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New York And London Continue Battle For FinTech Dominance

New York and London consistently compete for the title of financial capital of the world. With a focus on FinTech, London is confident they will take the lead, but other contenders are entering the ring.

In 2005 the Z/Yen Group began compiling the The Global FInancial Centres Index (GFCI). Sponsored by the Qatar Financial Centre Authority, It is widely quoted as a source for ranking financial centres. The index was created in order to compare the competitiveness of financial centres, based on over 29,000 financial centre assessments from an online questionnaire together with over 100 indices from organisations such as the World Bank, the Organisation for Economic Co-operation and Development (OECD) and the Economist Intelligence Unit.

New York and London consistently compete to be the financial capital of the world. In March this year New York topped the GFCI list, keeping London in second place. It’s of little surprise that both of these financial hubs are home to a variety of Bitcoin companies. With global investment in financial technology (FinTech) ventures tripling to $12.21 billion in 2014, according to Accenture, the two centres will be trying to attract as much of this years growth as possible.

The technology behind the digital currency, and bitcoin itself, lends itself to the FinTech field. The currencies illicit uses became the face of Bitcoin after the Federal Bureau of Investigation (FBI) shut down the notorious Silk Road website in 2013. While Some jurisdictions have moved on, and are allowing the technology room to breathe and evolve, others are approaching the technology with caution.

In New York the State Department of Financial Services (NYDFS) is attempting Bitcoin regulation, and recently applied what is known as the BitLicense. The license makes New York the first US state to formally launch a framework for regulating digital currency firms, and according to the NYDFS, “contains key consumer protection, anti-money laundering compliance, and cyber security rules tailored for digital currency companies.”

“In many ways, the fact that we found ourselves working on an issue as unexpected as digital currency speaks to the extraordinarily dynamic nature of the financial markets and financial technology right now. The pace of change is only going to accelerate in the years to come. And regulators need to be ready to meet that challenge.”
— – Benjamin Lawsky former NYDFS Superintendent

After two years and three drafts, the final BitLicense has received mixed reviews. Perhaps the most contentious issue is a nonrefundable $5000 fee, just to apply. In addition, the regulation states that “each Licensee may be required to pay fees to the Department to process additional applications related to the license.”

Following the release of the final BitLicense, Lawsky gave his last speech as Superintendent of the NYDFS stating that "regulators should balance their responsibility to protect consumers and root out fraud – while still permitting beneficial innovation to proceed. We can tell you, from experience, setting the exact contours of the new rules of the road in these areas is extraordinarily difficult." He went on to explain, "In many ways – I think it is fair to say – right now it often feels like regulators are from Mars and technologists are from Venus. What we are currently seeing is the collision of a very tightly regulated financial sector and a much more lightly regulated technology sector."

Surviving businesses in the New York regulatory environment have significant backing. itBit operates in New York and became the first company to operate a fully compliant and regulated exchange. The company raised $25 million from their Series A funding round, and have raised a total of $32 million to drive their business forward.

Concerns are that a high application fee imposes a high barrier to entry for small businesses, and therefore a weakened competitive environment. Privacy issues have also arisen and companies are shifting locations or shutting down altogether.

The CEO and founder of Shapeshift.io, Erik Voorhees, recently stated that his company would no longer provide its services in the New York State. “Since New York has mandated unethical and dangerous data collection of users, we have no choice but to suspend service to that territory.”

“We hope other jurisdictions will be less reckless with the private information of their residents. Finally digital commerce can be safe—if only regulators would let it happen.”
— – Erik Voorhees, Shapeshift.io CEO and Founder

In London the regulatory environment is still developing, with no firm frameworks in place. Earlier this year the UK’s Chancellor of the Exchequer set out plans for making Britain “the global centre of financial innovation, benefiting consumers and businesses.”

Among plans to increase investment in the FinTech sector, the Chancellor announced “pro-innovation regulatory measures to unlock the potential of new technology, and allow new innovators to compete on a more level footing with established players.”

In parallel, the Financial Conduct Authority launched Project Innovate, which will help financial service firms navigate the regulatory system and identify where the regulatory system needs to adapt to new technology.

This March the UK Treasury expanded on the direction the new regulation would take. “At this early stage, the government’s objectives for digital currency technology and the sector more widely are as follows: to provide clarity and certainty on the application of existing legislation and regulation for users, businesses and other parties dealing with digital currencies.”

The current lack of regulation in the UK appears to have allowed companies to develop relationships, and platforms, that are preempting oversight. Elliptic recently partnered with the London based derivatives exchange Crypto Facility. Together they have launched a settlement and clearing mechanism that separates bitcoin custody from all other exchange functions.

According to the CEO of Crypto Facility, Timo Schlaefer, transparency is the key. “Mt Gox lost a couple of hundred million at one time, so that is surely the biggest risk factor. At the same time it doesn’t have to be that way, because the blockchain technology really is designed to make the whole thing very transparent.” He went on to state, “I don’t know why it hasn’t been used for that purpose so far, as that is what it is designed to do. I think that it is really important that there is a change in how bitcoins are stored, how transparent exchanges are and that is what we try to do.”

James Smith, Elliptic CEO, mirrored Schlaefers comments, “What we are doing with Crypto Facilities at the moment, is in a sense replicating some of the sensible separation of risk that you see in the existing financial system. Bitcoin has kind of grown up from people’s bedrooms and so on and hasn’t yet got some of those basic safeguards in place. In order to bring in larger financial players, people who are used to operating in a robust environment, you need to have these types of risk controls in place.”

London and New York appear to have taken a relatively similar approach to regulation, when compared to China. While the two western world financial hubs jostle for first place in the GFCI ranking list, Hong Kong is catching up.

Following the recent collapse of MyCoin, and the disappearance of approximately $3 billion HKD, Hong Kong still does not see a need to regulate digital currencies. Lawmaker Leung Yiu-ching has been working with victims of the scam and is trying to get the Hong Kong Monetary Authority to place restrictions on Bitcoin. However, Secretary for Financial Services and the Treasury, Professor K C Chan, denies there is a necessity for such restrictions.

“Bitcoins are not widely circulated in Hong Kong and do not pose a significant threat to the financial system, so there is no need to introduce legislation to regulate virtual commodities trading or to prohibit people from participating in such activities.”
— – Professor K C Chan

Chan believes that current laws which exist in Hong Kong are sufficient to govern the use of digital currencies. Hong Kong has laws prohibiting money laundering, terrorist financing, fraud, pyramid schemes and cyber crimes. Digital currency exchanges and remittance services are expected to apply for Money Services Operations license in order to comply. Unlike the initial fee imposed by the BitLicense, $5000USD, Hong Kong charges $3300 HKD, ($450USD) based on today’s exchange rate.

New York and London may continue to battle it out for top position on the GFCI Index, but the field and contenders are changing. The decentralized nature of blockchain technology does not have to play towards geographic shackles. Borderless transactions, partnerships and innovation may give way to a global financial hub, with regional strengths and weaknesses.


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