Bitcoin – Big In Japan

I spent the past week in Tokyo on behalf of Brave New Coin, meeting with various participants in the cryptocurrency industry – from exchanges to brokers, from industry bodies to information vendors, from connectivity providers to technology platforms. Given its share of Bitcoin trading volumes, and the legal developments currently in motion, Japan is now the focus of attention as it navigates towards a fully regulated and orderly cryptocurrency market.

Bitcoin is now accepted in Bic Camera stores in Japan (Photo: Rory Manchee – all rights reserved)

On my previous visit to Japan, I commented on the extent to which it was still a cash economy – even major museums and galleries don’t accept plastic, and my pre-paid foreign currency card issued by a major Australian bank was only accepted at a limited number of ATMs: 7-Eleven, and Japan Post. But according to expats I spoke to last week, this situation has changed over the past couple of years.

One of the reasons I was given as to why Japan is taking a lead in regulating cryptocurrencies is its previous perception of having a somewhat lax approach to money laundering. Part of this might be explained by the limited technical integration and interoperability with the global banking system (somewhat akin to Japan’s approach to telecoms, where in the past, it was impossible for overseas visitors to use their mobile phones on the domestic network).

In addition, as China has cracked down on most things crypto, so has Bitcoin trading activity shifted to Japan. This growth in Bitcoin trading volumes can also be linked to Japan’s passion for retail forex trading, now expanding into crypto.

Earlier this year, the Japanese government passed legislation that recognises bitcoin as a legal form of payment. (Note: this does not mean that bitcoin is legal tender – shops do not have to accept it; but if they choose to take it as payment for goods and services, then it is no different to paying in cash or by credit card when it comes to things like consumer rights, for example.)

Later this month, the main regulator, the FSA is expected to announce new regulations to govern cryptocurrency exchanges and brokers. Currently, exchanges that accept Yen deposits for cash trading of crypto must be licensed as payment institutions. By the end of March 2018, my understanding is that all exchanges and brokers must be fully licensed to operate – for both cash trading, and futures and margin trading. Anywhere between 20 and 50 exchanges have applied for a license.

Currently, participants in the “legacy” securities and futures industry are either registered with the JSDA or the FFA. Likewise, it is expected that the FSA will appoint a similar self-regulating entity to have official oversight of the cryptocurrency markets, under the overarching authority of the FSA. However, there are two rival blockchain and cryptocurrency industry associations that are vying for this role – which is where things become a little political. One group claims to represent the “pure” crypto world, whereas the other might be seen to represent more of the traditional market. No doubt the FSA would prefer not to have to choose…

Key considerations for the FSA are retail investor protection, and market stability. The total market cap of all cryptocurrencies is now around US$150bn. If we assume that 10% of these assets are held in Japan, when compared to the total capitalisation of the cryptocurrency exchanges themselves, this creates a significant risk for the FSA should there be a market collapse or a run on Yen-based crypto deposits.

Equally, the FSA does not want to stifle innovation in an area of financial services where Japan is keen to take the lead. For example, Japan has witnessed a couple of bitcoin-denominated corporate bonds (more like privately syndicated short-term commercial paper) that demonstrate an investor appetite for this new asset class.

Meanwhile, in preparation for this new regulatory environment, and in anticipation of the increased interest by major banks and asset managers, there is a project underway to create an institutional-strength order management platform connecting banks, brokers and exchanges. I also heard of offshore fund managers looking to launch a crypto-based ETF for distribution in Japan.

Finally, at the risk of blowing our own trumpet, Japan’s leading financial vendor, Quick is now quoting the Bitcoin Liquid Index (BLX) alongside other FX data it distributes from around the world:

 

NOTE: The comments above are made in a purely personal capacity, and do not purport to represent the views of Brave New Coin, its clients or any other organisations I work with. These comments are intended as opinion only and should not be construed as financial advice.

Next week: Tech, Travel and Tourism

 

 

FinTech and the Regulators

What’s the collective noun for a group of financial services regulators? Given the current focus on FinTech sand box regulation and the cultivation of innovation, but also the somewhat ambiguous (and sometimes overlapping) roles between policy implementation, industry enforcement and startup monitoring, may I suggest it should be an “arbitrarium”?

Whatever, a panel of regulators (ASIC, RBA, APRA and AUSTRAC) came together at the recent FinTech Melbourne meetup to showcase what they have been working on.

First up, ASIC talked about their Innovation Hub and Sandbox, designed to accelerate the licensing process. Most of the FinTech startups engaging with the Innovation Hub are operating in marketplace lending, digital/robo advice, payment solutions and consumer credit services. Meanwhile, ASIC is seeing a growing number of enquiries from RegTech startups, and as a result, the regulator will be running a showcase event in Melbourne in the near future.

Next, the RBA gave an update on the new payments system (NPP), which will operate under the auspices of the Payments System Platform Mandate. A key aspect of this “pay anyone, anywhere, anytime” model is ISO 20022, the data standard that covers “simple addressing” as part of the payment interchange, clearing and settlement protocols. The system is due to go live later in 2017.

The biggest news came from APRA, in their role of licensing Authorised Depository Institutions (ADIs). According to APRA statistics, 26 new ADIs have been approved in the last 10 years. Most licenses come with significant conditions attached, so APRA is looking to simplify the process and encourage more competition. Similar to ASIC’s sandbox model, new entrants will be able to apply for “restricted ADI” status, under a 2-year license, with certain limitations on the size and volume of their book of business. Essentially, there will be a less onerous startup capital requirement, and the new regime is expected to be operational in the second half of 2018.

Finally, AUSTRAC gave an update on their responsibilities under the AML/CTF Act 2006. While AUSTRAC has selective oversight of FinTech startups, it has responsibility for 14,000 reporting entities, including businesses holding gambling permits. Acknowledging there is something of regulatory lag when compared to new business models and new technology, AUSTRAC pointed to the Fintel Alliance, launched earlier this year, and which may run its own pilot sandbox. Currently undertaking a legislative review and reform exercise, a key aspect of AUSTRAC’s work is undertaking product and sector risk assessment.

During the audience Q&A (including some interesting contributions from ASIC Chairman, Greg Medcraft) there was discussion of cryptocurrencies and blockchain solutions vis-a-vis the NPP, and how to address the potential conflict of laws, for example between KYC and privacy and data protection.

Next week: YBF FinTech pitch night

 

What might we expect in 2017?

On a number of measures, 2016 was a watershed year. Unexpected election results, fractious geopolitics, numerous celebrity deaths, too many lacklustre blockbuster films, spectacular sporting upsets (and regular doping scandals), and sales of vinyl records are outpacing revenue from digital downloads and streaming services. What might we expect from 2017?

Detail from "The Passing Winter" by Yayoi Kusama (Photo by Rory Manchee)

Detail from “The Passing Winter” by Yayoi Kusama [Photo by Rory Manchee]

Rather than using a crystal ball to make specific predictions or forecasts, here are some of the key themes that I think will feature in 2017:

First, the nature of public discourse will come under increased scrutiny. In the era of “post-truth”, fake news and searing/scathing social commentary, the need for an objective, fact-based and balanced media will be paramount. In addition, the role of op-ed pieces to reflect our enlightened liberal traditions and the need for public forums to represent our pluralist society will be critical to maintaining a sense of fairness, openness, and just plain decency in public dialogue.

Second, a recurring topic of public conversation among economists, politicians, sociologists, HR managers, career advisors, bureaucrats, union leaders, technologists, educators and social commentators will be the future of work. From the impact of automation on jobs, to the notion of a universal basic income; from the growth of the gig economy, to finding purpose through the work we do. How we find, engage with and navigate lifelong employment is now as important as, say, choosing high school electives, making specific career choices or updating professional qualifications.

Third, the ongoing focus on digital technology will revolve around the following:

  • The Internet of Things – based on a current exhibit at London’s Design Museum, the main use cases for IoT will continue to be wearable devices (especially for personal health monitoring), agriculture, transport and household connectivity
  • Fintech – if a primary role of the internet has been for content dissemination, search and discovery, then the deployment of Blockchain solutions, the growth in crypto-currencies, the use of P2P platforms and the evolution of robo-advice are giving rise to the Internet of Money
  • Artificial Intelligence – we are seeing a broader range of AI applications, particularly around robotics, predictive analytics and sensory/environmental monitoring. The next phase of AI will learn to anticipate (and in some cases moderate) human behaviour, and provide more efficacious decision-making and support mechanisms for resource planning and management.
  • Virtual Reality/Augmented Reality – despite being increasingly visible in industries like gaming, industrial design, architecture and even tourism, it can feel like VR/AR is still looking for some dedicated use cases. One sector that is expected to benefit from these emerging technologies is education, so I would expect to see some interesting solutions for interactive learning, curriculum delivery and student assessment.

Fourth, and somewhat at odds with the above, the current enthusiasm for the maker culture is also leading to a growing interest in products that represent craft, artisan and hand-made fabrication techniques and traditions. Custom-made, bespoke, personalized and unique goods are in vogue – perhaps as a reaction to the “perfection” of digital replication and mass-production?

Fifth, with the importance of startups in driving innovation and providing sources of new economic growth, equity crowdfunding will certainly need to come of age. Thus far, this method of fund-raising has been more suited (and in many cases, is legally restricted) to physical products, entertainment assets, and creative projects. The delicate balance between retail investor protection and entrepreneurial access to funding means that this method of startup funding is constrained (by volume, amounts and investor participation), and contrary to stated intentions, can involve disproportionate set up costs and administration. But its time will come.

Finally, as shareholder activism and triple bottom line reporting become more prevalent (combined with greater regulatory and compliance obligations), I can see that corporate governance principles are increasingly placing company directors in the role of quasi-custodians of a company’s assets and quasi-trustees of stakeholder interests. It feels like boards are now expected to be the conscience of the company – something that will require directors to have greater regard to the impact of their decisions, not just whether those decisions are permitted, correct or good.

One thing I can predict for 2017, is that Content in Context will continue to comment on these topics, and explore their implications, especially as I encounter them through the projects I work on and the clients I consult to.

Next week: The FF17 Semi Finals in Melbourne

Summing up the #FinTech summit

Coinciding with the launch of the inaugural EY FinTech Australia Census 2016*, FinTech Australia’s first industry summit Collab/Collide was a major beneficiary of the initial round of funding from the Victorian government’s LaunchVic program. The summit provided a useful opportunity to survey the global landscape, to compare notes and of course, to network. But did we learn anything new?

6278fd_bc2f12c8b40744a281f9afbb37ba1a3emv2The summit was programmed around key FinTech themes of payment services, alternative funding, robo-advice, Blockchain, data and regulation. Participation by some key industry figures from Asia, Europe and the USA (both founders and investors) also provided some international perspective.

While Australia appears to be maintaining a top 5 position in the global FinTech rankings, our focus on things like P2P lending, payments and robo-advice risks losing sight of bigger opportunities in Blockchain assets, enterprise solutions and institutional services.

And although it was good to see a team from the Treasury Corporation of Victoria in the audience, as well some of their colleagues from DEDJTR, it was surprising that there was hardly any representation from among institutional investors (superannuation funds, asset managers, insurance industry), major financial institutions, or the traditional financial markets (exchanges, intermediaries, brokers, vendors)**.

Some of the best sessions were the comparative panels on Blockchain, regulation and funding. In particular, there was an interesting discussion on whether Australia should be worried or concerned about UK opportunities post-Brexit, or focus more on Asian markets. But with the development of reciprocal financial licensing arrangements between Australia and the UK, and Australia and Singapore (and between the UK and Singapore), ASIC is clearly trying to engage with both markets.

The Federal Treasurer, Scott Morrison also took time out of his busy schedule to address the audience on the topic of Open Banking Standards, following on from the Productivity Commission’s Draft Report on Data Availability and Use. The overall goal is to have a system of FinTech data and operating standards that is “regulatory match fit”, that delivers frictionless inter-party transactions and enhanced industry participation and collaboration. For example: once the New Payment Platform launches in 2017, we should have more open access to transaction data; the ATO is implementing a “single-touch” payroll process; and ASIC is due to publish recommendations for the financial services Regulatory Sandbox by the end of 2016.

Unfortunately, given the changes in venue and content, the program struggled to stretch to a second full day, as audience numbers dwindled. Something for the organisers to think about next time? I would also advocate organising specific sessions, e.g., for B2B and B2C, or for vendors and institutions.

Finally, speaking to a member of the DEDJTR team, there is a clear desire on the part of the State government that the FinTech community will come together along with other market participants to figure out how to scale this emerging sector. In other words, how to turn the growing number of FinTech startups (often with directly competing products and services), hubs, incubators, accelerators and VC funds into a sustainable industry?

* For a handy summary of the EY survey, check out Lucinda de Jong’s blog for Timelio

** In the interests of full disclosure, a FinTech startup I work with, Brave New Coin (a market data vendor for Blockchain assets) was a Strategic Partner for the Summit

Next week: The Startup of Me v2.0