Category Archives: Fintech Opinions

Will the Law Keep Up with Smart Contracts in 2021?

Crowdfund Insider | | Jan 19, 2021

smart contracts and lawWhy 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.

See:  FINTECH FRIDAY$ (EP.4-Aug 10): Importance of Smart Contract Safety Net with Amy Wan, CEO & Founder at Sagewise

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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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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Stupid

Scott Gallway | Jan 8, 2020

stupid matrix

Shadow Government

As our institutions have retreated, private capital has emerged as a shadow government. Banks command our economy, the shareholder class commands the politicians, and big tech reigns over it all. Our idolatry of innovators equates wealth with virtue, and does not hold the innovator class, or their firms, to the same standards as old economy firms (or the general population). Twenty-four hours after a failed coup, the lead story on Twitter is Elon Musk becoming the wealthiest man in the world.

When Trumpism began its march, it wasn’t the government or the media that we turned to for help, but big tech. Today, we plead with @jack to suspend the President’s account. The FBI, voters, our laws … all of them sit secondary to thirty-something innovators who hold the real power: algorithms that decide who sees what, how often, and from whom.

In this rudderless environment, where information flow is not a public good but a revenue stream, is it any wonder that misinformation — call it what it is, disinformation — has taken hold?

What can be done? A virus should be monitored. An epidemic must be cauterized.

See:  Should the U.S. Government Create a Token-Based Digital Dollar?

The striking arrogance of our American exceptionalism allowed us to ignore the virus of fringe ideas fueled by algorithms and profit. The sight of a mob overrunning the U.S. Capitol, under the direction of a U.S. President, forces us to acknowledge that we have an epidemic that demands swift, severe action(s). Put another way, putting the President in a social media timeout is insufficient.

We need greater attribution and accountability. President Trump should be stripped of power immediately. The incitement of violence against a co-equal branch of government is grounds for impeachment, conviction, and removal from office by Congress. If he had just one day left in office, Trump would still be a clear and present danger to the republic. More importantly, the first declaration in years that our leaders face consequences for their actions should be in bold type.

If there is any question that big tech is our new government, then register that these are the only entities whose actions seem to have a meaningful impact (or what we view as meaningful). Which has had more impact? Futile discussions about the Twenty-Fifth Amendment, or Facebook and Twitter suspending President Trump’s accounts and Shopify closing MAGA stores? Applaud these actions if you like, but accountability for sedition should not be meted out by private companies (in the case of Shopify, a foreign one). We should not be pandering to part-time CEOs to save the nation they demonstrate no regard for.

Stupid

In The Basic Laws of Human Stupidity, former Berkeley professor Carlo M. Cipolla posits that a stupid person causes damage to others while deriving no gain, or even possibly incurring losses. We invariably underestimate the number of stupid individuals in circulation as the probability that a certain person is stupid is independent of other characteristics or credentials (e.g., they can have a Ph.D. or be President). We (the non-stupid) are vulnerable to the stupid and their actions as we find it difficult to imagine and understand — or to organize a rational defense against — an attack that lacks rational structure or predictable movements. Or, as Friedrich Schiller put it, against stupidity the gods themselves fight in vain.

See:  The Success of Canada’s Recovery: Are Investors Ready to Spend?

At a deeper level, we must find ways to reassert the primacy of truth and reason in our discourse. No sooner had the mob been cleared from the halls of Congress than did Representative Matt Gaetz take to the podium to knowingly spread disinformation: that facial recognition determined the mob was Antifa. (It wasn’t.) Elected officials who knowingly spread disinformation should be censured and denied federal and state matching funds for their next election.

We are justifiably concerned about the declining state of math and science education, but it won’t be enough to teach more calculus. We need to teach our kids the tools of science: statistics, critical thinking, and then … civics. Mark Zuckerberg is what happens when you replace civics with computer science. We must also find a way to inculcate empathy and commitment to the commonwealth in the next generation, as the evolution of our economy leads to dispersion and segregation.

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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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From Global Leader to Follower, is Canada losing its FinTech edge?

Holt Accelerator | Jan Arp | Jan 6, 2021

From global leader to fast follower

Holt’s mission is to develop a more competitive fintech ecosystem in Canada to foster financial innovation. An overlooked focused area. Our research from hundreds of Holt Advisors, our digital events, and pre-covid travels across the globe discovered three key pillars are affected, resulting in Canada's positioning trending from global leader to follower.

Regulatory frameworks: A crucial hurdle on the path of Innovation?

 In an industry that moves exponentially fast, regulation can cause friction. It creates barriers through uncertainty in the development process, unclear regime, and setting primary conditions that become obsolete quickly.

See:  Advancing Competition in a Changing Marketplace

Take the drawn-out and delayed Open Banking process. As a result, our market isn’t benefiting from fintechs already serving this infrastructure. Why didn’t we continue to drive forward ten years’ worth of research on CBDC instead of waiting for other nations to catch up and pass us? While Open Banking gets most of the attention, other fronts would benefit from improvement. Streamlining inter-provincial regulations, improving market access for innovators, and loosening restrictions on banking/payment licenses (similar to Europe) would also help build a more competitive fintech ecosystem.

How can we create the support systems for growth stage fintechs, who are often left out of the current ecosystem?

The government must lead by example and act as the first customer to particular homegrown fintechs (e.g., PPP program in the US). They must also develop a system of incentives for these incumbents to work with fintechs and modernize themselves, improving venture investing liquidity ratios. Furthermore, stakeholders within Canadian fintech need to be included at the table when these new rules are being drawn up. These discussions need to be transparent and have to result in tangible action items with a set timeline.

Corporate incentives and security are not mutually exclusive.

Stifling innovation means it will eventually die off. Consequently, our financial institutions will be reliant on financial technologies from the US, Europe, or elsewhere as they struggle to catch up with the rest of the world.

Financial institutions play a huge role here. They must look into improving outcomes of innovation objectives, with data-driven marketing being an activity of said objectives but not the primary aim. For instance, setting goals and then optimizing processes to achieve these results and leverage. From here, diversifying your tactics to achieve these results (i.e., CVC, hackathons) are all welcomed as long as there’s alignment to the ultimate objective.

See:  NCFA Response to the Modernizing Ontario’s Capital Markets Consultation Taskforce

Security is and should always remain a top priority. While it’s fair game to make sure system vendors (i.e., fintechs) are well compliant here, there should be budgets for fintechs to help them deliver their solution securely to the banks’ standards. Additionally, there are many opportunities around data processing and several secure methods to analyze a Financial Institution’s data without jeopardizing its customers’ privacy and security.

Inefficient Distribution of Financial Allocation

There are too few options for startups in need of venture capital when considering stage and industry. Over the short-term, there is a reluctance to invest, even with a decrease in valuation. You notice this behavior in early-stage financing (especially seed), which ultimately defeats the purpose as it takes capital to build startups.The government must continue to support R&D programs to help our startups, a significant funding source for early-stage companies, while also supporting the woes in commercializing R&D properly in Canada. Rubber stamping of IRAP has been very helpful, but we need greater transparency around who is taking advantage of it, and who has been hindered.

See:  Monopoly-Friendly Canada ‘Does Not Treat Competition Policy Seriously’

Improved targeting programs for early-stage startups is required, as France did with a €4B plan to support startups, or better streamlining the abundance of government investment programs.

The Canadian people have shown great tenacity and teamsmanship throughout the pandemic and in combination with directed efforts and precise planning Canada has an amazing pool of talent that can continue to help build a robust ecosystem and become a global contributor in financial innovation.

holt-jan

About the author:  Jan Arp, Founding Managing-Director at Holt, is a global expert in this space and works towards helping Canadian Financial Institutions & Services embrace financial innovation in a meaningful way. One that pays off for both their customers and bottom line.


Fintech Confidential issue 3 cover 1 - Fintech in Atlantic Canada

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

 

 


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

NCFA Financial Innovation MapNCFA Innovation Opportunity BriefsNCFA Fintech Insights
NCFA Fintech WhispererNCFA Fintech Fridays PodcastNCFA Weekly Newsletter

 

Vitalik’s 2020 Year End Thoughts from Singapore

Vitalik Buterin | Dec 28, 2020

Vitalik ButerinI'm writing this sitting in Singapore, the city in which I've now spent nearly half a year of uninterrupted time - an unremarkable duration for many, but for myself the longest I've stayed in any one place for nearly a decade. After months of fighting what may perhaps even be humanity's first boss-level enemy since 1945, the city itself is close to normal, though the world as a whole and its 7.8 billion inhabitants, normally so close by, continue to be so far away. Many other parts of the world have done less well and suffered more, though there is now a light at the end of the tunnel, as hopefully rapid deployment of vaccines will help humanity as a whole overcome this great challenge.

2020 has been a strange year because of these events, but also others. As life "away from keyboard (AFK)" has gotten much more constrained and challenging, the internet has been supercharged, with consequences both good and bad. Politics around the world has gone in strange directions, and I am continually worried by the many political factions that are so easily abandoning their most basic principles because they seem to have decided that their (often mutually contradictory) personal causes are just too important. And yet at the same time, there are rays of hope coming from unusual corners, with new technological discoveries in transportation, medicine, artificial intelligence - and, of course, blockchains and cryptography - that could open up a new chapter for humanity finally coming to fruition.

The Changing Role of Economics

Economics has historically focused on "goods" in the form of physical objects: production of food, manufacturing of widgets, buying and selling houses, and the like. Physical objects have some particular properties: they can be transferred, destroyed, bought and sold, but not copied. If one person is using a physical object, it's usually impractical for another person to use it simultaneously. Many objects are only valuable if "consumed" outright. Making ten copies of an object requires something close to ten times the resources that it takes to make one (not quite ten times, but surprisingly close, especially at larger scales).

See:  Life after blockchain: Why Ethereum mastermind Vitalik Buterin doesn’t want to be a founder again

But on the internet, very different rules apply. Copying is cheap. I can write an article or a piece of code once, and it usually takes quite a bit of effort to write it once, but once that work is done, an unlimited number of people can download and enjoy it. Very few things are "consumable"; often products are superseded by better ones, but if that does not happen, something produced today may continue to provide value to people until the end of time.

On the internet, "public goods" take center stage. Certainly, private goods exist, particularly in the form of individuals' scarce attention and time and virtual assets that command that attention, but the average interaction is one-to-many, not one-to-one. Confounding the situation even further, the "many" rarely maps easily to our traditional structures for structuring one-to-many interactions, such as companies, cities or countries;. Instead, these public goods are typically public across a widely scattered collection of people all around the world. Many online platforms serving wide groups of people need governance, to decide on features, content moderation policies or other challenges important to their user community, though there too, the user community rarely maps cleanly to anything but itself. How is it fair for the US government to govern Twitter, when Twitter is often a platform for public debates between US politicians and representatives of its geopolitical rivals? But clearly, governance challenges exist - and so we need more creative solutions.

This is not merely of interest to "pure" online services. Though goods in the physical world - food, houses, healthcare, transportation - continue to be as important as ever, improvements in these goods depend even more than before on technology, and technological progress does happen over the internet.

But also, economics itself seems to be a less powerful tool in dealing with these issues. Out of all the challenges of 2020, how many can be understood by looking at supply and demand curves? One way to see what is going on here is by looking at the relationship between economics and politics. In the 19th century, the two were frequently viewed as being tied together, a subject called "political economy". In the 20th century, the two are more typically split apart. But in the 21st century, the lines between "private" and "public" are once again rapidly blurring. Governments are behaving more like market actors, and corporations are behaving more like governments.

See:  It’s instant – I get a message, and it’s received: Central bankers comb for crypto clues as Bahamas launches ‘Sand Dollar’

A few select quote teasers:

The researchers' eye of attention is increasingly switching focus to the challenge of governance.

We wanted digital nations, instead we got digital nationalism

People are motivated not just by earning as much money as possible in the work and extracting enjoyment from their money in their family lives; even at work we are motivated by social status, honor, altruism, reciprocity, a feeling of contribution, different social conceptions of what is good and valuable, and much more.

I have always believed is simply the fact that gold is lame, the younger generations realize that it's lame, and that $9 trillion has to go somewhere). Similarly complex forces are what will lead to blockchains and cryptocurrencies being useful.

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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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Startup advice is confusing. Here’s how to make sense of 6 common contradictions

Fast Company | Andrew Vasylyk | Dec 2020

startup lessons

The founder of StartupSoft says that even though contradictory approaches can both seem sound and come from reputable sources, there are ways to parse the information to work for you.

Founders looking for guidance are faced with too much information. Google any startup related question and open up a few links, it’s quite likely that you’ll find conflicting advice. Similarly, there’s a good chance that if you go out and ask people yourself you’ll hear opposing thoughts.  What should founders do? Who should they listen to? Let’s look at a few examples.

See:  Top Investors Advice To Prepare For The Next Decade

Following customers vs. following a vision

“If I had asked people what they wanted, they would have said faster horses.” –Henry Ford

This quote is often used to argue that customers don’t really know what they want and asking them about it is pointless.
Henry Ford isn’t alone in such thinking. In his 2018 letter to shareholders, Jeff Bezos wrote,

“Market research doesn’t help. If you had gone to a customer in 2013 and said, ‘Would you like a black, always-on cylinder in your kitchen about the size of a Pringles can that you could talk to and ask questions, that also turns on your lights and plays music?’ I guarantee you they’d have looked at you strangely and said, ‘No, thank you.'”

On the other hand, the Lean Startup methodology, which is by far the most popular framework for starting companies, takes a seemingly opposite approach in which customer feedback is the main driver of your product and, in many ways, your entire business.

See:  How to Make a Great First Impression With Investors

Weathering a storm vs. beating a dead horse

“I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.” –Steve Jobs

Perseverance, grit, and tenacity are some of the most important traits of successful entrepreneurs.  At the same time, having enough self-awareness to say “no” or “enough” is just as crucial.

Impact vs. effort matrix

Unfortunately, there is no universal list of things that are or are not worth chasing. It’s a call that founders have to make, usually relying on two things:

  • Effort: How difficult is it to achieve a certain goal?
  • Impact: How mission critical is the goal?

Innovating vs. imitating

“Good artists copy, great artists steal.” –Pablo Picasso

To outsiders, Silicon Valley is synonymous with innovation. Startup founders are seen as contrarian geniuses who create unique solutions and first-of-a-kind products.  But in reality, the world of tech is full of copycats. For example Instagram Stories and Snapchat, Uber and Lyft, Apple and Xiaomi, Indiegogo and Kickstarter, etc.  Should you take the lead or follow others?  Ideally, do both. Your product should be familiar, but different.

Too early vs. too late

“Timing is that element of your startup growth mix which is not under your control. You know the ‘how’, but it is the ‘when’ that deludes you.” —Bill Gross

For startups, timing is critical. It may be the single biggest factor, accounting for as much as 42% of the final outcome.  A guaranteed way of not being too late is to be the first. In Zero to One, one of the most popular book on startups, Peter Thiel argues that founders should not enter markets where competitors already exist.  On another hand, the advantages of being first may not justify the risk. For example, Apple is known for rarely being first, and they’re certainly not struggling.

Continue to the full article --> here


See: 

How to Value a Fintech Startup

4 Ways the Startup Landscape Will Shift in 2021

Catching the Wave: Capitalize on New Opportunities in Private Placements


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

NCFA Financial Innovation MapNCFA Innovation Opportunity BriefsNCFA Fintech Insights
NCFA Fintech WhispererNCFA Fintech Fridays PodcastNCFA Weekly Newsletter

 

Here is why InsurTech is heating up as an investment category

Luge Capital | Karim Gillani and Laviva Mazhar | Dec 22, 2020

Why insurtech is heating up

The global InsurTech startup ecosystem saw record-breaking level of investments of US$2.5 billion in Q3 2020. Despite a slow start in the first quarter of the year, due to the impacts of COVID-19, global InsurTech funding for 2020 has already surpassed $5 billion and is likely on track to match the 2019 figure of $6.3 billion.

Our Luge Capital data for Canada, presented in our  Status of the Canadian InsurTech Landscape report, shows that $1.2 billion of venture capital has been invested in InsurTech startups headquartered or operating in Canada between 2011 and H12020. The number of InsurTech startups founded in the last few years has also picked up significantly.

So why is there so much buzz about InsurTech? Why are entrepreneurs choosing to dedicate their resources to build solutions for this industry? Why are investors bullish on this category? Some of the key drivers of heightened activity in this sector are discussed below.

Massive industry

The  Canadian  insurance  industry  wrote  in  excess of $187 billion in premiums through Property & Casualty (P&C)2 and Life & Health (L&H)3 in 20194. Together, the P&C and L&H insurance sectors paid out

See:  Fintech Fridays EP41: 40% pandemic growth, taking risks and innovating Insurtech in Canada

$144.5 billion in claims or benefits to Canadians in the same year. Globally, the industry placed more than  US$6  trillion  in  premium  in  20195.  The  sheer  size  of  the  industry  in  itself  attracts  both entrepreneurs and investors aspiring to build massive businesses.

Legacy technology and cost-centre mindset

Many insurers still have legacy core systems built on monolithic, on-premise applications. This poses several challenges including time-consuming maintenance, lack of scalability and an inability to be fast and nimble. Today’s customer expectations demand rapid innovation, and this is difficult to achieve with siloed databases and inflexible core systems. In addition, historically, IT spend has been viewed by many insurance leaders as a cost-centre6. The industry is being forced to completely shift its mindset to view technology as an avenue for faster time to market and superior customer experience. But this is not going to happen overnight.

Enter InsurTech startups, who take a technology-first approach to insurance and build their software on cloud-based architectures, allowing them to go to market fast and innovate quickly.

Expectations of Amazon-like experience

Entrepreneurs have identified an opportunity to make the process of buying and keeping insurance suitable for today’s consumers, who now expect Google, Amazon and Uber-like experiences. Other entrepreneurs  and  investors  see  the  opportunity  to  help  incumbent  players  such  as insurers and brokers bring their customer experiences up to par.

Yet other startups are helping insurers with automating their internal processes, and improving  their underwriting and claims functions. Gartner expects the global IT spending of insurance companies to be US$222 billion in 2020 and forecasts the IT software sub-segment to grow at 8.4% CAGR between

2019-20247. This demonstrates the growing demand for software from insurers.

Whether it’s in distribution, process automation, underwriting or claims, there is an opportunity for technology startups to drive innovation in the industry.

Data = oxygen

Data and underwriting are the lifeblood of insurance. Yet, historically, insurers have used a pre-defined and limited set of data to underwrite policies. This worked fine for the last 100 years. However, today’s consumers want significant personalization, which can only be provided with the use of contextual data. Increased  access  to  alternative  data as well as structured data have opened up a whole world of possibilities when it comes to better personalization of insurance products and experiences.

See:  Fintech Canada Directory Category: Insurtech

To that end, InsurTech startups have identified an opportunity to either become the provider of such alternative data to incumbent insurers, or compete head-on against such incumbents to use contextualized data and provide a better experience themselves.

Shift in talent demographics

The  average  age  of  a  life  insurance  agent  in  the U.S. is 598   and this is comparable to the talent demographic in the Canadian insurance industry. As a large part of the insurance workforce starts to enter  retirement,  the  industry  is  facing  growing  challenges with replacing that talent. There is an opportunity for technology companies to help insurers and brokers continue to deliver their topline numbers in a scalable way with a smaller workforce. In fact, the use of modern technologies may even work to attract a younger talent demographic to this industry.

Commoditization of core product and need for standout brand

As  the  ease  of  insurance  product  distribution  accelerates    with  the  help  of  technology,  we  may eventually   reach   a   point  where  insurance  products  themselves  become  commoditized  due  to competitive  pressures.  Insurers  will  need  to  find  other  ways  to differentiate from competitors by offering superior customer service, smooth claims experience and add-on services. Many InsurTech startups are building technology solutions to help insurers differentiate in those respects and build brand loyalty.

Exits

The InsurTech space is beginning to see some mid-to-large startup exits. To make matters even more interesting,  some  of  these  startup exits have happened within just a few years of operations. For example, earlier this year, Lemonade went public with a valuation of US$1.6 billion and the shares soared 139% on the first day of trading9. Prudential acquired Assurance IQ for US$2.35 billion last year10. As investors, we believe that the industry will continue to see more acquisitions as incumbent players use M&A as a strategy to add new technologies and revenue.

These are some of the key factors driving innovation and venture funding in InsurTech. We expect this category to continue to grow from a funding and M&A perspective for the next few years.

NCFA Fintech Confidential Issue 3, Dec 2020

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

 

 


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

NCFA Financial Innovation MapNCFA Innovation Opportunity BriefsNCFA Fintech Insights
NCFA Fintech WhispererNCFA Fintech Fridays PodcastNCFA Weekly Newsletter

 

The Good, the Bad and the Ugly of Central Bank Digital Coins (CBDCs)

Paul Schulte | Schulte Research | Dec 21, 2020

CBDCs Good, Bad and Ugly

The good: inclusion, provenance and bank cleanup  

It is becoming clear to anyone with a window in their office that blockchain is now (finally!) emerging as a viable and pivotal technology. It was a long time coming and, as with all new technologies, the actual use case is far different from anything envisaged during its inception. The main drivers in the development of distributed ledger technology are central banks. And they do, in fact, see great benefits to Blockchain technology.

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These benefits include...

  • Independent identification and verification. The establishment of an identity confers ownership. Shockingly still, more than 1 billion people in the world do not have a conferred legal identity and about 2 billion have no financial history.
  • This creates provenance for everything: ideas, people’s bodies, property, data, relationships, and so much more we cannot conceptualize now.
  • The provenance constructs a whole new understanding of collateral and establishes the capacity to borrow against assets which, heretofore, were an uncounted part of human experience. This includes millions of hectares of agricultural land, millions of homes, and 2 billion people who are not in the banking system.
  • Blockchain, thus, guarantees mass inclusion — once provenance is established, everyone’s land, ideas, and homes become protected assets that can be borrowed against.
  • Finally, once newly empowered and financially integrated people start businesses, blockchain technology offers them smart and cheap contracts; expensive and business-killing middlemen are eliminated.
  • Whole new types of financial opportunities emerge and a new class of entrepreneurs is born, creating prosperity for millions of families and their communities.

There is another more subtle and complex — yet utterly simple — dynamic at play here. I have heard it from too many separate and independent corners of the investment community for it to be hearsay. The banks in the US, Europe, Middle East, and China are a mess. They need to be cleaned up after a 20-year Supercycle of mad lending. What if there is a plan afoot to roll out a new form of M1 in the form of digital coins from The Central Bank directly to the e-wallets of accredited entities or directly to people’s accounts so as to bypass banks altogether?  What purpose does this serve? It redirects the deposit liabilities of banks directly into people’s accounts in order to give those same banks time to deal with their bad debt.

In effect, digital coins will act as a “ring-fence,” turning banks into a large scale “asset management company” to clean up balance sheets. Incidentally, don’t expect the banks to sit by idly as they will want a piece of the “central bank crypto action.”

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In the meantime, the economy can function with digital money distributed directly to citizens.  Digital coins, in effect, become a substitute bank credit. Easing the pressure on bad debt and ensuring that bad banks can’t paralyze national economies. Ideally, it is done slow enough so as not to put too much pressure on asset prices.  We need to pay attention to how central bank coins (let’s call it  M1-b money) replace paper money and what financial applications (the new rails) are used to distribute M1-b directly to consumers. I contend that the chatter distinguishing wholesale and retail distribution will become irrelevant as the global banking system morphs from a fractional reserve system run by banks to a full reserve system run by a group of tech companies who manage the ‘electronic rails’ and ‘train stations’ by which the money flows from the government to the citizen.

 

The Bad: conflicts of interest and political blocs  

Now we get to the bad stuff. What I see playing out before my eyes is a general rebellion against the dollar. There is a growing global perception that the US hegemony has morphed from an enlightened Pax Americana to a hypocritical bully-ana; DC has been weaponizing sanctions (or outright invasion) “willy nilly” to punish countries who dare to question the dollar’s supremacy. I attended a European Central Bank Zoom conference last week and was alarmed to hear that CBDC now carries intellectual baggage of regionalism and “currency bloc” thinking. There is certainly a sense of FOMO (fear of missing out) as the Eurozone confronts its lack of an alternative to Libra and BSN. That’s fair. But the optimistic tenor of the discussion belies a confused attempt to create a CDBC Frankenstein’s monster to satisfy 18-19 countries (is it “Euro-first” or “Euro, first”). I heard a “don’t call us — we’ll call you” attitude when it comes to the creation.

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At the same time, I was alarmed to hear about BUNA, the newest FOMO iteration of a CBDC in the Gulf States.  When pressed by interlocutors about why the Gulf States needed their own CBDC, the argument boiled down to sanctions. I am getting the sense that the CBDC’s elephant in the room is that each national bloc wants to be able to impose its OWN sanctions on its OWN perceived adversaries.  They do not want someone else to impose sanctions on them, ie Uncle Sam.  So, we have a world which is morphing into four blocks: Libra in the US; a many-headed-hydra in Euroland; BUNA in the Gulf countries; and BSN in Asia. Incidentally, there was a massive pushback to Libra among the European central bank folks. A representative from the Deutsche Bundesbank was especially unflattering about Libra: “We might give it a look sometime in 2025.” OUCH!

Second, the “bad” part of CBDC is the practical realization that central banks are, by nature, very conservative organizations. The joke goes that if you need a heart transplant, get one from a central banker because it has never been used. The slowness and institutional absence of imagination, technological or otherwise, means that a private sector partner is vital. Public-private partnerships are crucial to kickstart the process. Someone has to build the new digital rails! In the US, it seems that Libra has been tapped on the shoulder. In China, it is Red Date.

The Eurozone has the European Payments Initiative which will use the existing technology of 14 banks in 5 countries to build a private rail system (what could possibly go wrong?). For better or worse, the private sector is vital to work alongside central banks in order to create a speedy, flexible, and interoperable system of payments. So far, Red Date is further ahead than anyone. While Libra can rapidly create a system, there is still massive resistance to Facebook operating inside other countries as an “honest broker.” A company like Master Card might be a better candidate, but it seems that the political Rubicon has been crossed and Libra has been tapped.

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Lastly, there was a terrific presentation by a very senior member of the Banque de France on the politics of a digital coin. There is now yet another elephant in the living room (it seems that a herd of elephants is squeezing CBDC from all sides).  He was very clear about the priorities of central banks when it comes to new initiatives of any kind. ‘What is the order of priorities?”, he asked? “First is politics. Second is policy. Third is regulation. And fourth is the functional solution.” I think this explains why the evolution of agreed-upon terminology is so problematic. It explains why the functionality of the CBDC’s “rails and train stations” is too elusive.

The reality is that politics and national policy are far more important than the creation of clever solutions to glaring problems.  I have learned that money and power are always at the heart of fixing national problems. Find out whose money and whose power is working the levers behind the scenes and you will find the solution. The regulators will also slavishly follow this trend. For instance, all of Libra’s senior leadership will be in Washington DC. It will likely be located in Lafayette Square across from the White House. The new spokesperson has been hired from the FDIC. The new CEO came from HSBC and has a history as an undersecretary in the US Government.

Follow these breadcrumbs. It’s a matter of form over function. Investing with an eye toward finding companies with the best solutions rather than companies with the best political instincts or connections might lead one to pick the wrong horse.   This is why people may be grossly underestimating Libra.

 

The Ugly: Each CBDC bloc wants to decide who is a terrorist & who is a money launderer.

Now we get back to the point I made earlier about The Euro Central bank conference last week (Incidentally, not a single Asian central banker was invited, even though it had delegates from Canada, Mexico, Libra, Bahamas, Sweden, Finland, and Middle East. I have to add that the smartest guy in the room was, I thought, Tim Lane from the Bank of Canada). There was frequent discussion of the need to regain control over a sovereign state’s ability to impose sanctions.  Countries no longer want to play the game of guessing who will be the new best friend or enemy of the United States. And they certainly do not want to find themselves on the sanctions list.

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If a country does land in the sanctions swamp, it is essentially barred from SWIFT and cannot transact in dollars. SWIFT is NOT a ‘society’ in Belgium. It is controlled by Politicians in DC and is executed through 5 banks in New York. The world has become increasingly wary of this arrangement and is seeking an alternative. Representatives from BUNA, ECB, and BSN have all made this same point loud and clear.

Second, countries also want to decide who is a terrorist and who is a patriot. It is easy to forget that the 56 “terrorists” who signed the Declaration of Independence in 1776 were ordered to be hanged by Great Britain. By 1781, they were hailed as patriots who created a new country.  (The US was not a country until 1789 — it took 13 years to get from rebellion to nationhood!). They say that the difference between a patriot and a traitor is a matter of timing.

Here we see the problem with dollar sanctions. At any time given time, the US gets to decide who is a terrorist and who is a patriot. Many countries are still very young and are in the painful and tawdry process of nation-building and establishing a national consensus. There is growing resentment about the US’ ability to take a snapshot of history and decide when nation-building must cease and restart again. The US’ gross history of international abuse ought not to be forgotten either. The 20th century is filled with the US overthrowing rightfully elected Democrats and replacing them with tyrants: Pinochet in Chile, the Shah in Iran, Arbenz in Guatemala, and so many more.

Third, countries want to have the freedom to decide who is a money launderer and who is a tax evader. This sounds absurd. Hear me out. Much of the clandestine activity of intel agencies are very often carried out with laundered money. Countries deem the activities of their intel agencies as essential to survival. If these activities are caught in a trap of “laundering,” the funds can be frozen by the US. Furthermore, some countries reserve the right for political or national security reasons to let some elites off the hook when it comes to tax evasion, money laundering, or hidden financial identities. Why should politicians in DC get to decide matters of sensitive national security of other nations in a simplistic “good versus evil” view of the world, especially when recent history has shown these judgment calls to be smeared with hypocrisy?

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So, the CBDC debate rages on. Let’s not think that it is solely about functionality or the issues being addressed. Power, money, and nation-building are first and foremost. Regulation comes a distant second.  And problems being solved are, unfortunately, last. The reason why the debate over CBDC has the hallmarks of the fog-of-war is because, as always, we’re having the discussion upside down: the solutions come last, politics come first. Welcome to the world of financial realpolitik.  It’s form over function — political form trumps practical function as these new digital rails are being built.

NCFA Fintech Confidential Issue 3, Dec 2020

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:

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