FinTech

• Fintech for payments services
• Fintech for banking services

Peer-to-peer funding platforms and marketplace lending

Australia has seen substantial growth in active FinTech businesses in sectors such as lending (including peer-to-peer (P2P) and marketplace lending), personal and business finance and payment management. There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes P2P-type structures often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or increasingly rather than, individual investors on a traditional P2P basis.

Issues for start-up marketplace lenders

Following the initial incorporation and start-up funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate growth of the ongoing lending activities of the platform. As the start-up lender will not have an established track record, deposit base or asset pools, the funding structure will often follow the format of a warehouse securitization structure. Origination of new assets will be funded through drawings on a note issuance facility backed by security over the new assets. Each of the new assets will be subject to eligibility criteria determined by reference to the nature of the underlying asset. In order to provide an efficient financing structure, the assets will typically be held through an SPV with origination and servicing provided by the marketplace lender. In order to cover expected losses on the asset pool, the senior facility will be subject to the lending platform maintaining sufficient subordinated capital in the form of equity, or a combination of equity and subordinated debt.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (e.g. in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on: their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

The ATO has published guidance setting out its views that trading cryptocurrencies are generally subject to Australia’s capital gains tax and the use of cryptocurrencies in businesses may give rise to Australian goods and services tax implications.

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Peer-to-peer funding platforms and marketplace lending

Peer-to-peer lending as such is forbidden by law in Belgium. On one hand, the Prospectus Law prevent individuals to raise funds publicly, even through an intermediary platform. This means that a borrower candidate cannot invite other people publicly to lend him money. On the other hand, one needs to be a regulated lender to grant loans and to get access to the Central Individual Credit Register. 

Crowdfunding is regulated by the Law of 18 December 2016, which introduced a bespoke crowdfunding regime for platforms in Belgium. This regime applies only to crowdfunding entailing a financial return for investors. This specific form of crowdfunding can itself be broken down into two types: debt-based and equity-based crowdfunding.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. The process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as Bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more complex interactions with the outside world using so called 'Oracles'. With Oracles the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors,' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms, which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years. 

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Before the enactment of CMN Resolution No. 4,656 and CMN Resolution No. 4,657, both dated as of April 26, 2018, which regulated the activities of financial technology companies that operate in the credit market, a financial institution duly authorized by the Central Bank of Brazil was required to mediate the transactions between lenders and borrowers, while the non-bank lending platform only acted as a corresponding agency of the bank. However, with the enactment of the above-mentioned resolutions, these startups were allowed to grant credit without the intermediation of a bank. These regulations came to create a healthier framework for the development and strengthening of FinTechs in Brazil. In addition, by regulating this kind of activity, the Central Bank hopes to encourage competition within this sector and, consequently, offer more competitive interest rates.

Also, as per the approved regulation, FinTechs could be structures as (i) Direct Credit Companies, which will carry out operations with their own resources through an electronic platform; or (ii) Interpersonal Loans Company, focused on financial intermediation (peer-to-peer). Furthermore, on October 29, 2018, the Federal Government enacted Decree No. 9,544, authorizing the foreign investment up to 100% in the capital stock of Direct Credit Companies or Interpersonal Loans Company.

 

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called "hashes".

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third-party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that, once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced more-complex interactions with the outside world using so called 'Oracles'. With Oracles the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

Brazilian Law No. 12,865/2013 defines cryptocurrency as the value stored in electronic devices or systems that allowed the user to make a payment in a transaction. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

Initial coin offerings (ICOs) are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture. ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security, or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

On April 26, 2018, the CMN enacted CMN Resolution No. 4,658, as amended, which provided for the obligation of financial institutions and other institutions authorized to function by the Central Bank, including Credit FinTechs, to implement cyber security policies and established requirements to hire data, computing processing and storage services in the so-called “clouds”.

This Resolution became effective on the date of its publication and financial institutions and other institutions authorized to function by the Central Bank, including Credit FinTechs, had a deadline of May 6, 2019 to implement the new security, course of action and prevention policies for incidents related to cyber environment.

Overview

In Canada, FinTech products and services are continually evolving and commonly include, among others, peer-to-peer (P2P) lending platforms, crowdfunding platforms, virtual credit cards, online lenders, robo advisors (ie algorithm-driven wealth management and advisory services), online money transfer services and the implementation of digital currency initiatives. These new products and services may use artificial intelligence (AI), machine learning, distributed ledger technology or other technologies to offer a compelling service to clients and customers.

Marketplace lending

How are marketplace lending platforms funding themselves?

Marketplace lending includes P2P-type structures often operated through an electronic platform provider, crowdfunding platforms that connect investors with companies looking to raise capital (including from retail investors) and various other financing mechanisms.

It is not uncommon for a marketplace lending platform to raise capital from venture capital funds and/or private equity funds or institutional sponsors.

Issues for startup marketplace lenders

Following the initial incorporation and startup funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate growth of the ongoing lending activities of the platform. As the startup lender will not have an established track record, deposit base or asset pools, deriving an effective funding structure will be particularly important.

A significant issue for any marketplace lender will be navigating the Canadian (and potentially international) regulatory regime(s). For example, depending on the nature of the activities and the manner in which they are conducted, some or all of the following legal regimes, among others, may be relevant to the business:

• securities law (eg robo advisory firms, crowdfunding platforms and P2P lending platforms may all be subject to applicable securities laws);
• consumer protection legislation (this may govern the relationship between the lender and its customers);
• payment processing regulation (either by federal or provincial legislation or industry standards and codes);
• anti-money laundering legislation (including the Proceeds of Crime (Money Laundering) and Terrorist Financing Act);
• privacy legislation; and
• data security legislation.

It is imperative that startup marketplace lenders engage appropriate legal counsel and other advisors to assist in establishing a business structure that is both efficient and regulatory compliant from the outset as this will assist the startup in attracting investment and ensuring it is positioned to reduce potential issues during its growth phase.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

There are various definitions of cryptocurrency and many individuals use it in a colloquial sense; however, it can be considered to be a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a ‘security’ for purposes of applicable laws.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper (or an offering memorandum or prospectus if the token offering constitutes an offering of securities) available to potential purchasers. Any person contemplating an ICO should consult with global legal counsel to ensure that they are complying with all applicable laws, including securities laws, sanctions, anti-money laundering, tax and consumer protection legislation.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by AI that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years. Any business contemplating the use of cloud computing must ensure it has appropriate regulatory, privacy and data security procedures in place.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include: 

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

Marketplace lending in the form of FinTech initiatives such as peer-to-peer (P2P) platforms is in its early stages of development in the Chilean market. Some examples of FinTech applications and products which are currently operating in Chile are as follows:

• Broota is in an equity-based crowdfunding platform, and a leader in the finance and investment marketplace in Chile.
• ConsenSys is a venture production studio which builds decentralized applications and end-user tools for blockchain ecosystems, primarily focused on ethereum. ConsenSys coordinates, incubates, accelerates and spawns ventures by helping venture enterprises to develop, including by way of resource sharing, investing in ventures themselves, and acquiring them outright and through the formation of joint ventures.
• Godzillion is an entity which is currently operating on blockchain. Through the Godzillion platform people can vote, fund, and trade startups without limitations.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What is a cryptocurrency?

While there is no official definition of a cryptocurrency, in the global market it is understood that cryptocurrency is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large, developing infrastructure for holding, pricing and exchanging currency).

Examples in the Chilean marketplace

On May 2018, the Ministry of Treasury indicated that the market capitalization of the cryptocurrency in Chile is around US$400.000 million. Some examples of cryptocurrency-based platforms which operate in Chile include SurBTC and TradeBTC. CryptoMKT is another example of a marketplace service provider which is based on the cryptocurrency ethereum. On May 2017, the Santiago stock exchange (Bolsa de Comercio de Santiago) announced that it is developing a private hyperledger using blockchain technology with IBM, which is a great indication of the level of interest and enthusiasm there is for this type of technology in Chile.

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

We have seen the first example of an ICO launch in Chile on 23 August 2017 by a FinTech company called Godzillion. The Godzillion ICO is projected to create 300 million Godzillion tokens, known as GODZ, based on ethereum.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Although we have no substantial information about AI and robo advisory systems being used in Chile by corporate companies, banks and financial institutions have been known to use this kind of technology in their internal risk-assessment systems. In Chile, public and private universities have played a very substantial role in the study of AI which continues to be a developing technology. The only known example of locally developed tested AI is AIRA, an AI software which is used for the recruitment and selection of personnel worldwide.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Data managing cloud based systems, such as Cloudera and data analysis software such as SAS are used in Chile particularly in the banking and retail sectors and to assist with public sector projects.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

Marketplace lending in Colombia

Colombian lawmakers and regulators are currently drafting regulations regarding marketplace lending platforms. It is likely that the volume of lending as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a peer-to-peer mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example, relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

Bitcoin in Colombia

Law 31 of 1992 sets forth that the Colombian peso is the only legal means of payment with unlimited releasing power. Thus, currently under Colombian law, bitcoin is not an asset that can be considered as equivalent to the legal currency and it has not been recognized as an authorized currency.

The Financial Superintendence of Colombia (SFC) considers that bitcoin can represent a risk to the Colombian financial sector as follows.

• Platforms are anonymous. Virtual currencies can be used in illicit or fraudulent activities, which may include unauthorized funding, money laundering and financing of terrorism.
• There are operational risks. Consumers may be exposed, as digital wallets can be hacked and unauthorized transactions cannot be reversed.
• There is a lack of guarantee. Consumers of virtual currencies are not covered by any type of private or public guarantee and their operations are not covered by any deposit insurance.
• There is a lack of enforceability. Currently there are no mechanisms to enforce transactions that include virtual currencies, which significantly increases the possibility of a default risk.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

Smart contracts in Colombia

Currently, smart contracts are not regulated under Colombian law. Smart contracts in Colombia are still in an early stage but they are expected to be found in different kinds of operations such as voting for a publication in a forum or actions with a higher level of complexity, such as loan guarantees and futures contracts, as well as transactions such as setting payment priorities in structured notes.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Cryptocurrencies in Colombia

Currently, cryptocurrencies are not part of the Colombian stock market or any other platform and thus are not a valid investment for the regulatory authorities. There are at present no operators authorized to offer transactions that include cryptocurrencies.

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

ICOs in Colombia

Currently, ICOs are not regulated under Colombian law. As cryptocurrencies are not valid in Colombia, the offering of initial coins will be illegal.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms, which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

AI in Colombia

Although in Colombia, AI has not been regulated, there are firms that provide an AI service. For instance, customers may order products such as credit cards and insurance through an AI machine.

Robo advisory systems in Colombia

In Colombia, while businesses offering such services are not closed to the use of algorithms and models that can provide a more efficient and adequate service, this type of advice is not yet fully automated. Currently it is the client who must still make their own portfolio adjustment or rebalance.

There are two main challenges regarding the implementation of robo advisory systems in Colombia:

• Most of the small financial entities do not have the required technology that allows them to connect with a robo advisory system.
• The lack of regulation means that financial entities are uninformed about this type of advice system.

Data analysis and cloud computing

What is data analysis?

According to the Organization for Economic Co-operation and Development (OECD), data analysis is the process of transforming raw data into usable information, often presented in the form of a published analytical article, in order to add value to the statistical output.

Data analysis provides the following support to a FinTech:

• mining data from various sources;
• using data to understand current consumer behaviors and predict future consumer behavior (this is known as 'predictive analytics');
• using data to predict what specific type of consumer will effectively purchase; and
• analyzing data from both internal sources and external sources.

What is the difference between big data and data analysis

Big data is defined by the United Nations as the mass volume of data, structured and unstructured, that is too difficult to process within a traditional database and with traditional software. Big data platforms provide the ability to process mass volumes of data and to access and analyze information. For instance, data analysis' main objective is to examine raw data with the purpose of finding patterns in sets of specific information through the use of algorithms.

Under Colombian law, the National Development Plan law assigns to the National Planning Department the responsibility to design and regulate a big data strategy, which will become public policy with two main objectives, being to:

• use big data in the coordination of national planning, therefore maximizing public investment; and
• promote the participation and collaboration of the private sector in the design of the big data in order to resolve private social complexities.

Big data in Colombia

Currently, many sectors are applying big data day to day, in order to improve production and efficiency. An example is rice production in Colombia. By working with Fedearroz, the rice producers’ association in Colombia and the international center for tropical agriculture, the rice sector is developing strategies for using and sharing big data to make decisions on when to produce, how to produce, and how to use inputs more efficiently.

What is cloud computing?

The Ministry of Technology Information and Communications (MINCIT) defines the term 'cloud computing' as a technology that offers services within the internet, updating the traditional model of computing. MINCIT refers to the definition given by the National Institute of Standards and Technology, which indicates that cloud computing is a model for enabling ubiquitous, convenient, on-demand network access to a shared pool of configurable computing resources that can be rapidly provisioned and released with minimal management effort or service provider interaction.

Cloud computing in Colombia

Currently in Colombia there are multiple cloud computing options (from Claro, Google, Microsoft and Amazon). According to the Colombian Chamber of Electronic Commerce (CCCE) the lack of cloud uptake is attributed to overregulation in the sector. Nonetheless, the Colombian government has initiatives to promote cloud computing and is procuring cloud services using Colombia Compra Eficiente Portal. Yet, CCCE determines that government agencies are reluctant to allow further development of cloud computing as it is still perceived as unsafe.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending has started to develop recently in the Czech Republic and is now is available to address some forms of traditional bank funding products, such as consumer loans and small and medium-sized enterprises (SME) lending.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P) type structures often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Issues for startup marketplace lenders

Following the initial incorporation and startup funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate growth of the ongoing lending activities of the platform. As the startup lender will not have an established track record, deposit base or asset pools, the funding structure will often follow the format of a warehouse securitization structure. Origination of new assets will be funded through drawings on a note issuance facility backed by security over the new assets. Each of the new assets will be subject to eligibility criteria determined by reference to the nature of the underlying asset. In order to provide an efficient financing structure the assets will typically be held through a SPV with origination and servicing provided by the marketplace lender. In order to cover expected losses on the asset pool, the senior facility will be subject to the lending platform maintaining sufficient subordinated capital in the form of equity, or a combination of equity and subordinated debt.

While the funding may be structured through a revolving loan or note program, if there is tranching of the debt this will typically result in the platform being treated as a securitization for the purposes of the European Union Capital Requirements Regulation, with the attendant requirements to hold risk retention and provide appropriate reporting and disclosures.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third-party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending, given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• consumer loans (Fixura and Lainaaja are examples of providers); and
• small and medium-sized enterprises (SME) lending (eg Fellow Finance).

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology, in which data is recorded on computers, by way of a peer-to-peer mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features, such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that, once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced more-complex interactions with the outside world using so called 'Oracles'. With Oracles the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form, or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture. ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding.

In an ICO the company issues digital tokens or coins that have value inside the company’s ecosystem. The tokens or coins can be transferred either to other ecosystems, or for government regulated money.

It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a virtual currency (as discussed later in detail), a specified investment or form of regulated security, or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as ‘robo advisors’ are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally used in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs. In Finland, for example, Taaleri has an authorized robo-advice system.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Financial management for businesses

There are currently several Finnish FinTech companies (Holvi and Zervant are examples) providing online financial management services for SMEs. Such services include, for example, online invoicing, paperless bookkeeping, portfolio management, customer relationship management and reporting.

Payment technology

Finnish FinTech companies are also providing different types of online payment services. These include, for example, an application by PayiQ through which a client may acquire tickets for events or public transport. 

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P) type structures often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Banking Authority definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded electronically. The best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal and may result in criminal sanctions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

On 22 May 2019, France has adopted an innovative legal framework (law and decree) governing initial coin offerings (ICOs), digital assets and digital assets services providers (DASPs). The entry into force of this legislation is however subject to specific rules to be published by the French financial market authority (AMF). The definition of digital assets is very broad and not limited to ICO Tokens and virtual currencies. DASPs providing the service of digital asset custody or purchase/sale of digital assets in exchange for legal tender are subject to mandatory registration with the AMF. Additionally, all DASPs may apply for an optional license.

Public offering of tokens is subject to specific rules including an optional registration (visa) with the AMF requiring the issue of a white paper made available to investors detailing, without purporting to be exhaustive, the token issuer's project, the intended use of the funds and digital assets collected, the rights and obligations attached to the tokens, etc. The AMF publishes on its website a white list of ICOs benefiting from its visa as well as a “black list” of ICOs and DASPs not complying with the regulation.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years. 

Payment initiation service and account information service

The European Directive on payment services introduced two new types of payment services providers: payment initiation service is a service to initiate a payment order at the request of a bank account holder with respect to this account, held at another payment service provider, and account information service is an online service to provide consolidated information on one or more payment accounts held with either another payment service provider or with more than one payment service provider.

Blockchain

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a peer-to-peer mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

Smart contracts

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors', are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters.

Cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection.

The fintech space has been described as vibrant and burgeoning. In 2018, the central bank counted 71 fintech operators providing services to the banking sector. Payment services and mobile money are the most widely used technology products. Banks are increasingly collaborating with telecommunications companies (Telcos) to offer products and services to holders of mobile money accounts. The Ghana Interbank Payment and Settlement System operated by a subsidiary company of the central bank has enabled inter-operability across the financial institutions and the Telcos. A number of licensed financial institutions have deployed various online technologies to offer savings and loan products. Fintech enterprises have been active in online remittances, lending and insurance. Some have used peer-to-peer funding platforms and engaged in marketplace lending. A small number are beginning to offer services based on artificial intelligence and robo advisory systems and some are developing the use of blockchain technology. A few have been involved in initial coin offerings. There are several cryptocurrency trading platforms operating.  Data analysis and cloud computing capabilities are also being developed by some fintech companies.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P) type structures often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Issues for startup marketplace lenders

Following the initial incorporation and startup funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate growth of the ongoing lending activities of the platform. As the startup lender will not have an established track record, deposit base or asset pools, the funding structure will often follow the format of a warehouse securitization structure.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example the most widely-known alternatives to bitcoin being ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

HOW ARE MARKETPLACE LENDING PLATFORMS FUNDING THEMSELVES?

Marketplace lending includes peer-to-peer (P2P)-type structures, often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds, as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

ISSUES FOR STARTUP MARKETPLACE LENDERS

Following the initial incorporation and startup funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate growth of the ongoing lending activities of the platform. As the startup lender will not have an established track record, deposit base or asset pools, the funding structure will often follow the format of a warehouse securitization structure. Origination of new assets will be funded through drawings on a note issuance facility backed by security over the new assets. Each of the new assets will be subject to eligibility criteria determined by reference to the nature of the underlying asset. In order to provide an efficient financing structure, the assets will typically be held through a SPV with origination and servicing provided by the marketplace lender. In order to cover expected losses on the asset pool, the senior facility will be subject to the lending platform maintaining sufficient subordinated capital in the form of equity, or a combination of equity and subordinated debt.

While the funding may be structured through a revolving loan or note program, if there is tranching of the debt, this will typically result in the platform being treated as a securitization for the purposes of the EU Securitization Regulation, with the attendant requirements to hold risk retention and provide appropriate reporting and disclosures.

WHAT IS BLOCKCHAIN?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a peer-to-peer mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features, such as; its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (e.g. in the case of cryptocurrencies such as bitcoin) or providing an indisputable record; for example, relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third-party intermediary. It may be public and open (permissionless or unpermissioned) or structured within a private group (permissioned).

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that, once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an address). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

WHAT ARE SMART CONTRACTS AND DECENTRALIZED AUTONOMOUS ORGANIZATIONS (DAOS)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so-called smart contracts. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another, or advanced, more-complex interactions with the outside world using so-called Oracles. With Oracles the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of the transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

WHAT IS A CRYPTOCURRENCY?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

WHAT IS AN INITIAL COIN OFFERING (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as robo advisors are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms, which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running fintech businesses and the technology has had a significant impact in recent years.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved, provided that CONSOB has recently conducted a set of studies on the matter, trying to outline a more precise framework for this phenomenon. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P)-type structures often operated through an electronic platform provider as well as crowdfunding and also direct to retail financing mechanisms.

Issues for startup marketplace lenders

Italian marketplace lending is at an early stage of development but the number of participants and transactions is increasing at a rapid rate. Issues for such lenders may relate to funding structures and the regulatory aspects of marketplace lending. For more information, see FinTech products and uses – particular rules.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record, for example, relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

Recent regulatory changes introduced the possibility for the execution of smart contracts to have the same evidentiary value of written contracts under specific conditions and technical standards that needs still to be approved. Once approved, such a change might represent a significant improvement since smart contracts might be more easily used in the financial services sector.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether, based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Furthermore, because of these different features, it is not only the Italian banks and financial institutions that are interested in this new technology, but also the insurance, digital payments, Industry 4.0, the Internet of Things (IoT), health, retail and public sectors.

As a general remark, it is not quite clear which Italian regulatory reference framework can be (and is) used for managing impacts connected to the crypto-currencies sector; moreover, important proposals for action, such as the adoption of decrees implementing EU provisions, are on the table of the Italian Parliament and are expected to be adopted and implemented in the next future.

Having this said, at the current state of affairs, a first step towards the regulation of the aforesaid sector has been made with reference to the anti-money laundering regulations. With the implementation of the Fourth and Fifth AML Directive providers engaged in exchange services between virtual currencies and fiat currencies and custodian wallet providers have been expressly included within the scope of the obliged entities subject to the requirements and obligations of the AML and CTF regulations.

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. The expression ‘Initial Coin Offering’ was initially used in the relevant market with reference to the issue of crypto-currencies (e.g., Bitcoin, Ethereum); as of today, such expression is used to identify any offering of tokens which do not necessarily represent a crypto-currency but, however, embed various rights and can be purchased against payment either in fiat currency or crypto-currency. ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. In general terms, most ICOs are issued for an activity/project. Tokens may be issued by companies, natural persons or networks of product developers. The company’s business activity is often merely in the phase of being planned (more or less organised start-ups), and the production of goods/services is scheduled to start after the end of funding.

It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

ICOs are substantially similar to an Initial Public Offering as long as both the offerings aim at raising capital from the public made up of a potentially undetermined number of investors, involving a set of activities aimed at promoting/advertising the offering itself. Compared to conventional offerings of financial instruments, ICOs are characterised by the following elements:

• use of blockchain technology, which allows to disintermediate the typical capital markets infrastructure (e.g., custodian banks, underwriters, secondary markets);
• the means of payment used for the transaction settlement, as payments for purchasing tokens are made in crypto-currencies (e.g., Ethereum, Bitcoin) instead of fiat currency;
• they are advertised and promoted via the World Wide Web, which allows promotion and funding at a cross-border level, with no territorial constraints either for the issuer or the promoter;
• the publication of a so-called ‘white paper’ in place of a prospectus, describing the main characteristics of the investment scheme and the object of the offering.

Due to their characteristics, some types of token may qualify as financial instruments or, as financial products (investment tokens or security-like tokens). Other tokens present a variable mix of characteristics and are therefore called ‘hybrid tokens’; these are the most difficult to discuss and qualify in the light of the current regulatory framework. In particular, this last set of tokens may have a remarkable financial content, in addition to being placed to retail investors via public offerings.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

Artificial intelligence and robo advisory systems

The system known as 'robo advisors', or automated financial advice tools, are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. In general, robo advisors or automated financial advice (and optimization) tools are digital/mobile asset management and financial advice platforms, which process data around specified parameters for a variety of financial assets and activities and/or (personal) finances.

Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

In terms of different market sectors, AI brings significant value to financial operations, where both the risk mitigation as well as customer service could be supported. Italian AI is a rapidly growing sector. With reference to the Italian market, it is estimated that in 2019 the assets managed by 'robo advisors' exceeded $400 million (with an average assets approximately equal to $12,000 per client), while the average growth rate forecast between the 2019 and 2023 stands at a total of around 51%.

Data analysis and cloud computing

What is cloud computing?

Cloud computing is a method for delivering scalable and flexible information technology (IT) services in which users can retrieve resources from the internet/intranet through private or public web-based tools and applications, rather than hosting software locally within their own organization. Within the broad 'cloud' concept three main service models can be identified:

• Software as a service (SaaS) involves providing access to and use of, an end user software application, such as e-mail or a word processor, through a pay-as-you-go or on-demand model.
• Platform as a service (PaaS) involves providing access to and use of tools for the development and deployment of custom applications, for example, certain mobile applications.
• Infrastructure as a service (IaaS) involves providing access to and use of computing resources including servers, networking, storage, and data center space on a pay-per-use basis.

Depending on the degree of privacy of the resources and service delivery mechanisms, businesses can employ cloud computing in different ways. Some users maintain all apps and data on the cloud, while others use a hybrid model, keeping certain apps and data on private servers and others on the cloud.

What are the advantages of cloud computing for FinTech firms?

The rise of cloud-based solutions offers FinTech companies a number of potential benefits allowing them to speed-up business processes while reducing costs. As an example, cloud computing could:

• assist in automating audit and verification processes thereby allowing FinTech engineers to work on product enhancement;
• allow maintenance of performance levels even during peak hours or end of month queues, by giving access to high-performance servers and data storage;
• help make the production cycle continuous by providing access to data 24/7, thereby reducing time-to-market of a product/solution; and
• help create an enhanced setup for disaster recovery.

In exploring the potential benefits of cloud computing, attention should be paid to ensure full compliance of each solution with the applicable law, even at local level.

The most common technology products and fintech applications used or being developed in the finance and investment marketplace are:

Peer-to-peer funding platforms and marketplace lending

Marketplace lending is characterized by wide variety of market participants and financing mechanisms. Among the principal characteristics of new marketplace lenders, one can name:

• the use of non-bank lending platforms established as a specialist corporate or special purpose vehicle (SPV) based structure;
• recourse to technology to leverage and optimize the lending platforms;
• bringing together borrowers and lenders, through platforms rather than using the traditional financing mechanisms.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• prepaid cards;
• consumer loans;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property lending.

How are marketplace lending platforms funding themselves?

Money raising is organized from a large number of people who contribute small amounts in order to fund projects, usually via internet.

Recourse to those platforms has been increasing.

Blockchain, smart contracts and cryptocurrencies

Blockchain, smart contracts and cryptocurrencies are not regulated neither under WAEMU nor in Ivory Coast.

The Central bank (BCEAO) did not hide their negative position as far as cryptocurrencies are concerned. Such a position stems from a series of concerns especially in terms of protection of personal data, compliance with competition rules, national security and monetary policy. They have reiterated their concerns over Facebook’s project to create a cryptocurrency called Libra under the following terms: "This cryptocurrency project is the source of many concerns among regulators, particularly in terms of protection of personal data, compliance with competition rules, national security and monetary policy," said the Central Bank's representatives in their monitoring report for financial services backed by electronic payment.

Money creation is strictly controlled by a central authority, which issues and destroys it.

It is in the same line of thought that the CREPMF have, many times, recalled the regulations. On the money market, only a bank can hold an authorization and provide a financial guarantee from the BCEAO to be able to collect money from the public against the payment of interest.

The situation is not different in the financial market, where only an SGI has the same authorization from CREPMF.

Initial coin offerings and token-based products

Initial coin offerings and token-based products have not been subject to rules and regulations within the WAEMU. Their use is not tolerated in the WAEMU zone. Ivory Coast, being part of the eight WAMU member countries, has not allowed the creation or use of digital currency.

Money creation is strictly under the power and control of a central authority, BCEAO.

Please refer to response above it (Topic 13).

Artificial intelligence and robot advisory systems

Artificial intelligence and robot advisory systems are not specifically regulated in the WAEMU or in Ivory Coast.

However, as a tool using telecommunications, it is subject to the provisions contained in the telecommunication code.

In Ivory Coast, telecommunication activities are controlled by the regulatory authority, which is ARTCI (Ivory Coast Telecommunications Regulatory Authority).

Such an activity is not regulated; however, its use is being promoted withing the WAEMU zone, including among youngsters as was the case of a competition organized under the auspices of the of the regional stock exchange, the "BRVM Fintech Innovation challenge" launched by the Regional Stock Exchange (BRVM). The Ivorian recipient, Mr. Cédric Arthur Yao, presented “the Fetish project,” an application dedicated to technical analysis on the stock market. The aim of the proposed analysis model was to allow a short, medium and long-term investment orientation for securities and to anticipate possible price rises and falls. The intention of the Fetish application was to integrate this technical analysis model into a digital application.

Data analysis and cloud computing

Cloud services are at their early stage in Ivory Coast.

They are used by banks for investments to improve customer experience and credit risks. Governments are also using them to provide certain public services.

Peer-to-peer funding platforms and marketplace lending

Peer-to-peer (P2P) lending is considered a type of 'cloud funding', which encompasses various types of transactions including, among others, contribution, buying and selling and capital investment. P2P lending is a lending system available on an online platform that matches individual investors or lenders with borrowers, such as small and medium-sized enterprises or individuals. P2P lending reduces funding and investment costs through the simplification and automation of lending procedures. Additionally, because investors can make a series of smaller investments through P2P platforms, they are able to diversify their investment risks.

How practical is peer-to-peer lending in Japan?

A business lending money or an intermediary service providing for the borrowing of money, which includes lenders and P2P platform providers, must register under the Money Lending Business Act. A partnership agreement (Tokumei-Kumiai) scheme may be used where registration is not practicable for lenders; they invest in platform providers as silent partners instead of lending. It should be noted however that in addition to the platform provider being required to register as a lending business, it would also need to register as a Financial Instruments Business for the sale of its equity interests under the Financial Instruments and Exchange Act.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (e.g. in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third-party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

No license is required to manage or use blockchain technology in Japan because it consists only of a distributed computer network system and distributed ledger system.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

Smart contracts are likely to be used in various industries to conduct business, including by an investment fund raising funds by issuing electronic tokens to investors and using the funds raised to invest in target assets or businesses at the direction of the majority of investors. The investors are then eligible to receive dividends in proportion to the amount of the tokens in their possession. This investment fund programs the aforementioned process (fundraising-investment-dividend) in advance through implementation of the fully-automated smart contract mechanism.

What are cryptocurrencies?

Cryptocurrencies such as bitcoin or ethereum are digital, virtual currencies generated using blockchain technology.

In Japan, cryptocurrencies are not considered traditional legal currencies, such as US dollars or Japanese yen. In 2014, Mt. Gox, which was then the world’s largest virtual currency exchange, filed for bankruptcy protection in Japan due to misappropriation of customer assets by Mt. Gox operators. Recognizing the risk of virtual currency abuse by business operators for money laundering or other purposes, both the Payment Services Act (PSA) and the Act on Prevention of Transfer of Criminal Proceeds (APTCP) were amended on 25 May 2016 to address this concern. Furthermore, incidents involving loss of users’ cryptocurrencies have continued to arise following the Mt. Gox incident. In light of this situation, the PSA was further amended in May 2019 to strengthen the cryptocurrency regulations for user protection purpose.

The PSA:

• provides a definition of cryptocurrency;
• requires business operators of 'Virtual Currency Exchange Services' to register with the Financial Services Agency (FSA); and
• requires those Virtual Currency Exchange Services business operators to comply with various obligations in order to protect customers.

These amendments were seen as significant legal developments for the FinTech sector in Japan.

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

An ICO can be considered a form of crowdfunding, which typically operates by raising funds through the issuance of digital tokens. This funding method is often used by startup FinTech ventures. An ICO is similar to an Initial Public Offering (IPO); however the main difference is that investors typically do not have any voting rights or control rights similar to those associated with shares issued in an IPO. Therefore, company directors are free to manage their companies without having to worry about direct interference from shareholders.

In Japan, there are currently only a few instances of fund raising using ICOs. A unique service called 'VALU' has had more success recently in Japan. VALU is provided by a FinTech company whose target users are individuals rather than companies. On the VALU platform, individual users are provided their own 'total market price' which is automatically calculated based on their number of followers on social networking sites such as Facebook or Twitter, and these individual users can issue unique tokens to investors similar to the way companies issue shares to investors for funding.

It is also expected that Japanese financial regulations or cryptocurrency regulations will apply to ICOs depending on their structure. For example, if a company sells a cryptocurrency (as defined in the PSA) in the course of an ICO, registration is required and relevant restrictions would be imposed on the company in accordance with the PSA and the APTCP.

Under the amendments to the Financial Instruments Exchange Act in May 2019, it is now clear that tokens having the feature of a 'security' (the so-called 'Security Token') is classified as a 'Type 1 security' which is the most liquid type of securities consisting of shares of stocks, corporate bonds and debentures, share options, etc. Therefore, the issuance of Security Tokens is clearly subject to the securities disclosure requirement that mandates the filing of a Security Registration Statement prior to the offering of such tokens to the prospective investors, unless a private placement exemption applies.

Artificial intelligence and robo advisory systems

Automated advice tools known as 'robo advisors' have been introduced gradually as part of asset maintenance or investment management services. Robo advisors can provide advisory services to a wider range of individuals through personalized data analysis, and are comparable to those advisory services offered to high-net-worth clients and traditionally provided by private bankers. Investment advice services provided by robo advisors include portfolio selection, investment management and intermediary services, among others. Robo advisory providers must register as a financial instruments business and satisfy capital and organizational requirements in accordance with the Financial Instruments and Exchange Act.

Data analysis and cloud computing

The situation is the same as in England and Wales. Cloud computing enables delivery of IT services through internet-based tools and applications and cloud-based storage makes it possible to save masses of data on remote servers, accessible through the internet. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure (which inter alia can be set up as a (regulated) securitization vehicle);
• applying technology to leverage and optimize the lending platform and user experience;
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship; and
• virtual payment applications (eg using smartphones).

Instead of having a central institution (such as a regulated credit establishment) granting loans, these are made by 'peers' (eg retail or institutional investors, or funds), subject however to certain restrictions as lending activities are regulated activities.

Alternative credit providers involved in FinTech applications are gaining market share, based on a specific framework. In this respect, loan origination and loan participation or acquisition (as these terms are defined in the CSSF Frequently Asked Questions, version 11, dated 6 July 2017 cannot exclude the possibility that a Luxembourg court will find otherwise based on the law dated 5 April 1993 on the financial sector as amended from time-to-time.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P) type structures often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Issues for startup marketplace lenders

Following the initial incorporation and startup funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate growth of the ongoing lending activities of the platform. As the startup lender will not have an established track record, the funding structure will often follow the format of a warehouse securitization structure or fund. Origination of new assets will be funded through drawings on a note issuance facility backed by security over the new assets. Each of the new assets will be subject to eligibility criteria determined by reference to the nature of the underlying asset. In order to provide an efficient financing structure the assets will typically be held through a SPV with origination and servicing provided by the marketplace lender. In order to cover expected losses on the asset pool, the senior facility will be subject to the lending platform maintaining sufficient subordinated capital in the form of equity, or a combination of equity and subordinated debt.

While the funding may be structured through a revolving loan or note program, if there is tranching of the debt this will typically result in the platform being treated as a securitization for the purposes of the European Union Capital Requirements Regulation, with the attendant requirements to hold risk retention and provide appropriate reporting and disclosures.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record, for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that, once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

The Commission de Surveillance du Secteur Financier published a warning on virtual currencies on 14 March 2018 in order to state that virtual currencies are not currencies, are not regulated, not guaranteed by a central bank or a deposit guarantee scheme. Their high volatility bears a number of risks including total loss of investment.

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is expanding). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

The Commission de Surveillance du Secteur Financier published a warning on initial coin offerings (ICOs) and tokens on 14 March 2018 in order to state that raising funds from the public in the form of so-called initial coin offerings is not subject to a specific regulation and does not benfit from any guarantee or other form of regulatory protection. ICOs are highly speculative investments that may lead to a total loss of investment. 

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

The Commission de Surveillance du Secteur Financier published the 27 March 2018 its position on Robo-advice as well as, in December 2018, a White Paper on Artificial Intelligence: Opportunities, risks and recommendations for the financial sector. This White Paper aims at better understand what Artificial Intelligence is and the related risk as well as explain some practical use cases for the financial sector. An analysis of the main risks associated and key recommendations to take into account when implementing Artificial intelligence inside a business process ae also covered.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Peer-to-peer funding platforms and marketplace lending

There is no definition for marketplace lending under Mauritian Law inasmuch as it is a new area and there is no adequate legal and regulatory framework.

In relation to peer-to-peer lending, the Financial Services Commission, which is the non-bank financial services regulator, has issued a draft Financial Services (Peer-to-Peer Lending) Rules 2017 (P2P Rules) for discussion in or around November 2017.

The aim of these P2P Rules is to, inter alia, establish a sound and conducive automated environment or platform for the offer and execution of alternative peer-to-peer lending, other than bank lending, for the benefits of borrowers and stakeholders in the non-banking sector of Mauritius. The small and medium-sized community of entrepreneurs/innovators will be a key category of borrowers targeted by these P2P Rules. 

Blockchain, smart contracts and cryptocurrencies 

To provide an impetus to blockchain and its associated products like smart contracts and cryptocurrencies, Mauritius set up the Mauritius Blockchain Center of Excellence in January 2018, which was a joint initiative of the Office of the President of the Republic of Mauritius in collaboration with the US Embassy. 

The aim of this center is to capitalize on the potential of blockchain, which is perhaps the biggest innovation in computer science to date. This new platform is intended to shape the world of finance, business and science as never before and transform the old order for the better. 

The mission of the Mauritius Blockchain Center of Excellence will be threefold: blockchain education, community building, and development of use cases, which solve real world problems. 

Mauritius aims to leverage its competencies through its ease of conducting business, strategic location, and keenness to advance technology to become a significant blockchain epicenter. The center will collaborate with other stakeholders to bring blockchain expertise to Mauritius and help develop a local blockchain brain trust and opportunities for Mauritius.   

Mauritius is further preparing to create an "Ethereum Island" to serve as a hub for innovators from throughout Africa and Asia, through a collaboration between the government of Mauritius and a number of private entities, including ConsenSys, a solutions provider capitalizing on the Ethereum blockchain. As another example, in 2018 Rogers Capital, a Mauritian company, has partnered with BlockCerts, a private blockchain platform, in line with the same vision and even more: expanding blockchain initiatives into Africa.

Initial coin offerings and token-based products

ICO and token-based products are still at a very nascent stage in Mauritius but they will be called upon to develop, expand and become crucial in the Mauritian FinTech landscape.

Artificial intelligence and robo advisory systems 

AI and robo-advisory systems are still at a very nascent stage in Mauritius but they will be called upon to develop, expand and become crucial in the Mauritian FinTech landscape. Regtech is the buzz at the moment and many operators are looking at exploiting this potential. 

In November 2018, a report, named The Mauritius Intelligence Strategy, issued by the AI Working group commissioned by the government, was published. Its purpose was to show Mauritius’ dedication towards making AI a cornerstone of the next development model by recognizing the potential of the technology to improve growth, productivity and the quality of life. The report makes recommendations to achieve objectives set. The Working group also focused on how to create a regulatory framework to enable the development of AI as well as possible incentives, fiscal or otherwise.

Data analysis and cloud computing 

Cloud computing is quite prominent in Mauritius and with many back office operations being structured in Mauritius, data analysis is also gaining popularity and momentum.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending in Mexico is at an initial stage but has made available most forms of traditional bank funding products. Most common products include:

• debt consolidation;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• factoring.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P) type structures, often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Issues for startup marketplace lenders

Marketplace lending businesses can be incorporated under various corporate forms, often as stock corporations (sociedad anónima or SA) – or one of its variations, the investment promotion corporation (sociedad anónima promotora de inversion or SAPI) – which provide flexibility and corporate governance features that facilitate joint venture arrangements and private equity investments. There is also an example of a marketplace lender incorporated as a Popular Finance Company (sociedad financiera popular or SOFIPO), a microcredit financial institution authorized and supervised by Mexico’s National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores or CNBV).

Most marketplace lenders operate as agents of investors to make loans on their behalf to third parties interested in obtaining financing. The loan funds are provided by the investors; the marketplace lender then distributes the funds on behalf of investors to various pre-qualified borrowers and also acts as agent of the investors for administrative and collection purposes.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record, for example, relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third-party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The Financial Technology Law bill (Ley de Tecnología Financiera or LTF) that regulates the FinTech industry in Mexico, indicates that virtual assets, including cryptocurrency, will be defined by Mexico’s Central Bank. However it is understood that these virtual assets will be a representation of verifiable digital value that is neither issued nor backed by a central bank or financial entity; that is, they are not legal tender, however they generate units for exchange, given its acceptance by the general public. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Crowdfunding

The law on collaborative financing or crowdfunding was adopted by the Government of Morocco to regulate the activity of electronic collaborative funding platform (plateforme électronique de financement collaborative, or PFC). This law created the status of the collaborative funding company (société de financement collaborative, or SFC) to manage PFCs and defined a system for the accreditation of SFC and for the supervision and monitoring of collaborative financing. The law also defines the SFC commitments and obligations, in particular with regard to public information, advertising and reporting.

Blockchain, smart contracts and cryptocurrencies

Cryptocurrencies and blockchain

In 2017, the foreign exchange office in Morocco initially banned the use of crypto currencies sending a negative signal to the players of the Blockchain industry.

Then, the Governor of Bank Al Maghrib caused a turnaround by integrating the Blockchain and cryptos currencies into the digitalization charter of the 2019- strategic plan 2023 of Bank Al Maghrib.

This unblocking has enabled Blockchain operations to be set up in Morocco, although adequate regulation and the creation of tools to ensure the security of the value chain are still expected.

In particular, the Kingdom of Morocco has created a Digital Development Agency (ADD) in charge of promoting and developing new technologies.

With the implementation of the amended Payment Services Directive (EU/2015/2366), platforms providing account information services, payment initiation services and transferring payments is more and more seen in the market. Also marketplace lending remains populair. There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• consumer loans; and
• small and medium-sized enterprises (SME) (Midden-en Kleinbedrijf or MKB) lending.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes P2P-type structures often operated through an electronic platform provider as well as crowdfunding and also direct to retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another, or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Cryptocurrencies are at the moment not regulated, but regulators and legislators aim to regulate cryptocurrencies and virtual wallets soon (eg by way of the 5^th Anti-Money Laundering Directive).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

As the Authority for Financial Markets (Autoriteit Financiele Markten) tends to broaden its regulatory authority and scope, it remains point of discussion whether robo advice may be seen as investment advice or is a merely a tool, which is not regulated. These discussions take place on a case-by-case basis.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years. 

Regulated entities, such as banks, are required to notify the Dutch Central Bank (De Nederlandsche Bank) of any material cloud outsourcings.

Peer-to-peer funding platforms and marketplace lending

Peer-to-peer (P2P) funding matches people who want loans with people who are potentially willing to fund those loans. The matching is done through an intermediary platform – a P2P lending service.

In New Zealand, the provision of a P2P lending service is a market service that requires a license from the Financial Markets Authority under the Financial Markets Conduct Act 2013.

A person provides a P2P lending service if:

• they provide a facility by means of which offers of debt securities are made; and
• the principal purpose of the facility is to facilitate the matching of lenders with borrowers who are seeking loans for personal, charitable or small-business purposes.

How are marketplace lending platforms funding themselves?

Marketplace lending includes P2P-type structures often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis. However, it is relevant to note that there is currently no permitted secondary market for investments in marketplace lending platforms in New Zealand.

Issues for startup marketplace lenders

The requirements for a P2P lending service license (including governance and management requirements, as well as operational functionality) are not insignificant; and New Zealand currently offers no regulatory sandbox or testing period. The integrity of credit scoring and servicing/collections processes have been critical to establish funding support for existing marketplace lenders.

It is also important for startup marketplace lenders to ensure that the platform's interest and fees structure is fully compliant with applicable consumer credit regulation, while still providing sufficient revenue for the platform (and yield for investors). Anti-money laundering and fraud prevention processes must also be considered.

As well as the initial incorporation, licensing and startup funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate growth of the ongoing lending activities of the platform (for instance, through securitization).

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (e.g. in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third-party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

A cryptocurrency is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding.

It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• a prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors', are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Personalised 'robo advice' is currently prohibited in New Zealand under the Financial Advisors Act 2008 (FAA). An exemption was granted in June 2018 to allow entities to provide personalised digital advice on approval by the Financial Markets Authority. Currently 8 entities have been approved to provide digital advice facilities under the exemption. From 29 June 2020 new provisions in the Financial Markets Conduct Act 2013 will come into effect which provide for licensing of entities wishing to provide digital financial advice services.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform, rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is still in its early days in Norway and we only see a few platforms in the market. The main obstacle for growth in the Norwegian market is most likely to be the regulatory regime, which is quite demanding.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P) type structures, often operated through an electronic platform provider as well as crowdfunding. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds, as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain, in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record, for example, relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether, based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture. ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights; and
• compliance with law and all regulatory requirements.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet, rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years. 

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending, given that specific regulations on this matter do not exist in Peru. Usual market practice includes companies lending money with their own capital and companies connecting investors and borrowers through a platform (either with or without knowing the identity of the applicant requiring financing). Marketplace lending is available to address mainly personal loans and is becoming available for small companies. Additionally, citizens may employ FinTech lending products available worldwide that accept Peruvian citizens.

As marketplace lending is just starting its development in the country and many projects are being developed, it is likely that the volume of lending in personal loans as well as further and additional product areas will significantly increase over the coming years.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a peer-to-peer mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third-party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that, once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

At the time of writing, there is only one Peruvian company that operates using the blockchain platform to exchange cryptocurrencies, specifically bitcoins, from dollars or soles; however, Peruvian citizens can operate cryptocurrencies through platforms that accept them. Therefore, it is not common for commercial establishments to accept cryptocurrencies as payment method.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced more-complex interactions with the outside world using so called 'Oracles'. With Oracles the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

There is no legal definition of cryptocurrencies in Peru. The exchange of cryptocurrencies is not regulated by Peruvian laws but it may be considered as a foreign currency that may not be limited since the free possession and disposal of foreign currency is guaranteed by the Peruvian Political Constitution. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

To our knowledge, there have not been any ICOs led out of Peru at the time of writing.

Electronic money

Law 29985 regulates a range of matters, including the issuance of e-money. Electronic money is a monetary value represented through an enforceable credit to its issuer for the same amount of the money received, which is stored in an electronic medium, allowing the user to carry out payments without using cash or credit cards. According to Law 29985, issuers may rely on financial institutions, such as banks or other financial companies authorized by the Superintendence of Banking, Insurance and Private Pension Fund Management Companies to carry out such activity or use specialized companies for issuing money. The purpose of this product is to be an instrument for financial inclusion for people who would not otherwise have access to alternative financial products, so that they may pay by means other than cash (which is the most common payment method in Peru).

Artificial intelligence, robo advisory systems and auction systems

Recommender systems include software tools that provide information published and provided by traditional financial institutions (such as banks, financial entities and fund management companies) to users in order for them to make a decision to acquire financial products that fit their needs. The recommender systems available do not analyze personal data; therefore, they are not suitable for financial products that consider those parameters to advise in areas such as lending but they are functional for deposit and investment products.

Robo advisory systems which analyze personal data and other values are being developed for acquiring loans and are beginning to operate in the finance marketplace. These systems utilize algorithms relating to a person's historical information and the characteristics of financial products in order to rate the risk profile and display the best offers or products available according to the person’s appetite for risk.

Auction systems for financial products such as deposits and loans based on recommender systems and robo advisory systems for deposits and loans also exist in Peru. Through auction systems, the developer of the FinTech application makes alliances with different financial companies so that the latter may give a specific offer to the client suitable to their requirements.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• consumer loans;
• student lending products; and
• small and medium-sized enterprises (SME) lending.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P) type structures often operated through an electronic platform provider as well as crowdfunding and also direct to retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that, once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

In Poland, a Polish accelerator of blockchain technology is working on the potential use of blockchain to support sectors such as:

• public administration (controlling the circulation of documents, digital identity and traceability of public assets);
• the health service; and
• the oil and gas sector.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

Smart contracts have not been formally classified as a manner of executing an agreement and therefore they are not regulated under Polish law. However, a declaration of will which constitutes an agreement may be expressed by any behavior which manifests the intent of a party to the agreement in a sufficient manner, including a disclosure of such intent by electronic means. Accordingly, agreements executed based on smart contracts technology are allowed, as long as they clearly demonstrate the intent of the parties.

It should be noted that certain types of agreements need to be entered into in a specific form (for instance in a written form or in a form of a notarial deed). In such a case, application of smart contracts technology will not be possible.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency). A Polish cryptocurrency – polcoin (PLC) – was created in 2004.

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

The cloud computing market is developing rapidly in Poland.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Although there is still not a very active market in Portugal, marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

Blockchain, smart contracts and cryptocurrencies

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a peer-to-peer mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features, such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by several nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example, relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to decide. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings (ICOs) and token-based products

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal and may result in criminal sanctions in several jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are several applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Peer-to-peer funding platforms and marketplace lending

The FinTech marketplace in Puerto Rico is in its early stages of development. Due to the political and economic relationship between Puerto Rico and the United States (US), it is expected that developments in FinTech solutions will come as a result of evolving trends in this area from the US. As a result, Puerto Rico has not seen any local trends in financing mechanisms for marketplace lending platforms or other similar structures; the only type of emerging funding platform we are aware of is reward-based crowdfunding.

One of Puerto Rico’s economic development strategies, however, is based on transforming Puerto Rico into an attractive and successful services export hub. To this end, several tax incentive laws have been approved which provide attractive tax benefits to companies that establish their operations in Puerto Rico in order to export their services abroad. It is expected that these tax benefits will attract FinTech companies from all over the world to Puerto Rico, and these will play an active role in the development of the local marketplace in the near future.

Although commercial banks do provide limited internet banking and are starting to offer peer-to-peer payment products, financial services and products are still, generally, delivered by traditional means. Thus, generally speaking, in Puerto Rico, financial services and products continue to be provided by traditional market players, namely commercial banks, credit unions and other non-depository lending companies.

Blockchain, smart contracts and cryptocurrencies

The financial system in Puerto Rico continues to offer banking services under traditional security technology. No major developments have been observed in blockchain, smart contracts or cryptocurrencies. However, it is expected that commercial banks operating in Puerto Rico will need to enhance their offering in this area, as new technologies develop in the US and Europe.

Notwithstanding the above, the formation of International Financial Entities with cryptocurrency and digital exchange markets have been approved by the Office of the Commissioner of Financial Institutions.

Initial coin offerings (ICOs) and token-based products

There have been no ICO products introduced into Puerto Rico; however, due to its close relationship with the US markets, it is conceivable that this type of funding mechanism will be developed in Puerto Rico in the near future.

Artificial intelligence and robo advisory systems

Puerto Rico has not yet seen any developments in connection with artificial intelligence or robo advisory systems. It is anticipated that these will be introduced, as these software tools continue to develop in the US.

Data analysis and cloud computing

Cloud computing is available in Puerto Rico to support future FinTech applications that may be developed in Puerto Rico.

Peer to peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through an electronic bank lending platform established as a specialist corporate or special purpose vehicle based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform.

In Romania, peer-to-peer (P2P) funding platforms are not popular. However, there is one intermediary platform which operates as an internet-based intermediary between natural persons who can offer and request loans; a couple of similar platforms are being developed and we anticipate evolution in the field (alongside the currently more popular crowdfunding platforms).

Blockchain, smart contracts and cryptocurrencies

The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency). 

While the use of both of bitcoin and blockchain technology is expected to become mainstream, Romania has yet to embrace this global trend. According to data released in March by Netopia mobilPay, Romanians made payments in bitcoin equivalent to €300,000 in 2016. The average payment value per was €400.

Currently, there are no specific regulations concerning bitcoin in Romania. The National Bank of Romania has taken a reserved attitude towards blockchain technology and bitcoin; reflecting the perspective of the European Central Bank. In March 2015, the National Bank of Romania issued a statement in relation to cryptocurrencies confirming that they are considered neither national, nor foreign currency and may not be considered e-currency either, which leads to an argument that bitcoin falls under the category of movable goods and, as a result, any transaction which applies a bitcoin 'payment' may qualify as barter trading, in accordance with article 1763 of the Romanian Civil Code.

Initial coin offerings and token based products

Issuing digital tokens by way of an initial coin offering (ICO) is not common practice in Romania. However, there are startup projects, including in the video gaming market sector, which have raised financing by means of an ICO. Issuance of tokens to fundraise in the video gaming market (where such tokens may be used for purchases within the game as well as being exchangeable in other cryptocurrency markets) is expected to grow and may be copied by issuance of so-called utility (discount) tokens in other market sectors.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Based on a recent study in Romania, 60% of the financial intermediaries interviewed mentioned that the main reason for using AI interfaces was data collection. On the other hand, the study also highlighted that concerns about the privacy of data are one of the main challenges to further development, as well as a preference for human interactions. The survey also found that although the number of human interactions at banks or telephone offices is decreasing and is likely to continue in line with this trend, the quality and importance of human contact will increase.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Cloud computing is most commonly used in the financial sector for the following services:

• internet banking platforms; and
• outsourcing activities with respect to services previously carried out by the financial institution (eg electronic archiving, e-mailing services etc).

General

According to the latest reports, Russia is one of the leading and fast-growing FinTech markets with approximately 82% of major cities' populations actively using, or at least being familiar with the most common technology products (EY, 'Global FinTech Adoption Index 2019'). Core FinTech products in Russia currently include online payments, mobile transfers, electronic banking, insurance utilizing telematics and automatic financial planning.

The following is an overview of the developing FinTech products based in Russia and their prospects in the near future.

Online wallets, payments and money transfers

Digital currency is a non-bank form of electronic payments and money transfers, which provides a prompt, simple and cost-efficient way of conducting monetary transactions without relying on the intermediary of a bank. Account ('wallet') services, as well as the other parts of infrastructure are provided by the issuer of the currency, with the latter generally not being limited to inter-user operations, but allowing the transfer to either another wallet or a bank account. While digital currencies are capable of performing most traditional bank account functions, their most prominent areas of application are online currency exchange and cross-border transfers, where banks' fees for the respective services are significantly higher.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P)-type structures, often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds, as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

The current position of peer-to-peer funding and its perspectives

Marketplace lending is available to address most forms of traditional bank funding products. Recent products have included:

• consumer loans;
• small and medium-sized enterprises (SME) lending; and
• debt refinancing.

It is likely that the volume of lending in these and additional product areas, will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector and lawmakers become increasingly more motivated to create a legal framework for the sector. To date, the further development of the market is currentlyhas been hindered by the lack of certainty regarding the different platforms' legal standing and unavailability of uniform credit history and rating. It may be expected that in light of recent adoption of Federal Law "On Raising Investments via Investment Platforms and on the Amendments to Certain Legislative Acts of the Russian Federation" (Crowdfunding Law) that uncertainty will decrease to some extent and market players will become more open to the growing peer-to-peer sector.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions, which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system, apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

One of the pilot uses of smart contracts and blockchain in Russia included the documentary letter of credit transactions made between a leading private bank and an airline. The use of smart contracts is now becoming more widespread, owing, at least partially, to recognition of smart contracts and digital rights by the Civil Code of the Russian Federation (the relevant amendments came into force on 1 October 2019). One recent example of their use includes establishment of infrastructure for payment for utilities – a smart-contract solution allowed for speedy exchange of electricity consumption data between consumers, generating companies and distributors. 

What is a cryptocurrency?

One of widely accepted definitions of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency). The legal framework regulating this new form of virtual money is yet to be developed.

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

The current ICO sector is developing in Russia. Its future shape will significantly depend on the approach to be taken by the regulators who are working on the legal framework for the cryptocurrencies and ICOs. Recently adopted Crowdfunding Law allows for offering of certain crypto-assets via "investment platforms", however, comprehensive framework for cryptocurrencies and ICOs is yet to be developed. Russian regulators are expected to develop their approach in the near future following recommendation by the FATF to adopt relevant legislation.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms, which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

The most common technology products and fintech applications used or being developed in the finance and investment marketplace are:

Peer-to-peer funding platforms and marketplace lending

A salient feature of marketplace lending is a wide variety of market participants and financing mechanisms.

The principal characteristics of new marketplace lenders one can name are:

• the recourse to non-bank lending platforms established as specialist corporate or special purpose vehicle (SPV) based structures;
• the use of technology to leverage and optimize the lending platforms; and
• matching borrowers to lenders, through platforms rather than using the traditional financing mechanisms.

Marketplace lending is available to address most forms of traditional bank funding products. Recent products have included:

• consumer loans;
• prepaid cards;
• residential property and commercial property lending; and
• small and medium-sized enterprises (SME) lending.

How are marketplace lending platforms funding themselves?

A large number of people contribute small amounts of money, in order to fund projects. That money raising is usually organized via the internet, through platforms.

There is a significant potential for peer-to-peer (p2p) lending in microfinance in Senegal. Recourse to those platforms has been increasing over the years. Eligibility for that type of financing structure is, sometimes, characterized by an absence of intermediaries and based on an assessment of entrepreneurs’ credit history, their ability and capacity to pay back their loans that banks and financial institutions have granted them in the past.

This is the case with Zidisha.org, an online microlending community that directly connects lenders and entrepreneurs.

Blockchain, smart contracts and cryptocurrencies

Blockchain, smart contracts and cryptocurrencies are not regulated, neither under WAEMU nor in Senegal.

The Central Bank (BCEAO) did not hide their negative position as far as cryptocurrencies are concerned. Their approach stems from a series of concerns especially in terms of protection of personal data, compliance with competition rules, national security and monetary policy. They have reiterated their concerns during a Facebook project to create a cryptocurrency called Libra under the following terms: "This cryptocurrency project is the source of many concerns among regulators, particularly in terms of protection of personal data, compliance with competition rules, national security and monetary policy," said the Central Bank’s representatives in their monitoring report for financial services backed by electronic payment.

Money creation is strictly controlled by the central authority, which issues and destroys it.

It is in the same line of thoughts that members of the CREPMF have, many a time, referenced the regulations. On the money market, only a bank can hold an authorization and provide a financial guarantee from the BCEAO to be able to collect money from the public against the payment of interest.

The situation is not different in the financial market, where only an SGI has the same authorization from CREPMF.

Initial coin offerings and token-based products

Initial coin offerings and token-based products have not yet been subject to rules and regulations within the WAEMU. Their use is not tolerated in the WAEMU zone. Senegal, being part of the eight WAMU member countries, has not, at least for now, allowed the creation or use of digital currency.

Money creation is strictly under the power and control of a central authority, BCEAO.

Please refer to response above, on blockchain, smart contracts and cryptocurrencies under (Topic 13).

Artificial intelligence and robot advisory systems

Artificial intelligence and robot advisory systems are not specifically regulated in the WAEMU or in Senegal.

However, as a tool using telecommunications, it is also subject to the provisions contained in the Senegalese telecommunication code. In Senegal, telecommunication activities are controlled by the regulatory authority, which is the Telecommunications and Postal Regulatory Authority (ARTP).

Such an activity is not regulated; however, its use is being promoted within the WAEMU zone, including among young people through competitions as was the case of those organized under the auspices of the regional stock exchange, the BRVM Fintech Innovation challenge, the first edition of which was launched from September 18, 2018, to October 17, 2018.

There was no Senegalese recipient and the Ivorian recipient, Mr. Cédric Arthur Yao, presented “the Fetish project,” an application dedicated to technical analysis on the stock market.

The aim of the proposed analysis model was to allow a short-, medium- and long-term investment orientation for securities and to anticipate possible price rises and falls. The intention of the Fetish application was to integrate this technical analysis model into a digital application.

Data analysis and cloud computing

Cloud services are at their early stage in Senegal. They are used by banks for investments to improve customer experience and credit risks. Governments are also using them to provide certain public services.

Overview

The Singapore government and the Monetary Authority of Singapore (MAS) have actively encouraged the growth of the FinTech industry to entrench Singapore as a global financial hub and further its initiative to transform Singapore into a 'Smart City'. Compared to Western markets, market and consumer maturity in Southeast Asia is lower since a large part of the population is underbanked or unbanked and has limited access to smart technologies. This presents different challenges for companies wishing to enter the FinTech space and for FinTech investors, as entrepreneurs are limited in the extent to which they can employ technological advances in their innovations.

In Singapore, FinTech innovations are within the payments and marketplace lending space, which provide platforms for new consumers to access traditional banking services.

Peer to peer funding and marketplace lending

Peer-to-peer (P2P) funding includes both P2P lending and P2P equity platforms. Unlike traditional banks, P2P lending firms operate a platform which connects borrowers and lenders, instead of applying funding raised from a deposit-based relationship. Furthermore, while P2P lending platforms were initially used mainly to help startups raise capital, they now operate across many industries and finance assets which could previously only be financed by bank funding. Examples include lending platforms which deal in consumer loans, real estate or student lending.

P2P lending platforms and other forms of marketplace lending have presented an ever increasing challenge to traditional financial service providers largely because their technological innovation leads to greater efficiency, cost savings and flexibility and their ability to service small and medium-sized enterprises (SMEs) that have been turned down by traditional banks in the post financial crisis era.

MoolahSense (set up in 2014) and FundingSocieties (set up in 2015) were some of the successful early pioneers of marketplace lending in Singapore. They have entered into a partnership with DBS Bank to refer successful borrowers to the bank for larger loans and other traditional banking services. FundedHere and Crowdo are other key marketplace lending players, and they provide both equity and lending based platforms. We can expect to see a longer list of crowdfunding platforms in time to come, as the number of platforms receiving licenses from the MAS is increasing.

Industry specific platforms have also taken off in Singapore. One example is CoAssets – a Singapore grown, Australian listed crowdfunding platform founded in 2013 – which focuses on real estate funding. Another example, Crowdo, earlier this year announced a strategic partnership with BFI Finance, a multi finance company in Indonesia, to offer customers (particularly SMEs) loans for vehicles and fixed assets.

Many of these domestic funds have also been expanding their operations to include securitizing loans through invoice financing which is particularly favorable for asset light SMEs.

How are marketplace lending platforms funding themselves?

Marketplace lending includes P2P-type structures often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Issues for startup marketplace lenders

In general terms, marketplace lending has not been as successful in Singapore as it has been in the US or the UK, mainly because the local financial market is not large enough to achieve the scale and success of American P2P platforms such as Lending Club. This is a difficult challenge to overcome for Singapore's relatively small domestic funds since they do not have access to the kind of business/investor data that banks have access to and since not many P2P platforms have partnered with banks in Singapore, unlike in the UK or US.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

There seems to be a great push to make Singapore a world leader in distributed ledger technology with many users in Singapore testing the application of blockchain in areas such as:

• interbank payments;
• verifying and reconciling trade finance invoices; and
• executing and verifying the performance of contracts.

Examples of FinTechs in the blockchain space include Attores, a Singaporean FinTech startup which utilizes the ethereum platform (a blockchain that records smart contracts) to allow its customers to create and execute tailored smart contracts securely, while building an open repository of smart contracts. In September 2017, IBM announced it was piloting blockchain technology for managing the design, management and execution of its contracts with Bank of Tokyo Mitsubishi on the IBM cloud.

The Singapore government, acting through its FinTech office, is taking the lead in developing the application of blockchain technology in Singapore. The FinTech office was set up in May 2016 by the MAS and the National Research Foundation, to serve as a one-stop virtual entity for all FinTech matters and to promote Singapore as a FinTech hub. In a keynote address in November 2016, the Managing Director of the MAS expressed that there was an important opportunity for the government to build blockchain infrastructure that the private sector could meaningfully use. He discussed examples in banking, KYC, consent standards in big data and payment infrastructure for mobile payments as possible areas within which blockchain could be successfully deployed. However, attracting and recruiting talent and developing local talent remains an important challenge for the Singapore government, which it is actively trying to overcome the issue by hosting events such as the annual FinTech festival since November 2016 (for more information, see here).

In March 2017, the MAS completed phase 1 of a proof-of-concept project named 'Project Ubin' to conduct domestic inter-bank payments using blockchain. The project was formed in partnership with R3 and a consortium of financial institutions, and was borne out of a need to explore the use of blockchain in financial transactions. The project evaluated the implications of having a tokenized form of the Singapore dollar (SGD) on a distributed ledger, and its potential benefits to Singapore’s financial ecosystem. If blockchain-based interbank payments are successful, it could lead to faster settlements in securities and bond trading. The report for the project, however, mentioned the potential issue of credit risk liability and stated that an appropriate legal structure is required to ensure that the transfer of digital SGD is equivalent to a full and irreversible transfer of the underlying claim on the central bank’s currency. This would help ensure that there is no credit risk associated with the creation, distribution, use or redemption of the digital SGD.

With an unprecedented push for the adoption of blockchain led by Singapore’s government, Singapore is on its way to being at the forefront of the technology, and perhaps an example of how blockchain can work to improve the lives of its citizens.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

As defined by the Monetary Authority of Singapore, a digital token is a cryptographically secured representation of a token holder's right to receive a benefit or perform a specified function. A virtual currency (examples include bitcoin or ether), also known as cryptocurrency, is a type of digital token.

Initial coin offerings and token based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty initiative or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

ICOs have become increasingly popular as a way for startups in Singapore to raise funding. Millions of US dollars have been raised through ICOs in Singapore over the last year. Digix, a platform which trades gold backed tokens issued for ethereum, raised US$5.5 million in under 12 hours in 2016, while blockchain startup TenX recently raised close to US$80 million to support the development of a protocol enabling transactions across different blockchains.

TenX is only one of many startups in the digital tokens and cryptocurrency based products space which has raised money to help finance or support the development and application of cryptocurrencies and other tech startups in Singapore. Cofund.it provides a platform much like a P2P lending or equity funding platform to connect startups in the blockchain and cryptocurrency space to investors and experts for both funding and advice. Cross Coin, a Singapore special purpose vehicle, raised US$5 million in one day through an ICO to fund and develop 60 to 70 Russian and Eastern European technology startups in Starta Accelerator, a New York accelerator. FundYourselfNow, which dubbed itself as the first cryptocurrency crowdfunding platform in Southeast Asia, has created a platform to allow entrepreneurs to raise funds for their projects using virtual currencies such as bitcoin or ethereum, instead of regular currency.

Other startups such as Coss and HelloGold Foundation aim to bring cryptocurrencies to the mass market by adopting crypto and blockchain based services and products into a user friendly and intuitive environment.

For information on the regulation of ICOs, see FinTech products and uses – particular rules.

Artificial intelligence and robo advisory systems

Digital advisory systems which employ artificial intelligence, such as robo advisory systems, have become increasingly popular in Singapore over recent years. As defined by the MAS, digital advisory services refer to the provision of advice on investment products using automated, algorithm based tools, usually online and with limited or no human interaction.

Since the availability of digital advisory services will increase investor choice and market competition and provide access to low cost investment advice, the MAS has refined the licensing and business conduct requirements for digital advisory service providers.

Digital advisors may operate with a capital markets services license (CMSL) for fund management or for dealing in securities under the Securities and Futures Act (SFA), or a financial advisor's license under the Financial Advisers Act (FAA), depending on their business models and the specific activities that they undertake. Current regulations mean that financial institutions which are already regulated under the SFA or the FAA can provide digital advisory services. In line with this, OCBC Bank Singapore recently announced plans to launch a robo advisory service targeted at accredited investors, in partnership with WeInvest. Bambu, a Singapore business-to-business robo advisor services provider, has developed a white label platform for financial institutions to offer robo advisory to their customers. One of their offerings is called 'Robo-in-a-box', which is a one-stop-shop for any company to offer end-to-end digital solutions to retail investors. Another one is called the 'Intelligent Advisor', which is a propriety algorithm-ranking tool for relationship managers to improve customer experience targeted at high-net-worth investors. Bambu has signed partnerships with notable industry players including Tigerspike, Thomson Reuters and Finantix.

In June 2017, the MAS released a consultation paper on proposals to facilitate the provision of digital advisory services. These proposals discuss the governance, supervision and management of algorithms for robo advisors to ensure integrity and robustness in the delivery of financial advice. At the same time, the MAS recognizes that some digital advisors whose activities fall into fund management and who intend to obtain a CMSL in fund management to service retail investors may not be able to meet the five-year corporate track record requirement of managing funds for retail investors in a jurisdiction which has a regulatory framework that is comparable to Singapore.

In order to make it easier for entities offering digital advisory services to operate in Singapore, among other concessions, these proposals state that the MAS is prepared to admit digital advisors (which operate as fund managers under the SFA) to offer their services to retail investors even if they do not have a five year corporate track record or do not meet the minimum total assets under management requirement (S$1 billion), provided they meet safeguards such as:

• offering diversified portfolios of non complex assets;
• having key management staff with relevant collective experience in fund management and technology; and
• undertaking an independent audit of the advisory bureau within one year of operations on key risk areas (ie prevention of money laundering and countering the financing of terrorism, handling of client moneys and assets, technology risk and suitability of advice).

However, the MAS would require the providers of digital advisory services to manage the new technology risks associated with these activities. The public consultation on these proposals ended on 7 July 2017 but the proposals have not yet been finalized.

Data analysis and cloud computing

Cloud computing refers to the use of a network of remote servers hosted on the internet to store and process data, instead of relying on a local server or personal computer. It provides economies of scale, delivers operational efficiencies and, like data analysis, is an enabler for a variety of other FinTech innovations.

There has been a growing trend among financial institutions to outsource aspects of their service delivery to cloud operators. In July 2017, as part of its Guidelines on Outsourcing Risk Management, the MAS set out specific guidelines on the use of cloud services by financial industry players. These mainly required cloud service providers to be aware of the risks to data confidentiality and data recovery posed by cloud services such as multi location processing and to carry out the necessary due diligence and implement appropriate risk management processes.

In this light touch regulatory environment, many startups have begun innovating in the cloud computing and data analytics space. Smartkarma and Call Level, both founded in 2014, provide services based on data analysis for investors. Call Level simplifies tracking investors' personal investments using tailored notifications which are generated from market analysis whereas Smartkarma provides research and transparency into Asian markets, combining intelligence from analysts, data scientists, academics and industry experts, to help investors enhance returns and proactively manage their investment strategies.

Business-to-business (B2B) platforms such as Matchmove, which provides cloud computing services to enterprises (in the form of a fully customizable secure mobile wallet service) to help businesses increase customer loyalty and user engagement are also popular in Singapore. Innovation using data analysis is also being deployed in the B2B services arena. FitSense is an analytics platform that collaborates with insurance companies to provide data analytics which allows insurance companies to personalize policies for anyone with a smartphone or wearable technology, thereby reducing insurance premiums.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

Recently, peer-to-peer (P2P) products in Slovakia have included:

• (non-regulated) consumer loans;
• loans in order to pay down payments for property mortgages; and
• lending to SMEs.

How are marketplace lending platforms funding themselves?

Marketplace lending includes P2P-type structures often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. Funding platforms are mostly backed by individual investors but financial institutions are also starting to invest in the platforms (mainly in the case of crowdfunding).

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the block using sophisticated algorithms and add the verified block to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (e.g. in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third-party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Banking Authority definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority, nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, stored or traded electronically. The European Central Bank (ECB) defines a cryptocurrency (or virtual currency) as a “type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community”. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICO is a popular method of raising funds primarily for startups (even though in Slovakia their use is rather limited). ICOs come in a wide variety of forms and may be used for a wide range of purposes. It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal in Slovakia and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security, or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• a prospective return on investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of the underlying technology;
• quantity of coins or tokens that are reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact the banking and private wealth advisor sectors. Robo advisors are one of many ways that minimalize human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Data analysis

Data analysis is a process through which data can be inspected, transformed or modeled with the goal of discovering new information and providing an ability to draw conclusions. Data analysis is usually directed to improve the process of decision-making, although there are multiple approaches and diverse techniques, each under a variety of names, that can be used to analyze data.

Cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data on remote servers (privately-owned cloud, or a third-party server), accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years. Use of third-party clouds allows companies to focus on their business without the need to invest as much as they otherwise would in their own IT infrastructure.

South Africa is recognized as one of the main FinTech hubs in Africa. South African FinTech companies are currently focusing on mobile banking, payment services and alternative financing. Major banks and FinTech companies are slowly starting to tap into the large unbanked population and are designing FinTech products aimed at this group.

Mobile banking

South Africa has experienced exponential growth in the uptake of mobile banking, mostly due to the fact that a large percentage of the South African population lives in rural locations with limited access to traditional banking infrastructure. Socially, there is a need for workers in urban areas to transfer money to dependents living in rural areas and with both parties having access to mobile phones, this creates a platform for the transfer of funds, thus providing banking services to the unbanked. The major South African banks have identified the need and there has been significant growth in the remittance space, through electronic wallet services.

Peer-to-peer funding platforms and marketplace lending

Lending platforms and crowdfunding arrangements are growing steadily in the South African market, in particular gaining popularity with small to medium-sized enterprises who are seeking funding. Retail and institution based interfaces have been developed by non-bank lending enterprises and the major banks and other financial institutions. In addition to corporate lending, these platforms are also being used for philanthropic purposes (an example being a major bank setting up a crowdfunding platform where individuals can contribute to assisting tertiary level students in paying their fees).

Payment services

In the mobile payment space, there are a number of startups which are receiving good traction from customers in South Africa. These startups offer a number of services, including mobile payment solutions for e-commerce and mobile businesses. There are some startups which are tackling the hugely successful funeral parlor industry, by introducing point of sale (PoS) devices which assist insurers and their clients in keeping track of payments using invoices, especially in rural areas where this this type of insurance is prone to fraud.

Blockchain, smart contracts and cryptocurrencies

The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Cryptocurrency attracted a lot of attention in South Africa during 2017, with significant growth in trade volumes and token values. It has also been announced that the South African Reserve Bank is currently testing regulations with regard to bitcoin and other cryptocurrencies and will be introducing new rules regarding the use of cryptocurrencies in the coming months. The South African Reserve Bank also stated that it will be carrying out feasibility studies regarding the associated technology in South Africa and increasing numbers of South African FinTech startups are being established. According to bitcoinzar.co.za there are two fully licensed exchanges, ICE Cubed and Luno, and the first bitcoin ATM in South Africa has been installed in a Johannesburg suburb. There are more than five other unlicensed bitcoin exchanges which are currently operating in South Africa.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. AI and automated advice tools also impact the banking and private wealth advisor sectors; the implications include decreased human involvement although based on experiences elsewhere, it may be preferable to operate hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of information technology services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of FinTech business targeting this space in South Africa.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform, rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently, products have included:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P)-type structures often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to or rather than, individual investors on a traditional P2P basis.

Issues for startup marketplace lenders

Following the initial incorporation and startup funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate growth of the ongoing lending activities of the platform. As the startup lender will not have an established track record, deposit base or asset pools, the funding structure will often follow the format of a warehouse securitization structure. Origination of new assets will be funded through drawings on a note issuance facility backed by security over the new assets. Each of the new assets will be subject to eligibility criteria determined by reference to the nature of the underlying asset. In order to provide an efficient financing structure, the assets will typically be held through a SPV with origination and servicing provided by the marketplace lender. In order to cover expected losses on the asset pool, the senior facility will be subject to the lending platform maintaining sufficient subordinated capital in the form of equity, or a combination of equity and subordinated debt.

While the funding may be structured through a revolving loan or note program, if there is tranching of the debt this will typically result in the platform being treated as a securitization for the purposes of the European Union Capital Requirements Regulation, with the attendant requirements to hold risk retention and provide appropriate reporting and disclosures.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (e.g., in the case of cryptocurrencies such as bitcoin) or providing an indisputable record, for example, relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether, based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms, which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P)-type structures, often operated through an electronic platform provider as well as crowdfunding and also direct to retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Issues for startup marketplace lenders

Following the initial incorporation and startup funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate the growth of the ongoing lending activities of the platform. As the startup lender will not have an established track record, deposit base or asset pools, the funding structure will often follow the format of a warehouse securitization structure. Origination of new assets will be funded through drawings on a note issuance facility backed by security over the new assets. Each of the new assets will be subject to eligibility criteria determined by reference to the nature of the underlying asset. In order to provide an efficient financing structure, the assets will typically be held through a SPV with origination and servicing provided by the marketplace lender. In order to cover expected losses on the asset pool, the senior facility will be subject to the lending platform maintaining sufficient subordinated capital in the form of equity, or a combination of equity and subordinated debt.

While the funding may be structured through a revolving loan or note program, if there is tranching of the debt, this will typically result in the platform being treated as a securitization for the purposes of the European Union Capital Requirements Regulation, with the attendant requirements to hold risk retention and provide appropriate reporting and disclosures.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database, operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features, such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions, which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another or advanced more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form, or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question, if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security, or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of the underlying technology;
• amount of coin or token that is reserved, or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms, which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Peer-to-peer funding platforms and marketplace lending

The BOT is the authority that supervises and regulates financial business and activities in Thailand. Currently, Peer-to-peer lending and consumer lending eg personal loan, nano finance and pico finance have been regulated in Thailand. The BOT is responsible for supervising the peer-to-peer lending activity whereby it requires the prospective peer-to-peer operator to participate in the BOT’s Regulatory Sandbox and be licensed before operating the peer-to-peer business.

Please see Electronic payments platforms and regulation of peer-to-peer lenders.

Blockchain, smart contracts and cryptocurrencies

The BOT has implemented the FinTech regulatory sandbox (BOT Sandbox) which will enable financial institutions, as well as FinTech companies, to experiment with and develop innovative financial products or services within a well-defined space and duration, under the BOT's supervision.

The main criteria is that the products or services in questions must be the products or services which are under supervision of BOT.  Otherwise, it could not participate in the BOT Sandbox.  Currently, the financial services to be tested in the BOT Sandbox must be (i) relevant to infrastructure or centralised standard or (ii) required by laws to participate in the BOT Sandbox. 

According to the practice guidance concerning the FinTech regulatory sandbox issued by the BOT on 15 March 2019, the financial products or services which can enter into the Sandbox must have the following criteria:

• being financial products / services regulated by the BOT;
• being financial products / services or FinTech innovation using new technology – it could be (i) a new innovation, (ii) different from currently available financial products or services in Thailand or (iii) an innovation which applies new technology to improve efficiency of existing products/services; and
• having any of the following qualifications;
  • being financial products / services which could be developed to be infrastructure or centralised standard for Thai financial sectors which shall be tested together by financial service providers; or
  • being required to participate in the Sandbox by virtue of laws or relevant supervising criteria (e.g. the regulated peer-to-peer lending).

However, if the services are not qualified under the criteria above, it could be apply to be tested under the Own Sandbox scheme.  The Own Sandbox is a separate and independent sandbox of each business operator but still under the monitor of BOT.  Quarter report on progress of the Own Sandbox is required to be submitted to BOT. 

Several FinTech companies have participated and are currently participating in the BOT Sandbox.  According to the publication of BOT, technologies tested under the BOT Sandbox are for example Standardized QR Code, Biometrics (ie facial and iris recognition), Blockchain, Machine Learning and Standardized API, etc.

Initial coin offerings and token-based products

By virtue of the Emergency Decree on Digital Asset Business B.E. 2561 (2018), since 14 May 2018, the Initial Coin Offerings (ICOs) as well as the operation of Digital Assets Business in Thailand have become the regulated activity under the supervision of the SEC. Cryptocurrencies and Digital Tokens are considered as Digital Assets thereunder.

Initial Coin Offerings (ICOs)

The ICOs under the supervision of the SEC refer to the offering of regulated Digital Tokens in Thailand.  Basically, an ICO issuer must be a private or public limited company licensed by the SEC and must offer the ICO through the ICO portals licensed by the SEC.  Currently, while three ICO portals are licensed by the SEC, no ICO issuer has been licensed by the SEC. 

Further, the SEC has prescribed the following types of qualified investors being able to subscribe for the ICO:

• Institutional Investors or Ultra High Net Worth (UHNW) Investors;
• Venture Capital or Private Equity; and
• Other investors who are subject to the capped of offering value as prescribed by the SEC.

Similarly to the securities offerings, a disclosure-based regulation theme is applicable to the ICO whereby a prospectus is required to be submitted to the SEC and effective before the ICO can be made. Nonetheless, certain types of offerings are exempted from being supervised by the SEC (e.g. an offering of Digital Tokens by the Bank of Thailand) or from the disclosure and prospectus requirements (e.g. a private placement of Digital Tokens to limited types of investors).

Operation of digital assets business

The Emergency Decree on Digital Asset Business B.E. 2561 (2018) categorised three types of business operation which are relevant to the digital assets; being (i) Digital Asset Exchange, (ii) Digital Asset Broker and (iii) Digital Asset Dealer.  These three businesses are subject to licensing requirements of the SEC prior to operating its digital assets-related business in Thailand.

To prevent the illegal use of digital assets, the SEC requires the secondary trading or exchange of the digital tokens to be done only through the licensed Digital Asset operators. Besides, in case where the ICO issuer and / or the Digital Asset operators receives cryptocurrencies as remuneration or part of transaction, only the cryptocurrencies tradeable or exchangeable at the licensed Digital Asset operators can be accepted.

Artificial intelligence and robo advisory systems

Currently, there are no particular laws that are specifically intended to apply to the artificial intelligence (AI) and robo advisory systems; and there is no regulatory sandbox exclusively dedicated to AI and robo advisory systems.

However, the SEC has supported the use of technology especially AI and robo advisory systems in the context of securities.  The SEC therefore has cooperated with private sectors to opening an official website under the project named ‘Five Steps to Investment with Confidence’ which is so-called ‘Wealth Advice for All’. This project is aimed to be an introductory platform for investors to easily connect with wealth advisors as licensed by the SEC with less associated investment costs and to advocate long-term financial well-being of Thai nationals.

Certain licensed operators are implementing AI and robo advisory systems when providing investment consultation services. To be qualified as a licensed wealth advisor, the operator must be licensed by the SEC to provide securities/derivatives business and shall also be equipped with reliable systems and personnel in response to the five key concerns of the SEC i.e.:

• exploring and understanding customers;
• constructing an investment portfolio;
• implementing the portfolio according to the asset allocation plan;
• monitoring and rebalancing the portfolio; and
• providing consolidated reports for clients' review.

Please see FinTech products and uses – particular rules.

Data analysis and cloud computing

Currently, there are no particular laws that are specifically intended to apply to the data analysis and cloud computing market; and there is no regulatory sandbox exclusively dedicated to data analysis and cloud computing activities.

There is no specific legal requirement for the use of cloud services. However, a service provider of electronic transactions under the Electronic Transaction Act B.E. 2544 (2001) who opts in to use the cloud services are encouraged to follow the Notification of the Electronic Transaction Committee re: Guideline on Application of Cloud Services B.E. 2562 (2019) (Cloud Guideline) which sets out the fundamental criteria and recommendations when using the cloud services regardless of whether the cloud services are provided by third parties.  Initially, the Cloud Guideline guides on key considerations in several aspects which should be factored when using the cloud services, eg policies and practices of electronic transactions service providers, efficiency of cloud services, security, data management and personal data protection.

Please see FinTech products and uses – particular rules.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• consumer loans; and
• small and medium-sized enterprises lending;

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P)-type structures often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition, to or rather than, individual investors on a traditional P2P basis.

Issues for startup marketplace lenders

Following the initial incorporation and startup funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate growth of the ongoing lending activities of the platform. As the startup lender will not have an established track record, deposit base or asset pools, the funding structure will often follow the format of a warehouse securitization structure. Origination of new assets will be funded through drawings on a note issuance facility backed by security over the new assets. Each of the new assets will be subject to eligibility criteria determined by reference to the nature of the underlying asset. In order to provide an efficient financing structure, the assets will typically be held through a SPV with origination and servicing provided by the marketplace lender. In order to cover expected losses on the asset pool, the senior facility will be subject to the lending platform maintaining sufficient subordinated capital in the form of equity, or a combination of equity and subordinated debt.

Ukrainian law does not regulate securitization. If the funding of the marketplace lending is structured through a revolving loan and includes tranching of the debt, this will not result in the platform being treated as a securitization for the purposes of regulation. Thus, it would neither be required to have risk retention nor provide appropriate reporting and disclosures.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third-party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized, can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another, or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles, the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Although there were several bills registered in the Ukrainian Parliament aimed at creating the regulatory framework for virtual assets and currencies, Ukrainian law still lacks regulation on cryptocurrency. At the same time, use of cryptocurrency is not prohibited or restricted by the state, so Ukraine can be considered a jurisdiction with a neutral approach.

In November 2019 the Ministry of Digital Transformation of Ukraine and Binance, a global cryptocurrency exchange, signed Memorandum of Understanding. The parties agreed to cooperate in the determining of legal status of cryptocurrency and virtual assets in Ukraine and creating of the legal framework that would meet the requirements of the industry.

The Ministry of Digital Transformation also signed Memorandum of Cooperation with Belarusian company Currency.com on developing Ukrainian legislation in the field of IT and crypto regulation using the Belarusian experience.

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P)-type structures, often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds, as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Issues for startup marketplace lenders

Following the initial incorporation and startup funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate growth of the ongoing lending activities of the platform. As the startup lender will not have an established track record, deposit base or asset pools, the funding structure will often follow the format of a warehouse securitization structure. Origination of new assets will be funded through drawings on a note issuance facility backed by security over the new assets. Each of the new assets will be subject to eligibility criteria determined by reference to the nature of the underlying asset. In order to provide an efficient financing structure, the assets will typically be held through a SPV with origination and servicing provided by the marketplace lender. In order to cover expected losses on the asset pool, the senior facility will be subject to the lending platform maintaining sufficient subordinated capital in the form of equity, or a combination of equity and subordinated debt.

While the funding may be structured through a revolving loan or note program, if there is tranching of the debt, this will typically result in the platform being treated as a securitization for the purposes of the European Union Securitization Regulation, with the attendant requirements to hold risk retention and provide appropriate reporting and disclosures.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a peer-to-peer mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features, such as; its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that, once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another, or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of the transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms, which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Recently products have included:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P)-type structures, often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds, as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Issues for startup marketplace lenders

Following the initial incorporation and startup funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate growth of the ongoing lending activities of the platform. As the startup lender will not have an established track record, deposit base or asset pools, the funding structure will often follow the format of a warehouse securitization structure. Origination of new assets will be funded through drawings on a note issuance facility backed by security over the new assets. Each of the new assets will be subject to eligibility criteria determined by reference to the nature of the underlying asset. In order to provide an efficient financing structure, the assets will typically be held through a SPV with origination and servicing provided by the marketplace lender. In order to cover expected losses on the asset pool, the senior facility will be subject to the lending platform maintaining sufficient subordinated capital in the form of equity, or a combination of equity and subordinated debt.

While the funding may be structured through a revolving loan or note program, if there is tranching of the debt, this will typically result in the platform being treated as a securitization for the purposes of the European Union Capital Requirements Regulation, with the attendant requirements to hold risk retention and provide appropriate reporting and disclosures.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a peer-to-peer mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features, such as; its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that, once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another, or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of the transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

In September 2017 the Financial Conduct Authority issued a statement warning the public that 'ICOs are very high-risk, speculative investments' and outlining the potential risks associated with investing in unregulated parts of the financial sector.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms, which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Peer-to-peer funding platforms and marketplace lending

There is no strict definition for marketplace lending given the wide variety of entrants and financing techniques involved. The principal characteristics of new marketplace lenders, however, would include:

• operating from or through a non-bank lending platform established as a specialist corporate or special purpose vehicle (SPV) based structure;
• applying technology to leverage and optimize the lending platform and user experience; and
• connecting borrowers and lenders through the platform rather than applying funding arising from a wider deposit-based relationship.

Marketplace lending is available to address most forms of traditional bank funding products. Products under development are generally understood to include:

• virtual credit cards;
• consumer loans;
• student lending products;
• small and medium-sized enterprises (SME) lending; and
• residential property and commercial property mortgage lending.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support the marketplace lending sector.

How are marketplace lending platforms funding themselves?

Marketplace lending includes peer-to-peer (P2P)-type structures, often operated through an electronic platform provider as well as crowdfunding and also direct-to-retail financing mechanisms. The increase in demand for credit through these marketplace platforms has also been appealing to larger pools of available capital, such as private equity and venture capital funds, as well as institutional sponsors. Funding platforms will now often be backed by institutional finance in addition to, or rather than, individual investors on a traditional P2P basis.

Issues for startup marketplace lenders

Following the initial incorporation and startup funding for a new marketplace lending business, there will be a need to establish funding lines which can accommodate growth of the ongoing lending activities of the platform. As the startup lender will not have an established track record, deposit base or asset pools, the funding structure will often follow the format of a warehouse securitization structure. Origination of new assets will be funded through drawings on a note issuance facility backed by security over the new assets. Each of the new assets will be subject to eligibility criteria determined by reference to the nature of the underlying asset. In order to provide an efficient financing structure, the assets will typically be held through a SPV with origination and servicing provided by the marketplace lender. In order to cover expected losses on the asset pool, the senior facility will be subject to the lending platform maintaining sufficient subordinated capital in the form of equity, or a combination of equity and subordinated debt.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain provides a new approach to holding and authenticating data. It is a database operating through distributed ledger technology in which data is recorded on computers, by way of a P2P mechanism, based on pre-agreed consensus algorithms in the applicable participating network. It is a form of database where data is stored in the chain in either fixed structures called 'blocks' or algorithm functions called 'hashes'.

Each block includes unique features, such as its unique block reference number, the time the block was created and a link back to the previous block. Each block is reviewed by a number of nodes and the block is only added to the database if the node reaches consensus that the block only contains valid transactions. Content includes digital assets and instructions which reflect the transactions and parties to those transactions. The ability to track previous blocks in the chain makes it possible to identify transactions back to the first ever transaction completed, enabling parties to verify and establish the authenticity of the assets in the latest block. This makes blockchain exceptionally accurate and secure.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by all users in the network and verification of any block can only happen through a 'proof of work' process. This process requires vast amounts of computing power, making it practically impossible to insert fake transactions into a block.

As a result, the data is identified and authenticated in near real-time, providing a permanent and incorruptible database sufficiently robust to operate as a store of value (eg in the case of cryptocurrencies such as bitcoin) or providing an indisputable record for example relating to securities transfer.

Blockchain is a decentralized system, created and maintained by users of the network rather than being dependent on any central or third-party intermediary. It may be public and open ('permissionless' or 'unpermissioned') or structured within a private group ('permissioned').

Permissionless blockchains include bitcoin and ethereum, in which anyone can set up a node that once authorized can validate, observe and submit transactions. The identities of the participants are not known (other than the unique and random identities known as an 'address'). Permissioned ledgers restrict participation in the network and only the specific participants are given access and are known within the network. The network is private, and only organizations that have been authorized can participate and view transactions.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions verified within the electronic system in the form of so called 'smart contracts'. These contracts have been converted into code and are then executed and enforced by the blockchain network on the occurrence of an event. This reduces the need for intermediaries to collect, store and act on communicated information.

Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another, or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of the transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

The European Central Bank definition of a cryptocurrency is that it is a digital representation of value that is neither issued by a central bank or public authority nor necessarily attached to a fiat currency, but is issued by natural or legal persons as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin (itself based on the bitcoin platform) although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether based on the ethereum platform and litecoin (these cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging currency).

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are a form of digital currency or token using blockchain technology. ICOs are often a means by which funds are raised for a new blockchain or cryptocurrency venture (the market for ICOs is currently booming). ICOs come in a wide variety of forms and may be used for a wide range of purposes. Some forms of ICOs may be directed at customers or suppliers as a form of loyalty program or a form of access or purchasing power (preferential or otherwise) in respect of assets of the issuer’s business. Other forms may be more focused on raising initial funding. It is essential to examine the legal and regulatory basis for any ICO, as an unauthorized offering of securities is illegal and may result in criminal sanctions in a number of jurisdictions. Legal analysis of the underlying token will determine if it should be treated as a specified investment or form of regulated security or is more appropriately a form of asset that is not itself subject to the regulatory regime.

Typical attributes provided by tokens will include:

• access to the assets or features of a particular project;
• the ability to earn rewards for various forms of participation on the platform; and
• prospective return on the investment.

Key aspects to consider will include the:

• availability and limitations on the total amount of the tokens;
• decision-making process in relation to the rules or ability to change the rules of the scheme;
• nature of the project to which the tokens relate;
• technical milestones applicable to the project;
• basis and security of underlying technology;
• amount of coin or token that is reserved or available to the issuer and its sponsors and the basis of existing rights;
• quality and experience of management; and
• compliance with law and all regulatory requirements.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

The Abu Dhabi Global Markets free zone has set out guidance on its approach to ICOs and virtual currencies under the Financial Services and Markets Regulations (see here). The Dubai Financial Services Authority, the financial regulator of the Dubai International Financial Centre, has stated that it does not regualte any of these types of offerings and that 'these offerings should be regarded as high-risk investments'.

It should be noted that any promotion of securities in the UAE (outside of the financial free zones) will require registration with the Securities and Commodities Authority (SCA) unless a qualified investor exemption applies (which does not include individuals). Public offers of securities in the UAE are outside the scope of our answer to this question.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors' are software tools driven by artificial intelligence (AI) that provide a variety of investment advice services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms, which produce optimized outcomes around specified parameters. Although generally of application in the asset management sector, AI and automated advice tools also impact in the banking and private wealth advisor sectors; the implications include decreased human involvement, although recent trends have included a growth in popularity of hybrid structures which combine AI and human inputs.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.

Online lending (e.g. peer-to-peer funding platforms and marketplace lending)

A variety of online lending and similar platforms currently exist in the US. While each of these platforms have distinct business models and focus on different markets and asset classes, they can most easily be categorized as either 'balance sheet lenders' (i.e. those that invest their own money in the assets they originate) or 'peer-to-peer (P2P) lenders' (i.e. those that create and manage a platform on which investors in credit products can provide credit to either individuals or businesses seeking credit).

Balance sheet lenders make money the old-fashioned way – by earning yield on the products they originate, which after deducting losses, cost of funds and administrative costs, should result in a profit.

P2P lenders on the other hand, typically do not take balance sheet risk and instead earn a fee for every transaction executed on the platform. Both models use technology extensively and in novel ways for both customer acquisition, underwriting and portfolio management. Also, online lenders generally do not have a bank charter, and thus are unable to take deposits to fund their business (although some online lenders recently applied for an Federal Deposit Insurance Corporation (FDIC)-insured industrial loan company charter).

Online lenders address most forms of traditional bank funding products. Recently, products have included:

• credit cards;
• consumer loans (secured and unsecured);
• merchant cash advances;
• student lending products;
• small business lending;
• residential property and commercial property mortgage lending; and
• multiple forms of factoring.

It is likely that the volume of lending in these product areas as well as further and additional product areas will significantly increase over the coming years, as financing becomes more readily available to support this sector.

How are marketplace lending platforms funding themselves?

Balance sheet online lenders, without a bank charter, raise debt and equity from both private and public sources to finance their asset originations, and also establish whole-loan sale programs whereby institutional investors purchase loans shortly after origination (thus earning the originator an immediate premium on the asset sold and relieving the originator from the burden of financing the asset through maturity). As these balance sheet online lenders are becoming more mature, they are also accessing funds via the traditional securitization markets, in both rated and unrated deals.

P2P lenders, on the other hand, originally conceived of a model whereby the 'investor side' of the platform would provide all necessary financing. However, as the P2P models have evolved, many platforms have become more reliant on the stability and cost-effectiveness of institutional financing, often executed through committed whole-loan sale programs whereby the institutional investors agree to buy newly-originated assets meeting certain specified criteria either on a one-off basis or on a periodic schedule. These investors then leverage the assets themselves in multiple ways, including with traditional warehouse and term financing and through the securitization markets.

Issues for startup online lenders

Most startup online lenders initially raise equity to establish the business and fund initial originations, and thereafter raise private debt financing as they continue to build the business. Most of these debt facilities are structured as special purpose vehicle (SPV) financings, whereby the newly-originated asset is sold to the SPV (a subsidiary of the originator) and then the lender makes a loan to the SPV at a pre-agreed percentage of the principal balance of the asset (for instance, 85%). Thereafter, the SPV is required to maintain the 'borrowing base' at all times, lest it default on its obligations to the lender. First facilities tend to be quite expensive and advantageous to the lenders; but as the originator grows, and its performance track record increases, the cost of funding normally drops over successive debt facilities.

Depending on the model used, the particular asset class, and whether the online lender partners with a bank, the lender must also consider any license or authorization to lend that applies. Such requirements are driven by the state or location of the borrower in most cases, which unfortunately dictates a fairly extensive multi-state assessment for online lenders seeking to provide credit on a national basis.

Blockchain, smart contracts and cryptocurrencies

What is blockchain?

Blockchain is a distributed ledger technology in which data is recorded on a P2P network, using pre-agreed consensus algorithms to process changes in the data. Data is stored in 'blocks' that, as transactions are processed, connect to form a 'chain'.

Specialist users on the system apply advanced computing software to identify time stamped blocks, verify the accuracy of the blocks using sophisticated algorithms and add the verified blocks to the chain. As the number of participants increases, the replication of the data over a wider base makes it harder for any person to alter the data in the chain. Any attempted addition or modification to the information on a block needs to be approved by a consensus of the users in the network following a verification process that requires significant effort and expense, which makes it practically impossible to insert fake transactions into a block.

What are smart contracts and Decentralized Autonomous Organizations (DAOs)?

Developments in blockchain are also providing an ability to transfer and rely on instructions set forth in so-called 'smart contracts'. Smart contracts are essentially pre-written computer codes which are stored and replicated on distributed ledger platforms such as blockchain. Execution takes place over the network, eliminating the need for intermediary parties to confirm the transaction, leading to self-executing contractual provisions. These contracts can be as simple as moving a balance from one account to another, or advanced, more-complex interactions with the outside world using so called 'Oracles'. With Oracles the contract code consults with a service outside of the blockchain network to make a decision. This may entail receiving a confirmation that an event has occurred, such as payment, which automatically executes a further step in the contract, such as the transfer of an asset, which might be in digital form or by delivering instructions to a person or warehouse to release the asset for delivery.

DAOs are essentially online, digital entities that operate through the implementation of pre-coded rules. These entities often need minimal to zero input into their operation and they are used to execute smart contracts, recording activity on the blockchain. DAOs can be particularly challenging to regulate, depending on their software engine, the nature of the transactions they are completing or other unique features. Questions of ownership and responsibility for resulting acts of DAOs can also be brought to question if any technical issues arise with their operation.

What is a cryptocurrency?

Cryptocurrency is the common name given to digital representations of value. Unlike fiat currencies, cryptocurrencies are not created or sanctioned or backed by any governmental entity. Instead, they are usually issued by entities as a means of exchange and can be transferred, shared or traded economically. The oldest and best-known cryptocurrency is bitcoin, although many other cryptocurrencies now exist. For example, the most widely-known alternatives to bitcoin include ether and litecoin. Cryptocurrencies are now actively traded with a large developing infrastructure for holding, pricing and exchanging them.

Initial coin offerings and token-based products

What is an Initial Coin Offering (ICO)?

ICOs are offerings of digital currency (tokens) for sale to the public or to a set of users, often as a means of raising funds for a new blockchain or cryptocurrency venture. ICOs vary in structure and purpose. Some ICOs offer tokens to customers or suppliers as a form of loyalty program, while others offer network users access to the network or purchasing power as to the issuer’s business. It is essential to examine the legal and regulatory basis for any ICO, as tokens may constitute securities, commodities, money transmission devices, or otherwise raise legal concerns.

The nature of the business and the purpose and structure of the token offering will typically be set out in a white paper available to potential purchasers.

The Securities and Exchange Commission and several other governmental authorities in the US are actively monitoring ICOs.

Artificial intelligence and robo advisory systems

Automated financial advice tools, also known as 'robo advisors', are software tools driven by artificial intelligence (AI) that provide a variety of investment advisory services, from portfolio selection to personal finance planning. The systems are generally operated on a platform/personal dashboard basis; a user can input a set of personalized data to be processed by the AI algorithms, which produce optimized outcomes around specified parameters. Robo advisors are particularly important to investment advisors and broker-dealers, including those serving younger clientele. The Financial Industry Regulatory Authority (FINRA) reported in December 2016 that 38% of investors between the ages of 18 and 34 have used robo advisors, although their popularity has been expanding among all age groups and classes of investors.

Robo advisors in the US must comply with the securities laws applicable to any other type of investment advisor, including state or federal registration obligations. These authorities have published various guidance concerning robo advisors, both for the benefit of investment advisors offering robo-advisor services and their clients. Key considerations relevant to anyone involved in this space include:

• decreased human involvement;
• the information provided to create recommendations;
• the approaches (from style to products to risk profile) that the robo advisors use; and
• the fees charged.

Data analysis and cloud computing

Cloud computing enables delivery of IT services through internet-based tools and applications, rather than direct connection to a physical server. Cloud-based storage makes it possible to save masses of data to remote servers, accessible through the internet rather than by way of a physical connection. With the vast data processing and storage capabilities offered by cloud computing technology and virtually no infrastructure barriers to entry, there are a number of applications in building and running FinTech businesses and the technology has had a significant impact in recent years.