Fintech Talk: May 19, 2017
After a short hiatus, Fintech Talk returns and features a long list of hot topics and interesting news. First up, is the ongoing success story that is Transferwise. The UK fintech start-up – if you can still call it a start-up – has done what a lot of unicorns have failed to achieve and has edged into profitability, proving highly valued high-growth companies can become sustainable businesses. According to Business Insider UK, the company revealed that it had a revenue run rate of £100m last year and that over $1.3bn was transferred on the platform every month by one million customers. Commenting on the results, co-founder and CEO, Taavet Hinrikus said, “To have hit break-even just six years on from launch shows how strong the foundations of our business are. This is just the starting point. With the unique platform we’ve built, we’re looking forward to creating a new kind of financial services for the future."
To demonstrate how difficult it is for unicorns to become profitable, you only have to look at Snapchat, which IPO-ed earlier this year without having made a profit, and research from GP Bullhound that suggests that only 60 percent of European unicorns are profitable. Interestingly, the research also noted highly valued (fin)tech start-ups in the UK are more sustainable than those in the US, where often profitability is years away for start-ups.
Another recent, and long-awaited, fintech success story comes from Zopa, the UK’s oldest and largest peer-to-peer (P2P) lender, which has been granted full authorisation by the UK regulatory body, The Financial Conduct Authority (FCA). The approval comes after an 18-month approval process and will now allow the company to apply to Her Majesty’s Revenue and Customs (HMRC) for ISA manager status to offer the Innovative Finance ISA. The news is an important moment for the P2P industry, which has been waiting for the largest players to become fully regulated to move the sector into the mainstream. The regulator’s stamp of approval is expected to boost the sector’s legitimacy to investors and financial advisers alike. To better illustrate Zopa’s clout in the sector, it is worth noting that it has lent more than $3.51bn to consumers since its fruition, employs over 200 people and has over 60,000 active investors.
As you will know, a large part of the world was affected by the WannaCry ransomware attack last week, which targeted computers running the Microsoft Windows operating system by encrypting data and demanding ransom payments in Bitcoin – the question we have been discussing in the office is, how many people actually know what a Bitcoin is, let alone know how to mine, use and pay with them? That aside, those behind the hack have, without doubt, had a lucrative week. Recent estimates show that they have racked up almost $80,000 in bitcoins.
However, according to Coindesk, their next step may be more difficult as they still have to work out how to move that money, without giving themselves away to authorities. So what are the options for the bad actor(s) behind the ransomware attack?:
- One of the simplest processes is ‘chain hopping', where bitcoins are converted into other digital currencies, usually at offshore exchanges. “Following the trail gets quite difficult as the coins cross jurisdictions and change shape,” said Emin Gün Sirer, a professor at Cornell University.
- Another technique known as ‘tumbling’ would allow the hackers to pool their ill-begotten bitcoins with other people's coins. In a bitcoin tumbling service, coins from different sources are mixed together and then re-disbursed. Conceivably, the hackers could repeatedly mix their coins until the coins were diluted enough to throw law officials off their path. However, Ethan Heilman, a university researcher behind TumbleBit, a proposed bitcoin tumbler, indicated that mixing bitcoin is risky business, especially when dealing with larger sums of money. As he pointed out, one of the problems the hackers may run into is finding a large enough number of bitcoins to adequately mix with.
On a related note, the price of bitcoin has more than tripled over the past twelve months. Many other cryptocurrencies have seen an even larger price increase than bitcoin. For example, Ethereum, which has been attracting interest from banks (as well as ransomware extortionists), has increased in value by 1,400 percent in under a year. With this in mind, City AM published a debate featuring Dr Garrick Hileman, a research fellow at the Cambridge Centre for Alternative Finance, Judge Business School, and Colin Hanna, an associate at Balderton Capital, to discuss whether or not we are witnessing a bubble?
Hileman argues that we are, indeed, experiencing a bubble. He says “that the value of the entire cryptocurrency universe, now estimated at over £40bn, has doubled in just the past month alone. While solid economic rationale – in the form of innovation and growing cryptocurrency use – underpins part of this increase in value, it is also very likely that some cryptocurrencies are currently overvalued. Paradoxically, should a cryptocurrency bubble burst, the price of bitcoin may rise even further, at least in the short-run, as bitcoin is the dominant currency pair for altcoin exchange trades.”
Conversely, Hanna suggests “that we are not in a bitcoin bubble and that bitcoin and other cryptocurrencies will continue to be very volatile assets, but for long-term investors there are handsome future returns. You can think of these currencies as networks. Like all networks, they increase in value exponentially as more people participate. Moreover, in a time of geopolitical flux, many investors are looking to these assets as alternatives to the classic macro asset classes of currencies, commodities, equities, government bonds, and fixed income investments. While bitcoin’s market cap is still below $30bn, the total aggregate market cap of all cryptocurrencies likely does exceed $50bn, particularly given the recent strength of Ethereum – which is now approaching $10bn. In summary, while we may see increased price volatility in the near term, bitcoin and other networks like Ethereum are going to continue to gain value in the long run. Both as fundamentally new distributed technologies, and alternative asset classes.”