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The (Ethical) Paradigm shift of Fintech and Blockchain
Finance and Technology are interlinked and evolve together in the perspective of the Evolution of Fintech. The last paradigm emerged in 2008 following the financial crisis based on the widespread use of information technology and the need for regulatory innovation. The same year, a paper titled Bitcoin: A Peer-to-Peer Electronic Cash System was published by the unknown Satoshi Nakamoto, who created the well-known cryptocurrency, one of the first use cases of blockchain technology. One may wonder if this paradigm shift is an incremental evolution of Fintech or a more disruptive revolution similar to nuclear power or electricity.
If we look at some ethical considerations, blockchain gives rise to several issues in terms of security, privacy, efficiency and the integrity of the system itself, and the risk of crime and oppressive conduct that a mediating institution would otherwise offset. Those issues are only the emerged part of the iceberg of blockchain ethics which is a broader quest to redefine the value of our society since blockchain technology is changing the nature of money and organisations. In this way, we shouldn’t only consider the risks brought by the technology and the opportunity of blockchain for good based on evolved moral principles.
Fintech and blockchain are paradigm shifts in our society, with other technologies that include artificial intelligence and big data. Alone this paradigm is an evolution of Fintech. But combined with AI and cybernetics, this paradigm shift is a cognitive revolution that may either decentralise the power of monopolies or control the decentralised power of people. That’s why blockchain ethics should examine what the technology can do and ponder the potential consequences like the control of nuclear power that led to the atomic bomb or the electricity that led to the electric chair for the death penalty.
This article is part of the Ethics of Fintech & Blockchain series with the 5 key principles of digital currencies and cryptocurrencies and Are Digital Currencies the new Technological Power?
Are Digital Currencies the new Technological Power?
Money is more and more digital with the emergence of virtual banking, online payment and cryptocurrencies based on blockchain technology. Although Bitcoin may not become a global reserve currency, it has opened the box for digital currencies created by private organisations and central banks that will compete with the Dollar. History has shown that the US Dollar will eventually stop being the world’s reserve currency. More importantly, cryptocurrencies raise ethical questions about the control of the technology behind which will impact the worldwide economy as never before compared to the traditional fiat currencies.
The emergence of cryptocurrencies such as Bitcoin or Ethereum, and more recently, the launch of the project Libra proposed by Facebook, highlight the fact that technology is not neutral—it’s political and even geopolitical. As an example, Zuckerberg faces US Congress on Libra, privacy and more. As an argument, Facebook warns Washington that Beijing wins if Libra plan fails. Indeed, the People’s Bank of China races to launch its digital currency to accelerate the yuan’s use internationally. Moreover, the Chinese Communist Party is adopting a proactive approach since President Xi Jinping calls for blockchain development to gain technological power.
The challenges of digital currencies are related to payment before the replacement of the U.S dollar as the world’s reserve currency. It starts with the rise of stablecoins such as USDC or Libra, central bank digital currencies (CBDC) and a combination of both through synthetic CBDC model, which is a public-private partnership, with the rise of digital money. For example, AliPay and WeChat Pay are already required to back the money with the reserves of the People’s Bank of China. The Chinese central bank is about to increase its technological power with the launch of its digital currency in addition to the social credit system developed by the Chinese Communist Party.
This article is part of the Ethics of Fintech & Blockchain series
The 5 key ethics principles of digital currencies & cryptocurrencies
Blockchain technology is one of the elements of the current Fintech paradigm that is changing how our society defines money and organisations. Blockchain applications may not often be a revolution. Nevertheless, digital currencies have a disruptive potential as technology power based on the decentralization of trust. Taking into consideration the ethics of fintech and blockchain, we will look at trust as one of the key ethics principles, together with proximity, accountability, privacy and cultural lag. Then, we will introduce the ethical paradigm shift of fintech & blockchain and discuss the technological power of digital currencies.
Trust: Because of the decentralized characteristic of Bitcoin and other cryptocurrencies, it’s difficult for the general public to trust their use since there is no central authority. Blockchain stakeholders are working with financial regulators to create a trustful framework to avoid money laundering, fraud and other associated risks.
Proximity: The rise of stablecoins fosters the adoption of cryptocurrencies because they are pegged to fiat currencies. People feel more comfortable using digital money that they are familiar with since they already transfer it online, although it’s not based on blockchain.
Accountability: The launch of cryptocurrencies by large TechFins companies raise the issue of their responsibility since it may affect traditional currencies and the whole economy.
Cultural lag: Blockchain has revolutionary potential to change world trade and monetary organisations, but it will take more time for companies and people to adopt the new system.
Privacy: Privacy may be the central issue in the long term since the blockchain is immutable. The risk is that everyone can access your information, or at least your pseudonym, in the public blockchain, in other words, a decentralised power. On the contrary central organisation may monitor all your information in a private blockchain that allows controlling of the decentralised power of people.
I recommend you join the online course FinTech Ethics and Risks from HKU FinTech to learn more about those 5 Key Ethics Principles with concrete examples in Fintech, including Blockchain, Cybersecurity, Artificial Intelligence as well as technological decentralization.
This article is part of the Ethics of Fintech & Blockchain series
Toward a Global Fintech ecosystem based on Blockchain
Hong Kong and Singapore are competing to become the leading Asia-Pacific Fintech Hub. The Fintech ecosystem had a busy month in November with the Hong Kong Fintech Week and Singapore Fintech Festival. The innovation hubs are also trying to become the leading place to launch a blockchain for business gathering several communities, conferences, festival, and meetups. Hong Kong has even welcomed two major blockchain events in March with the Hong Kong Blockchain Week and Asia Crypto Week that focused more on cryptocurrencies.
These events highlight different approaches to develop new applications based on blockchain following the bitcoin and cryptocurrency bubble that has burst last year. On the one hand, the blockchain ecosystem still focuses on the competition between blockchain platforms, mainly based on a cryptocurrency funded by an ICO (Initial Coin Offering). On the other hand, STO (Security Token Offering) may take centre stage in 2019 to raise funds and to digitise illiquid assets. Finally, a consortium approach based on private blockchains has led to concrete applications in finance most of the time.
We are still at the inception of the blockchain technology to build the next FinTech: Global “Open Finance” Infrastructure. This new paradigm is led by Global Fintech Hubs, such as Hong Kong and Singapore in Asia-Pacific, that can scale through blockchain to connect with other hubs. The deployment of digital finance platforms based on Distributed Ledger Technology is one of the first use cases whereas the tokenisation and traceability of assets in various sectors will spread fintech solutions based on enterprise blockchain and Web 3.0 standards through the whole economy.
I share my overview of a Global Fintech ecosystem based on Blockchain as follow:
The paradigm of Fintech and blockchain platforms
Connecting Global Fintech Hubs to foster Financial Innovation
Leveraging Blockchain for Banking and Business Processes
Fintech at the age of decentralised applications and Web 3.0
Fintech at the age of decentralised applications and Web 3.0
In 2008, a Peer-to-Peer Electronic Cash System invention was released anonymously implementing the first cryptocurrency Bitcoin. In 2013, The 2nd generation of blockchain Ethereum added smart contracts functionality to program transactions without third parties. Then comes Cardano – blockchain 3.0 to solve scalability issue and add interoperability among different blockchains. The pioneer protocol competes with Ethereum, “Chinese Ethereum” NEO or the decentralised operating systems EOS and Elastos to become the leading decentralised applications (Dapps) platform and create standards for Web 3.0.
To solve scalability and interoperability issues, the 3rd generation of blockchains develops sidechain and cross-chain approaches to create an internet of blockchain between base-layer blockchains and layer 2 protocols. Based on multilayers, Blockstack put minimal logic into a blockchain and handles scalability outside of the blockchain by using decentralised computing to build a new internet for Dapps. This infrastructure allows users to own their data directly thanks to an identity layer. Among other projects, Elastos integrate an ID sidechain whereas uPort self-sovereign identity platform can be used for Ethereum Dapps.
This new age will change data monetisation business models with new data sharing platforms that will disrupt the sharing economy and transform industries. As an example, SingularityNET partners with Ping An Insurance using its decentralized network to create, share and monetize AI services at scale. There are even more examples to rethink the monetisation of data at the age of decentralised applications and Web 3.0. The application layer is becoming an internet of value on top of the internet of blockchains building a global Fintech ecosystem based on the continuous transaction of data from payment to artificial intelligence.
This article is part of the Global Fintech Ecosystem series
Leveraging Blockchain for Banking and Business Processes
After the cryptocurrency burst last year, the market consolidates around leading exchanges and payment systems following the stablecoins trend and reducing the volatility of the market. The pioneer Ripple with its network of banks and payment providers, Circle payment technology and Coinbase exchange joint USD coin, JP Morgan with its U.S dollar backed coin, and other stablecoins such as Tether or BitSpark are competing to provide cross-border payments. Not only payment may leverage blockchain but also other business processes in banking as well as regulated sectors such as insurance.
Before moving toward Open Banking based on permissioned blockchain, the sector has deployed standards following the EU’s P2D2 with the Open Bank Project. The Open API (Application Programming Interfaces) framework allows banks to open up existing systems and share them internally. Moreover, the microservices layer on top of their existing environment enables easy plug-and-play integration. Following the microservices architectural style, Open Banking platforms will look at the next integration evolution – blockchain to build the new generation of distributed business processes.
Among the new solutions for business integration, Unibright aims to connect existing business processes with blockchain networks by generating smart contracts. Kaleido’s enterprise blockchain, backed by ConsenSys, helps to build enterprise blockchain consortia with the same underlying technologies and cloud providers. In addition to a multi-cloud Platform-as-a-Service, Chainstack includes a multi-protocol feature. Finally, Stratumn decided to focus on the protocol itself betting on Proof of Process to provide consortium blockchain technologies reinventing inter-business relationships.
This article is part of the Global Fintech Ecosystem series
Connecting Global Fintech Hubs to foster Financial Innovation
The rise of Bitcoin and cryptocurrencies has created a network born global nevertheless blockchain technology brought regulation issues that local authorities still need to tackle. It highlights the importance of RegTech (regulation technology) to transform the current framework to foster the adoption of blockchain and new financial solutions. Traditional finance communities that gathered at the last Asian Financial Forum (AFF) are integrating Regtech topics. They are also looking for other financial innovation, that is not only based on Fintech, such as green finance and financial inclusion.
From Hong Kong’s perspective, the cooperation among the Guangdong – Hong Kong – Macao Greater Bay Area is the first step to consolidate its position as a global Fintech hub. The Greater Bay Area is a perfect stone to go global enjoying the benefits of the vast market and the proximity with Shenzhen to innovate, but that doors must be opened up further. The second step would be the cooperation between Asian Fintech Hubs through associations that foster collaboration inside the local fintech community as well as with other Asian communities through an Asia-Pacific Fintech Network.
Coordinating regulation frameworks is one of the reasons why it is so important to connect global fintech hubs. The aim is to manage risk and prevent legal uncertainty brought by new practices such as Initial Coin Offering (ICO). Thus, 29 regulatory bodies launched the Global Financial Innovation Network’s regulatory sandbox for companies to apply for a cross-border testing pilot. Financial innovation is not only about digital but also sustainability thanks to working groups led by green finance key players such as Finance for Tomorrow by Paris Europlace in Europe and Hong Kong Green Finance in Asia.
This article is part of the Global Fintech Ecosystem series
The paradigm of Fintech and blockchain platforms
The new paradigm of FinTech started ten years ago with startup solutions that have emerged following the financial crisis. Since then, tech leaders (BATX in China or GAFA in the USA) have leveraged their customer database to launch “TechFin” solutions. More recently, the banking industry is adopting FinTech or TechFin solutions opening its customer database and building financial services infrastructures to adapt to digital finance. Finally, blockchain technology is the last stage of this profound transformation creating an Open Finance ecosystem based on digital platforms.
Banks are partnering through several consortia based on private / permissioned blockchains to develop digital platforms for trade finance such as Voltron or Marco Polo Network with Corda. We.trade and eTradeConnect collaboration is even creating a network of digital trade finance platforms between Europe and Hong Kong based on Hyperledger. Enterprise Ethereum is another private blockchain alternative based on the public blockchain Ethereum. In this way, ConsenSys partners with fifteen of the world’s largest banking and commodity companies to develop the trade financing network Komgo.
Financial markets consider using blockchain to improve trading processes. For example, the stock exchange HKEX is teaming up with Digital Asset to accelerate the post-trade process and reduce settlement risk for the Stock Connect (Hong Kong, Shanghai and Shenzhen Stock Exchanges collaboration). Capital markets also benefit from distributed ledger technology to exchange digital securitisation of underlying assets. Thus, FinFabrik is developing capital markets software for the financial institutions and Liquefy betting on Security Token Offering to transform illiquid assets into liquid assets.
This article is part of the Global Fintech Ecosystem series
Hong Kong: an Asia-Pacific Fintech Hub
Although Hong Kong is one of the top 3 financial centers in the world alongside New York and London, one may wonder if it can be seen as an Asia-Pacific FinTech hub. This is what InvestHK aimed at promoting through the Hong Kong Fintech Week and the StartMeUp Festival. Hong Kong is only ranked the 5th fintech hub in the world, according to the last Connecting Global Fintech Review 2016, and the 2nd in Asia-Pacific. Singapore is leading the way with strong government support, but Hong Kong is more attractive for B2B solutions and is a gateway to China.
Last year, The Hong Kong Monetary Authority (HKMA) launched the FinTech Supervisory Sandbox to test fintech innovation on a pilot basis. However, this sandbox does not include insurance and securities, which are regulated by two other authorities. HKMA is also collaborating with the research institute ASTRI to set up the Fintech Innovation Hub as a neutral testing ground. Fintech companies can already find support from incubators and accelerators programs in Hong Kong. Shenzhen should also be targeted by those programs to tap into the Chinese market.
At the doorstep of Hong Kong, the Shenzhen-based company Tencent reaches millions of WeChat users to provide B2C solutions such as WeChat Pay or WeBank. To compete and reach this huge Chinese market, Hong Kong’s leading lending platform WeLend completed its US$ 160M Series B funding round this year. TNG Wallet, another one of the top fintech startups in Hong Kong, targets other promising Asian markets as well. Compared to Mainland China, the B2B market is more important in Hong Kong if we look at the need for financial platforms and digital infrastructures to manage Asia-Pacific operations.
This article is part of the Hong Kong — Shenzhen Innovation Hub series.