The FCA has announced the fifth round of its regulatory sandbox which includes three blockchain start-ups. It’s the latest effort in their attempt to assess the value and the risks of new technologies.
The three startups included in this round are:
- Diro Labs: Using blockchain storage technology for identity verification online.
- Fintech Delivery Panel Partners: A decentralised digital identity platform using machine learning identity for verification.
- Nuggets: A payments and digital identity platform. It aims to test blockchain storage of personal data and payment details.
This is the fifth cohort of its sandbox and the regulator said it received a total of 99 applications for inclusion in this round. Around half of last year’s intake was focused on blockchain and cryptocurrency solutions which included startups such as BlockEX, Capexmove, Etherisc, Fineqia, Fractal, Globacap.
This sandbox aims to explore if benefits can be delivered to the consumer while managing all the risks associated with blockchain technologies.
Some of those risks have already made themselves rather plainly apparent.
BlockEX, which was included in the sandbox last year, has been having something of a rocky time. It has a number of advantages including what will be a regulated exchange. However, after an ICO worth $24 million, it struggled to deliver on its projects in 2018, including a mobile app, and has been forced to lay off staff. It now operates with a much scaled-down vision, although its leaders still say they believe they are well positioned to generate revenue.
Meanwhile, South Korea’s Financial Services Commission has also announced its first intake of companies which includes 18 fintech solutions, several of which use the blockchain.
Kasa Korea will be testing mortgage backed securities in the form of electronic securities. Koscom will be testing a blockchain financial service which computerises and updates the shareholder lists of SMEs and helps with P2P trading of these companies while Directional will be testing a stock lending platform. These companies will be able to provide their services without regulatory oversight for the trial period of four years.
This is a pivotal moment for blockchain and the wider financial sector. Depending on who you talk to, the blockchain could be transformative or no big deal. It can open up the financial system and contribute to the fight against cybercrime, or leave customers vulnerable and open up all sorts of opportunities for scams and fraud. It’s an area bristling with potential but also full of risks.
For the regulators this is a chance for them to crystalise their stance on the topic. So far they’ve treated the sector with a mixture of suspicion and confusion while grudgingly acknowledging its potential. Last year they penned an open letter to banks warning about the risks of crypto currencies. More recently, they issued another warning that most investors were piling into the crypto sector despite not understanding how it works.
This is an underlying challenge for the entire sector and even some of those blockchain startups. They see involvement with the sandboxes as a chance to test their platforms and gain some credibility with the backing of a reputable regulator. Many will fall by the wayside, but as the market matures we should soon get a better idea of what works and what will not.
This is still an environment in which all parties must tread carefully. The technology has opportunities and there is plenty of enthusiasm for new startups, but it’s still far from clear which will have legs and what attitude the regulators will eventually take.