Why the fintech sector needs a common taxonomy

In the roughly 10 years that fintech has existed as a term of reference for finance firms that use technology, industry observers have struggled to put those companies into buckets. But they haven’t given up yet.

The Cambridge Centre for Alternative Finance, part of University of Cambridge Judge Business School, recently produced a taxonomy for the fintech sector with 13 different verticals and 103 sub-verticals.

The work is part of a survey that the university is conducting with the help of the World Economic Forum and World Bank Group about the impact Covid-19 has had on the fintech sector. By 17 August, the deadline for input, the group had received more than 1,300 responses.

“The definition issue has always been problematic for as far back as we can remember – back in the crowdfunding days,” said Bryan Zhang, executive director at the Cambridge Centre for Alternative Finance.

And the issue persists. The Financial Conduct Authority still uses the phrase ‘loan-based crowdfunding’ for what is widely referred to as peer-to-peer lending. The watchdog also uses the term ‘cryptoassets’ to refer to what almost everybody else calls cryptocurrency or digital assets.

Classification can seem a rather dry business, but in a rapidly growing market that has the potential to harm customers if left unchecked, the need for regulators and policymakers to get on the same page is critical. When it comes to cryptocurrency, which is inherently global in reach, it is even more important that national authorities take a joined-up approach.

The World Federation of Exchanges, a trade body representing over 250 stock exchanges and clearing houses, made exactly this point in a statement on 15 July.

Responding to the Financial Stability Board’s consultation on stablecoins, cryptocurrencies backed by a basket of low-risk assets, the WFE called on international standard-setting bodies to come up with a common set of definitions for both stablecoins and cryptocurrencies. Without this, it warned in a statement, a “fragmented regulatory landscape” could emerge.

Libra, a cryptocurrency spearheaded by the social media giant Facebook, is perhaps the best-known attempt to launch a stablecoin on a truly global scale – and certainly the most visible. If it materialises, the Libra token could be used to make payments across Facebook’s family of apps, but the plan was met with fierce opposition from regulators after being announced in 2019.

Nandini Sukumar, chief executive of the WEF, told Fintech Files that there “is really a very great need, in regulatory terms and to aid the future growth of crypto products, to have a common taxonomy for stablecoins and cryptoassets”.

“We believe in innovation and we believe also in innovation that sits within the regulated framework and structures, and I think that the taxonomy is part of that theme,” she added.

The results of the FSB’s consultation and its final recommendations for regulating global stablecoins are due to be published in October 2020.

In the current climate, the idea that taxonomy could form a crucial part of any consultation on fintech – given the widely reported struggles that startups in the sector have had with, say, fundraising or revenues drying up – is an odd one. Put simply, there would appear to be more pressing matters to address.

Then again, perhaps it is the very fact that the pandemic has put the brakes on the sector’s normally explosive growth that has given observers the chance to lay down some hard definitions. 

Further reading:

Last week was a tough one for digital banks, perhaps fintech’s most promising sub-sector (while we’re on the subject of taxonomy).

The Times has interviewed Monzo’s new chief executive TS Anil. The banking veteran takes over at a difficult time for the startup, which saw losses double in its latest financial results in late July.

Revolut and Starling have also posted their own results in the past few weeks. A hiring spree at the former startup has led to losses tripling to £107m, despite a surge in revenue, according to the Financial Times. The Telegraph reports that Starling saw losses double to £52m.

Sifted has the analysts’ take on the three British digital banks’ performance.

Meanwhile, in Germany, N26 is facing turmoil at its headquarters as a group of employees fight to set up a powerful union-like staff body against management’s wishes.

This punishing week of headlines has led some within the fintech sector to repost this Wired article about how the tech press ‘forces’ a narrative on companies.

Finally, Reuters reports that Greek payments firm Viva Wallet has appointed Jefferies to assist with a €500m fundraising.

To contact the author of this story with feedback or news, email Ryan Weeks

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