Fintech: ahead of the pack

Written by: Tim Green Posted: 04/07/2019

CITY_fintech illoFor decades, the Channel Islands have punched well above their weight in financial services. Can their test bed environment help them stay ahead as the sector embraces radical digital innovation?

In 2014, the Bitcoin world was in trouble. The world’s biggest crypto exchange, Mt Gox, had just collapsed, taking millions of dollars of investors’ money with it. 

A year earlier, the FBI had shut down the online marketplace Silk Road, on which criminals used cryptocurrencies to buy and sell drugs and other illegal goods. Clearly, Bitcoin was bad news. It was regarded as an unregulated wild west. A haven for cheats and scammers. 

And yet, in the middle of all this, the Jersey Financial Services Commission gave the all-clear to the world’s first regulated Bitcoin fund, GABI (the Global Advisors Bitcoin Investment Fund). The move meant major investors such as pension and insurance companies could invest safely in Bitcoin for the first time.

This is one of many audacious crypto-related decisions made by the Channel Islands’ financial leaders. In 2018, The International Stock Exchange (TISE) approved the first listing on a regulated exchange of notes digitised on a blockchain. 

Digital bravery

Why would the Channel Islands take such a brave line on crypto? Simple. Its leaders know that digital innovation is the future of virtually every industrial sector. But they also know that finance is a little different. Why? Because of the part played by regulation. And it’s here – in compliance – that the islands have a huge advantage over other jurisdictions. 

Tony Moretta, CEO of Digital Jersey, says this is due to a unique set of circumstances. “Obviously, Jersey has long been home to major international financial services companies and private wealth management funds. So we have thousands of people here with expertise and the experience,” he says. “But the islands are also small and independent. We can make our own decisions, and we can make them fast. That has led to a forward-thinking regulatory regime.” 

Digital Jersey has already delivered a number of wins. Earlier this year, it facilitated the launch of Binance Jersey, an exchange that lets users buy and sell Bitcoin and Ethereum using pounds and euros. 

Michael Bateman, Head of Bespoke Development at Guernsey-based tech provider C5 Alliance Group, appreciates the achievement. “Digital Jersey has sold a digital vision to Jersey’s government and associated firms. Its relationship with Binance is a good example of the work it does in promoting the island,” he says.

Global change

Island regulators recognise the need to be bold or risk being left behind. Fintech innovation is sweeping across the traditional financial services space. Consumers all over the world are adopting new ways to manage their money. 

In China, for example, mobile payments rule. Chinese consumers do most of their shopping from within messaging apps such as WeChat. Last year alone, the country’s customers are reported to have made 60.5 billion mobile payment transactions worth $41.3trn.

Meanwhile, in Europe, new digital-only challenger banks are siphoning customers away from the traditional incumbents. Germany’s N26 is now trading in 24 markets and has tripled its customer base during the past 12 months to more than 2.3 million customers. 

Island leaders are mindful of these changes. Jersey alone has 26 banking licences, which is why many of the world’s leading banks (including the big five UK retail banks) have an operating presence there. The takeaway is self-evident: if the islands want to maintain their traditional strength in financial services, they need to prepare for the upheaval to come. 

And the nature of this upheaval? According to EY, it will centre on six main areas. In its 2018 report Fintech in the Channel Islands, it identified the biggest opportunities as blockchain, payment tech, regtech, insuretech, alternative financing and robo advice. 

Island test beds

To experiment with these ideas, Jersey and Guernsey have established their own test beds. The Jersey Sandbox and the Guernsey Innovation Soundbox give small companies the ability to try out new ideas without the high-cost and complex legal, government and regulatory barriers they face in other cities or markets.

Essentially, this is possible because the islands are small. They have the attributes of much larger countries but in a compact, campus-like space. It helps too that innovators can test their ideas on a population that is technologically advanced. Jersey is home to 100,000 people, all of whom have access to one gigabit fibre broadband.

CITY_fintech illo2Meanwhile, there are three 4G networks delivering 118 mobile subscriptions per 100 inhabitants. 

As Moretta says: “We’re in the ‘goldilocks’ zone. We have an advantage in infrastructure, and a long history of financial services expertise. Basically, we can do the ‘tech’ bit but we also have a right to play in the ‘fin’ bit.”

Amy Bryant, Deputy CEO of Jersey Finance, agrees – which is why her organisation held a Fintech Demo day earlier this year. “There are 13,760 people working in financial services here,” she says.

“There will be some employees of big firms who leave to start their own ventures. We want to encourage that. We want Jersey to be the easiest international finance centre to do business with remotely, in a digital world. We have the reputation, the access to compliance, the technical infrastructure and the attitude.”

Unsurprisingly, most of the innovation to date has been in regtech. For larger financial institutions with substantial compliance overheads, the ability to replace manual processes with automation is compelling. Already, a small number of island start-ups have made breakthroughs in the space. 

James Fox, Partner at law firm Appleby, explains: “Jersey is a nine by five-mile island with the 10th fastest broadband in the world. That’s pretty amazing. It makes the island a great test bed for fintech communities in London, New York and San Francisco – especially in KYC [Know Your Customer] and onboarding.”

Another promising area is bots and automation. Many banks around the world are already experimenting with robot agents that can converse with customers in natural language – via text or live web chat. The next phase could be giving customers their own bots too. In theory, these digital agents could seek out the best deals and thrash out contracts with other bots.

Guernsey is taking a lead in this space. In February 2019, it introduced a draft ordinance under the Electronic Transactions Law to offer greater certainty around ‘interactions between an electronic agent and a natural person’.

Fiona Le Poidevin, CEO of TISE, says the law could help position Guernsey as the jurisdiction for those who want to explore smart contract technology. “The legislation basically looks at what happens in legal terms when bots talk to other bots. It might be a world first,” she says.

It all links back to how technological automation can replace inefficient paper and manual processes. David Brown, Director of Client Solutions at Jersey-based Ocorian, is an expert in this robotic automation. He says: “There will always be a need for due diligence and the tracking of financial data. We’re working on these ideas, which I think will transform finance. And I think Jersey is a great place to do it.”

Another area in which the islands have taken a lead is initial coin offerings (ICOs), which replace traditional stocks and shares with electronic tokens. But they can be pretty controversial because many scammers have exploited the regulatory uncertainty around ICOs to rip people off.

But this doesn’t make ICOs inherently criminal. Dave Birch, a renowned payments expert and Digital Jersey’s Fintech Adviser, explains why. “A lot of people are dismissing the token ICO marketplace. Yes, it’s full of criminals. But the regulated market that comes out of the other side could be vast – because ICOs are a radically more efficient way of transacting in some corporate spaces.”

Island regulators recognise this. It’s why the Jersey Financial Services Commission published a guidance note for ICOs in 2018. The island has since been the base for a number of successful offerings.

Cooperation, too

Clearly, all of these ‘firsts’ are sending a message to fintech communities in other countries: come to the Channel Islands. But regulators know that they are not purely in competition with other jurisdictions; cooperation is called for too.

It’s why the Guernsey Financial Services Commission was one of the founder members of the Global Financial Innovation Network (GFIN) – a ‘global sandbox’ that makes it easy for fintechs to talk to regulators in multiple countries. There are currently 29 other regulators in GFIN, including the UK’s Financial Conduct Authority and the Hong Kong Monetary Authority.

Ultimately, the islands need to be included in these conversations. After all, the edgy start-up asking for regulatory advice today could be the established giant applying for a banking licence tomorrow. 

Fintech opportunities and regtech start-ups

Blockchain – This offers a new way of recording financial transactions (and other asset movements) using a distributed digital ledger. Blockchains keep records that are immutable and transparent – and offer an alternative to traditional intermediaries
Payment tech – Changing the way people pay via challenger banks, mobile and cryptocurrency
Regtech – Using technology to make it easier and faster for companies to meet regulatory requirements
Insuretech – Applying new tech and business models to insurance – from in-car ‘black box’ driving monitors to peer-to-peer micro-insurance
Alternative financing – Financing options available outside the world of regulated banks and capital markets
Robo-advice – The use of artificial intelligence-powered bots to handle financial transactions and investment plans

Regtech start-ups in the Channel Islands

KYC Global – KYC Global develops data analytics software that helps companies meet their anti-money laundering compliance requirements. More than 700 businesses, regulators and law enforcement agencies use the technology to combat financial crime. 
Elian – Elian, now owned by Intertrust, has developed an ID Check app, launched in 2014, which helps users simplify parts of the Know Your Customer (KTC) process.
Atam – Atam specialises in kiosks, which use biometrics to identify users. Banks and telcos can use them to support 24-hour self-service.
Bank Global – Bank Global helps banks automate workflows and processes.
ID Register – This Guernsey company offers an online platform that improves the KYC process for onboarding investors.

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