Has the Chancellor introduced enough new developments to make a difference to the FinTech sector? (Part 2 of 2)


1. ‘Scale box’ and CFIT

The ‘scale box’ is a new regulatory sandbox for FinTech and RegTech businesses intending to ‘scale’ and collaborate with ‘incumbent’ financial services providers. CFIT will be an industry-led organisation for FinTechs to promote the development of FinTech and support the implementation of certain initiatives.

Both the scale box and CFIT were recommended in the Kalifa Review of UK FinTech published by Ron Kalifa OBE earlier this year. For context, the Kalifa Review has been widely lauded by the FinTech industry for its ambitious plans to boost the growth of UK FinTech and help to ensure the UK remains a global leader in the industry.

The creation of a scale box is a welcome addition to the existing sandboxes, such as the FCA Regulatory Sandbox (which has been successful in assisting with the launch of a range of new FinTech businesses in the UK), the cross-border Global Financial Innovation Network sandbox and the FCA’s ‘digital sandbox’. In particular, the scale box aims to tackle obstacles to partnering between start-ups and incumbent financial services firms. These obstacles include: the complex procurement processes of incumbents which tend to be driven by regulation; a concern by incumbents in relation to potential risks (particularly as the regulatory risk tends to fall on these incumbents); and a lack of opportunity for FinTechs or RegTechs to demonstrate or experiment their solutions in a manner which could reduce the concerns of incumbents in relation to their risk.

With respect to the CFIT, this is intended to operate as a delivery mechanism for the Kalifa Review and a co-ordinating body for the FinTech community. The CFIT will consider and implement several of the other recommendations in the Kalifa Review, such as the formation of a Steering Committee to understand the educational skills gap in relation to FinTech, or to drive the international plan of action for UK FinTech. In this respect, we can infer from the early establishment of the CFIT that the government is looking favourably upon the Review and is preparing to implement a significant number of its recommendations.

These announcements indicate that the government is moving in the right direction to implement the recommendations set out in the Kalifa Review (which contains 15 distinct recommendations and dozens of sub-recommendations). We will find out more information when the government publishes its response to the Kalifa Review.

The Monetary Authority of Singapore (“MAS”) has recently implemented an SGP$125m fund to support FinTech including:

  • a digital acceleration grant providing 80% funding for FinTechs to adopt digital solutions (capped at S$120,000);
  • reductions on office grants and discounts on certain new leases;
  • new platforms and tools for improving access to business opportunities;
  • business growth grants for up to S$80,000 per firm for proof-of-concepts;
  • wage subsidies for undergraduate interns; and
  • 70% funding (up to S$400,000) to support for experimentation, development, and dissemination of nascent technologies in the financial services sector.

By comparison, the recommendations in the Kalifa Review are similar to those implemented by the MAS but at a grander scale. For example, the new £1bn “FinTech Growth Fund” and an expansion of R&D tax credits tackle the same funding issues and encourage the development of new technology, but with greater funding behind it and fewer restrictions on such funding.

If the Chancellor wants to see a significant acceleration of growth in UK FinTech, he will need to look at the larger, more costly, and more complex elements of the Kalifa Review. In particular, the expansion of R&D tax credits, Enterprise Investment Schemes and Venture Capital Trusts, the creation of a new £1bn “FinTech Growth Fund”, and the creation of top 10 fintech clusters to develop FinTech strategy more locally in the UK. These initiatives will be key in unlocking growth in FinTech but will require a much greater commitment of government time, energy, and funds to be implemented.

2. CBDCs

In brief, a CBDC is a digital currency which is issued by the central bank (i.e. the Bank of England (BoE)) and which acts as the equivalent of a digital form of a traditional banknote.

Last year, the BoE signalled its interest in the possibility of creating a CBDC by releasing a discussion paper which considered how such a system could be designed. The Kalifa Review also endorsed the implementation of a CBDC and indicated that collaboration between HM Treasury and the BoE would be essential to create an effective approach to a CBDC.

The Chancellor’s announcement of the creation of a new Taskforce and two new forums exploring CBDCs, suggests that he supports this approach, with the creation of a new Taskforce being jointly chaired by both HM Treasury and the BoE. The increasing prominence of the Treasury in this process implies that government is taking a CBDC seriously and that the policy objectives (and perhaps political objectives) of the Treasury will be expressed by the introduction of a CBDC.

The role of the new Taskforce is technically only to take a preliminary view and consider how a CBDC will operate (as opposed to delivering a CBDC). While both HM Treasury and the BoE have made clear that a decision on its implementation has not been made, the direction of travel for policymakers is certainly moving towards its introduction.

Similarly, the creation of the two new forums announced by the Chancellor – the CBDC Engagement Forum and CBDC Technology Forum - will be looking for senior stakeholders from industry, academia, NGOs, trade bodies, etc. to share their thoughts on the practical and technological aspects of a CBDC.

There has been some debate in relation to the implementation of a (retail) CBDC. The advantages are likely to include a cheaper, more resilient, and more trustworthy mechanism for depositing funds and making payments. It will also foster new business models and could create innovative new ways of implementing monetary policy (e.g. by directly applying interest rates to deposits or more easily and cheaply implementing “helicopter money” strategies). The disadvantages relate to privacy concerns for individual citizens, the potential for misuse of data which can be gathered by government, and the general concern of whether the public sector should be involved in such a project. However, it is difficult to evaluate the advantages and disadvantages of a CBDC until a clear plan for how a CBDC will operate emerges. Any argument in the abstract could be made irrelevant by the design of the new payment system.

Overall, the approach taken by the government and the BoE will be welcomed by the FinTech industry as a CBDC invites a huge opportunity to innovate and replace existing payments infrastructure with new, cheaper, and more efficient methods. However, the idea of a BoE CBDC had been mentioned as far back as March 2016, and other countries, most notably China with its DCEP or “digital yuan”, have already begun implementing CBDC projects. Also, whilst it can be appreciated that a cautious approach may be best for a system which could last for generations, the government will need to weigh this against the opportunity cost of delay.

By comparison, the MAS developed a multi-currency wholesale settlement network in 16 November 2016 for tokenised SGD, and a specialist leader in distributed ledger technology, Toh Wee Kee, announced it is looking to develop and test new multiple CBDC models for cross-border settlements.

In this respect, we can see that the MAS is by contrast aiming to create wholesale CBDCs whereas the BoE’s focus on the retail CBDCs. The latter will undoubtedly be more popular with both the public and FinTechs, who can more readily take advantage of a retail offering market, therefore the Chancellor’s announcement will undoubtedly be welcomed.

This article was first published in Thomson Reuters on Friday 7 May 2021.

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