Crypto-currencies, distributed ledger technologies and initial coin offerings dominate Crowd Dialog in Vienna

Three hundred delegates from thirty-countries convened in the Austrian National Library of the Hofburg Palace in Vienna, as guests of the Austrian Parliament, to consider developments in the crowdsourcing and crowdfunding space over the last year. Perhaps predictably, there was a strong focus on the role of distributed ledger technology (DLT), initial coin offerings (ICOs), Security Token Offers (STOs), crypto-currencies as well as peer-to-peer, equity and reward-based crowdfunding. The conference was opened by the deputy chair of the Austrian Parliament — who spoke of the crowdsourcing initiative of the national assembly in establishing the Austrian people’s priorities in the renovation of their building which is due to be completed in 2021. The theme of harnessing the power of the crowd in politics was also followed up in the afternoon when Austrian parliamentarian Martha Bissman opined about how citizen democracy might work.

The conference received a keynote address from Ewald Nowotny, the governor of the Austrian central bank who discussed different approaches to regulatory sandboxes across Europe, and observed that the distribution of alternative finance around the continent is very uneven. Austrian retail bank customers have arrived in the digital age with fifty-eight per cent using online banking at least monthly, and only forty-three per cent using bank counters. He stressed the importance of social objectives in devising regulation — including for traditional finance where the increasing use of algorithms in making lending decisions had generated some quite peculiar outcomes.

Reflecting on approaches to corporate finance, Dr Nowotny explained that the role of small businesses was greater in Europe than in the United States: and that higher risk should be financed through equity: contrasting that venture capitalists required robust risk appetites and products, whilst investment trusts tend towards risk aversion. The contribution of fintech was still small — just 20m Euros in Austria. Legislative change had been enacted there in 2015, but the sector still represented just 0.007 per cent compared with banking.

Finally, on crypto-assets, the governor argued that crypto-currencies were not proper currencies — suitable for speculation and trading, but not as means of payment and store of value.

The role of initial coin offerings was championed in another presentation where Olga Feldmeier reported that $30 billion had been raised through initial coin offerings this year (compared with $55 billion in venture capital last year), with three-thousand companies likely to adopt this approach this year. It was acknowledged that costs remain relatively high, and regulatory and banking complications exist (with banks charging as much as two per cent for an ICO, which is broadly consistent with that for an IPO, but just for managing the payments). ICOs offer the prospect of borderless capital not controlled by banks, which, whilst presenting some risks which need adequate management, can also replicate a global IPO.

The future of crypto-currencies was a feature of the afternoon’s discussion, including with a thoughtful speech by Dr Joachim Schwerin, the Principal Economist in the SME Access to Finance team at the European Commission — with markets identified as the vehicle to determine what does and doesn’t constitute a currency. Traditional banking — which poses significant systemic risk and has a poor track record in small business finance — has a particular dominance in European markets (with three-quarters of small business finance sourced through banks). Conventionally, the banking sector has created money, but with the emergence of new players — such as security token offerings, securities and ICOs — other opportunities are gaining momentum, with distributed ledger technology (DLT) increasingly integrated into the real economy. DLT is one of the four key issues being promoted by the European Commission (alongside genomics, artificial intelligence and quantum physics) with a view to: (i) scaling the internal market, including for crowdfunding; (ii) creating awareness and increasing the appetite: a process for education; and (iii) promoting the security and integrity of markets. An EU Blockchain Observatory had been created, but one challenge is the speed of development in the sector which renders legislation obsolete very quickly. However, establishing global governance for global technology is juxtaposed by the political dynamics which increasingly are shifting in the opposite direction.

All-in-all, Crowd Dialog was another opportunity to reflect on the rapidly-changing world of alternative finance and the broader power of the crowd. It’s clear that there is much to be done to promote the growth of crowdfunding in parts of Europe where experience lags behind that in more developed markets, such as in the United Kingdom. However, the main theme for me at the event was the future of distributed ledger technology, initial coin offerings (security token offers) and the difficulty in determining the future of crypto-currencies. What is certain is that this remains a very exciting field, and one which will fascinate delegates at many such gatherings in the future.

Second annual European Alternative Finance Research Conference, Utrecht

Researchers and academics convened in Utrecht for the second European Alternative Finance Research conference, excited at the prospect that a network for future gatherings could receive support from the European Co-operation in Science & Technology programme.

My own address — shared in the schedule with a presentation from the European Commission — was focused on the evolution of the regulatory regime for peer-to-peer lending in the United Kingdom, and, in particular, the current proposals contained in the Financial Conduct Authority (FCA)’s post-implementation review of crowdfunding regulation. Ensuring that the prospects for retail participation in peer-to-peer lending is enhanced by a rigorous regime for platform disclosures, particularly with the prospect of a broadening investor base is a priority. The Commission’s willingness to prioritise market innovation and development ahead of prescriptive regulation is reflected in the approach adopted in the United Kingdom.

Professor Nir Vulkan of the Said Business School at the University of Oxford, considered whether equity crowdfunding remains a good idea. Tracing the history of crowdfunding back to the dotcom era of the early 2000s (with venture capital moving ‘up the supply chain’) creating a struggle for start-up entrepreneurs to access vital capital of the magnitude of around £150k. Post-2007, the FCA’s instinctive reluctance to let retailers be exposed to the risks of small, start-up enterprise investment was relaxed on the basis of self-certification, which broadened the potential investor base for these early-stage businesses: democratising access to capital and mitigating market frictions. Professor Vulkan considers it too soon to draw definitive conclusions about the sector, but reported on his research on retail investor ‘herding’ behaviour; the increasing entanglement of venture capital and angel investors in crowdfunding (with thirty-six per cent of angel investors using equity crowdfunding); and fresh insights into fundraising strategies.

Ana Odorovic’s paper on whether regulators should mandate disclosure requirements in equity crowdfunding found that a social/market optimality would arise where the net benefits of additional disclosure equalled the marginal cost of the same (which would be less than that sought by investors, but exceed that preferred by a platform). However, a disclosure regime would not overcome the challenge of adverse selection, and would not improve the result due to the costs of processing the information and the co-ordination failure of investors. Indeed, mandatory disclosure might prevent some firms from participating in the market and serve further to aggravate information asymmetry. The discussion focused on the role of quality signalling in platforms approaching the market.

 

A discussion on Wanxiang Cai’s paper explored whether the role of social capital was the same in crowdfunding as in other forms of entrepreneurial finance, given the prevalence of strangers, its online and typically distant engagement. The researcher’s narrative of evolution from the crowd to a virtual community of investors raised questions as to the extent to which a crowdfunding ‘community’ of individual investors’ exists — albeit that there is the potential for it to develop.

A presentation from Professor Gianfranco Gianfrate of Harvard University examined risks and returns in peer-to-peer lending, looking at 68 European platforms and 4,130 peer-to-peer business loans over the period from 2012 to 2017. Professor Gianfrate’s analysis arrived at the counter-intuitive conclusion that risk was inversely related to returns, and he argued for further regulation of the sector. Other delegates suggested that these findings warranted further exploration and explanation.