Category Archives: Entrepreneurs and Start-ups

Final Report: Ontario Capital Markets Modernization Committee Recommendations

Ontario Capital Markets Modernization Committee | Walied Soliman Taskforce Chair | Jan 22, 2021

Ontario capital markets modernization committee final report - Final Report:  Ontario Capital Markets Modernization Committee Recommendations

Job creation and economic prosperity. Fundamentally, these are the most important outputs of a successful capital markets regime. Ontario first enacted its capital markets laws in 1928. For decades, Ontario has been at the forefront of investor protection and market efficacy. We cannot fall behind. Late last year, former Minister Rod Phillips formed the Capital Markets Modernization Taskforce to review the current status of Ontario’s capital markets. By February 2020, Rupert Duchesne, Wes Hall, Melissa Kennedy, Cindy Tripp, and I were appointed to conduct this review.

Since the financial crisis in 2008, the global financial system has undergone significant changes. The ongoing COVID-19 pandemic has highlighted the need to be adaptive and forward-looking in developing a modernized capital markets. The Taskforce aimed to address the issues of tomorrow’s capital markets with bold and innovative recommendations that will make Ontario one of the most attractive capital market destinations globally.

See:

The Taskforce worked diligently for ten months, through the COVID-19 pandemic. We met over 110 different stakeholders in our preliminary consultations, meeting with some repeatedly, and received over 130 stakeholder comment letters in response to our consultation report released in July 2020.1 The consultation meetings and formal feedback told us that the time for change is now.

One of our main objectives is to amplify growth “The recommendations we have made are and competitiveness in Ontario’s capital generational in their impact on the Ontario capital markets. The decline in new issuers and initial markets.” public offerings in Ontario is alarming. The real Walied Soliman consequences of this trend are fewer head offices, fewer entrepreneurs, and fewer growth investment opportunities, all of which could drive Ontario to become a “branch plant” economy. To address this, the Taskforce proposes recommendations to incubate junior issuers in this province by reducing the regulatory burden, providing new opportunities for capital-raising through the expansion of prospectus exemptions, and streamlining disclosure requirements, among others.

The recommendations we have made are and competitiveness in Ontario’s capital generational in their impact on the Ontario capital markets, Walied Soliman

Recommending proposals designed to spur the growth and establishment of independent dealers will increase the number of intermediaries who focus on connecting capital with smaller companies. Smaller companies, in particular, rely heavily on the independent dealer community to raise capital.

To give more choice to Ontario investors, we put forward recommendations to ensure that wealth management distribution channels provide greater access to competitive and independent wealth management products. Competition among product manufacturers leads to better and more innovative products, resulting in greater choice for investors.

Read:

Although developing recommendations to foster growth and innovation is important, all of our recommendations were made through the lens of investor protection. Instilling confidence in our capital markets is critical and investors need to feel safe. One way that confidence is instilled in our capital markets is through a transparent and effective corporate governance framework. Changes are being recommended to modernize governance standards and the proxy voting framework for Ontario’s public companies to make it easier for companies to address stakeholder concerns, increase transparency, and encourage shareholder participation.

Our recommendations also support enhanced enforcement powers to protect investors and ensure a fair playing field for all market participants, while providing enhanced certainty and clarity on the enforcement process. We have also recommended new ways for funds to be returned to harmed investors.

In all, we have made over 70 consequential recommendations. The Taskforce was incredibly honoured to have had the confidence of , and encouragement from former Minister Rod Phillips in this endeavor. I would also like to thank the OSC for their support throughout this process. Ontario is privileged to have the hardworking individuals at the OSC working for us. They are talented, global capital markets leaders and we hope these recommendations will give them enhanced tools to help drive our capital markets objectives.

On behalf of the Taskforce, I would like to thank the stakeholders who have provided input during the preliminary consultations and submitted detailed, written comment letters. We are encouraged by the enthusiasm displayed by all stakeholders to work towards enhancing Ontario’s capital markets.

This report is a result of a dedicated team effort and I extend my greatest gratitude to my fellow Taskforce members, Rupert Duchesne, Wes Hall, Melissa Kennedy and Cindy Tripp for their tremendous dedication and commitment to public service throughout this process. I want to thank Eric de Roos, Deputy Minister Greg Orencsak, Assistant Deputy Minister David Wai, Assistant Deputy Minister Sunita Chander, Shameez Rabdi, Jeet Chatterjee, Luc Vaillancourt and Diane Yee at the Ministry of Finance. I would also like to thank my partners Heidi Reinhart and Rowan Weaver, and my colleagues Abigail Court, Daniel Weiss and Scott Thorner from Norton Rose Fulbright, f or their pro bono assistance to the Taskforce. Lastly, I would also like to thank members of the Expert Advisory Group for their advice and feedback throughout this process. The Government of Ontario is committed to modernizing our capital markets regulatory framework. The recommendations we have made are generational in their impact on the Ontario capital markets. Together, these changes will make our province more prosperous, entrepreneurial, competitive, and help position us as a global leader.

Respectfully submitted in December 2020, with thanks for this opportunity.

Walied Soliman Taskforce Chair

Download the 115 page PDF Recommendations Report --> Now

 


NCFA Jan 2018 resize - Final Report:  Ontario Capital Markets Modernization Committee Recommendations The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Canadian banks are following in BlackBerry’s footsteps, and that’s not very good news

Hardbacon | Julien Brault | Jan 15, 2021

open banking vault with data - Canadian banks are following in BlackBerry's footsteps, and that's not very good newsIn my time as a business reporter, I was at the forefront during the decline of the country's 2000s tech giant, BlackBerry.

BlackBerry launched its mobile app store in 2009, a year after Apple launched the App Store.

Everyone knows the rest of the story.

See:  NCFA OpEd: Canada’s Open Banking Consultations: Let’s Get it Done!

While BlackBerry executives praised themselves for having better sound quality and a more efficient keyboard, what people wanted when they bought a smartphone were apps.

Today, the Canadian banks are making the same mistake by refusing to put control of financial data back into the hands of their users, as the European banks are already doing.

In fact, since September 14, 2019, European open banking regulations (PSD2) force banks to allow their customers to share their data with third parties according to a standardized protocol. In other words, their customers can choose to share their bank information with an online loan app or even with a budgeting app.

In Canada, the federal government created the Advisory Committee on Open Banking in 2018, which delivered its first report in 2020, which was very favorable to open banking. The report listed the many benefits of such an approach, including increased data security and accelerated innovation in the financial services industry.

The committee then conducted public consultations, the results of which have not yet been released at the time of this writing. Meanwhile, Canadian banks are patiently waiting for a possible regulatory framework before taking action.

This slowness is all the more deplorable as the Canadian banks won’t be the only victims of this delay.

The collateral victims are Canadian financial technology companies like Hardbacon, which must operate in more difficult conditions than their American and European counterparts.

Consumers are also victims, since they can’t benefit from all the innovations they are entitled to expect, have less choice, and have to choose financial products in a scarcely transparent market.

See:  Refusal to embrace open banking puts Canada behind yet another curve

Open banking shouldn't be a political issue. The game of competition should ultimately force the hands of reluctant financial institutions to allow their customers to use their financial data as they see fit. This is happening in the United States, where, despite the fact that there is no regulation forcing financial institutions to allow their customers to share their data with third parties, a growing number of players are doing so. This is notably the case with BBVA, ETrade, and TD Ameritrade.

As there is little competition in Canada, this change could unfortunately take a long time to materialize.

However, in recent months, Canadian banks have proven that they can be nimble by allowing electronic document signatures and enabling their customers to open accounts online.

Rather than wait to lose their market share to neo-banks like Revolut, which is already in Canada, Canadian banks have every interest in being proactive and embracing open banking.

The first step would of course be to create and implement a technological protocol allowing their customers to share their data with fintechs like Hardbacon or competing institutions.

But they shouldn't stop there. Canadian banks should also launch their own app stores, which would enable them to offer all kinds of services through their banking portals.

Of course, I would be eager to see Hardbacon become one of the first applications offered through a Canadian banking portal.

Despite the lack of standardized protocols, Hardbacon already manages to offer an application that helps you budget by using your banking information, track your portfolio with its brokerage data, as well as compare credit cards, online brokers, and other financial products. Imagine what Hardbacon could do if it could integrate directly with the financial institutions...

In conclusion, open banking should not be limited to banks. In Europe, PSD2 does not apply to investment account data or data related to insurance policies. However, this data is more complex than bank data, which makes their digital transmission even more significant.

Julien Brault - Canadian banks are following in BlackBerry's footsteps, and that's not very good news

Author:  Julien Brault is the CEO and co-founder of Hardbacon, the Canadian fintech behind the eponymous app that helps Canadians plan, budget and invest. Before Hardbacon, he worked as a business reporter for Les Affaires and as a growth marketer for other fintech startups.

 


NCFA Jan 2018 resize - Canadian banks are following in BlackBerry's footsteps, and that's not very good news The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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How Banks, Fintechs, and Customers Win Together

Fintech Confidential | Michael King and Richard Nesbitt | Jan 21, 2021

NCFA how banks fintechs and customers win together - How Banks, Fintechs, and Customers Win Together

In our recently published book The Technological Revolution in Financial Services: How Banks, Fintechs, and Customers Win Together, a group of expert contributors from North America and Europe share their insights on how the financial services industry will evolve in the coming decade. The context is the ongoing transformation in the financial  services industry, which is being driven by three structural forces: heightened regulation that followed the 2008-2009 Global Financial Crisis (GFC),  innovation fueled by new technologies and entrepreneurial fintech startups, and demographic trends with the rise of millennials and the retirement of baby boomers.

These forces are changing the competitive landscape of financial services, lowering barriers to entry and increasing competition from both inside and outside the industry. Our book outlines what we see as the successful strategies for financial technology (fintech) companies and incumbents, namely banks, insurance companies, and asset managers.

While there is much to learn from our contributors, this article shares our main conclusion and a few key takeaways.

We argue that the winning strategy for the coming decade will be for banks, insurance companies and asset managers to partner with fintech startups to deliver a superior experience to end-customers.

The media has portrayed fintechs and financial incumbents as rivals. But the real threat over the coming is coming from outside the financial services industry – from large technology companies such as the Chinese techfins (Alibaba and Tencent) and North American bigtech companies (Amazon, Apple, Facebook, Google, and Shopify). These global players have platform ecosystems with large and loyal customer bases, massive datasets on customer behavior, and well-known brands. Techfins and bigtech are bundling financial services with non-financial products to provide end-customers with the delightful, easy, convenient and lower cost experiences they desire.

See:  Why Partnerships Are the Future for Fintech

Faced with these new entrants, we argue that incumbents need to partner with fintechs, combining their respective strengths to provide a better customer experience.

  • Banks, insurance companies and asset managers are product-centric. These incumbents have millions of customers, expertise in risk management and compliance, funding and scale. But they view the world in terms of deposits, loans, payments, and investments. They see technology as a tool to reduce costs and increase profitability while meeting increased regulatory requirements. They are more focused on their shareholders than on understanding their end-customers.
  • Fintech companies are customer-centric. Fintechs are better at understanding the customer’s needs and their financial journey. Fintechs leverage technology to solve customer pain points and offer a better value proposition. They have access to talent and are employing design thinking to develop innovative solutions that provide a delightful user experience.

So, the technological revolution highlighted in the title does not refer simply to the emergence of new technologies or the disruption from new entrants. It refers to a paradigm shift in financial services that refocuses on the end-customer, their experience and their lifetime journey.

Briefly, here are three more takeaways:

Technology is not a strategy, it is a tool for the execution of strategy.

Strategy is the answer to three questions: where is the organization today, where does it want to go in the future, and how will it get there. Technology can provide better tools for pursuing this strategy, but technological innovation is not the end goal of strategy itself. Technology does provide a sustainable competitive advantage; it is widely available and can be copied by competitors who are fast-followers. The biggest barrier to entry in banking is not technology or even regulation, but access to customers.

See:  Does FinTech Substitute for Banks? Evidence from the Paycheck Protection Program

Trust in banking is paramount, supported by data security and privacy.

The loss of trust in incumbents following the GFC opened the door to new entrants including fintechs. But trust in financial services is intertwined with cybersecurity and data privacy. Cybersecurity has clearly become the biggest operational risk. The approach must be a shift in mindset from “if we are hacked” to “when we are hacked”.  Finding it fast, disclosing it and dealing with it immediately, and minimizing the impact on customers will be critical. Data privacy is a second critical issue. Consumers and privacy advocates are acutely aware of the mixed incentives created by the advertising- based business models of Facebook and Google. This is one area where technology (such as blockchain) and new services (such as digital identity) can promote trust, by protecting customer data, privacy, and identity.

Open banking sits at the nexus of these concerns. We argue that the adoption of open banking -- in Canada and globally – will increase data security by putting in place a secure system for the transmission of data using application programming interfaces (APIs).

Regulation and risk management remain pillars of financial services.

See:  The future of European payments: Strategic choices for banks

Regulation is not going away, nor should we want it to. Leading financial players – whether fintechs or incumbents – support higher regulatory requirements to weed out bad actors. We argue that maintaining a level playing field and avoiding regulatory arbitrage are important. Effective risk management will continue to be a driver of success in financial services. Incumbents possess this expertise. Fintechs and other new entrants will inevitably need to invest in risk management and compliance to be successful.

Authored by:

  • Michael R. King, Lansdowne Chair in Finance, Gustavson School of Business, University of Victoria
  • Richard W. Nesbitt , CEO, Global Risk Institute in Financial Services

 


Fintech Confidential issue 3 cover 1 - How Banks, Fintechs, and Customers Win Together

This article appears as a featured article in NCFA's digital magazine, Fintech Confidential (Issue 3 Dec 2020). Click to read the latest thought leadership, insights and trends about Fintech in Canada:

Checkout NCFA's digital magazine, Fintech Confidential (Issue 3, Dec 2020) --> here

 

 


NCFA Jan 2018 resize - How Banks, Fintechs, and Customers Win Together The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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The OSC’s New Innovation Charter: Is this really a ‘new model’?

NCFA | Jan 21, 2021

OSC new innovation charter - The OSC’s New Innovation Charter:  Is this really a ‘new model’?

The OSC has recently announced a Charter for a new Office of Economic Growth & Innovation (Innovation Office):  release and innovation office charter.

The NCFA welcomes the announcement but remains skeptical. Is this really a "new model" or merely window dressing

1. An Innovation Office alone will not make the OSC more "innovative". Innovation requires a lot more than a mere reference to these words. The Charter points towards "fostering a culture that encourages experimentation, embraces failures as necessary learning steps and allows for a quick pivot to the next idea" and playing a role in the "OSC’s ongoing modernization, which includes adopting a more flexible regulatory approach, making investments in technology and simplifying our rules and processes".

Do the OSC leaders (and the Ontario Government) understand how difficult this essential culture change will be? 

What does "modernize how we formulate policy and new regulations" mean? Does it involve, for example, more disciplined decision making, better analysis and use of data (including collecting or enabling much better capital markets data generally in Canada), extensive staff training, learning to better manage risk?   We need more information so that industry participants can have greater comfort about what the OSC proposes and what is likely actually to be achieved.

See:  Big Changes In Financial Regulation: Dialogue With The OSC 2020

Related to this, the vision for the Innovation Office seems odd. "To be recognized as a catalyst in innovative regulation that promotes confidence and economic growth." Why would the OSC want the Office only to be "recognized"? Normally one would expect to see a vision for a more cost-effective regulator in a dynamic regulatory ecosystem supporting a healthy economy, eg, 'OSC is a world class regulator in a dynamic, innovative economic environment', or 'OSC is a key partner in building a healthy Ontario economy that enables innovation and provides jobs'. The vision would be followed by a mission statement that sets out how the Office/OSC itself would work towards the vision (perhaps by "accelerating innovation, bolstering capital formation and reducing regulatory burden"?), followed by the strategic priorities to achieve the mission as set out in the Charter.

2. There appears to be a willingness to "deepen engagement" with stakeholders, which may not have existed in the past. This is always positive, but will the OSC really listen? The NCFA has been very clear for years about what is needed. See https://ncfacanada.org/advocacy/. Our views are well supported by the fintech sector, academia, investors, and others. Little has changed. What does the OSC want from stakeholders?

3. Overlapping issues like data and privacy protection, competition, and IP, while perhaps not directly within the OSC's jurisdiction, are becoming increasingly urgent. And yet there is nothing in the announcement about collaboration with other regulators and entities like the Standards Council. There is no mention of the Canadian Securities Administrators (CSA) who must be involved if the OSC is to become a cost-effective, world class regulator and a key partner in building a healthy Ontario economy. Does the OSC view the CSA as a mere "stakeholder" to which the OSC may listen, or as a partner?

 

Conclusion

The NCFA looks forward to further details on this project which we hope will address some of our concerns. There are many barriers to innovation in Ontario, and elsewhere in Canada. Many stakeholders think that the main barrier is the regulatory culture of the OSC itself. To the extent that this is so, the OSC faces a big challenge - one that the incoming OSC Chair must tackle full on for impactful regulatory change .

Links to recent NCFA advocacy on behalf of the Fintech & Funding industry


Fintech Confidential issue 3 cover 1 - The OSC’s New Innovation Charter:  Is this really a ‘new model’?

This article appears as a featured article in NCFA's digital magazine, Fintech Confidential (Issue 3 Dec 2020). Click to read the latest thought leadership, insights and trends about Fintech in Canada:

Checkout NCFA's digital magazine, Fintech Confidential (Issue 3, Dec 2020) --> here

 


NCFA Jan 2018 resize - The OSC’s New Innovation Charter:  Is this really a ‘new model’? The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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For Digital Assets, Private Markets Offer the Greatest Opportunities

Bain and Company | By Mike Kühnel, Thomas Olsen, John Fildes and Karl Gridl | Dec 16, 2020

digital asset private markets - For Digital Assets, Private Markets Offer the Greatest Opportunities

Despite decades of technological advances, global capital markets remain characterized by fragmented and siloed networks, with limited interoperability between them. Reconciliation between systems requires extra, sometimes manual, steps. Many processes across the financial ecosystem thus continue to be prone to error and high costs. This applies to public markets but even more acutely to private markets.

See:  3 Ways Digital Assets Will Reshape The World

As a consequence, a consensus across the global financial ecosystem has emerged: Digitized financial assets and distributed ledger technology (DLT) platforms will substantially improve transparency of information, automation, distribution and, ultimately, liquidity. Adoption of digital assets—assets and regulated financial securities that are represented digitally and administered on digital platforms—will expand beyond the first niche application of cryptocurrencies, with DLT removing many sources of inefficiency.

Exchanges, banks, technology companies and other financial market firms will need to make decisions soon about how to participate, as it takes time to build an economically attractive business model and the required capabilities and partnerships. Postponing this decision comes with the risk of losing strategic position as early movers gain share and replace or create new market infrastructure roles.

Despite uncertainty around the relevant legislation, dominant technologies and trustworthiness of some emerging firms in this space, we expect that digital assets will increasingly serve as substitutes for traditional financial products―not completely replacing them but rather operating side by side for many years. In the near term, DLT platforms can digitally represent traditional assets on a blockchain ledger to deliver more efficient administration, such as in managing collateral. But digital assets will also make inroads in issuance, trading, settlement, transfer and custody, because current systems for private assets involve expensive, manual tasks done by many intermediaries, resulting in cumbersome, duplicative and nontransparent processes.

Read:  Self-driving Banking

Private market opportunities

In principle, any type of asset can be tokenized, in the sense that related rights of ownership or entitlement to cash flows, along with obligations, can be captured and stored via DLT. We have already seen oddities, such as shares in a professional athlete’s contract or fractional ownership of a painting. Yet while DLT has earned broad attention and support, the biggest opportunities do not lie in public markets, whose current technologies are fairly efficient and would be expensive and complicated to replace in the near term.

To be clear, digital assets are not a miracle that will make very small companies easy (or more desirable) to invest in. Nor will they circumvent retail investor protections by, say, allowing anyone to trade any private asset directly on a mobile app.  Rather, the near-term breakthroughs consist of automating workflows and data ranging from capitalization tables to share transfers and dividend or interest payments. Digital asset platforms will bring benefits in efficiency and cost savings, accessibility and transparency. This, in turn, will enable new private capital market innovations to be more:

More Efficient:  Digital platforms will allow alternative asset managers to create new, more efficient investment products with portfolios of tokenized private assets. Transfer and trading of private company shares currently have high documentation requirements for new shareholders, creating an administrative burden. Digital assets minimize that burden through smart contracts, where the terms of an agreement are programmable and thereby automated. Instead of settlement processes that take up to two weeks, embedded holder rights and an immutable record will ease verification of ownership, accelerate post-trade processes and remove intermediaries. Digital assets can also unlock more efficient settlement using digital fiat currency tokens and central bank digital currencies, as they become available.

See:  Will the Law Keep Up with Smart Contracts in 2021?

More Accessibile:  Automating capitalization tables through DLT will make private assets such as private company equity, debt and real estate much more efficient to administer. Efficiency also allows for new types of private capital products that will be more readily available to a broader set of investors―for example, through 401(k) retirement savings plans.

More Transparent:  In the future, such platforms can be extended to help minimize costs and administrative tasks at the individual asset level. Transfer of equity tokens will also feature transparency of price and governance, including right of first refusal, proxy voting and divided payments. Automated administration would allow investors such as pension funds to more easily coinvest in specific parts or assets within a private equity fund portfolio.

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NCFA Jan 2018 resize - For Digital Assets, Private Markets Offer the Greatest Opportunities The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Will the Law Keep Up with Smart Contracts in 2021?

Crowdfund Insider | | Jan 19, 2021

smart contracts and law - Will the Law Keep Up with Smart Contracts in 2021?Why are smart contracts significant?

Traditionally, parties have relied on intermediaries, such as escrow agents, banks, or governments, to ensure the performance of a contract (or that a party didn’t simply run off with your cash). Smart contracts eliminate the role of intermediaries because they are both self-executing and self-enforcing. The entire transaction is dictated by computer code alone. By cutting out the “middleman,” transaction fees are dramatically reduced, while transaction speed is dramatically increased. Parties can now make a wide variety of agreements without fear that the agreement will be dishonored.

See:  The UK Provides Legal Certainty For Smart Contracts And Cryptoassets In Its Landmark Legal Statement

Blockchain-based smart contracts are quickly becoming a common method of transacting. Since 2018, private parties have increasingly used smart contracts to tokenize assets and execute the terms of commercial loans and securities lending transactions, such as “repo” swaps of U.S. Treasury bonds.

In the near future, smart contracts may be used in an even greater variety of transactions involving international trade finance, derivatives markets, mortgages, and auto leasing. With their ability to instantaneously execute and settle transactions, smart contracts have the potential to increase the liquidity of traditional credit markets, as well as creating entirely new ones in intraday lending.  The possibilities for creating new deal types and methods of transacting business are endless.

The self-enforcing feature of smart contracts may also have significant consequences for the Internet of Things. Take for instance a car lease stored on blockchain, where the financing company is entitled to automatically disable, or even seize, the vehicle if the lessee defaults on a payment. Once autonomous vehicles hit the road, one can imagine a delinquent lessee returning to the parking lot only to find his vehicle has literally driven itself back to the bank. Smart contracts may ultimately spell the end of the “repo man,” as well as a number of other professions.

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How does current law treat smart contracts?

Traditional legal frameworks act as road maps for parties to create legal interests and rights when entering into an agreement. However, they are often subject to different – and sometimes conflicting – requirements. When a transaction shares the characteristics of different legal frameworks, disputes between parties can arise.

Smart contracts have the ability to capture and transfer assets from one party to another. As such, they can conflate contract law with other legal frameworks, such as property, secured transactions and entity law. For instance, contracts are typically private agreements in which the rights of third parties are unaffected. As such, the terms of a contract may be kept confidential. A smart contract, however, can put assets out of the reach of third parties that claim an interest in them. Property law has the ability to affect third parties’ rights. However, property rights require the giving of notice to be enforceable against third parties, such as by recording a deed or mortgage at the county clerk’s office.

See:  LabCFTC Releases Primer on Digital Assets

A smart contract may also share the characteristics of a secured transaction governed by Article 9 of the Uniform Commercial Code (UCC).

Imagine a smart contract where a creditor extends a loan to a debtor and takes as collateral a “secured interest” in the debtor’s personal property, such as a vehicle, patent or valuable artwork. This same smart contract may also contain a self-enforcing protocol that uses blockchain to automatically capture and transfer the collateral to the creditor if the debtor fails to repay the loan on a certain date.

Smart contracts could also provide protections only available under entity law. Unlike a security interest, which prioritizes competing claims between creditors, entity law can completely shield assets from creditors’ claims. By incorporating and respecting corporate formalities, business assets of a corporation are placed beyond the reach of the creditors of the corporation’s owners. This ability is unique to entity law, and arguably its most important feature. However, a smart contract may have the same effect without requiring incorporation.

Why is regulation necessary?

As smart contracts become more commonplace, parties must have confidence that they are creating intended legal interests and rights. As such, new regulations must be enacted to account for how blockchain and tokenization intersect with traditional legal frameworks – or perhaps create new ones.

See:  Blockchain: legal and regulatory guidance report

This process has already begun at the state level, where states like Arizona and Tennessee have enacted laws to define smart contracts and recognize electronic signatures secured by blockchain technology as valid and enforceable. Wyoming has gone even further, amending its state commercial code to specifically define and classify digital assets, and to establish requirements for the perfection of a security interest in a tokenized asset. However, these states remain the exception, not the rule.

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NCFA Jan 2018 resize - Will the Law Keep Up with Smart Contracts in 2021? The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Self-driving Banking

Financial Times | OpEd by Brian Brooks | Jan 12, 2021

Self autnomous banking - Self-driving BankingLenders run by algorithms and blockchain technology will require 21st century regulation

The writer is the US acting comptroller of the currency In 1961, Popular Science magazine envisioned self-driving cars.

The reality arrived sooner than anyone anticipated, and before safety regulators could adapt. Most automotive laws — on speed limits, giving signals, drink-driving — had been designed to protect against dangerous drivers, not dangerous cars. Autonomous vehicles brought new risks that legacy rules never considered. As one headline on the Wired website put it: “Who’s Regulating Self-Driving Cars? Often, No One”.

Banking is headed down the same road. And it’s being driven by the technology behind decentralised finance, or DeFi. But just as the original rules of the road protected us from other drivers, so our current bank regulations exist mainly to prevent human failings.

See:  Intro to yield farming and the latest developments in DeFi

At the US Office of the Comptroller of the Currency, we require every bank to have officers responsible for its safety — such as a chief risk officer and a chief audit executive. We limit how much banks can lend to their directors. We even make some bank employees take a certain amount of vacation so others can sit at their desks and identify potential fraud. We call it bank regulation, but we’re really regulating bankers.

DeFi turns all this on its head. It leverages blockchain technology to deliver services with no human intermediation.

One example is creating money markets with algorithmically derived interest rates based on supply and demand — rates that traditional banks set by committee. Other DeFi projects include decentralised exchanges that allow users to trade without brokers, and protocols for lending that do not involve loan officers or credit committees. Although these “self-driving banks” are new, they are not small. They are likely to be mainstream before self-driving cars start to fly.

However, self-driving banks present the same challenges and opportunities as autonomous vehicles. On the opportunity side, they can allow savers to stop shopping around for the best interest rates by having algorithms do this for them. They can also end discrimination against certain borrowers by having software make credit decisions. They could even eliminate the risk of fraud or corruption by no longer being run by humans at all.

See:  Interested in a High Interest Bitcoin Saving’s Account? Interview with Ledn CEO, Adam Reeds

Self-driving banks also present new risks, though. If technology accelerates withdrawal of depositors’ funds, just as high-frequency trading can accelerate equity sell-offs, that could increase liquidity risk compared with traditional banks. Asset volatility could be a concern for similar reasons. And the management of loan collateral could be more difficult if humans are not involved in valuations.

There is also a risk that, in the absence of federal regulatory clarity, US states rush to fill the void and create a patchwork of inconsistent rules that impede the orderly development of a national market. This is exactly what happened with self-driving cars. Federal regulators must therefore determine what a regulatory scheme for self-driving banks should look like. Could they ensure fair treatment of customers by such a bank? Sure.

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NCFA Jan 2018 resize - Self-driving Banking The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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