UK’s Financial Conduct Authority (FCA) has signed today an agreement with the Hong Kong Monetary Authority (HKMA) for reciprocal co-operation between the two markets, especially as it pertains to Fintech companies and financial innovation.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said: “Alongside promoting innovation in UK businesses, we also want to see the best firms from around the world coming to the UK. Both consumers and the wider UK economy benefit from this transfer of ideas and innovation. The Agreement signed today with the HKMA is a good example of this type of international co-operation and we look forward to working to promote innovation and reduce barriers to entry for firms both here in the UK and in Hong Kong.”
This is the fifth agreement by FCA specifically regarding financial innovation, following likewise agreements with Australia, Singapore, South Korea, and China. The usual base of the agreement is reciprocal recognition of each other’s regulatory authority. Thus, an FCA approved company can operate in any of the other five countries, usually without requiring any further licensing or at reduced requirements, and likewise any of the other five countries’ Fintech company can more easily operate in UK.
According to a press release , the two authorities will “closely collaborate on a number of initiatives such as referrals of innovative firms, joint innovation projects, information exchange, and experience sharing, to facilitate financial innovation in the United Kingdom and Hong Kong.” Usually, this translates to a somewhat similar regulatory framework for both entities, with a probable sandbox framework, where regulatory requirements are substantially reduced, to be expected from HKMA.
The agreement with China in particular, as well as UK’s regulatory framework’s passporting to other EU countries, which will probably continue one way or another, now makes London one of, if not the, most attractive regulatory environment for a Fintech company.
In particular, blockchain entities are likely to benefit from London’s sandbox, a highly innovative new approach where regulators closely collaborate with usually Fintech companies during an experimental and market testing stage. The FCA recently announced a number of firms that have been accepted, with the list dominated by blockchain entities.
They include Billon, which we covered in a recent article, and Epiphyte, which uses bitcoin’s blockchain through payment channels to instantly transfer funds from bank account to bank account with incredibly low fees of pennies or less. It also includes Otonomos, a seemingly DAO like entity that is described as “a platform that represents private companies’ shares electronically on the blockchain, enabling them to manage shareholdings, conduct book building online and facilitate transfers.”
The sandbox further includes a number of other blockchain based companies, ranging from charity management, insurance, benefit’s payments and more, as well as traditional or established entities, such as Lloyds, HSBC and, even, Citizen’s Advice, a well-known legal charity that provides court representation and more general legal assistance to individuals in need.
UK’s regulators further announced today a seemingly shakeup of the clearing system, particularly Bacs, Faster Payments Service (FPS) and LINK. Described in a press release as a “‘[g]enerational step towards wholesale change of the payment infrastructure,” the Payment Systems Regulator, the only regulator of its kind as far as is known, found that “there is no effective competition for the provision of central infrastructure for these three payment systems.” It further:
“[I]dentified the common ownership and control of both the payment systems and the infrastructure provider as a key concern. It also cited the need to adopt a common international messaging standard to encourage new entrants, and create a competitive procurement process that addresses consumer needs.”
They have proposed the “mandating [of] a competitive procurement process” and the adoption of a common “international messaging standard for Bacs and FPS to lower barriers and encourage new entrants to the market.”
Hannah Nixon, Managing Director of the Payment Systems Regulator, stated:
“The remedies we are putting forward today are another step in our strategy to bring about a once in a generation change to UK payments. The work being undertaken will remove barriers and create a competitive procurement process. In turn, this will promote more effective competition and innovation that will help better meet the needs of all users of payment systems – be they consumers, small businesses, or banks.
The British government has been the most forward looking in the world regarding Blockchain innovation following George Osborn’s, then Chancellor of the Exchequers, surprising move in 2014 to embrace digital currencies and blockchain technology. He has the honor of being the first high-ranking official to own or use a bitcoin, purchased at the time to much media fanfare, complementing Alistair Darling, the Chancellor in the genesis block.
The move came while America, and New York, in particular, was taking and continues to take a very different approach. The then Superintendent Benjamin Lawsky proposed a number of highly restrictive measures, sending the digital currency up in arms, with companies boycotting New York in protest. London clearly saw the opportunity. Since then, they have taken a number of measures to encourage and even cheerlead competition in finance and payments, embracing blockchain technology and the Fintech industry more generally.
With the upcoming new administration, USA is now likely to join UK in its approach as the Trump administration will probably be highly friendly to blockchain technology, both on an ideological level through conservative’s/republican’s embrace of free market and Austrian school economics, as well as more practically as the industry continues to grow globally, with many Chinese companies now worth billions because of their embrace of financial innovation, particularly due to the lack of a banking system, but also due to a seemingly hands-off approach by regulators (save for as it pertains to bitcoin) as Chinese entrepreneurs copy Silicon Valley’s ask for forgiveness not permission approach.
The race between these three nations will probably define our industry, but whether that race will be competitive and filled with barriers, or co-operative based on mutually beneficial agreements to further advance technological progress which increases productivity and efficiency, while reducing costs, will depend on the outcome of the highly sensitive negotiations the Trump administration and the Chinese counterparts are likely to undertake regarding their economic relationship more generally and, probably, Fintech specifically.
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