Where Are We in Fintech? Some Answers in Singapore for CFOs

The inaugural Singapore FinTech Festival was held from November 14 to 18, a few days after Hong Kong Fintech Week, which was also being held for the first time.

It’s evidence of how serious Asia’s two leading financial centers have become with regard to the emerging financial-technology tools and start-ups (and reinvented incumbents) that aim to supplement, enhance or replace the services currently offered by established banks and other financial services companies.

Indeed, regulators in both cities (as well as in Australia, Indonesia, Malaysia and Thailand) are creating ‘regulatory sandboxes’ to allow fintech firms to test next-generation products, services, business models and delivery mechanisms in a live environment without immediately incurring the normal regulatory consequences.

All this tells us that fintech is on track to become mainstream sooner rather than later across Asia. And that means many new opportunities for CFOs – and also risks.

The Singapore FinTech Festival opened with a bombshell announcement by the Monetary Authority of Singapore that it was going to launch its own blockchain with a digital currency

CFO Innovation attended the Singapore FinTech Festival to get a sense of where fintech services are in Asia, and what’s in store for chief financial officers and other senior finance executives. Here are our observations.

Regulators are coming onboard

We asked Gavin Raftery, partner at law firm Baker & McKenzie in Tokyo, his thoughts on the future of fintech and what it means to the CFO. “The idea behind fintech is to try and improve the value of services beyond that offered by financial institutions and make [those services] easier to access,” he said.

Fintech also allows countries that have yet to fully develop their banking sector and those isolated areas around the world to leapfrog current technologies and obtain the means to deliver full-service banking.

Already, said Raftery, Chinese e-commerce companies such as WeChat and Alibaba are offering financial services to their huge online customer bases – WeChat is estimated to have 806 million users, while Alibaba has 434 million users across its various platforms.

The regulators are scrambling to catch up. Piyush Gupta, CEO of Singapore bank DBS, recalled asking Chinese regulators why they were not regulating Alibaba and Alipay, its online payments arm. “Before, they were too small,” was the somewhat tongue-in-cheek answer. “Now, they are too big.”

One important development is the advent of regulatory sandboxes. On November 16, the Monetary Authority of Singapore (MAS) issued guidelines for fintech experiments (Hong Kong issued similar guidance in September). “The guidelines reflect MAS’ commitment to building a smart financial center where innovation is pervasive and technology is used widely,” said MAS Deputy Managing Director Jacqueline Loh in a statement.

“The regulatory sandbox provides a conducive environment where regulatory requirements will be relaxed to enable firms to experiment with promising innovations within boundaries.”

Singapore’s central bank is adopting blockchain

The Singapore FinTech Festival opened with a bombshell announcement by MAS, the country’s central bank. Managing Director Ravi Menon said MAS was going to launch its own blockchain with a digital currency for direct, blockchain-based interbank clearing.

The first phase would involve eight Singapore banks that would settle accounts directly on the MAS blockchain. In the second phase, MAS will partner with another central bank for cross-border clearing.

The announcement electrified the 11,000 festival attendees because blockchain has been associated with Bitcoin, a cryptocurrency that has been linked to criminal activity. That one of the world’s most conservative central banks is going out on a limb on blockchain says much about the potential of this fintech creation.

Not that Singapore is adopting Bitcoin. The assets that the Singapore banks will be clearing on the MAS blockchain will use “tokens” that they will buy from the central bank, which will ask them for collateral. And MAS will use blockchain technology developed by the R3 consortium, not what the Bitcoin proponents have created.

In effect, said Tim Grant, CEO of R3 Lab and Research Centre, “Ravi put the Singapore dollar onto the a ledger to put the SGD onto the blockchain.” R3 is a fintech company that has partnered with more than 50 of the world’s leading financial institutions (including Commonwealth Bank of Australia, Deutsche Bank, Mizuho Bank and Toyota Financial Services) to work on industrial-grade blockchain.

Putting sensitive information on a shared blockchain is still “somewhere between unwise and illegal”

Blockchain is approaching a tipping point to widespread adoption

Broadly, a blockchain records transactions by various parties on encrypted ledgers that are spread out over multiple computers. In theory, the technology can promote security because of the cryptography and the fact that there is no single point of failure – the updated chain of transactions can be accessed by many independent machines.

That there are many copies of the ledger is also thought to prevent tampering and to ensure transparency. Again, in theory, buyers, sellers, banks, accountants, lawyers, regulators and other parties that are authorized to transact on the blockchain and/or access it will get a ‘single version of the truth’ at any point in time on who has paid whom when and in what amount – and who owns which assets.

Blockchain can be used not only for payments. The distributed ledgers can record procurement and trade transactions, including contracts, customs documents and letters of credit, track intellectual property rights, document Know-Your-Customer risks, and scores of other commercial transactions. And blockchain can save costs, reduce errors and speed up back-office processing.

At the Singapore conference, Oliver Bussmann, who as global CIO at UBS drove that Swiss bank’s blockchain initiative, said he expects a tipping point in the next 15-18 months that will mark the widespread adoption of blockchain technology. People are already looking at cross-border settlements that currently cost US$25 per transaction to process to fall to just US$1.

Both Deutsche Bank and Morgan Stanley have indicated that using blockchain for cross border clearing would save the industry 20% of current costs, said Bussmann.

But blockchain still has risks  

Blythe Masters, CEO of fintech company Digital Assets Holdings, said that blockchain is still a work in progress. Putting sensitive information on a shared blockchain is still “somewhere between unwise and illegal,” she observed. There is encryption, but advances in quantum computing, for example, can poke holes into that security feature.

To date, the industry still has not figured out how to maintain forward secrecy, said Masters. Then there are issues of smart contracts that are not necessarily smart, such as how The DAO project spectacularly imploded due to a coding bug. In 2016, this digital autonomous organization (DAO) raised more than US$100-million-worth of Ethers, a cryptocurrency similar to Bitcoin, but lost the equivalent of US$50 million to data hackers.

Even so, Peter Stephens, CTO for Asia Pacific at UBS, remains a believer. With specialized regulator nodes, he argued, regulators can have near real-time overview of the state of the entire system. This will lead to lower systemic risk and resilience of the industry through closer, real-time oversight of transactions.

Mike Blalock, General Manager, Financial Services Industry, at Intel, said that the chipmaker was working on a new consensus mechanism on the chip-level with cryptographic proof-of-elapsed time as well as other approaches aimed at keeping data private.   

And John Shipman, Asia FinTech leader at PwC, pointed out that many governments are issuing their own cryptocurrencies, which resolves the issue of who regulates them. Bitcoins and Ethers, to cite two examples, are created and managed by private organizations that are not tied to any one state, making for murky accountability and oversight.   

With blockchain, settlement is near instantaneous rather than T+3 or more, meaning that cash will not be tied up and can be used immediately on the business or to earn interest

Beyond payments with blockchain

Stephens hopes to see more companies move out of proof-of-concept and start with non-financial use cases. UBS is looking at blockchain for notarizing documents and providing proof-of-existence, as well as for use in supply-chain management.

Ken Chia, a principal at Baker & McKenzie Singapore and a member of the Asia Pacific IT & Communications and Global Privacy steering committee, discussed how smart contracts can be embedded in the blockchain. In procurement, for example, bills of lading can be embedded, reducing the duplication of data, among other benefits.

In the past, the shipping industry developed Electronic Data Interchange format (EDI), but it did not take off in a big way. Chia hopes that smart contracts will have enough benefit to succeed where EDI did not.

Chia also spoke of the possibility for smart procurement contracts that trigger payments automatically once goods have been delivered, without the need for any further manual intervention.

For corporate treasury functions, the benefit lies in optimizing working capital. With blockchain, settlement is near instantaneous rather than T+3 or more, meaning that cash will not be tied up and can be used immediately on the business or to earn interest.   

Blockchain can revolutionize capital-raising, too

Baker & McKenzie’s Raftery spoke highly of t0, a US fintech start-up that is developing blockchain-based solutions that allow corporates to access capital markets without needing to hire (and pay) investment banks and other middlemen. The company has already been able to issue and trade bonds, and is now looking at equities in the US.

Raj Karkara, COO of t0, explained that the start-up uses a combination of centralized and decentralized blockchain technology to provide near real-time settlement of shares and transparency to key stakeholders at a much lower cost than the current market-listing system.

A company will have to decide to list with t0 technology. If all the brokers involved are using t0, then the settlement and transparency happens in real-time. If not, it will fall back to T+3 conventional back office settlement. The actual matching of orders happens on t0’s centralized servers, but the audit trail is accessible on the blockchain.

For companies which are already listed, Karkara said t0 can settle and show trades in real time using its own blockchain (and the blockchains of either Bitcoin or Ethereum, if required). Most users would see only anonymized amounts without the details of the transacting parties. But a stock market regulator could log in and see the names and addresses of everyone doing the transaction.

While he declined to cite numbers, Karkara claimed that it would be significantly cheaper for a company to list using t0 technology. Then there is transparency. The CFO can log in at any time to know exactly who owns which shares without having to initiate a report request that can take days, if not weeks.

About the Author

May May Ho is a Singapore-based Contributing Reporter at CFO Innovation.

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