China is coming up with cryptocurrency – shock or surprise?

The meeting of finance and technology, widely known as fintech, is changing the landscape of investment management. As the saying goes, it’s tough to make predictions, especially about the future events. But it’s manifestly worth the effort because catching big trends is how fortunes are made and catastrophic losses are avoided.

Blockchain-related topics are extremely hot nowadays and cryptocurrencies are one of those. So, what is a cryptocurrency? From the word itself you can see that it has something to do with cryptography and currency. For its part, cryptography is the process of converting ordinary plain text into unintelligible text and vice-versa. Modern cryptography deals with confidentiality: information cannot be understood by anyone, integrity: information cannot be altered, and authentication: sender and receiver can confirm each other.

Putting all the pieces together, cryptocurrency is a medium of exchange value (just like ordinary money) that exists in the digital world and relies on encryption, which makes transactions secure. A cryptocurrency is an alternative form of payment to cash, credit cards, and cheques. The technology behind it allows you to send it directly to others without going through a third party like a bank. In short, cryptocurrencies are like virtual accounting systems.

As you can find, there are many exciting use cases for this. You can send money back to your family without incurring large international fees if you’re working in a different country. Merchants no longer have to worry about payment fraud because people can only spend what they have. Summing up, Cryptocurrency is a radically new way of paying that makes all the transactions secure and helps to get rid of intermediaries represented by banks, which also contributes to a significant reduction in the commission fee.

The cryptocurrencies can either be based on blockchain technology or can be centrally issued, circulated within a community or geographic location, or tied to fiat currency. Blockchain is a revolutionary ledger technology, with a wide array of potential applications from smart contracts to healthcare systems, but it did not catch the attention of speculators and the media until Bitcoin surged from $0.009 to more than $11,000 per coin. There are more than 869 cryptocurrencies, but without fundamentals, they are little more than “trust machines” and, as such, are nearly unanalyzable. They generate no cash flow, making discounted valuation approaches inapplicable, but this criticism applies to gold as well.

Although it is cheaper to invest in the early stages, during a new cryptocurrency’s initial coin offering, doing so may overlook the network effect that favors older altcoins (alternative cryptocurrencies other than bitcoin).

Cryptocurrencies are going to play a major role in the coming years and China has decided to be part of that future, in a big way. China’s official digital currency is nearly ready. As much as China frowns on cryptocurrency, it’s happy to introduce its cryptocurrency. There is a great deal of confusion and misunderstood facts surrounding the legal status of cryptocurrency in China. Various headlines like China Bans Bitcoin, China Bans Crypto Exchanges, China Bans Bitcoin Mining, and many more make most people unclear on where China stands on cryptocurrency and whether that has any real impact on how its citizens behave.

The People’s Bank of China has revealed that its digital currency, “can now be said to be ready” after five years of research work. Don’t expect it to mimic crypto, however. According to payments Deputy Chief Mu Changchun, it’ll use a more complex algorithm and structure. This project of coming up with own cryptocurrency of China was started by the former governor of China’s central bank, Zhou Xiaochuan, who retired in March. He decided to come up with the digital currency which will protect China from having to adopt a technology standard, like Bitcoin, designed and controlled by others. 

Facebook Inc.’s push to create cryptocurrency Libra has caused concerns among global central banks, including the People’s Bank of China (PBOC), which said the digital asset must be put under central bank’s supervision to prevent potential foreign exchange risks and protect the authority of monetary policy. Sun Tianqi, an official from China’s State Administration of Foreign Exchange, said, “Libra must be seen as a foreign currency and be put under China’s framework of forex management”. Dave Chapman, executive director at BC Technology Group Ltd also said on similar lines that, “It is without a doubt that with the announcement of Libra, governments, regulators and central banks around the world have had to speed up their plans and approach to digital assets. They have to consider the possibility that non-government issued currencies could dramatically disrupt finance and payments.”

How the cryptocurrency issued by China will be different from other cryptocurrencies, might be one of the questions coming to your mind. To begin with, in launching the new cryptocurrency, referred to as DC/EP for Digital Currency/Electronic Payment, the People’s Bank of China (PBOC) has stolen a march on both Facebook and other central bankers who have been discussing the possibility of a cryptocurrency and how it’s the implication. What sets China’s DC/EP apart from libra and Mark Carney’s(Bank of England’s Governor) “synthetic hegemonic currency” (SHC), according to Paul Schulte(The founder and editor of Schulte Research, a company does research on banks, financial technology, bank algorithms, and credit algorithms), is that while libra is little more than early-stage computer code and the SHC doesn’t appear to have gone much further than Carney’s mind, the Chinese cryptocurrency is ready to launch. “China is barreling forward on reforms and rolling out the cryptocurrency,” says Schulte, who now runs a research firm. PBOC will be the first central bank to come up with its cryptocurrency. Unlike the decentralized blockchain-based offerings, this one could give Beijing more control over its entire financial system. It would increase the PBOC’s ability to root out risks and crackdown on money laundering. It could also give the government an unprecedented window into individuals’ private lives.

Deputy Chief Mu Changchun described the central bank’s “two-tiered” system, wherein the bank would create the cryptocurrency and a small group of trusted commercial businesses would “pay the central bank 100% in full” to be allowed to distribute it. This dual delivery system is suitable for national conditions of China. It can not only use existing resources to mobilize the enthusiasm of commercial banks but also smoothly improve the acceptance of the digital currency across China. If China’s leaders agree on with this idea of a legal cryptocurrency for the whole country, its introduction will likely be gradual. Early adopters would be barred from using it on investment products, a person familiar with the central bank’s plans says, which would make the impact on monetary policy negligible. 

“China’s strategic plan is to integrate more closely with the rest of the world. Cryptocurrency is just one of the means to have a more internationalized renminbi. It’s all strategic. It’s all long term”, said Charles Liu, chairman of HAO International, a private equity firm investing over $700 million in Chinese growth companies. Finally, the Chinese government said that the cryptocurrency could launch as soon as November 11, China’s busiest shopping day, known as Singles Day.

Author
Pratik Jaju
Team Member– Fintech
(M.Sc. Finance, NMIMS – Mumbai. Batch 2019-21)

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Co-author
Omkar Pawar
Team Member– Fintech
(M.Sc. Finance, NMIMS – Mumbai. Batch 2019-21)

Connect with Omkar on LinkedIn
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Fintech in India- A Global Growth story

FinTech has emerged as a relatively new industry in India. The year 2018 was a big one for the Indian financial technology and financial services ecosystem. With $2.34 billion being raised across 145 deals, fintech finally unseated ecommerce from the top of the list after years of dominance.

So, what really is FinTech?

In short, it is an industry that comprises of companies(such as insurance, asset management, payments) that use technology to offer financial services. Initially, FinTech started its trial by setting its operating base in the banking industry. But over the last five years, it has seen tremendous development and has expanded to insurance and asset management companies as well. 
By leveraging machine learning, FinTech companies are looking to analyze customer expectations and their responses.

In today’s digital economy, a whole new generation of FinTech’s, including nimble new start-ups with cutting edge technology have boomed alongside behemoths and are now valued more than many traditional banks and financial services firms.
We are witnessing specialization in many of the global fintech centres – London emerging as a hub for investments into open banking solutions, while China has become well known for facial recognition associated with biometric technology and Israel, a centre for cybersecurity.
India, however is yet to find a niche to focus on or a specialization, despite the mass availability of smart-technology talent.
As different hubs emerge around the world and technologies become more mature, specialization will be key to further develop India’s fintechs and continue to lure billions of dollars in investments and talent. Being the jack of all trades in different technologies and solutions, from mobile payments to credit scoring, digital banking and peer-to-peer lending, may have worked at the initial stages of fintech development, but the future will be dominated by specialists. 

To answer the many queries we have about fintech, its utilization and growth in the future, I decided to go ahead and take a personalized approach about this. I prepared some questions I had in mind about FinTech in India, and figured the ideal approach to know more would be to ask people who themselves are part of this industry.

I went ahead and interviewed two people, one who works as an Analyst in ‘Advanced Analytics’ division of MasterCard, and the other who is a Head of Sales and Alliances at Airpay. Both had a lot to say about matters relevant to this field, since a lot of work is being done in India to promote FinTech as a rising industry. Here is what they had to say about it.

Me-

How is the growth of fintech being supported in India?

MC-

India is doing pretty good in terms of fintech and it’s mostly coming from start-ups. Though one of the concerning facts is that most of them are eventually bought by foreign investors so won’t be completely fair to say that India has its in-house fintech innovation or technology. But with Indian government taking great initiatives like launching apps BHIM and UPI interface for P2P payments, it’s a great step towards our contribution to the fintech world.

AP-

  • A large unbanked and untapped market in India has been driving in private players willing to bet on it.
  • The Digital India initiative by the GoI has broadly laid down the framework for going digital and you cannot truly be a digital economy without Fintech.
  • The PMJDY led to financial inclusion of the masses, which has been leveraged by Fintechs to grow.
  • The exponential growth of smartphone adoption, along with some of the lowest mobile data rates have brought the next round of Indians online, which will further fuel digitisation of payments, insurance, etc.
  • The NPCI has been actively involved in churning out cutting edge payment methods like the UPI, which has again spurred adoption of digital means.

Me

There are namely 4 spheres of Fintech: In the systems sphere, in the B2B sphere, in the B2C sphere and B2G sphere. How do you think these are getting impacted, whether interdependently or not?

MC-

I think we are experiencing a major shift in our focus from P2P to B2B or B2C. The P2P space is quite evolved now unlike B2B or B2C space which has great potential. And, when it comes to B2B space, it’s both Corporates and Small Business where we need to focus because one is much more higher in revenue and the latter one is much more in number. There is still a lot of informal lending when it comes to business space and there is a lot of potential to not only improve payments systems in that space from both cost and speed perspective but also, come up with new technology to encourage small business to start using digital ways of money transfer.

B2C is also evolving everyday where every business is trying to value their customer much more than ever and give as personalised recommendations or offers as possible.

AP-

There are definite overlaps in the various spheres and a huge opportunity to create a unified platform. The effort has already begun with the BBPS infrastructure, which brought C2B and C2G payments on a single platform.

Me-

FinTech is reshaping categories and disrupting incumbents across a number of financial services sector categories. These include ‘Savings, Personal Finance, Investment & Wealth Management, Insurance, Block chain & Crypto, Lending & Unsecured Credit, and most significantly, Payments. Could you highlight more on the payments system, considering how big it is, not only in India, but all across the globe?

MC-

Gone are the days when people used to stand in long queues in banks to deposit/withdraw money for their personal use or to transfer it to somebody else. We are also trying to come out of the cheques world which takes 2-3 days for payment processing. This is the age of fast and quick technology, we want everything simple, fast and secure. You press the button while you’re sitting at home and you can transfer money from 1 part of the world to another. This is already embraced by P2P payments world and companies are coming up with efficient and cheap solutions for Small Business and even large corporates. We are yet to capture the full potential of corporate space but fintech is headed in the right path and card acceptance in Small Business and Corporates is a start of it. So yes, payments system has been modified highly not just for ease but also to make it more secure.

AP-

As they say, data is the new oil. Payments are the final layer to any business activity. It is your final signature when doing business with an entity. This payments data generated through digital payments is a rich source for creating patterns and understanding consumer behaviour. We see Fintech as an enabler or a partner for the existing ecosystem, helping them reach out to untapped markets and helping them to create a consumer profile using alternate data points.

Me-

38% of the world’s population lack a basic bank account and an even greater proportion lack the simplest of insurance and investment products. Do you think FinTech, particularly in the form of mobile money, is an essential part of the solution for this or it could face barriers?

MC-

If we just talk about India, out of 1.3B population, we have 800M mobile users. With such high penetration of mobile in India, fintech in the form of mobile money is an essential part of the solution. Apps like Paytm which cater to small business and small local merchants making them reach out to each and every person in India in turn, facilitating P2P, B2C, C2B, B2B payments. Anyway, the future is mobile or maybe something even smaller where 1 device could serve the purpose of everything so it does make sense that we are trying to fit in every payment form in there.

AP-

Absolutely! Digital payments give the customer a footprint that banks and insurance companies can leverage. It is redefining the metrics that a traditional bank or an insurance company would use to evaluate a customer and use the alternate data points to curate the best products. Even for existing consumers, Fintechs are helping the large legacy players get down to the brass tacks of profiling and provide products that stay current and relevant. For example, sachet insurance is a great innovation that does away with larger bulky and one-size-fits-all products and gives the consumers exactly what they want and presents the insurer another opportunity for product uptake

Me-

Is it a boon for cyber security or are we just unaware of how much of our personal data is actually out in the cloud? Fintrusion? A survey said online fraud could reach $25.6 Billion by 2020. Views on this? So, is fintech actually increasing cyber security?

MC-

There is definitely new technology coming up for cyber security and it is surely needed when it is so easy to do an identity fraud or any kind of fraud for that matter because technology will have certain limitations too. Definitely, most of the people are unaware of the quantity/quality of their personal data in the cloud and even, if they are have some idea, they aren’t educated enough on its misuse. And with this whole fintrusion, there is growth of the idea of “privacy” and people are becoming more cautious while sharing their personal data with various websites/apps. But fintech is definitely coming up with increased cyber security. Country like India has 2 step authentication which is a good measure to avoid fraud. Not even that, banks are also coming up with different algorithms to identify fraud and mitigate it in the best possible manner. But there is need for more and at much faster rate especially with new payment methods like Card on File, Contactless, etc. coming in.

AP-

Every innovation comes with its own set of risks. We feel the problem here is that the push is mostly on product adoption, rather than consumer education and then eventually adoption. So rather than being reactive, all the stakeholders must be proactive when it comes to data security and consumer awareness.

That said, there is a whole segment of entrepreneurs and technologists working on data security & fraud prevention, so as the industry matures, we should see this challenge being mitigated.

Me-

50.2% globally saying they do business with at least one non-traditional firm for banking, insurance, payments or investment management, with the percentage reaching the highest in Asia-Pacific (58.5%). How do you think the consumer response has been to fintech since its inception?

MC-

Asia Pacific has a lot of developing countries which is one of the major factors as to why they do business with at least one non-traditional firm. People are still stuck to their old ways and will definitely take time to come up to speed in terms of learning new technology. But overall, fintech has been growing quite fast in these countries and even in better way because fintech isn’t just reaching the consumers or large corporates but also small business or local small merchants which are more prevalent again in developing countries rather than developed countries. China has their own payment system and they are closed to the idea of having the same payment system as the rest of the world but that definitely makes them more secure and India has 2 step authentication which is again unique to it but again, mitigates a lot of fraud already. And because there is a lot of untapped potential and cash is still a king in Asia Pacific, the growth of fintech will be the highest here.

AP-

The consumer response till now has been positive, albeit not uniformly. While banks and traditional institutions invoke trust, the generation coming into the workforce (with disposable income in hands and a key drivers of consumption) values speed and customer experience equally, if not more. That said, there is still an entire section of the population that intrinsically thinks of new-age Fintechs as risky. This trust deficit hampers a digital-only strategy. So as a Fintech, our ideal sweet spot is to partner with the traditional institutions to combine the trust that banks inspire with the speed and customer experience that Fintechs offer.

Author
Purnima Dutt
Volunteer- FinTech
(MSc Finance, NMIMS Mumbai. Batch 2018-20)

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How Blockchain is changing dynamics for Stock Trading

In the recent past Blockchain has been the most talked about technology, it was originally designed to digitize and decentralize currency (Bitcoin) by using multiple ledger systems. What if there are multiple application of this technology and not just limiting it to the use of currencies. Experts over the world are now validating the use of this technology over the areas such as supply chain management, cross border trades & finance, etc.

Blockchain has gained so much attention and admiration because

  • It is decentralized, no single entity owns it
  • The data is cryptographically stored inside
  • Data tampering cannot be done inside blockchain, it is immutable
  • It is transparent

So the question raised is that can blockchain tech be used in stock trading and if yes then how will it change the dynamics of it.

Recently, SEBI has appointed a Committee on Financial Regulatory Technologies (CFRT) , exploring the possibility of using Blockchain platform in areas of post-trade settlement and fundraising. Japan is already the front runner, as it has already implemented blockchain as its core trading infrastructure at Tokyo Stock Exchange. Japanese brokerages have reportedly initiated an consortium, dedicated to adopt the process of blockchain, the founding member were Rakuten Securities, SBI Securities, Daiwa Securities and Nomura.

Back in 2015 Nasdaq, started the use of its Nasdaq Linq Blockchain ledger technology, this allows private non listed companies on the stock exchange to represent their own shares digitally. With the help of Linq and blockchain it is now possible for private companies to successfully complete and record securities transactions.

Intermediaries Minimization

A single trade between buyer and seller involve stockbrokers, depositories, bank, clearing corporation, etc. The intermediaries are for efficient functioning of the markets but they are not indispensable. Consider brokers, most of them require you to keep a minimum deposit to start an account, forget the stock trading fees, then there are other fees like option fees, etc. In a world where DIY is given so much importance such high fees is unjustified. One survey found that 9 out of 10 millennials would prefer free digital trading platform instead of a regular broker. Budget conscious investors who are unwilling or unable to buy entire shares would be happy to use blockchain powered apps which allows micro-investing.

Built in Regulation

October 24th 1929, also known as “Black Thursday”, as 13 million shares were sold in panic by the investors on NYSE. Nearly 90 years later there is no way to shape up financial sector as such incidents have had happened since then (Black Monday, Black Tuesday, etc) Perhaps blockchain will take the regulatory imperative from traders hands for goods. Users of blockchain with the help of a passkey can access the ledger remotely. Traders could save money by permitting the regulators some oversight into blockchain powered trading. National Stock Exchange (India) is also piloting on such a blockchain system for automatic KYC process.

Dividends

Some investors buy shares which gives dividends on regular basis and also who wont like some additional money coming in form of dividends. A significant portion of returns is attributed to dividends. “Cash on hand is music to an investors ears.” Automation in the dividend payment process would help the companies in saving a lot of time and money. Blockchain smart contracts help in creating process of self-executing payments. This payment will release the dividends to the customers on behalf of the companies. TMX Global and Natural Gas Exchange (NGX) are testing automatic dividend payments.

Ease in post trade events/ settlement

Over a million securities in India change hand on daily basis. The size of global investing marketplace cannot be comprehended by humans. Efficient trades settle on T+0 or T+1 day. There is need for automation in the settlement of trades happening. The way to do it maybe is with the help of blockchain powered smart contracts. Smart contracts can replace human oversight which happens in settlements of trades which by the way is also very costly. As soon as some pre-requisite is fulfilled these contracts execute. For eg. If a buyer and a seller agree on a price point the trade will be executed, resulting in shorter time lag. Shorter time lag means more money is available ko keep wheeling and dealing. Nasdaq Linq Blockchain Ledger, Australian Stock Exchange, Deutsche Borse are already using such technology for after trade settlement.

Asset Management and Fund Raising

A lot can be said about a company through its fundraising. Tesla’s management has admitted that it often runs negative cash flow. Even if the public weren’t privy to such an admission, Tesla’s relatively frequent return to the fundraising table would have clued investors in. Elon Musk’s electric car company raised $270 million in capital in 2010, $451 million in 2012, and over $18 billion total between 2010 and 2018. Experts don’t expect Tesla to be cash flow positive for quite some time. But perhaps Musk and the heads of other publicly traded companies who require capital could execute fundraising even more efficiently and cost-effectively by adopting blockchain technology next time. Companies will be able to sell stock directly to public without time constraints. Blockchain’s value comes from its ability to conduct fundraising sales and agreements without any middlemen involved. It dispatches cost-effective and immediate smart contracts to execute the transactions, saving money and time without sacrificing quality. aXpire is a blockchain powered company trying to solve this problem.

Tracking Securities Lending

Security lending is not understood by a mass of population. Traders lend ETFs or a commodity within ETF to other parties in exchange of a collateral. Nearly 3.5 trillion USD worth of ETF as of December 2018 was the market share. ETFs are considered as safe return instruments but are not so safe after all, using technology to hedge the ETFs could be critical as the market worsens. Leveraged loans that led to last financial crisis, most of the ETFs are heavily invested in such leveraged loans. For ETF manager lending securities to short seller is low stress and high upside proposition. Tracking the price of ETF is important. They can be tracked through blockchain powered ETFs, and triggers the issuance of collateral if the short seller becomes over-leveraged. Nasdaq Linq Blockchain ledger is tracking the purchase of securities.

Author
Sagar Vikmani
Team Member – Equity Research and Valuation
(M.Sc. Finance, NMIMS – Mumbai. Batch 2018-20)

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