The global fintech race

Fintech is not just about finance and technology.

It’s the trade war between Trump and China. It’s about politics, history and culture. It’s the battle over privacy and money laundering. In an era when some politicians seek to exploit fears of immigration, fintech is also a global race for human talent.

What are the next moves in this multi-dimensional chess game?

In the latest New Money Review podcast, we ask Lex Sokolin, global co-head of fintech at ConsenSys, to respond to this question.

Sokolin discusses the technological arms race and who’s winning it, crazy fintech valuations and why they might persist, and how the power imbalance between private and public equity markets can be corrected.

Some key excerpts from the podcast:

The fintech arms race

“The digitisation of financial services has become all-pervasive. It’s touching every industry you can imagine—from media to technology to politics. Ten years ago people saw technology primarily as a tool.”

“How good is the soil that regulation provides?”

“There’s something existential about this next leg of global competition. In the news, we read about competition in the form of tariffs on physical or goods or spyware in 5G networks. But the real competition is about two things. First, what is the human talent and how are people taught? And the second is about the regime within which people operate. How good is the soil that regulation provides?”

“The Asian fintechs are winning in terms of next-generation packaging. But on a global scale, the Silicon Valley artificial intelligence/tech firms, like Facebook, Google and Amazon, are still massively powerful.”

“The revenue and the product sophistication are still centred in the West: for example, institutional capital markets, asset allocation, wealth management or corporate banking. The problem for them is that finance is being reoriented. It’s going from a manufacturing-first to a distribution-first approach. Now people ask, ‘what’s the coolest way to access financial products on my phone, in my Uber or Tesla?’ That’s a game the Americans and Europeans are not so good at.”

“In artificial intelligence, China has very rapidly caught up to the US. And in some implementations, China is ahead, because the country’s datasets are so much larger.”

Regulators’ uneven response

“Blockchain is a space where regulation matters massively. At least today, the West is still in the game. Its mature and open capital markets have helped. But the uncoordinated response by regulators to innovation, especially in the US, is at risk of putting us behind.”

“China is thinking about blockchain as a national sword in a global competition for economics.”

“How the Facebook/Libra project is treated by governments is incredibly important”

“How the Facebook/Libra project is treated by governments is incredibly important. All of a sudden, there’s a high-tech club with a massive modern consumer footprint, trying to get into finance. That messes up the traditionally close relationship between banks and governments.”

“There are different approaches to the regulation of digital assets. In the US they are trying to keep regulations the same, meaning technology-agnostic. They then apply the existing categorisations to the new technologies. In other jurisdictions like France and Japan, they start with a definition of a crypto-asset, then back out into how consumers should be protected.”

Integrating fintech and blockchain

“There’s massive open-source innovation happening across the world”

“There’s massive open-source innovation happening across the world. It’s a combination of the fintech start-up ecosystem and the bitcoin/cryptoasset movement. Watching how these two things connect will tell you a lot about the future of finance.”

The tensions between private and public markets

“The purpose of the new Softbank $100bn Vision fund is to take over and destroy traditional markets. Clearly, some fintech companies don’t make any economic sense. At the same time, there is no end in sight to the inflow of price-insensitive capital.  If anything, there is more capital coming in, rather than less.”

“Companies are just far less interested in going public. The alpha is being captured by venture capital firms and private equity. It’s not reaching regular investors. By the time they get exposure, it’s an overpriced asset that’s going public to help make whole those investors who’ve overpaid along the way.”

“Companies are just far less interested in going public”

“Who will mount a backlash against this trend? Stock pickers are dead. The stock markets are places for robots to do high-frequency trading around the large movements of passive indices, which are put together by machines. And fewer and fewer people believe active managers can outperform, so there’s compression on pricing.”

“The only way to fight back is to find a way for regular people to access the private markets and to erase that boundary. Historically, the boundary is regulation, legal requirements, complexity, paper and illiquidity. Digital assets and various crypto-based wrappers are the path to break things down.”

The future will be tokenised

“Where will the digital asset movement get us in ten years? You won’t be opening up an app on your phone that does something to securities which are held somewhere else. Instead, you’ll own a token that embeds an asset allocation between equities, fixed income, commodities, real estate, venture capital and private equity. Those rules and the qualities of those investments will live within the token itself.”

“All the value chain stuff that currently lives outside of a fund will live inside the fund. The fund will travel and be instantiated on the blockchain network, and that is what you will have inside your pocket.”

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