Blockchain is the next big regulatory debate in finance
Financial technology, or “fintech”, is the latest in a series of trendy start-up segments that is capturing venture capital dollars around the world. Cities up and down the Asia-Pacific capital corridor (that is, from Tokyo, Seoul and Beijing through Hong Kong and Singapore all the way down to Sydney) are competing aggressively to bill themselves as global fintech hubs, investing heavily in what they see as a new driver of sustainable growth.
Up to now, fintechs have generally focused on peer-to-peer lending, payments technology, and cloud-enabled enhancements to back-office function. While these have been significant developments, none of the current technology could yet be considered truly disruptive to the financial services industry in the same way that Uber or Airbnb are changing the transport and hospitality industries.
This could be because:
- The technology adds convenience or capability while “riding the rails” of existing infrastructure (e.g. PayPal);
- The technology is niche in its application and is thus naturally limited in how far it can penetrate the market; or
- The technology has not reached sufficient scale to truly challenge traditional banking.
For these reasons, fintech has largely avoided heavy regulatory scrutiny, despite a few high-profile collapses such as the Mt. Gox bitcoin exchange in Tokyo and China’s Ezubao P2P lender. But this light-touch regulatory approach could be coming to an end as the market starts to look at what is likely to be the first fundamentally disruptive technology for financial services: blockchain, the infrastructure which backs the digital currency bitcoin.
Blockchain is essentially a shared digital ledger of transactions, updated dynamically and distributed in real time to all market participants. The technology can effectively replace any trusted third party (that is, a middleman) which exists primarily to validate a transaction.
Blockchain is still an amorphous concept. According a March 2016 report from PwC, 57% of financial services businesses are “unsure about or unlikely to respond to blockchain technology,” despite PwC’s prediction that “blockchain technology may result in a radically different competitive future in the [financial services] industry” with the ability to cut billions of dollars in costs particularly around trade settlement and back-office operations. It can also dramatically improve overall transparency, for example in the opaque world of OTC derivatives and fixed income trading.
PwC’s blockchain team predicts that 25 blockchain startups (of over 700 identified by the team) are likely to “emerge as leaders”. The most well-known of these at present is Digital Asset Holdings, created in 2014 by former JPMorgan investment banker Blythe Masters and now carrying a $100m valuation, according to Crunchbase.
So we may safely assume that the financial services industry is up for a period of significant technological disruption. But the role of regulators will be much more important than it’s been in other segments.
Banks are “systemically important” institutions, as defined by the world’s most influential market regulators like the Basel Committee on Banking Supervision. Ensuring the day-to-day liquidity and capital access of these institutions are basic requirements of an effective market. Even seemingly mundane tasks such as transactions settlement and clearing, not to mention credit card payments, are vitally important functions of a modern economy.
It is these basic functions that regulators seek to constantly protect and manage in the interests of the economy as a whole. With this in mind, regulators are now taking a closer look at how the emergence of Blockchain technology should be managed.
Blockchain is the only technology which could, at present, rightly be seen as “systemically important” as it reaches scale in the market and becomes increasingly integrated into the operations of financial markets. Regulators will need to strike a careful balance between encouraging innovation and rewarding true wealth-creating entrepreneurs while minimizing the broader risks for the system as a whole.
Our advice to technology entrepreneurs who are considering communications strategy is to think beyond the immediate disruptive and efficiency-generating results of their products. Here are our recommendations on how fintech companies should think about their communications as they become increasingly disruptive in global markets:
- Engage with regulators in constructive dialogue. Understand the principles and policies shaping financial regulation and what trends are shaping ongoing regulatory efforts. For example, outside of systemic risk, how does your technology comply with or advance efforts to combat money laundering?
- Use simple and clear language to narrate your technology. In an industry riddled with jargon, an elegant wordsmith can be a more powerful marketer than a website littered with meaningless buzzwords. Ensure that all company collateral and materials use simple language to narrate the value of technology, and use rich digital media such as infographics and videos to provide visual illustration.
- Recognise risk management at scale. New technologies may not see widespread immediate take-up, but as they scale they may increasingly be seen as systemic risks. When communicating around risk management, think about the risks created by technology if it were adopted widely in the market.
Of course, every fintech idea is different and requires its own communications strategy, but we believe the most successful will need to be better than just out-innovating the competition. They will need to convince the entire market and its regulatory guardians that they can create new opportunities without too many more risks.
