debt

May 15 2021

Traditional finance has much to learn from new entrant DeFi

Incumbents in traditional capital markets, as well as new entrants looking to capture market share, should heed the innovations within the crypto ecosystem collectively known as decentralized finance, or DeFi. These innovations present a model for the direction that traditional capital markets are likely to take in the coming years as regulation catches up with the capabilities of distributed ledger technology, or DLT, and as the technology itself is refined through “in-the-wild” usage.

Decentralized exchange protocols, also known as automated market makers, or AMMs, are one of these innovations that has been widely adopted in the crypto space.

Real-time settlement is a game changer

Right away, we can see that with AMMs, trades are settled in near real-time. Compare this with the two days (T+2) it takes to settle most liquid securities in today’s advanced capital markets. The near real-time settlement of AMMs brings two key benefits: reduced counterparty risk and improved balance sheet management.

Financial institutions involved in capital markets must reserve cash on their balance sheet to cover their exposure to the risk of non-delivery by their trading counterpart. The reserve requirements are defined by the parties in the trade and, until a transaction is settled, they must tie up cash on their balance sheet to compensate for the risk. With the near real-time clearing and settlement enabled by DLT infrastructure (demonstrated by DeFi protocols), the reserve requirements are a fraction of the amount required to hold in reserve with two-day clearing and settlement. If AMM-like protocols could be adopted in traditional capital markets, the vast majority of capital tied up on the balance sheet today could be put to economic use in the capital markets, turning an opportunity cost into economic gain.

Adopted at a large enough scale, real-time settlement also has the power to reduce systemic risk. Since the 2008 financial crisis, in response to regulations aiming to reduce the risk of systemic failure, large global central counterparties, or CCPs, were increasingly adopted as intermediaries. While CCPs deploy complex risk mitigation strategies, they have now become interconnected to the point that they exacerbate the risks they were meant to alleviate. In fact, according to a 2018 report from the Financial Stability Board, the 11 largest CCPs are connected to between 16 and 25 other CCPs, and the two largest account for “nearly 40% of total prefunded financial resources provided to all CCPs.” The default of a single CCP will adversely affect most accounts, and could result in cascading defaults even worse than those associated with the 2008 financial crisis.

Lower rent-seeking and accelerated bootstrapping

Beyond near real-time settlement, decentralized exchange protocols (AMMs) reduce operational costs and lower rent-seeking through disintermediation. The infrastructure that makes up the exchange is reduced to code and distributed across participants, with the participants themselves providing the needed liquidity. The latter feature has the power to bootstrap capital formation and democratize access to capital — which is exactly what we are now seeing in the burgeoning crypto-native AMM space.

AMM protocols have exploded in popularity in the “Wild West” of cryptocurrency markets, where self-custody and anonymity are the default. By April, spot volume traded through AMM protocols exceeded $164 billion in a single month, representing greater than 10% of the total spot trade volume in the wider cryptocurrency markets.

It’s not just exchanges

Other DeFi products have also been gaining steam over the last year. One example is lending, where users lock up digital assets in collateral pools where they can be borrowed from. Compared with traditional lending, automated management of custody, settlement and escrow reduces the rent charged to perform those actions. Debt outstanding in DeFi lending (a key metric for tracking adoption) rose from $500 million in mid-2020 to exceed $25 billion by May 2021, led by the Compound, Aave and Maker protocols.

Beyond lending, more complex derivative instruments including options, futures and synthetic assets are being deployed. In short, DeFi protocols are rapidly forming a mirror-image version of traditional capital markets, but one with significant advantages.

What does this mean for traditional capital markets?

Of course, DeFi — as it currently exists in the crypto world — is noncompliant from a regulatory standpoint, due to its pseudo-anonymity as well as the reliance on self-custody. However, this fact should not dissuade traditional finance incumbents and startups. There’s already a clear roadmap for how innovations in the DeFi space can be adapted to traditional capital markets infrastructure.

Big players in the traditional capital markets have already recognized the shift and are making moves. For example, they are aggressively piling into the digital asset custody game. Take for instance, Standard Chartered’s investment in Switzerland-based digital asset custody solution provider Metaco, which just closed out a twice-oversubscribed $17 million Series A.

What’s more, a number of forward-thinking jurisdictions have already set up regulatory sandboxes, encouraging experimentation and innovation with DLT-based solutions for capital markets. Examples include the Monetary Authority of Singapore with its FinTech sandbox and Sandbox Express, Europe’s regulator sandboxes and innovation hubs for FinTech, and Saudi Arabia’s Capital Market Authority’s FinTech lab and the ADGM RegLab in Abu Dhabi.

Out of these sandboxes, a growing number of new entrants are leading the way. Singapore-based regulated digitized securities platform iSTOX graduated from the MAS’ FinTech Regulatory Sandbox. This made it one of the first DLT-based capital market platforms to be approved and licensed by a major regulator.

ISTOX closed a $50 million Series A in January, bringing investments from a number of Japanese state-owned entities, including the Development Bank of Japan and JIC Venture Growth Investments, the venture capital arm of the Japan Investment Corporation. Such investments are another strong signal that capital markets incumbents see DLT-based infrastructure as a winning play.

The opportunity

Naturally, with a complex and structurally critical system such as modern capital markets, changes will be incremental. Consider the example of custodians, which are legally and practically entrenched in the structure of capital markets. It will likely take a decade before disintermediation of custodians can occur at scale since 1) regulations need to change and 2) DLT-based market infrastructure needs to be developed, tested and broadly adopted, as is stated in the report dubbed “Opportunities for Blockchain Technology in Capital Markets.”

This means that there is plenty of opportunity for incumbents and new entrants alike to establish themselves in the present-day world of DLT-based capital markets. For forward-thinking traditional finance players, now is the time to make moves.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Matthew Van Niekerk is a co-founder and the CEO of SettleMint — a low-code platform for enterprise blockchain development — and Databroker — a decentralized marketplace for data. He holds a BA with honors from the University of Western Ontario in Canada and also has an international MBA from Vlerick Business School in Belgium. Matthew has been working in fintech innovation since 2006.

Traditional finance has much to learn from new entrant DeFi

Source

May 13 2021

UK Fintech Startup ilumoni Acquires £1.2M in Seed Funding, Receives FCA Authorization

ilumoni, a Fintech app that aims to assist consumers with borrowing, has secured £1.2 million in an over-subscribed seed funding round. ilumoni has finalized its round after introducing the Beta version of its app earlier this year.

ilumoni is a “purpose-led,” AI-enhanced Fintech solution provider that previously acquired £455,000 in capital through pre-seed funding. The company has also rolled out the initial build of the first version of its app. In January 2021, the app reportedly received full authorization from the UK‘s Financial Conduct Authority (FCA). The app has also managed to attract its first beta users.

The free-to-use app assists consumers with better understanding and managing how they borrow funds. ilumoni aims to offer rich, personal insights into how people borrow and pay back money, with complete visibility of what they might owe, including how long it could take to make repayments and how much their borrowing will end up costing them in interest. These features are reportedly combined with prompts and future scenarios that consumers can engage with to determine repayment amounts or alternative products that might cost less in terms of interest.

This round of investment was over-subscribed. It has managed to attract 20 other angel investors as well. The capital acquired should help with taking the product to market. A general App and Play Store release are planned for later in 2021. Early adopters may act as beta users of the app through the official ilumoni website.

ilumoni has appointed investor James Eden and current investor Simon Moran to its board of (non-executive) directors.

Eden stated:

“While there are many emerging tools that champion consumers’ financial degrees of freedom, there aren’t any that provide an independent view of borrowing and debt, despite the impact it can have on people’s financial and mental wellbeing. The purpose behind ilumoni, level of innovation and credentials of the team were more than enough to convince me this was an investment worth making. So much so that I am delighted also to be joining the board.”

Ilumoni CEO, Gary Wigglesworth, remarked:

“We’re thrilled to have such a ringing endorsement of ilumoni with an over-subscribed funding round. There is a huge opportunity to help people to borrow well and it’s more important now than ever.”

The FCA reports that more than 50% of all UK adults have been paying interest on their borrowing, increasing to nearly two-thirds or 66% of working age adults. Recent stats from StepChange reveal that over 40% of consumers have reported a negative change in their circumstances since the COVID-19 outbreak.

Wigglesworth added:

“Many borrowers need to manage their debt better, yet there is very little help available until they’re faced with formal debt management, such as IVAs. As with anything, prevention is better than cure, and we believe in better borrowing for everyone. ilumoni provides a tool that not only demystifies borrowing but provides practical ways to relieve the stress of debt and reduce how much it costs. We can’t wait to show people how, very often, small changes can make a big difference, and encourage them to borrow well.”

The FCA study further noted that almost 60% (30.6 million) of UK adults are overwhelmed by or “overconfident” in their financial numeracy; 45% of 18-24 year-olds say their financial knowledge is fairly low (an increase from 1 in 3 back in 2017).

Wigglesworth also mentioned:

“Let’s face it, for most of us, calculating the cost of your borrowing and making sure you pay back optimally on the best deals is neither easy nor a fun way to spend your time. And we now expect young adults to emerge from school with financial literacy skills, yet they have no frame of reference. We want to change that and give people the tools to help them manage their borrowing, so that they can spend time on the things they want to do, knowing their borrowing is under control.”

Source

May 07 2021

Government Spending Means Investors Should Seek Hedges

This week I came across a statistic that shocked me. It turns out that 34% of all US income currently comes from the government. Here’s a chart from an article on ZeroHedge showing the rise of government “transfer payments” to citizens.

I just can’t believe that more than a third of the entire nation’s income is currently dependent on the federal government. That number includes stimulus checks, unemployment benefits, welfare, social security, etc.

Many people think that once the COVID-19 crisis is over, things will return to normal. But I don’t think so. Back in the 1960s, only around 7% of all income came from the government. That figure had grown to around 17% before this most recent crisis began. The pandemic merely accelerated a trend that was already in place.

Once a government benefit is in place, it’s very difficult to cancel it. We seem destined to enact “universal basic income,” where everyone gets a monthly stipend.

Workers Not Rejoining The Workforce

One of the most troubling aspects of all of this is the unintended consequences. When you give people just enough money to get by, there’s the risk that some of them will lose their motivation to work. What’s the point in working when you can collect almost the same paycheck by not working?

Now that the crisis is winding down and many are vaccinated, companies are having trouble hiring. Bloomberg just ran a feature article about this “Job Paradox.” Here’s an excerpt talking about how some economists view the situation.

“…the labor force participation rate remains well below pre-pandemic levels…

And anyone who previously made less than $32,000 per year is better off financially in the near term receiving unemployment benefits, according to economists at Bank of America.“

Other reasons for people not returning to work include looking for jobs with benefits and jobs with a guaranteed number of minimum hours. Needless to say, I am extremely sympathetic to all the people put out of work by COVID-19. It’s an awful thing, and we do need to support these people until they can return to work. I am, however, also concerned about the direction we’re headed with all of this.

We’re going to have to print money to pay for all these programs — and that doesn’t happen without consequences. I think we’re likely to see stagflation (slow growth and high inflation) that could last a while.

I don’t really see any way to avoid what’s coming. More spending, more debt, more inflation. This, in short, is why investors need hedges.

Source

Apr 15 2021

Liquity Protocol attracts $1B TVL in just 10 days

The team behind Liquity Protocol — a DeFi project launched on April 5 — has attracted $1 billion worth of locked up value according to data from Dune Analytics.

From $0 to $1B TVL in 10 days

Here’s some charts highlighting Liquity’s growth so far: pic.twitter.com/qpSzRp0gZs

— Liquity (@LiquityProtocol) April 15, 2021

The Pantera Capital-backed Liquity is a Swiss-based decentralized and governance-free lending protocol that offers interest-free loans against Ethereum locked as collateral, with users required to maintain a minimum collateral ratio of 110%.

Loans are paid out in the protocol’s algorithmic stable coin LUSD, which is pegged to the value of USD at a one-to-one ratio. The protocol automatically generates LUSD to meet user demand, and so far has minted a supply of 480 million stable coins, with more coins being minted than burned each day.

The loans are secured by the protocol’s Stability Pool that acts as a source of liquidity to repay liquidated debt, and also by fellow borrowers collectively acting as guarantors of last resort. Users can earn money through the protocol by staking liquidity and earn revenue from issuance fees in LUSD and redemption fees in ETH.

Data from the mammoth 10-day run published via DuneAnalytics revealed that borrowing demand has rewarded stakers so far, with an average of roughly $240,000 of fees generated per day on the protocol between April 12 and April 14. The total staked amount edged past $720,000 on April 15, and the majority of users are keeping within a collateral range between 150-250%.

On March 29 Cointelegraph reported that the Liquity Protocol had closed its Series A funding round led by Pantera Capital with a $6 million investment, which included additional contributions from companies such as quantitative investment firm Alameda Research.

The decentralized finance protocol sector continues to push past its all-time highs, with data aggregator DeFi Llama showing that there is now $123.33 billion worth of total locked-up value in DeFi protocols as of today. In its short lifespan, the Liquity Protocol has pushed itself up to rank 26 in the top 100 DeFi protocols with $1.06 billion in TVL.

Liquity Protocol attracts $1B TVL in just 10 days

Source

Apr 15 2021

Leading UK Fintech Firms Now Working with PwC to Streamline Digital Financial Services with AI, Data Analytics

Ten of the United Kingdom’s leading Fintech companies are now working with Big Four auditing firm PwC in order to showcase how the future of banking will focus on both collaboration and innovation, along with greater personalization.

After 3 years of ongoing development, the 10 Fintechs have managed to contribute to the company’s “Tysl” ecosystem which includes various solutions related to software, automation, AI, data management and analytics.

These solutions aim to make it easier or more convenient for clients to open new bank accounts, obtain specialized financing services, move house and digitally sign official documents.

By leveraging an API-powered approach, which lets software apps communicate with each other, Tysl has enabled these firms to work cooperatively and innovate together with PwC to create a banking tech proposition that helps organizations with significantly enhancing performance across several different measures.

This includes dealing with complex customer or user experience journeys like advanced Customer Relationship Management (CRM), Know Your Customer (KYC), Credit Decisioning, and in life account and loan servicing across several key areas such as mortgages, savings and corporate lending.

By leveraging Tysl, PwC can effectively develop all-digital solutions through an innovative, affordable, and user-centric online lending platform. This can help the company’s customers with enhancing their customer-facing business operations and improve products and services in order to meet the speed and multi-channel expectations required by companies today.

James Morgan, Lead Partner on Tysl stated:

“Banking is changing, people expect more and require personalised digital interactions. Based on the needs and expectations of tomorrow’s customers, we have developed our Tysl platform. This is helping our clients reach new customers, upsell and grow topline revenue by delivering enhanced capabilities whilst significantly reducing the costs of servicing the client from onboarding to in life servicing.”

The companies or businesses that are now integrated with the Tysl platform include:

Mambu – is a software-as-a-service or SaaS financial services platform supporting innovation in banking, lending, and – a Cloud-native alternative to more traditional core banking systems.

Yoti – is a global identity platform that makes it more seamless and safer for banking clients to prove who they are via ID verification and biometrics

Kompli Global – created a remote due diligence solution that harnesses artificial intelligence and “human expertise” to provide intelligence on organizations and their workers.

DueDil – is an insights provider assisting financial services organizations and insurers with a better understanding of their client base to handle digital or online onboarding, manage compliance, risk, and in-life monitoring.

Just Move In – provides a home setup experience for people moving home that arranges essential services including council tax, insurance, and broadband.

SignNow – is a legally binding eSignature application, allows users to create and complete legally binding electronic signatures on any device.

Codat – connects the tools and services that small businesses need for their operations to their financial service providers and takes care of the “heavy lifting” of those integrations.

Flexys – is a specialist tech firm focused on enhancing the value and performance of debt management and collection systems with a low-code, Cloud-native platform.

Saltedge – develops PSD2-powered solutions that are used by Fintech firms, banking institutions, and other financial institutions across the globe. The company provides connectivity to over 2500 banks across Europe for data aggregation and payment initiation capabilities – through a single API.

Credit Kudos -an open banking credit reference agency that uses real-time financial behavior to “measure creditworthiness” and “affordability” to assist lenders when unwriting consumer and commercial loans.

Lendingmetrics – Auto Decision Platform (ADP) is a decision engine environment that may be applied across “unlimited” brands, products or lending journeys under a single license and offers a comprehensive (no-code) editor, helping non-technical staff to make real-time changes to credit risk logic

Gazeal – enables the seller of a property to provide key details required to meet the estate agent’s Consumer Protection Regulations requirements, and, as a Licensed Provider of the Law Society, all of the requirements of the Conveyancing Quality Scheme. By using Gazeal’s reservation service, it will “almost” completely eliminate abortive transactions.

Source