Keynote address – Technology as an
opportunity not as a threat (Paul
Cuatrecasas, chief executive office, Aquaa
Partners)
- It takes a lawyer on average 92 minutes to review a
contract but a machine can do it 10s, with 10 times more
accuracy (Stanford University study);
- Almost all big companies by market capitalisation are in
the technology sector (10y years ago, only Microsoft was in
that category): banks’ market capitalisation has
grown 60% in past few years but technology companies have
seen growth of over 1,000%;
- 80% of companies feel threatened by digital startups,
with half of the CEOs concerned (KPMG);
- -There are over 15,000 fintechs out there with are
disrupting the market: in the financial sector, challenging
banks have no physical outpost, doesn’t carry
out normal banking services and everything has to be done via
an app. Established banks are looking in (RBS for
instance);
- 2017 was the year that more technology companies were
bought by non-tech counterparts than by companies in the same
sector. Old M&A is dead: 75% of EU executives say fintech
disruption has caused an overhaul of their M&A strategy
(Harvard Business Review).
- Tips for successful M&A in fintech: find the right
target, rank the target, build relationships, and value IP
and talent as well.
Making sense of new regulatory
requirements in Europe
- GDPR is the right thing for all the
wrong reasons, this 'monstrous piece of
legislation’ could not come soon enough. It
hands more power to the consumer, which is good because a
majority of businesses are barely reaching the DPA standard,
so there is a clear need for new legislation;
- This legislation is demanding especially for smaller
companies which are trying to grow: documentation is where
everyone will fail (providing evidence of compliance
especially). The sheer scale of GDPR means it touches almost
all contractual relationships that a bank has.
- It’s a fundamental balancing act: a bank has
to be very minimalistic as to what it chooses to focus on to
be compliant quickly. Some chose to focus on binding
corporate rules previously – this pays dividends for
GDPR;
- On the technical side, PSD2 and GDPR are not in conflict:
you need to start giving everyone a bit more of a level
playing field but don’t lower threshold of
security;
- When it comes to Brexit, passporting is not going to
survive, so it’s likely there will be a shift of
business towards Germany: recruiting tech people has got
harder for example.
Preparing for the challenge of AI: legal, ethical
and policy issues
- Artificial intelligence (AI) isn’t built for
specific applications, but there is a risk of falling into
pattern of thinking it will transform everything. AI calls
for us to relax some of our assumptions about corporate
responsibility and other legal concepts;
- Data is the new oil: you need better and better data
– has the Cambridge Analytica scandal exposed that
the best data is Facebook’s? Algorithms are
creating wealth, building contracts – but for who?
Algorithms don’t have a legal personality;
- f you look at the long run impact of technology: there is
an increase of the contribution of capital to growth, and a
shift from labour to capital, which could work in
AI’s favour.
Framework for expanded use of block chain
technology
- The market is not as mature as it could be though there
are some established good companies – one thing that
works in DLT’s favour is the financial industry
taking this decentralised technology and applying it to
industries that didn’t have any innovation;
- What you’re looking at is a revolution is
ownership, which focuses on the distribution and allocation
of capital. One thing that bitcoin has done: removed password
and provided a better way of securing data. The focus should
be on good design patterns in DLT (common data structures,
lean processes) and also asset-backed tokens.
- Some areas are naturally suited to DLT: the supply chain,
for instance, for there are many others. Alignment is the
keyword here. Blockchain can contribute to creating a single
source of trust and truth between organisations;
- Smart contracts are usually seen as a legal term but
people use them outside them outside of the legal world.
There is a need to make these as costless as possible so they
can grow to other sectors: for now, there is a disconnect
between the legal world and the software engineering
world
- One issue remains: it’s difficult to open a
bank account using cryptocurrencies in the UK. Esma
isn’t ready to deal with crypto yet.
Finance and fintech collaboration – the dos
and don’ts
- If you’re a fintech and you want to advance
collaboration with a big financial institution, how should
you position yourself? Approaching them on a partnership
basis is a start;
- Challenge with fintechs is that they don’t
necessarily have audited accounts or collateral – as
an investor, you have had to come up with internal solutions
to address these challenges. In addition, a
fintech’s business model isn’t
necessarily to make money/profit so both the large financial
institution/investor and the fintech need to be clear on what
common goals are;
- Large financial institutions have an army of people all
over GDPR, but most smaller fintechs aren’t even
mentioning it – which is paradoxical when a lot of
fintechs specialise in legal and compliance;
- Some tips: it’s useful to plan collaboration
using a phased approach; don’t be wed to where
you think the partnership should go; don’t try
and drive innovation via a structure, it’s
really about trying and failing.
Regulating cryptocurrencies: where are we
now?
- Several approaches to this: ban (Bangladesh or Bolivia);
isolation (China) and integration (Gibraltar). Five years
ago, cryptocurrenices were more of a commodity than anything
else but now there are issues of stability, consumer
protection which are informing the debate;
- But here is an asset working like a commodity than a
currency;
- Regulators really need a case-by-case review of
cryptocurrencies to decide which is what:
- They need to look at the economic function of the token
and the underlying network/protocol. Some are very
straightforward but the vast majority of some form of
commodity-like asset (a lot are app coins, which only work in
a given network);
- Will tokenised model of fundraising win over private
equity? Comparing voting rights to liquidity – for
bitcoin, early stage investors have the ability to vote
early, which is invaluable. This could be better than
liquidity;
- Case in point: in Gibraltar, the issue started off as a
narrow topic area, but has now expanded in defined crypto
asset classes.
Scaling up – financing options for
start-ups
- The kind of businesses that operate in the sector are not
mass market, but niche which is why investors tend to look
for grit and tenacity in entrepreneurs;
- There is lots of K out there to do grow but companies
that raise millions and still haven’t broken
even or have a strong business case are a worrying
trend;
- What should companies think about doing to prepare for a
crash? Tips include thinking ahead – put the
business in survival mode; raising more money than needed,
and; picking decent VCs to work with;
- IP is becoming more critical in any industries, there no
reason it shouldn’t be the same in banking.
Banks could be in a tricky situation if they
don’t develop their IP like smaller fintechs
do;
- Problem with some aspects of fintech: investors are at
the mercy of regulators – investors are regulated
entities, and they don’t want exposure to
non-regulated assets or assets under scrutiny.
Capturing the regtech opportunity
- Regulatory drag phenomenon – there is no
regulation around new technology but regulation behind
innovation. Companies have gone down three routes: building,
buying or borrowing technology;
- Three areas of focus: internet of things, DLT and AI.
Regulators are pretty neutral on technology,
it’s about the outcome;
- Regtech's biggest development have been in KYC and AML:
regtech tends to look at how we organisations process/look at
data. It's helped facilitate reporting, and implement new
regulatory requirements.