Inclusive fintech

10949_9789813238633_tp.indd 1 4/6/18 4:41 PM

Other Related Titles from World Scientific

Electronic Trading and Blockchain: Yesterday, Today and Tomorrow

by Richard L Sandor

ISBN: 978-981-3233-77-5

Trade, Currencies, and Finance

by Morris Goldstein

ISBN: 978-981-4749-57-2

Contemporary Issues in the Post-Crisis Regulatory Landscape

by Imad A Moosa

ISBN: 978-981-3109-28-5

Yulin - 10949 - Inclusive FinTech.indd 1 21-05-18 1:45:02 PM

10949_9789813238633_tp.indd 2 4/6/18 4:41 PM

Published by

World Scientific Publishing Co. Pte. Ltd.

5 Toh Tuck Link, Singapore 596224

USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601

UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE

Library of Congress Cataloging-in-Publication Data

Names: Lee, David (David Kuo Chen), author. | Low, Linda, author.

Title: Inclusive fintech : blockchain, cryptocurrency and ICO /

David Kuo Chuen Lee (Singapore University of Social Sciences, Singapore),

Linda Low (Singapore University of Social Sciences, Singapore).

Description: New York : World Scientific, [2018] | Includes bibliographical references and index.

Identifiers: LCCN 2018012983 | ISBN 9789813238633 (hardcover) |

ISBN 9789813272767 (softcover)

Subjects: LCSH: Finance--Technological innovations. | Blockchains (Databases) |

Bitcoin. | Electronic funds transfers.

Classification: LCC HG173 .L3796 2018 | DDC 332.1/78--dc23

LC record available at https://lccn.loc.gov/2018012983

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library.

Copyright © 2018 by World Scientific Publishing Co. Pte. Ltd.

All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means,

electronic or mechanical, including photocopying, recording or any information storage and retrieval

system now known or to be invented, without written permission from the publisher.

For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance

Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy

is not required from the publisher.

For any available supplementary material, please visit

http://www.worldscientific.com/worldscibooks/10.1142/10949#t=suppl

Desk Editor: Jiang Yulin

Typeset by Stallion Press

Email: [email protected]

Printed in Singapore

Yulin - 10949 - Inclusive FinTech.indd 2 21-05-18 1:45:02 PM

June 4, 2018 15:23 Inclusive FinTech 9in x 6in b3207-fm page v

Contents

Foreword vii

Preface ix

Chapter 1: Overview 1

Chapter 2: Digital Currency, Bitcoin and

Cryptocurrency 33

Chapter 3: Introduction to Initial Crypto-Token

Offering (ICO) 83

Chapter 4: The Characteristics of Token Investors 125

Chapter 5: Blockchain: An Introduction 173

Chapter 6: Blockchain: A Technical Introduction 207

Chapter 7: Inclusive FinTech 259

Chapter 8: FinTech in Singapore 307

Chapter 9: FinTech in ASEAN 381

v

June 4, 2018 15:23 Inclusive FinTech 9in x 6in b3207-fm page vi

vi Inclusive FinTech

Chapter 10: Regional Trends and FinTech Future 437

Appendix: Interviews, Podcasts and Videos 449

References 483

Index 499

June 4, 2018 15:23 Inclusive FinTech 9in x 6in b3207-fm page vii

Foreword

When Professor Barry Marshall, Nobel Laureate in Physiology or

Medicine, contacted me some months ago regarding my knowledge

on cryptocurrencies, I had to confess that I did not know much,

if at all, on the matter. I decided I would instead bring along my

good friend and former colleague, Professor David Lee, to discuss the

subject together. Sure enough, when we met over dinner, the night

was spent not chatting about health and medicine, nor economic

growth and recession. Instead, we deliberated over cryptocurrencies,

and Professor David Lee, as expected, answered every question that

Professor Marshall brought up.

Inclusive FinTech is a consolidation of Professor David Lee’s and

Professor Linda Low’s knowledge and expertise on this new and

emerging topic. Not much has been written about the subject and it

is a timely book that elucidates the cryptocurrency market, and the

linkages to large FinTech companies.

New financial instruments will continue to develop in the financial

markets of tomorrow, and while this might be easier for the newer

generations to understand as they are well-acquainted with the

digital economy, it is perhaps more difficult for the older and in￾between generations.

The key question is: Are cryptocurrencies here to stay? There

are costs and benefits, and it requires a great deal of changing mind￾sets and deeper understanding for investors, financial institutions

and policy regulators. For example, regulating cryptocurrencies is

vii

June 4, 2018 15:23 Inclusive FinTech 9in x 6in b3207-fm page viii

viii Inclusive FinTech

difficult as it does not fall under the jurisdiction of any country.

Regulation could strip away the attractiveness to investors. The

value of cryptocurrencies is also highly volatile and dependent

on market sentiments. Yet, there are also benefits such as the

potential for microfinancing developing countries which lack access

to formal credit markets. Nevertheless, we continue to observe that

cryptocurrency hedge funds are increasingly being formed, and it

only seems like cryptocurrencies are here to stay.

This book is a useful reference to complement classic financial

textbooks, with a modern take and the business perspectives of

financial technologies, describing with clarity the concepts of new

finance, trends in FinTech, blockchain, as well as Initial Crypto￾Token Offerings. It provides a systematic and logical presentation

of the key cryptocurrencies today, and sieves out the myths and

misconceptions from the realities of the subject. The book covers

applications in the context of China, US, Australia, India, ASEAN,

Japan, and Singapore. It is an insightful and practical resource, and

an enjoyable read for experts and the general public alike.

Professor Euston Quah

President

Economic Society of Singapore

Professor and Head of Economics

Director, Economic Growth Centre

Nanyang Technological University, Singapore

Editor

Singapore Economic Review

June 4, 2018 15:23 Inclusive FinTech 9in x 6in b3207-fm page ix

Preface

“Banks must be trusted to hold our money and transfer it

electronically, but they lend it out in waves of credit bubbles with

barely a fraction in reserve. We have to trust them with our privacy,

trust them not to let identity thieves drain our accounts. Their

massive overhead costs make micropayments impossible.”1

— Satoshi Nakamoto

“The Times 03/Jan/2009 Chancellor on brink of second bailout for

banks.”2

— Satoshi Nakamoto

The word “FinTech” is an invention in 2014 in response to

the failure of traditional financial institutions to innovate despite

the huge capital and technology at their disposal. The onset of the

Global Financial Crisis (GFC) saw the emergence of bitcoin, a new

centralised e-cash by the accumulated efforts of cryptographers, and

invented by an anonymous group or a person by the name Satoshi

Nakamoto. A few years before that in 2004, a centralised form of

digital cash online payment was already born and mass adopted in

China going by the name Alipay. The Chinese invented the term

“Internet Finance” and that was 10 years before “FinTech” was first

1http://p2pfoundation.ning.com/forum/topics/bitcoin-open-source

2https://imgur.com/pGYXHJh

ix

June 4, 2018 15:23 Inclusive FinTech 9in x 6in b3207-fm page x

x Inclusive FinTech

used. Financial Technology (FinTech) has its root in China with a

social objective of serving those who were excluded in the financial

system dominated by state-owned enterprises (SOEs) and financial

institutions. Chinese banks were serving mainly the SOEs and the

micro, small and medium enterprises (MSMEs) and individuals were

primarily neglected.

Outside China, financial institutions thrived on lightly regulated

environment to foster financial invention and engineering to increase

their revenue prior to the GFC. Since the crisis, regulators have

tightened regulation in many financial activities. Stricter require￾ments in financial and technical requirements have been instituted

and regulators view negatively those innovations that are susceptible

to rent seeking. The inability and unwillingness of traditional

institutions in providing services to the needy have been the major

issues for policy makers. There are still too many that are excluded

from the financial system with the imposition of barriers such as high

remittance charges despite the efforts of international organisations,

for example, the World Bank. However, all that are changing with

the availability of digital devices and decentralised technology.

The Rise of Satoshism

In 2008, a group or a Cypherpunk3 that believed privacy was sacred

decided that it was time to use technology to change the world

instead of the physical occupation of Wall Street. There was an

earlier discussion about the concept of Bit-Gold by Nick Szabo4

before Satoshi Nakamoto’s 2018 white paper.5 Satoshi held the view

that decentralised Peer-to-Peer (P2P) cryptographic-based electronic

cash system would address some of the issues of the current financial

system. The Bitcoin cash system was created to address issues such

as credit-cycle bubbles and financial exclusion caused by a centralised

banking system. Quotations listed at the end will give readers a

3Cypherpunks are futuristic as they author science fiction and are very conversant

with cryptography.

4http://nakamotoinstitute.org/bit-gold/

5https://bitcoin.org/bitcoin.pdf

June 4, 2018 15:23 Inclusive FinTech 9in x 6in b3207-fm page xi

Preface xi

flavour of what were in the mind of Satoshi and many of the

like-minded early adoptors of Bitcoin. Hopefully, the thinking behind

the invention of Bitcoin will kindle the interest in finding out what

FinTech really means.

Satoshi discussed his invention publicly online after he became a

member of P2P Foundation on 11 February 2009 and on Bitcoin

Forum on 19 November 2009. The activity log showed that the

postings were late into the evening in California.

Source: http://p2pfoundation.ning.com/forum/topics/bitcoin-open-source

Source: https://screenshots.firefox.com/ChgxbzJBVJcOPLvA/bitcointalk.org

Satoshi’s most notable quote is on the power of central authority:

“Governments are good at cutting off the heads of a centrally controlled

networks like Napster, but pure P2P networks like Gnutella and Tor

seem to be holding their own.”

— Satoshi Nakamoto

This quote is perhaps the powerful concept of Satoshi that

centralised regulatory system is weakened if there were no legal entity

June 4, 2018 15:23 Inclusive FinTech 9in x 6in b3207-fm page xii

xii Inclusive FinTech

Source: https://screenshots.firefox.com/HLoIohvtgJHPeReA/bitcointalk.org;

https://bitcointalk.org/index.php?action=profile;u=3;sa =statPanel

that is being held accountable with a bunch of software codes. This

gives rise to the decentralised autonomous organisations (DAOs)

that are basically self-regulated by codes with the community as

stakeholders. With bitcoin, it is programmable money and with

DAO, a programmable entity.

Source: https://screenshots.firefox.com/uyRMThe3QkaPKKns/p2pfoundation.

ning.com

The aforementioned quote would give an idea of the very unique

feature of bitcoin and the motivation of creating a system that

bypasses regulatory system or is too costly to regulate. Satoshi

disappeared in 2010 and on 7 March 2014, there was a message posted

from the account saying that he was no Dorian Nakamoto, someone

June 4, 2018 15:23 Inclusive FinTech 9in x 6in b3207-fm page xiii

Preface xiii

who lived near Hal Finney — one of the well-known computer

scientists.6,7

Source: https://screenshots.firefox.com/0BwZ36Ms1xpW7NdB/p2pfoundation.

ning.com

The aforementioned are information and background on the

rise of Satoshism with decentralised and distributed innovation.

The invention of Bitcoin triggered the ideas surrounding FinTech.

Perhaps we can better understand that FinTech is just not a

combination of the use of capital and technology to have efficient

cost structure alone just as the banks and financial institutions are

thinking about. The search for a sustainable business model that

serves the community is the more powerful ultimate motivation.

This was indeed what happened in China four years before Satoshi

Nakamoto released his white paper on Bitcoin in 2008. China, with

a social objective, has been allowing TechFin8 companies to flourish.

The Rise of Chinese Finance

Out of the top 10 FinTech companies in the world, five are from

China. In 2016, Ant Financial raised USD4.5 billion in one of the

largest funding rounds for a private Internet company, P2P lending

and online wealth management company Lufax raised USD1.2

billion, online direct sales JD.com’s subsidiary JD Finance raised

USD1 billion, and installment e-commerce firm Qudian (known as

6https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sit

es/andygreenberg/2014/03/25/satoshi-nakamotos-neighbor-the-bitcoin-ghostwrit

er-who-wasnt/&refURL=https://www.google.com.sg/&referrer=https://www.go

ogle.com.sg/

7https://www.forbes.com / sites / andygreenberg/2014/03/25/satoshi-nakamotos￾neighbor-the-bitcoin-ghostwriter-who-wasnt/#289e37ea4a37

8Defined as those companies using technology to design new business models to

serve the underserved.

June 4, 2018 15:23 Inclusive FinTech 9in x 6in b3207-fm page xiv

xiv Inclusive FinTech

Qufenqi prior to this exercise) raised USD449 million. In September

2017, China’s first Internet-only insurer ZhongAn Online Property

and Casualty Insurance Co Ltd announced its intention to raise

USD1.5 billion in Hong Kong’s biggest ever FinTech IPO. ZhongAn

was formed in November 2013 by Alibaba Executive Chairman Jack

Ma, Tencent Chairman Pony Ma and PingAn Insurance Group Co of

China Ltd (2318.HK) Chairman Peter Ma. The appetite for FinTech,

especially inclusive FinTech, from the investment community has

been large and there are good reasons to be so. For these companies,

the technology strategy is about the use of ABCD (Artificial

Intelligence, Blockchain, Cloud and Data Analytics) or BASIC

(Blockchain, Artificial Intelligence, Security, Internet of Things, and

Cloud Computing).

Since the GFC, we have seen the balance sheet of some central

banks increase by as much as four folds. Unconventional monetary

easing has not rekindled inflation and increased lending to MSMEs

as expected. There have been many controversies surrounding quan￾titative easing (QE). Some argue that the increased liquidity has not

channelled to productive sectors as much as economic theory has

suggested, but into speculative activities and investable asset classes

such as real estate, bonds and equities. The Federal Reserve Bank

(FED) has raised rates four times since December 2015 as part of

a normalisation of monetary policy from near zero rates, reversing

an earlier trend of increasing the balance sheet from USD0.9 trillion

in 2007 to a high of USD4.516 trillion in Jan 2015. As at end Aug

2017, it was USD4.452 trillion. Meantime, others have commented

that many other countries such as China have employed innovative

backdoor QE methods by introducing new lending instruments.

Despite the slowing down of the advanced economies from

2.1% in 2015 to 1.7% in 2016 according to International Monetary

Fund (IMF) statistics, the Standard & Poor (S&P) had returned

−0.73% in 2015 and 9.84% in 2016. The MSCI World Index had

similar performance with −0.35% for 2015 and 8.15% for 2016.

While the growth of emerging markets and developing economies

was fairly constant at 4.3% for both 2015 and 2016, the MSCI

Emerging Markets returned −14.60% in 2015 and 11.60% in 2016.