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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

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May 04 2021

Uppsala Security Conducts First Virtual Assets AML Training Program for South Korean Government Agency Compliance Officers

Uppsala Security has reportedly conducted the very first “Virtual Assets AML Training Program” for partners and government agency compliance officers.

Uppsala Security, the provider of tools for Crypto Risk Management and Cybersecurity, revealed on May 4, 2021, that it has begun its Virtual Assets AML Training Program via the Crypto Incident Response Center (CIRC).

As mentioned in the announcement:

“The Training Program was initiated as a consequence of the implementation of more exigent special law revisions in South Korea beginning with March 2021. Government agencies and Virtual Asset Service Providers (VASPs) attended the training program and already obtained certified licenses.”

Uppsala Security also noted that at the end of last month, Park Jung-sup, Senior Researcher at the Center for Virtual Asset Damage Response (CIRC), had carried out a 3-day training program for Compliance Monitoring Officers of government agencies in its Korean branch office.

The training covered the following key areas:

Basic understanding of blockchain-based virtual assets suspicious transactions
Analysis of the flow of stolen funds and the suspected wallet
Improvement of tracking capability and real case practice

As noted in the announcement, the courses are divided into UCCA (Associate), UCCP (Professional) and UCCE (Expert), “depending on the training’s level of depth, and upon the training’s completion, trainees can also obtain an Uppsala Certified Cryptocurrency Incident Analysis certificate and license.”

A representative of the Coin&Coin Exchange, which has signed an AML contract with Uppsala Security and also took part within the CIRC training, stated that this was a good opportunity for them to gain an understanding of why AML solutions “specializing in virtual assets are important in order to comply with the special law revision.”

The representative added:

“We are looking forward to learning how to use Uppsala Security’s complex product suite for the swift tracking of alleged cases and to write STR’s evidence for suspicious transactions in next quarter’s training.”

Patrick Kim, CEO of Uppsala Security, remarked:

“I understand that the Korea Federation of Banks recently distributed a draft of ‘Guidelines for Issuing Real-Name Accounts’ to each bank in South Korea, including information on identifying and evaluating Money Laundering risks. Considering that this is a draft related to the Risk-Based Approach (RBA) recommended by the Financial Action Task Force (FATF), exchanges should eventually conduct continuous monitoring (RBA) on virtual assets separately during the VASPs’ business registration period. This means that Crypto-AML and its monitoring training for law-abiding virtual assets exchanges is also essential. We will continue to provide the best service to customers in order for them to fulfill their obligations and comply with current regulations by preventing Money Laundering through continuous operation of education programs.”

Uppsala Security provides virtual asset AML solutions to Samsung Blockchain Wallet users in 19 different countries. It also offers these solutions to Bithumb, Coin&Coin Exchange, Danal Fintech and Hexlant

Uppsala has also helped with “the identification and arrest of a virtual assets fraud suspect through a swift cooperation with the Bithumb Exchange.” Uppsala Security is based in Singapore and maintains business offices in Seoul, South Korea and Tokyo, Japan.

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Apr 21 2021

Insurtech Ignatica Raises $7 Million Pre-Series A Funding

Ingatica, an Insurtech that offers a digital self-service and automation solutions for insurers, has closed on a USD $7 million pre-series A funding. The investment was led by Lingfeng Capital, with participation from SOSV Investment Funds, Australia-based Artesian, HK-Based AFG Partners Fund, as well as other investors.

According to a note from the company, the funding was driven by the “stunning growth” the company saw over the last 18 months.

President and co-founder, Travis Callahan said they are very excited about the progress made over the last year:

“… and thanks to our investors and partners in this round of funding we are poised to accelerate our growth across Southeast Asia, China, Japan and into Europe and North America.”

Ignatica’s platform seeks to enable insurers to quickly build and launch new products at low cost, while reducing administration costs and improving the experience for consumers. Today, legacy insurers are stymied by legacy systems that make launching new products and managing policies a challenge as well as expensive. Ingatica is striving to offer an alternative path for these firms.

Adhish Pendharkar, co-founder and CTO at Ignatica, explained that their ability to transform data on demand is key to their success:

“We help insurers adapt to the changing markets and create new products, policies and businesses while keeping cost down and moving quickly to market.”

Ignatica’s SaaS offerings allow insurance product managers to create and edit coverages and plans, dynamically adjust pricing, and change product configurations in seconds. They also are said to enable servicing and back-office operations to be automated and pushed to the front edge for digital self-service for even the most complex insurance products.

“The insurance industry is going through an era of unprecedented transformation, with consumers seeking the convenience of buying and interacting with insurance services easily with nothing more than their mobile phone,” said CEO and co-founder Manuel San Miguel. “Our platform not only lets insurers be fast and agile about launching products to meet these customer needs, it also empowers them to truly move into the era of digital servicing.”

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Apr 10 2021

ZA Tech Global, the Technology Initiative Backed by Softbank Vision Fund I, Launches Asia Fintech Center

ZA Tech Global Limited, the technology venture established by ZA International and supported by Softbank’s Vision Fund 1, revealed on Friday (April 9, 2021) that it’s launching its Asia Fintech Center (AFC) in Singapore. The new center will focus on financial services innovation projects and it will also assist industry participants in the region so they can develop new products that will accelerate their digital transformation strategies.

The AFC launch is reportedly a global first for ZA Tech, as the business increases its focus on supporting the vision of providing a unified tech platform that aims to support the future of financial services and offer access to underserved consumers.

The Singapore-headquartered Center will aim to address specific use-cases in insurance and the financial services sector with assistance from industry partners. It will initially work on various insurance use-cases by co-developing innovative projects with ASEAN region-based insurance service providers. It will also work with local academic institutions or universities to develop appropriate Fintech-related expertise and talent.

Bill Song, CEO of ZA Tech, stated:

“We partner with industry players to strive to boldly redefine financial services, and the AFC is an important pillar of making that happen. As we have entered 2021, the year the internet economy continues to rapidly reshape consumer expectations across Asia, digital transformation is becoming as crucial as ever for financial services firms. AFC will bring together technology, talent and partner network to build innovative propositions that fit closely with the evolving customer expectations across both online and O2O and to help financial services prepare for the next chapter of the digital revolution.”

George Kesselman, Head of Commercial for ZA Tech, remarked:

“I am incredibly proud of the work that the team is doing with our partners in the region. AFC will allow us to bring collaboration to the next level by launching new innovative use-cases and enable rapid product-market fit testing and iteration. Southeast Asia is the major epicentre of financial services transformation. We strongly believe that Singapore, as the hub of innovation and talent in the region with its innovation friendly environment and forward oriented regulator Monetary Authority of Singapore, provides the perfect location to launch and scale fintech innovation across Southeast Asia.”

ZA Tech is the tech platform for ZA International that focuses on expanding its global operations by teaming up with major internet firms and financial services companies based in Southeast Asia, Japan and Europe. ZA Tech offers technical solutions and professional services as well.

ZA Tech aims to digitally transform the insurance sector by working with several different customer technology platforms. It’s focused on creating innovative insurance solutions while offering the digital core system to insurers as the infrastructure for their distribution.

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Mar 29 2021

Japanese bank Sumitomo Mitsui launches the country’s first ‘a-1’ rated security token

Japan-based bank Sumitomo Mitsui Trust Bank, or SMTB, has launched its first asset-backed securities token in partnership with Securitize on March 29.

The instrument is the first security token compliant with the Financial Instruments and Exchange Act (FIEA) to launch in the Japanese Market. The token has received an “a-1 rating” from Japanese rating agency, Rating and Investment Information, Inc, suggesting the product is very likely to fulfill its short-term obligations.

The token was created by tokenizing paper-based beneficiary certificates representing investor ownership to an underlying asset. SMTB has also created a trust company to manage its underlying securitized investments.

SMTB issued the product using Securitize’ security tokenization platform. Securitize was founded in the United States in 2017, before launching a Japanese division that secured investment backed from some of the country’s leading companies including Sony, SBI, and Softank.

In March 2020, Securitize partnered with Tokyo-based LIFULL to create a tokenized real estate investment platform.

In an announcement shared with Cointelegraph, SMBT’s Hirohito Niji expressed pride in the bank embracing digital securities, stating:

“We are committed to proactively develop and deliver innovative solutions to our customers with their changing needs by combining cutting-edge digital technologies and our conventional trust bank expertise.”

SMBT is a member of the Japan Security Token Association alongside local telecom giants NTT and Softbank. The firm first began exploring blockchain in October 2016, when they teamed up with IBM to explore using DLT to improve the efficiency of its asset management, real estate, and banking businesses.

Security token offerings, or STOs, have recently been gaining mainstream acceptance in Japan, with the country’s Financial Services Agency recognizing the Japan STO association in May last year.

Japanese bank Sumitomo Mitsui launches the country\’s first \’a-1\’ rated security token

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