Category Archives: Fintech Opinions

Peer-to-peer lending will help small businesses stay afloat

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The Globe and Mail | Michael King and Craig Asano | May 30, 2018

With interest rates on the rise and the Canadian banks moving up lending rates, the higher cost and reduced availability of credit will affect all Canadian businesses, like a rising tide lifting all boats. Inevitably some boats will be swamped and sink, particularly if they are smaller and more vulnerable.

One set of borrowers at greater risk are Canada’s 1.14 million small businesses, defined as companies that employ up to 99 workers. Statistics Canada reports that small businesses represented 98 per cent of all businesses, employed 70 per cent of workers, and generated 30 per cent of each province’s GDP on average. This category includes startups and high-growth firms, which represent Canada’s best hope for job creation and economic growth.

As credit becomes less available, small businesses face a difficult choice of cutting back on investment or turning to more expensive borrowing, such as credit cards or payday loans. Either option is bad.

Fortunately, small businesses now have an alternative source for loans called peer-to-peer (P2P) lending. These online platforms match borrowers and investors directly and can provide loans cheaper and faster than traditional sources. How can that be? The answer is technology.

Taking a step back, small businesses are financed differently than big ones. Most Canadian startups have neither the credit history nor the collateral to secure a bank loan. Statscan reports that more than 80 per cent of startups rely on alternative funding sources such as the entrepreneurs’ savings and personal loans taken out by owners. Only 45 per cent can access credit from financial institutions and 19 per cent receive trade credit from suppliers.

Technology is disrupting this paradigm. P2P lending platforms allow businesses (and individuals) to take out a loan online with the funds crowdsourced by investors who pool their savings to fund loans. Traditionally only financial institutions were set up to screen borrowers and allocate credit. But technologies such as the internet, cloud computing, data analytics and artificial intelligence have opened this asset class to new lenders such as your neighbour or a fellow business owner.

Canada’s first P2P platform, Lending Loop, was launched in late 2015 – a decade after this model was pioneered in Britain by Zopa. Last month, Lending Loop passed $20-million in loans funded on its platform by more than 20,000 Canadian investors. While $20-million is impressive, it is still only a sliver of the $95-billion of credit outstanding to Canadian small businesses as reported by Statscan.

The average small business borrower on Lending Loop’s platform is borrowing $75,000 to $100,000 for three to five years. While interest rates vary substantially, P2P loans typically start at around 6 per cent with an average interest rate of 12 per cent, significantly lower than a credit card. These loans are used to finance inventory and equipment, or to hire new employees.

The Canadian P2P lending market got a boost this month when the Ontario government announced it would contribute $3-million over the next two years to loans funded on Lending Loop’s platform. The Ontario government will fund up to 10 per cent of small business loans, supporting funding of $30-million.

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Besides the obvious benefit to small businesses, Ontario’s announcement was important for two reasons. First, Ontario has drawn attention to P2P lending as an alternative funding source and raised awareness among businesses to accelerate adoption. And second, by partnering with a fintech startup, Ontario is leading by example and giving a boost to entrepreneurs working to democratize finance.

Here are four more steps that Canadian policy makers can take to promote P2P lending:

First, Canada should follow Britain and adopt new P2P lending regulations, as opposed to shoehorning this sector under existing equity regulations. New regulations should ensure the cost of due diligence borne by lenders is proportionate to the investment risk.

Second, retail investor caps for P2P lending should be raised over time if this asset class is proven to be low risk, increasing the pool of funds available to meet the needs of small businesses.

Third, the federal government should partner with industry to provide more education for investors and small businesses. This effort should include data collection and benchmarking to allow researchers to establish what is working and what is not.

Fourth, Canada should adopt Britain’s mandatory referral program. Banks that reject a small-business loan must refer unsuccessful applicants to a government portal that connects them with alternative lenders who may be able to assist them.

Our hope is that Canadian politicians recognize that promoting innovation means more than cutting ribbons and offering tax credits. It is about plugging holes in a leaky financial system and adding wind to the sails of small businesses to move them forward.

 

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The National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with cryptocurrency, blockchain, crowdfunding, alternative finance, fintech, P2P, ICO, and online investing stakeholders globally. NCFA Canada provides education, research, industry stewardship, services, and networking opportunities to thousands of members and subscribers and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding and fintech industry.  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 forces of change are trumping banks and regulators

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The Globe and Mail | and | May 15, 2018

Patricia Meredith and James L. Darroch are the authors of Stumbling Giants: Transforming Canada’s Banks for the Information Age, the winner of the 2017/18 Donner Prize.

Most businesses fail to respond to the challenge of disruptive technology. But disruptive technologies, including mobile devices, cloud computing, artificial intelligence, blockchain and social networking, are transforming financial services.

So it is perhaps not surprising that, far from embracing creative destruction, the protected oligopoly of Canadian banks and their counterparts in many other parts of the world have chosen to lobby in favour of the status quo. The response of global financial regulators, in the form of Basel II and III, has reinforced the old business model, making it more difficult for banks to adapt. Unfortunately, as we describe in our book, Stumbling Giants: Transforming Canada’s Banks for the Information Age, the forces of change are far more powerful than the bankers and regulators are.

As Bill Gates said more than 20 years ago: “We will always need banking, we won’t always need banks.”

The functions of banking – lending, investing and paying – are necessary in the information age. But how these functions are performed looks very different. Financial-technology companies (fintechs) – such as Amazon, PayPal, Alibaba, Apple, Google and myriad small players including robo-advisers, lenders and payments providers – are using technology to create new and better financial services for both consumers and businesses. They operate in all parts of financial management, whether that is tracking overall spending, applying for a loan or optimizing investment strategies. These technology companies compete directly with traditional banks and, in many respects, have taken them by surprise.

Ant Financial Services (part of the Alibaba Group) uses information from its payment-processing platform to develop cash flow forecasts and assess the riskiness of micro, small and medium-sized businesses. It tracks performance in real time and increases credit lines if the business is increasing faster than expected and accelerates collections if it is not. Ant’s loan losses are significantly lower than those of traditional banks. It’s “Just Spend” securitized consumer loan product helps consumers take that vacation they have been dreaming about. Amazon One Click let’s me buy that item I have been eyeing up online without having to perform a payment transaction. PayPal for Business offers web payments, online invoicing and other services to help me run my online business better.

To support the growth of fintech companies in Canada, the federal government must encourage innovation and increase competition. As Payments Canada rolls out our new real-time payments system, the government should accept the Competition Bureau’s recommendation and enact legislation to open access to qualified non-bank participants. It must implement legislation similar to laws already in place in Britain, the European Union and Australia, making it clear who owns the data stored in warehouses (the customer) and who has access to it (all competitors with the owners’ permission). This would make information – the raw materials for modern financial services – available to all competitors.

Check out:  NCFA: Canada Needs a Harmonized Securities Environment as Current Provincial Approach is a Fintech Innovation Killer

To support the growth of micro, small and medium-sized enterprises (SMEs) the government should consider giving the Business Development Bank of Canada the mandate to develop securitized lending. Using artificial intelligence and sophisticated risk-pricing algorithms to adjudicate loans based on real-time transaction data and future cash flow forecasting has proven much more reliable than traditional bank lending, based on historical returns and secured assets.

Innovation in financial services is urgent. Canada is falling further and further behind. Countries such as China, India and the United States are moving rapidly to establish e-commerce platforms with integrated financial technology companies. Fintechs are key drivers of the financial ecosystem of the future. Instead of wasting time revising the Bank Act to preserve the status quo, our policy makers should focus on legislation to ensure access to infrastructure and data for innovative new entrants and access to financing for the SMEs that represent Canada’s entry into the 21st century information economy.

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The National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with cryptocurrency, blockchain, crowdfunding, alternative finance, fintech, P2P, ICO, and online investing stakeholders globally. NCFA Canada provides education, research, industry stewardship, services, and networking opportunities to over 1700+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding and fintech industry.  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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St. Louis Fed President on Crypto: ‘Currency Competition Is Nothing New’

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Coindesk | David Floyd | May 14, 2018

James Bullard, president of the St. Louis Federal Reserve Bank, said Monday that cryptocurrencies "are creating drift toward a non-uniform currency in the U.S."

Bullard spoke on the history and economics of private currencies at CoinDesk's Consensus 2018 conference in New York, drawing on his work in this area. He told attendees that public and private currencies can "coexist in equilibrium" and even "facilitate transactions that might not otherwise occur."

But U.S. history shows that currency competition often causes more problems than it solves, he contended. In the 1830s, 90 percent of the currency in circulation was privately issued, with the uniform "greenback" only coming into use during the Civil War.

"You would have Bank of America banknotes, Wells Fargo banknotes," Bullard said, but "they all traded at a discount."

See:  Crypto Self-Governance Touted as Solution to Regulatory ‘Mess’

With over 1,800 cryptocurrencies having been issued as of today, Bullard said there was a risk of drifting back towards that kind of "chaos of exchange rates." Consumers could find themselves having to hold multiple forms of currencies for different transactions, he said, with each trading at a different relative price - not to mention the risk that a currency tanks, taking the consumer's savings with it.

"Currencies have to be reliable and hold their value," Bullard said, using the hyperinflationary Venezuelan bolivar as an example.

As for whether cryptocurrencies "might be able to protect us from the vagaries of Venezuelan monetary policy," Bullard pointed to a few issues.

First, transactions using these currencies might be illegal. Ignoring that, though cryptocurrencies' monetary frameworks may not be as reliable as some proponents claim.

Bitcoin, for example, has a fixed supply of 21 million bitcoin, but "the system can still bifurcate, creating two fixed volumes of coins." In Bullard's opinion, problems with monetary policy are "not mitigated by commodity-based money nor by cryptocurrencies."

Looking ahead

Following Bullard's opening remarks, he was joined by Diane Brady, journalist and founder of dbOmnimedia, for a fireside chat. She asked if government control was the only way to guarantee a stable monetary system. Bullard replied:

"This century, the past century it's been true. Will it always be that way? I don't know. Maybe there are technological solutions."

For the time being, he said, cryptocurrencies aren't a threat to the dollar's dominance because of their low transaction volumes. "The dollar's in great shape today," he said. "It will stay in great shape."

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The National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with cryptocurrency, blockchain, crowdfunding, alternative finance, fintech, P2P, ICO, and online investing stakeholders globally. NCFA Canada provides education, research, industry stewardship, services, and networking opportunities to over 7500+ members and subscribers and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding and fintech industry.  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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Federal budget keeps Canada’s fintech sector in the ‘valley of death’

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The Globe and Mail | OpEd Michael King | March 1, 2018

Michael King is associate finance professor at Ivey Business School, University of Western Ontario.

In the world of startups, the period when entrepreneurs are spending cash to build out a new product or service but have no revenues is known as "the valley of death." The only way to survive is to find an investor who believes in the idea and is willing to finance it to production and to find customers fast. Almost as important as cash, however, is mentoring and strategic advice from someone who believes in the founders.

Currently, Canada's fintech industry is in the valley of death and is looking for mentoring, strategic advice and customers. The sector has been growing rapidly, investing in innovative products, but has yet to get traction. Canada's 2018 federal budget was a missed opportunity for Finance Minister Bill Morneau to voice his support for this innovative sector, to raise awareness among Canadians, to be a leading customer for these innovations, and to set a national strategy for this industry to succeed globally.

See:  NCFA Submission to Finance Canada (March 2018):  Urgent Need for Regulatory Change and Government Support

It is ironic, because the 2018 budget continues to focus on the right themes: promoting innovation; equipping Canadians with the skills to succeed in the digital economy; and creating economic growth and opportunity for all. Despite these lofty goals, the budget fails to mention the one sector that has the potential to achieve all three objectives: financial technologies or "fintech." In fact the word appears only three times in 367 pages, and then only in an annex.

Fintech innovations are affecting the daily financial activities of all Canadians – paying, saving, borrowing or investing. Whether you are paying a bill on your phone, transferring money abroad, taking out a loan online, comparing insurance using a website, or investing in an exchange-traded fund, Canadians will be seeing many improvements as fintech innovations are introduced by incumbents and new entrants alike. They will also likely be dealing with many non-traditional financial providers eager to bundle their product – whether it is social media, e-commerce, or part of the sharing economy – with unbundled financial products (e.g. a loan, an investment, or an insurance policy).See

The question no one is asking is whether these fintech innovations will be coming from a Canadian company or a foreign one.

While Canada has a highly educated work force, finance expertise, and talented entrepreneurs, it seems the Canadian government is indifferent whether these innovations are grown at home or imported from abroad. Canada's fintech ecosystem is not getting the support and attention directed at other crucial sectors, despite financial services accounting for 7 per cent of GDP and 4.4 per cent of all Canadian jobs. Of the government's five superclusters announced last month, financial services was a noteworthy gap.

What is behind this benign neglect for an important industry? It cannot be that Canadians are not hungry for simpler, less costly, and more responsive banking and financial services. The evidence from other countries is that fintech can enable higher savings for low-income individuals, access to capital for cash-starved small businesses, and better access to all financial services for underserved segments of the population. In many parts of their world, fintech innovations are democratizing access to finance and promoting growth from the bottom up.

See:  BCSC Consults Fintech Stakeholders and Requests for Comments (Closing April 3)

It may be that the government does not want to disrupt a stable financial system that has performed well over time. But that is not the attitude in countries such as Australia, where they view fintech as a valuable improvement and have committed to use government procurement to get startups on their feet.

Canada's growing fintech sector needs to hear that it is a valued part of the emerging digital economy, with great opportunities for jobs, investment, and growth. Britain, Australia, Hong Kong, Germany and Singapore are cheerleading their sectors. But as the Competition Bureau bluntly stated in a recent study, "Despite the attention that fintech is generating, Canada lags behind its international peers when it comes to fintech adoption."

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The National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding, alternative finance, fintech, P2P, ICO, and online investing stakeholders across the country. NCFA Canada provides education, research, industry stewardship, and networking opportunities to over 1600+ 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.  For more information, please visit:  www.ncfacanada.org

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Should we let the crowd fund Canadian science if no one else will?

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CBCnews | Kelly Crowe | Jan 20, 2018

Scientific crowdfunding is springing up all over the world. It's a departure from the way science is traditionally funded, with public sector institutions awarding research money using rigorous evaluation by experts — a process known as peer review.

But those public funding sources are shrinking. A national report last April warned that Canadian research is seriously underfunded and called on Ottawa to dramatically increase support for basic science.

In the meantime, scientists, especially young researchers, are struggling to launch their careers.  And that's a gap Eric Fisher is hoping to fill, through his made-in-Canada science crowdfunding platform called Labfundr.

See: Sign of the times: Crowdfunding for scientific research

"We have these really major questions and challenges facing society and there's not always the funding available to make the incremental steps forward," said Fisher. He has a Ph.D. in biochemistry, but instead of doing his own research he's decided to support other scientists and run a business at the same time. Like other crowdfunding platforms, Labfundr takes a percentage of the funds raised in successful campaigns.

The idea of going to the crowd to fund science makes Jeremy Snyder nervous. He's a medical ethicist at Simon Fraser University and he's researching the ethics of using crowdfunding to finance medical treatments. Snyder is concerned about a lack of oversight and peer review as science crowdfunding takes off.

"The Labfundr people I'm sure are trying to do a good thing," he said, "and I think there are probably ways it can be done really well, but I think there's also a lot of danger of turning it into a popularity contest, hijacking public funding and really hyping new treatments that aren't well supported by the scientific community and providing an alternate way of funding those."

See also: Crowdfunding the Canadian Knowledge Economy

Jim Woodgett, director of research at the Lunenfeld-Tanenbaum Research Institute, applauds the initiative but is also concerned about the lack of oversight and peer review.

"How do you identify what is the most likely to be useful or most likely to be scientifically valid? Peer review does provide some quality control but it also sets a pretty high bar, whereas crowdfunding has, in essence, no bar."

Fisher said Labfundr requires researchers to be affiliated with academic institutions.

"We've launched one project to date," said Fisher. "[We've had] quite a few leads and a lot of interest but it's been a challenge to get projects launched."

Crowdfunding science made headlines recently when 1,700 online donors gave money to a campaign to study whether a dimming star is being caused by aliens. A crowdfunding campaign raised more than $100,000, which the researchers used to book time on telescopes. So far the data suggests the dimming light is being caused by space dust — not aliens.

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The National Crowdfunding & Fintech Association of Canada (NCFA Canada) is a national non-profit actively engaged with social and investment crowdfunding, alternative finance, fintech, peer-to-peer (P2P), initial coin offerings (ICO), and online investing stakeholders across the country. NCFA Canada provides education, research, industry stewardship, networking opportunities and services to thousands of community members and works closely with industry, government, academia and eco-system partners and affiliates to create a vibrant and innovative fintech and online financing industry in Canada.  For more information, please visit: www.ncfacanada.org

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Bitcoin’s gender divide could be a bad sign, experts say

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CBCnews | Anne Gaviola | Jan 1, 2018

Bitcoin, and the world of cryptocurrency, is a boys' club, say some experts, and that should be cause for concern.

Cryptocurrency is a form of digital currency traded between people or used to purchase goods outside of banks or government regulation — that's part of what makes it risky. Figuring out exactly who is putting money into this kind of asset is difficult because part of the attraction of investing in the crypto realm is the assurance of anonymity.

But survey after survey backs up what the anecdotal evidence suggests — women are underrepresented.

Google Analytics results put the divide at 96.57 percent men to 3.43 percent women.

See: How to Take Advantage of the New Trends in Blockchain, Cryptocurrency and Financial Technology

That's a huge red flag to Duncan Stewart, research director of Deloitte Canada's technology division.

"It isn't merely that the value has risen as far and as fast as it has; it's the fact that it's 97 percent men — that is, in and of itself, a potential danger sign," he says.

"There are studies out there that suggest men are predisposed towards bubbles in a way that women are not."

Stewart made his case in a recent online post on the subject. Stewart said he "cannot think of any security, currency or asset class in history that shows that extreme a gender divide and has been sustainable."

One reason is the well-documented lower risk tolerance of female investors. In other words, if women aren't getting involved, it's likely too risky, this line of thinking suggests.

The most comprehensive study on gender and the stock market shows that women who invest — whether their own money or on behalf of an organization — take a more cautious approach but tend to outperform their male peers in the long run.

'Role models are needed'

Stewart says he saw this in action during the dot-com boom and bust in the early 2000s.

Back then, he was an award-winning technology fund manager on Bay Street. Female fund managers represented about 20 percent of institutional investors at the time, but they shied away from the tech stocks the men were heavily invested in.

He recalls his female colleagues being mocked for not jumping in with as much fervor as the men — until the men began losing lots of money.

"Maybe they 'got' it better than the men did all along," Stewart said.

Iliana Oris Valiente is a rarity in the cryptocurrency world. She has emerged as a female leader in this space and was recently chosen to lead consulting firm Accenture's global blockchain innovation division (blockchain is the technology behind cryptocurrencies).

See: 

A chartered accountant by training, she began her career in the world of auditing but got hooked on bitcoin as soon as she heard of it in 2012.

Oris Valiente says when she entered the world of cryptocurrencies it was a noticeably male-dominated industry.

"In 2014, when this started to become a core component of my day job, I was regularly the only female in the room, period," she said.

She says things are changing, albeit slowly. "We're starting to see really strong females in leadership roles," she said.

For instance, of the largest initial coin offerings (or ICOs, which are fundraising mechanisms for blockchain-related projects) currently underway, about 13 percent are headed by women.

"They're acting as very powerful role models, and these role models are needed to encourage other women to potentially looking at this field," said Oris Valiente.

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The National Crowdfunding Association of Canada (NCFA Canada) is a national non-profit actively engaged with social and investment crowdfunding, alternative finance, fintech, peer-to-peer (P2P), initial coin offerings (ICO), and online investing stakeholders across the country. NCFA Canada provides education, research, industry stewardship, networking opportunities and services to thousands of community members and works closely with industry, government, academia and eco-system partners and affiliates to create a vibrant and innovative fintech and online financing industry in Canada.  For more information, please visit:  www.ncfacanada.org

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Competition Bureau weighs in on fintech: urgent action required

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TheGlobeandMail | Jeffrey Graham | Jan 3, 2018

For several decades, federal policy makers have been attempting to create more competition in our financial-services environment. Initiatives to facilitate the creation of additional domestic banks, provision of greater flexibility for foreign banks to choose forms of establishment and, more recently, allowing provincial credit unions to convert and become national co-operative banking institutions, have not really made much of a difference. Our large and highly respected major financial institutions continue to dominate.

The Canadian Competition Bureau has released its final market study report into technology-led innovation in Canada's financial-services sector. The study is a valuable addition to a growing body of analysis and evidence that we need to do more to ensure that Canada is not left behind, as fintech has the potential to make an increasingly important impact on the availability and delivery of financial services to Canadians.

In its study, the Bureau notes that since the 2007-08 global financial crisis, a new wave of financial-services firms has emerged, leveraging the latest technologies. In a number of jurisdictions, these firms are helping to reshape their domestic financial-services sectors and, in some cases, the leading firms are becoming national champions with global reach. The bureau notes that Canada lags behind its peers in fintech adoption; a number of reasons for slow adoption are suggested, including regulatory and non-regulatory barriers. The study makes a number of important recommendations to financial-sector regulators and policy makers focused on retail payments and the retail payments system, lending and equity crowdfunding, and investment dealing and advice.

Could it be that fintech could actually address the long-standing challenge of creating more competition in domestic financial services? Will the bureau recommendations, if adopted, make a positive impact in achieving that objective?

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The National Crowdfunding Association of Canada (NCFA Canada) is a national non-profit actively engaged with social and investment crowdfunding, alternative finance, fintech, peer-to-peer (P2P), initial coin offerings (ICO), and online investing stakeholders across the country. NCFA Canada provides education, research, industry stewardship, networking opportunities and services to thousands of community members and works closely with industry, government, academia and eco-system partners and affiliates to create a vibrant and innovative fintech and online financing industry in Canada.  For more information, please visit: www.ncfacanada.org

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