With the wrong type of smoke signals emanating from the FCA, what does the future hold for the UK’s Financial Services sector?

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Allan Lane, Algo-Chain

By Allan Lane, Algo-Chain – With the news that PayPal has entered the cryptocurrency market, quickly followed by the world’s biggest ever IPO, where Ant, the financial services arm of Alibaba, raised USD34 billion from investors, it would be fair to say that 2020 has proven to be a breakthrough year for the FinTech movement.  With Alipay reputedly accounting for USD17,000,000,000,000 in online payments, and with Ant’s share issue taking place in Asia rather than the US, the sheer scale of what is at stake here will not be lost on many.

Of course, let’s not forget the other big event that is happening in November, and no I am not referring to the US election, which is the launch of Ethereum 2.0, which looks to address the issue of security and scalability that increasingly dogged the crypto industry for quite some time.  I am of the view that the arcane world of ‘DeFi’, short for decentralised finance, will be one of the key areas of development over the next few years. There’s insufficient space to do this topic justice, but some of the key things to flag up is that DeFi is a generic term for a range of financial applications in blockchain and cryptocurrency that often is in the business of disrupting financial intermediaries.  It turns out the summer of 2020 saw an avalanche of new contenders in this space resulting in what can only be described as a financial bubble.  If you looked away for 10 minutes, it is possible you missed the new craze for ‘Yield Farming’ where the traded price of start-up yEarn Finance’s token went up by nearly 15,000 per cent in a single week! At that stage, the stampede was well underway.

Recently, the UK’s Financial Conduct Authority, the FCA, banned the sale of crypto-derivatives to retail consumers.  Based on the above anecdote with yEarn, one could argue that pronouncement was hardly surprising.  Dig deeper, though, and the story gets much more interesting.  At a push, I can probably avoid mentioning the magic words Donald Trump, as that story may soon be yesterday’s news, but as we head into November it would be remiss of me to not mention the word Brexit.  Having developed a dislike for the majority of articles on the subject often masquerading as information,  I tend to discount any article purporting to be written by a think tank, but I did take note of a survey issued by CISI (the not-for-profit chartered professional body) which saw over 86 per cent of their members surveyed suggesting a no deal Brexit would negatively impact the industry.

So, what is the plan, what comes next? In a brave new world where the UK chooses to decouple itself from the rest of Europe and accept the risks that come from not being able to benefit from the passporting of financial products across Europe, one can only assume the architects of that vison do indeed have a vision?  This vacuum coincides with the increasingly common view that the build out of the digital assets space is best likened to re-building the new generation of a Capital Markets industry from the ground up, in which case isn’t it time to join the dots and bring the old world and the new world closer together?

While the UK’s regulator has stepped back from the crypto challenge, this is not the case in the rarefied atmosphere of the Alps.  Switzerland is leading the way in the regulation of cryptocurrencies, as is the pioneering asset manager known as 21 Shares, who has 11 listed products on the Swiss stock exchange.  The regulator has endorsed the use of Exchange Traded Products as the vehicle to offer investors a simple way to gain exposure to the most popular cryptocurrencies, such as Bitcoin, Ethereum and Ripple.  Elsewhere, the ETF providers WisdomTree and HanETF have also entered this niche market with their separate Bitcoin offerings.  In the case of HanETF, who domiciled their product in Germany, they have got off to a particularly strong start gathering over USD80 million in AUM since the launch in the summer, and WisdomTree, who also listed in Switzerland, has garnered over USD40 million in AUM since their launch.

The precise form of the future of financial services in the UK seems awash with contradictions.  Yes, the FCA is right to overtly ban over-risky investments for the retail market, but in many cases the lion's share of this risk seems to be driven by scammers and not the products themselves.  In the past when the BBC banned a song on Radio 1, we all knew it was only a matter of time before it topped the charts.  On that basis, there is a real danger that the FCA’s decision will drive more business into unregulated trading venues.  Post Brexit, if the UK’s Financial Services sector is to aspire to the success that Alibaba displayed this week, then it will need to embrace the new opportunities that the spirit of FinTech offers, while at the same time creating a regulatory culture that balances the real risks that come with a digital only offering.  That, I suspect, will be a difficult line to tread.

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Mark Kitchen
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