News Briefing - Crowdfunding, SME And Alternative Finance

Tech innovation represented by abstract picture of phone.

1.UK – FinTech


The big equity crowdfunding deal  has failed. AltFi reports: 

“Just hours after the Competition and Markets Authority (CMA) threw a wrench in Seedrs and Crowdcube’s plan to merge, both platforms have agreed to terminate the merger. 

“We're obviously disappointed with the CMA's findings but we have taken the decision to terminate the proposed acquisition,” said Crowdcube CEO and co-founder Darren Westlake. 

Seedrs CEO Jeff Kelisky echoed Westlake’s comments and added that “we had prepared for this possibility, and we’re pleased to announce that we have agreed a new funding round for the business.” 

While Kelisky didn’t reveal any details about this round’s size, he added that more details would be announced “very shortly”. 

“Given the strength of the business’s recent performance, we will be able to use this round to return to our pursuit of major growth initiatives.” 

On Crowdcube’s side Westlake added that the crowdfunding platform had seen two consecutive quarters of profitability in 2020, along with record revenue, and that he expects the business to be profitable again in the first half of 2021. 

In their evidence submitted to the CMA as part of the merger approval, the two platforms said they faced closure unless the deal was greenlighted. 

As part of the investigation, however, the CMA found that the collapse of one or both firms would be unlikely if the merger were not to go ahead and that “both parties will continue to compete to offer services for all types of SME customers.” 


2. UK – FinTech 

AltFi reports: 

“As its lending jumped in the second half of 2020, Funding Circle turned an operating profit for the first time of £7.2m, a trend the lender says it expects to continue. 

“We hit profitability in-line with what we always said we would,” CEO and founder Samir Desai told AltFi. “It proves the model and gives us a really good platform now with our strong balance sheet.” 

Desai said Funding Circle had seen a “huge acceleration” in the shift to online lending over the past 12 months prompted by Covid-19, giving the lender “tailwinds that we’re excited with.” 

Funding Circle’s loans under management grew 13 per cent across 2020 to £4.2bn, with originations up 17 per cent to £2.7bn. 

According to Funding Circle’s Adjusted EBITDA metric—which strips out costs including social security and FX between the lender’s UK, US and developing markets— the business turned a £20.3m profit in the second half of the year. 

Desai said the business expects to remain AEBITDA profitable going forward. 

Across the group operating expenses were cut by 12 per cent to £191.3m, largely coming from savings around marketing and staff costs. 

This morning Oxford Economics also published its Funding Circle Economic Impact Report, which showed that the lender contributed £7.5bn to UK GDP in 2020 through its loans which supported 100,000 jobs. 

As well as increased lending and cost reduction, Funding Circle also made savings as it significantly increased the automation of its lending, with 50 per cent of its UK loans being fully automated by the end of 2020. 

The lender’s long-term goal is to get this to 80 per cent in the coming years.” 


3. International – FinTech 

Finextra reports: 

“The European Central Bank has hit back at public "misconceptions" about the digital euro and its future role as a substitute for physical cash. 

Wiriting in a blog post, ECB board member Fabio Panetta refutes claims that the central bank intends to abolish cash and then, having done so, impose even lower interest rates on the digital euro for monetary policy reasons. He also gives short thrift to musings that a digital euro would displace banking intermediation and would not be based on a viable business model.

Plans to introduce a digital euro are still at a conceptual stage, with an announcement expected in June as to how best to proceed. But the project has been met with a backlash in Germany, spearheaded by the Deutsche Bundesbank, which has argued that successful tests of a six-year research effort to implement a distributed ledger for electronic securities settlement should negate the need for a central bank digital currency.

Popular German magazine Focus also wrote that a digital euro would be “catastrophic” for savers.

"Central to all our discussions is the fact that a digital euro would be a means of payment that would complement cash, not replace it," says Panetta. "Abolishing cash is not on the table."

Nor would it form part of a project to impose negative interest rates, as cash would still be available to the general public at an interest rate equal to zero.

"The aim of the digital euro would be to offer citizens the possibility of using central bank money as a convenient way of paying digitally," states Panetta. "It is not about monetary policy."

The concern that the ECB wants to draw significant amounts of customer deposits away from banks is also unfounded, he says.

"We believe in the strong merits of allocating credit through private channels - banks and capital markets," says Panetta. "So we have no intention of redesigning the European financial system. Customer deposits and the role of banks as lenders go hand in hand, and a digital euro would not challenge this."

Panetta argues that more attention should be paid to the stability risks if the ECB does not offer a digital currency.

"We must avoid a situation in which European payments are dominated by non-European providers, including by foreign tech giants potentially offering artificial currencies in the future," he says. "Not only could this threaten the stability of the financial system, but individuals and merchants alike would be vulnerable to a small number of dominant providers with strong market power." 

4. International – FinTech 

And there’s more from cryptoland… 

If the normalisation of Bitcoin and crypto-at-large is to be achieved, there are fundamental challenges that this ‘non-analogue’ asset will be faced with, according to Finextra.  

“During Citi’s Digital Money Symposium, panellists of the ‘Institutional Infrastructure for Crypto’ session explored the obstacles crypto firms have faced while trying to carve out a footing within the institutional ecosystem. 

Timing, definitional uncertainties, market sentiment and regulatory hurdles are a handful of the factors raised by the panel as influencing the industry’s journey over the last decade.

What is unique about the cryptocurrency journey?

Providing a background of the crypto market, Michael Moro, CEO, Genesis noted that cryptocurrency was initially an industry that started at the retail level - serving individuals with institutional infrastructure not appearing until 2016 or 2017.

“It’s really night and day when looking at 2013 to 2021, but it’s still a work in progress. We have a lot of holes to fill, processes to perfect, but we’re headed in the right direction.”

Moderator Shobhit Maini, director, market & securities services transformation, Citi, noted that while the market has been talking about the deployment of institutional capital into cryptocurrency since 2016 or 2017, it wasn’t until 2020 that we saw reputable investors begin to allocate money into the asset.

When asked whether infrastructural changes had occurred to generate the attention cryptocurrency saw during 2020, Brett Teipaul, head of institutional sales, trading, custody and prime services at Coinbase explained that as recently as June 2018 he believed that the necessary infrastructure simply wasn’t there.

At the time, Teipaul was working at Barclays and was considering whether the bank should open an OTC crypto trading desk. He said: “Infrastructure certainly wasn’t there to operate in the heavily regulated environment in which I was familiar with, which is a pretty remarkable statement as I’m now going to spend the next five years of my life or forever in this industry.”

Laying the foundations for the crypto asset class

Teipaul noted that there were three core factors which allowed for the formation of the asset class including the emergence of qualified custodians, prime brokerage services along with enhanced trading tools, and third, lending and credit intermediation.

Another factor which contributed to institutional interest in cryptocurrency, Teipaul added, is the emergence and recognition of reputable venues that conduct sufficient KYC AML procedures, with some of these larger players having satisfied the diligence levels of even the largest financial institutions. Coinbase currently recognises at least seven of these reputable venues: “effective and robust security continues to be highly relevant to institutional uptake.”

While perhaps unique to Coinbase, Teipaul also commented that the firm’s B2B infrastructure allows financial institutions without native capabilities to use Coinbase as a sub-custodian.

Agreeing on a crypto definition

When it comes to approaching cryptocurrency as a new concept, Itay Tuchman, global head of foreign exchange, Citi, explained that while traditional markets tend to “put it in a box that we are already comfortable with, we have to admit that this is a new asset class emerging.”
He noted that trying to make it feel like an analogue product like a precious metal or trying to make it feel like pure foreign exchange is a bridge too far.

There are similarities however between crypto and FX, Tuchman observed, such as the fragmented liquidity landscape (both geographically and technologically) and its high frequency. “I’m always impressed that Bitcoins tick frequencies at four times as many Euro-dollars frequencies. It’s a huge endorsement of the amount of interest, liquidity, activity, in the crypto asset space and FX probably has the highest trading volumes in that way as an analogue.”

The way in which crypto has evolved is also fundamentally different from the way FX trading took its current form. Tuchman explained that the retail asset classes in things like foreign exchange evolved from an institutional landscape around 15 years ago - making it an institutionally oriented marketplace.

“Margin related retail FX exploded onto the scene and had to conform to an already existing and latent FX ecosystem. It is the exact opposite with crypto. Crypto has grown on the back of a retail ecosystem. Now we’re trying to fit institutional mindsets to it […] you can’t help but be impressed by how much has been developed in the last couple of years.”

Listening to market forces to guide evolution

Providing context to Genesis’ success, Maini explained that the firm started out as an OTC broker dealer, added lending capabilities, followed by the addition of custody derivatives and capital introduction. “You’re beginning to look more and more like a bank - what were the market forces that drove Genesis toward adding these capabilities?”

“It was about connecting the crypto world to the institutional investor community,” responded Moro.

This became focused on making the experience of working with Genesis very similar to what you might get with a prime platform in equities or FX, Moro furthered. He explained that Genesis worked to remove friction to smooth the user experience and remove any speed bumps that might appear on the way.

The firm also had to pay close attention to timing, as the introduction of a full prime broker in 2013 would have been seven or eight years too early. Most of the necessary plumbing and infrastructure did not exist at that stage and Moro observed that the client demand would not have been sufficiently robust either.

Genesis also had to pay close attention to the sentiment of the marketplace and investors. “For the first five years of our business all we did was OTC trading. It was always about just getting crypto into the hands of kind of the early institutional guys, as well as general partners of these institutional guys in their personal accounts. We wanted to expand the network clientele and frankly, to spread the message around Bitcoin.”

Navigating regulatory divergence across jurisdictions

Moro observed that the evolution Genesis has experience has taken a piece-by-piece approach as the market conditions allowed for growth.

In 2018 Genesis added its lending business, in 2020 it acquired the custodian and began offering options and “now, the challenge is that in a traditional world you can do all or most of our activities through a broker dealer […] In crypto you cannot do everything through a broker dealer, and capital is a huge constraint to broker dealers and banks being the full-service prime broker.”

This means that crypto firms wanting to carry out these activities need to create different entities and apply for different licenses to operate in different jurisdictions servicing different customers.

“You’re basically piecemealing together all of the services you want ‘under the hood’ and doing everything in a jurisdictionally-legally-totally-compliant way, but you need the client to not notice any of it. I think that ultimately the challenge for cryptos is that regulation is still at the state-by-state level. We really have to keep in mind what state is implementing what rule.”

He concluded that much of the rulemaking and regulation around crypto is still developing around the world. Genesis has clients around the world and trying to be mindful and keeping up with every local jurisdiction is an incredible challenge while pioneering an asset class, Moro notes.

“But that's also part of the fun too.” 


5. International – FinTech 

Crowdfundinsider reports: 

“Digital asset marketplace Coinbase has revealed that it’s planning to hire in India, a country that has been attempting to ban “private” cryptocurrencies like Bitcoin. However, the nation’s authorities recently clarified that they’re not going to shut off crypto activity completely, meaning digital currencies may be used as a form of investment but not an officially approved medium-of-exchange (or legal tender like the Indian Rupee). 

The Coinbase team writes in a blog post: 

“Following our recent announcement that we are now hiring in Canada, today [March 25, 2021] we’re happy to announce that Coinbase is establishing a business presence in India. By housing some IT services, including engineering, software development and customer support operations in India, we will benefit from its huge pool of world-class engineering talent.”  

Coinbase added that India has a well-known reputation for being a major global hub for engineering and tech innovation. Coinbase also mentioned that they’re looking forward to “finding that world-class talent” to help them create “new ways” for their customers “to interact with the cryptoeconomy.” 

Coinbase further noted that they had announced earlier this year that they’re “committed to being a remote-first company, which means that new hires in India, Canada, and elsewhere will have the option to work across various locations in their country of hire.” 

Coinbase added: 

“We expect to open a physical office, initially in Hyderabad, for Indian employees as COVID-related conditions allow. Along with active hiring in the US, UK, Ireland, Japan, Singapore, Canada and the Philippines, establishing a presence in India is another important step to building more geographic diversity in our remote-first workforce.”