scene. The world’s foremost incubators and accelerators of technology including OneEleven, DMZ and MarS are all based in Toronto. As a case in point, UBI Global has incubated more than 260 start-up operations and the company is also the recipient of the 2016 Fintech Awards in Canada. Even the Canadian government has jumped in on the bandwagon, with C$1 billion allocated for developing innovative clusters throughout the country.

The Canadian government wants to ensure that innovative technology is available to Canadians across the country. Business-friendly regulations are being introduced to support Fintech growth and development in the province of Ontario. And Toronto is spearheading the pack as a leader in global financial services. The leaders in Fintech include London, New York, Hong Kong and Singapore.

Behind the leaders are Jakarta, Abu Dhabi and Istanbul. Toronto is certainly well-positioned to become a power player in Fintech. Regulatory frameworks are already in place, and the human, technical, and financial capital are available to accelerate the growth of this industry. Toronto is also booming with AI. Artificial intelligence start-ups have blossomed in this Canadian city, and this dovetails perfectly with the innovative technology in the financial sector.

 

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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Fintech Sandbox and Ontario Centres of Excellence Announce Partnership

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CrowdfundInsider | By

The Boston based company Fintech Sandbox and the Ontario Centres of Excellence (OCE) signed a memorandum of understanding (MOU) to work together to bring the Fintech Sandbox model into Ontario and eventually the rest of Canada.

The President and CEO of OCE, Dr. Tom Corr, spoke on this MOU:

“This new partnership between FinTech Sandbox and OCE is a unique opportunity that will give the growing fintech ecosystem in Ontario access to data, networks, platforms and events that will help accelerate growth and support the creation of high-quality jobs in the province. Signing this MOU with FinTech Sandbox will allow OCE to continue building on our programs and offerings in fintech innovation in Ontario.”

See: Fintech Regulation: Achieving the right balance to foster innovation

Fintech Sandbox is a nonprofit organization concerned with the promotion of global financial technology innovation. They provide Fintech startups with free critical data and resources to assist them with their business development. By providing this service for free, new Fintech companies can avoid the expensive cost of accessing large, relevant data. In return for this free information, startups collaborate and share what they learn in order to benefit the whole Fintech market.

OCE is a government funded organization that works with the commercialization of new and relevant innovations that can potentially shape future markets, thus ensuring that Ontario will be a global competitor. They work closely with industries, universities, colleges, research hospitals, investors, and governments in order to help cultivate these new ideas. OCE’s investments include advanced health, digital media and information communications, advanced manufacturing and materials, and cleantech energy, environment, and water.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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ICOs: New Model of Blockchain Capitalism

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The Cointelegraph | By Wassim Bendella | June 19, 2017

ICOs are the hot new thing in the Blockchain community. The idea behind an initial coin offering is that a company promises to build a Blockchain-based product or service.

To raise the funds necessary to the execution of its roadmap, the company issues digital tokens and sells them to contributors, usually all at once.

Contributors can then use these tokens to run the service when it is up and running, hold them or sell them for profit.

More and more Blockchain startups are organizing token sales as a way to raise money upfront in ICOs, a nod to the traditional securities’ IPOs. When last year, these companies raised $260 mln according to the research firm Smith + Crown, they have already raised over $560 mln since the beginning of 2017.

ICOs are considered an alternative to crowdfunding and are transforming the way startups capitalize themselves. It's basically a way for Blockchain startups to raise money outside the accredited system.

While tokens operate in the same way equity stakes do, they cannot be considered the same. Indeed, for securities to be sold, they need to be registered with the Securities and Exchange Commission. That is absolutely not the case for tokens, which are more like licenses people use to access a particular application on the Blockchain.

Breaking records

In 2013, Mastercoin organized a token sale to raise funds and was one of the first projects to use this new type of capitalization. Despite warnings that Mastercoin might just be an elaborate scam, investors braved the risk and contributed what was the equivalent of $500,000 at the time.

Ethereum followed the trend in 2014 and managed to raise $18 mln, although the project lost millions after the Bitcoin price crash that year. From there, ICOs started breaking records little by little, until a decentralized venture capital firm entered history by raising $150 mln in 2016. This firm is the infamous The DAO, which was hacked shortly after and lost $50 mln.

See: How The Blockchain Alliance Helps Law Enforcement With Bitcoin Crime And Developments Like The DAO

Since these ICOs are not regulated by the SEC, nothing can be done by authorities after such events. Startups that issue tokens become self-regulating entities that are independent of third parties, but contributors cannot be guaranteed that the roadmap promised by the founders will be respected. This dubious legal status makes ICOs a particularly risky investment.

No rules

The SEC is currently examining this capitalization method but until something is decided, contributors cannot enjoy any protection on their investment.

Aaron Ting, VP of the Malaysian Investors’ Association, believes:

“It is an investment option for those who have a high risk, high reward appetite.”

“Even though the white paper claims that by purchasing ICO tokens, investors own part of the start-ups’ assets and liabilities and have a claim on its profit, there is nothing much you can do if the project does not materialise and the people behind it take your money and run. There are no rules and regulations to govern the space,” explains Matthew Tan, founder, and CEO of Etherscan.

See: Ethereum's Double-Edged Sword: Will a Rising Price Hurt Users?

Risk appetite

By examining the developments of previously ICO-funded startups, one can argue that not many can be categorized as complete projects today. There is no doubt more time is needed to grow into a successful global company, but big wins in this field could bring more confidence to investors.

Adding to the difficulty of the exercise, it is not easy to distinguish between the genuine projects and the scams. For this reason, industry experts insist that contributors do their due diligence before investing and get deeply familiar with the project founders, its realizability and its potential for mass usage.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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Is the SEC About to Crack Down on ICOs?

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CrowdfundInsider | By Jonathan Nieh | June 17, 2017

The exponential growth of Initial Coin Offerings (ICOs), which are being used to raise huge amounts of money using blockchain based tokens, have been increasingly scrutinized. According to a recent report on Reuters, regulators within the SEC are taking a hard look at the use of ICOs and how they might be a tool to circumvent securities laws.

ICO vs IPO

ICOs are similar to IPOs in that a company raises capital from the public. However, instead of receiving a share in the company, investors who participate in an ICO instead receive a cryptographic token, like Bitcoin, although the companies conducting an ICO create their own unique token. The token usually does not give the purchaser a share of ownership in the company, but oftentimes the token can be redeemed later for cash.  Because of that distinction from IPOs, ICOs are not technically a “security” and thus not officially regulated by the SEC. However, ICOs can very much be characterized as the offering of securities in some situations. For an in-depth analysis of when an ICO counts as a security, here’s a great blog post by senior contributor Amy Wan.

SEC Concerns

Obviously, if companies are using ICOs as a way to circumvent securities regulations, the SEC will want to get involved. That’s why, as an anonymous source quoted by Reuters put it, ICOs are “high on [the] radar” at the SEC. The SEC notably hasn’t made any official statements on its position as to ICO’s, however. There were a couple ETFdenials related to cryptocoins a few months ago, but those were based on companies trying to create Bitcoin-based listings on different exchanges, the most famous being one funded by the Winklevoss twins
of Facebook fame. The denials of the ETFs do imply that the SEC is concerned about the inherent risks of cryptocurrencies. In fact, the SEC laid out their chief concerns in the letters explaining each denial. Still, ICOs present a different and unique problem in that the SEC has to balance two competing interests: capital formation for emerging companies and investor protection.

See: COMMENTARY: SEC rightly concerned about 'so-called SAFE' securities in crowdfunding

With many experts questioning the absurdity of the speed at which ICOs can raise huge amounts of capital and some even asking for the SEC give some guidance at the very least, the question isn’t whether the SEC will do anything to regulate ICOs, but when. Hopefully, when they do, the regulations put in place will be congruent with crowdfunding’s inherent goal of helping small businesses grow.

 

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

 

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$150 Million: Tim Draper-Backed Bancor Completes Largest-Ever ICO

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Coindesk | by Stan Higgins, Alex Sunnarborg & Pete Rizzo | Jun 12, 2017

An initial coin offering (ICO) for a blockchain project called Bancor has set a new industry record, raising approximately $153m in ether, the native currency on the ethereum blockchain, as part of a crowdsale that concluded today.

Data shows a smart contract connected to the sale had collected more than 390,000 ether by the time it ended at 18:00 UTC, an amount worth $152.3m at current prices. As such, the figure is higher than even the funding raised by The DAO, the notorious failed fundraising project that made headlines last year when it lost the millions of the $152m in investor funds it raised in a similar sale.

Overall, 79,323,978 Bancor network tokens (BNTs) were created as part of the ICO, with the top token holders now possessing 83.96% of the tokens, or 66,601,702 BNT. Fifty percent of the total tokens, or 39,661,989 BNT, were sold to the public, while the remaining 50% were allocated for future use.

The ICO attracted 10,885 buyers, according to available data, with more than 15,000 transactions sent to the address for purchases during the sale. One buyer went so far as to purchase 6.9m BNT, or roughly $27m, in the sale.

See:  Don't miss the Annual Summer Kickoff Rooftop Networking session June 22 @The Spoke Club

Launched in 2017, Bancor, overseen by the Bprotocol Foundation, has been pitched as a platform designed to make it easier for users to launch their own blockchain tokens.

Of the remaining funds, a blog post by the company states token capital will be directed toward partnerships, community grants, public bounties and project advisors.

Issues with the sale

As with past sales of this kind, the ICO was accompanied by reports that the ethereum network faced significant transaction loads, resulting in delays for buyers.

However, the project itself was adversely affected by long wait times on ethereum.

According to the Bancor website, an initial funding target was set at 250,000 ether, though this figure was not hard-coded into the smart contract deployed. As a result, a transaction sent on the ethereum blockchain in an effort to change the contract and limit the crowdsale in length did not work as desired.

Due to network disruption and delays holding up this transaction, the company said the crowdsale ended up continuing longer than initially desired. Overall, it lasted an two additional hours as a result of the delay.

Posts on social media further suggest that at least some users saw transaction issues during the sale. One thread on Reddit drew complaints about transactions being dropped as long as 35 minutes after they were sent to the ICO address.

Some participants who spoke to CoinDesk also said that they had experienced delays in transacting, including one who had issues moving their ethers off an exchange for the purposes of participating in the ICO.

One exchange operator went so far as to argue that the ICO had increased transaction congestion, colorfully remarking that larger ether buyers were disrupting the sale.

Notable investors

Another factor contributing to the frenzy is that, as sale was getting underway, Bancor revealed it had attracted new and notable investors.

Among those announced to be contributing funds was investor Tim Draper of VC fund Draper Fisher Jurvetson. Though new to the ICO space – he previously backed the Tezos project ahead of its yet-to-be-held offering – Draper has invested in a number of bitcoin startups in the past few years.

In 2014, Draper made headlines when it emerged that he had bought 30,000 bitcoins during US government auction, later picking up an additional 2,000 BTC during a second sale. As part of the funding, Draper will also be joining the project as an advisor.

The Bancor sale was also backed by Blockchain Capital, an investment firm that focuses on startups in the space.

According to a blog post published today, Blockchain Capital is making its investment via its BCAP token, which it launched earlier this year.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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Fintech Regulation: Achieving the right balance to foster innovation

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Financial Post | Special 'Op Ed' Post, Dinaro Ly | June 4, 2017

For nine months last year, executives of Lending Loop, which describes itself as Canada’s first peer-to-peer lending market, voluntarily put the company’s ambitious growth plan on pause to spend some quality time with securities regulators. As CEO Cato Pastoll recounts, the unusual interregnum was all about figuring out how the firm could operate within a regulatory system that doesn’t really know what to do with fintech firms like his.

“The Canadian regulator’s approach is to say, `Let’s stop anything from happening until we’re 100% okay [with the business offering].’” While Lending Loop emerged from the process and is now operating, Pastoll’s frustration is evident. “You can limit everything by being super prescriptive, but if you’re not innovative, everyone’s going to fly by you.”

Lending Loop is hardly alone. Canadian banking and securities regulators, as well as innovation and competition policy-makers, have been cautiously moving ahead with the task of developing new rules for a group of startups that have little in common with the giant banking and investment entities regulated by provincial securities commissions, federal banking regulators and other agencies.

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Some agencies, such as the Ontario Securities Commission’s LaunchPad program, have sought to test more flexible approaches to rules, such as intensive financial reporting requirements that currently apply to relatively modest fundraising programs. “The regulator has to have the capacity to be able to help,” says Adam Spence, Associate Director, Venture & Capital Programs at the MaRS Centre for Impact Investing. “What LaunchPad is doing with intermediaries looking to expand into these new regulatory environments is key.”

In Canada, most current rules reflect more traditional ways of lending, borrowing, underwriting and selling, as well as the overlay of more recent banking regulations designed to short-circuit financial fraud. As Pastoll says, existing anti-money-laundering and know-your-customer (KYC) rules were built for an era of face-to-face contact with customers, which is not applicable with fintech offerings.

A May 2017 report on fintech regulation by the federal Competition Bureau echoes this sentiment, pointing to a “disconnect” between the expressions of enthusiasm for new fintech solutions by regulatory bodies and the rigidity of their staff tasked with the day-to-day enforcement of the rules.

“Regulation should be done in a way that encourages and enables innovative startups to offer better solutions in the marketplace,” says Dave Feller, CEO of fintech Mogo, adding that the high cost of regulation for new entrants effectively serves to protect incumbents and prevent consumers from accessing cheaper and more flexible financial services.

A case in point: when the U.K. banned embedded commissions for wealth advisors three years ago, about a quarter of the established players pulled out, leaving an opportunity for upstart “robo-advisor” firms that offer discount services at a fraction of the fee. (The Canadian Securities Administrators have taken note, and recently released a discussion paper on discontinuing embedded commissions.)

A key source of friction about the evolution of regulation has to do with the legacy of the 2008 financial crisis. Unlike many western countries, Canada didn’t experience bank collapses and its financial services regulation and oversight system was widely praised internationally. As Pastoll says, that success “has been an excuse for the last nine years as to why things are the way they are.”

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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COMMENTARY: SEC rightly concerned about ‘so-called SAFE’ securities in crowdfunding

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ReutersJoe Green | June 1, 2017

Traders work on the floor of the New York Stock Exchange (NYSE) February 24, 2016.

NEW YORK (Thomson Reuters Regulatory Intelligence) - The U.S. Securities and Exchange Commission, released an investor bulletin earlier this month (here) cautioning retail investors about the risks of purchasing a particular type of security known as a Simple Agreement for Future Equity, or SAFE, in investment crowdfunding offerings. The commission acted following concerns raised by two of its commissioners and its Office of Investor Advocacy. It was right to do so.

INVESTMENT CROWDFUNDING

Regulation Crowdfunding — the SEC's rules allowing startups and small businesses to raise just over $1 million of capital from non-accredited, retail investors through online crowdfunding portals — became effective a year ago this month. These long-awaited regulations implemented the crowdfunding provisions of Title III of the Jumpstart Our Business Startups (JOBS) Act of 2012. Unlike popular crowdfunding platforms like Kickstarter, through which participants can make donations to for-profit businesses in exchange for rewards, investors participating in offerings under Regulation Crowdfunding receive securities (such as equity or debt) in exchange for their investments in fledgling companies.

See: SEC Approves Title III of JOBS Act, Equity Crowdfunding with Non-Accredited

The SEC's Division of Economic and Risk Analysis (DERA) has published a white paper analyzing all offerings launched under Regulation Crowdfunding from its May 16, 2016, effective date through the end of that year. To give a sense of the types of companies that have tried to raise capital using investment crowdfunding, according to DERA, the median issuer under Regulation Crowdfunding was incorporated within the last two years and had only three employees, no revenues and around $5,000 in cash and $10,000 in debt on its balance sheet. About 60 percent of crowdfunding issuers showed no revenues and 91 percent had yet to earn a profit.

When the SEC analysts looked at the types of securities that Regulation Crowdfunding issuers chose to offer to prospective investors, they found that common and preferred equity were most frequently offered, accounting for more than a third of the offerings. However, the next most commonly offered security, accounting for just over a quarter of the offerings, was the SAFE.

THE SIMPLE AGREEMENT FOR FUTURE EQUITY

As I described at length in a 2014 Hastings Law Journal article on contractual innovation in venture capital (here) that I co-authored with John Coyle, an associate professor at the University of North Carolina at Chapel Hill, the SAFE is a relatively new startup financing instrument developed and popularized by the influential Silicon Valley startup accelerator Y Combinator. The SAFE was designed to facilitate investments by wealthy, sophisticated angel investors in early-stage technology startups that were expected to raise institutional venture capital (VC) in the near future.

A type of deferred equity contract, SAFEs entitle investors to receive a company's equity securities upon certain triggering events, such as a subsequent VC investment. Unlike their close cousins, convertible notes, SAFEs do not accrue interest while outstanding and have no maturity date. The percentage of the company's equity a SAFE investor may eventually receive upon a subsequent financing is a function of the amount invested and the valuation of the company that is negotiated by the later VC investor. Conversion of the SAFE into equity depends upon that future VC financing actually coming to fruition.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1500+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at www.ncfacanada.org.

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