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Decentralization and Distributed Innovation: FinTech, Bitcoin and ICO's, Stanford Asia-Pacific Innovation Conference

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This paper will review some of the innovation thoughts such as creative destruction, innovation paradox and leapfrog economics, and explore the idea of decentralisation and distributed innovation. Examples of growth of FinTech companies in China and FinTech policy response from Singapore will be used to illustrate the efforts in innovation. We look at the growth of decentralisation and distributed technology such as Bitcoin and ICO's and examine if there is value in them as innovation for sustainable development. The paper argues that Decentralisation may eventually solve the pain points of catch-up theory of Creative Destruction in Development Economics. Decentralisation via the Token Economy has great potential to level the playing field for those that are small, less endowed, and with a weaker degree of access.
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Decentralization and Distributed Innovation:
FinTech, Bitcoin and ICOs
Stanford Asia-Pacific Innovation Conference
Oct 26 27, 2017
David LEE Kuo Chuen
1
25 Oct 2017
Abstract
This paper will review some of the innovation thoughts such as creative destruction, innovation paradox
and leapfrog economics, and explore the idea of decentralisation and distributed innovation. Examples
of growth of FinTech companies in China and FinTech policy response from Singapore will be used to
illustrate the efforts in innovation. We look at the growth of decentralisation and distributed technology
such as Bitcoin and ICO's and examine if there is value in them as innovation for sustainable
development. The paper argues that Decentralisation may eventually solve the pain points of catch-up
theory of Creative Destruction in Development Economics. Decentralisation via the Token Economy has
great potential to level the playing field for those that are small, less endowed, and with a weaker
degree of access.
Keywords: Decentralisation, Distributed, Innovation, Bitcoin, ICO, FinTech, Blockchain
1
Singapore University of Social Sciences, davidleekc@suss.edu.sg and Stanford Fulbright Visiting Scholar 2015.
Paper was presented to Stanford Asia Pacific Research Centre Innovation Conference.
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Introduction
This paper will review some of the innovation thoughts such as creative destruction, innovation paradox
and leapfrog economics, and explore the idea of decentralisation and distributed innovation. Examples
of growth of FinTech companies in China and FinTech policy response from Singapore will be used to
illustrate the efforts in innovation. We look at the growth of decentralisation and distributed technology
and examine if there is value in them as innovation for sustainable development.
The catch-up effect states that all economies will eventually converge in terms of per capita income
since poorer economies tend to grow more rapidly than high based wealthier economies. In other
words, the low based economies will literally “catch-up” to the more robust economies. The theory of
convergence is another name for the catch-up effect.
2
Poorer countries tend to replicate the production
methods, technologies and institutions of developed countries. Since the decay in marginal returns to
capital is much slower in developing countries as compared to the developed countries, the less
developed economies will eventually catch up to the capital-rich countries. Alpha-convergence occurs
when income dispersion among countries reduced and Beta-convergence refers to the poorer
economies experience faster growth than the rich ones.
There are other concepts of convergence. The absolute convergence concept implies that poverty will
disappear by itself as low initial GDP will naturally lead to higher average growth. The conditional
convergence concept implies income per capita will converge to a long-run level determined by
structural characteristics such as infrastructure, education, financial system and others. The club
convergence concept implies that group or clubs of countries may experience similar low income and
low growth needing external aid and transfer to break out from the low endowment trap.
The prediction of Abramovitz’s theory will not transpire if there are no social capabilities, i.e., the poor
countries fail to adapt to new technology, attract capital and participate in the global market. Failure to
adopt new technology will result in an inability to generate more capital. Inability to access or attract
capital will cause the catch-up effect to fail. Building global relationship is important because capital is
purchased by developed countries. The idea was that if the developing countries can sell more capital,
they will grow. With wealth, they will catch up. These ideas dominated the development thinking for
more than thirty years.
However, the key to the catch-up theory may be that technology and capital have to be freely traded
and affordable to the catching up countries. Expensive and unavailability of technology or capital
prevent the effect from occurring. The democratisation of technology, capital and information are pre-
requisite to a smooth functioning of the catch-up effect.
In Abramovitz’s 1948 paper
3
, he emphasised the importance of supply chain and supply chain
management in relation to the role of investors in Business Cycles. Raw materials, parts and logistics are
vital to meeting demand. Inventory will play a negative role if there is a lag in the production of the
inventory.
2
Abramovitz, Moses (Jun 1986). "Catching Up, Forging Ahead, and Falling Behind". The Journal of Economic
History. 46 (2): 385406. doi:10.1017/s0022050700046209
3
Abramovitz, Moses (1948). The Role of Inventories in Business Cycles. National Bureau of Economic Research, Inc.
3
Between 1960-1980, the East Asian Tigers comprising of Singapore, Hongkong, South Korea and Taiwan
rapidly converged with developed economies. The Asian Miracle that refers to relatively industrialisation
and development of previously-backwards Asian nations such as China into developed and sophisticated
societies is even more phenomenal. The question now is whether the Tiger Cub Economies, i.e.,
Indonesia, Malaysia, the Philippines and Thailand, that were on a slower growth trajectory as the
original tigers will eventually catch up with them. The last four is now the Newly Industrialised
Countries, a term reserved for the first four previously.
In industrial organisation and economic growth literature, Fudenberg et al.
4
outline the conditions under
which a new entrant can leapfrog an established firm. These conditions can occur not only to firms, but
they can apply to countries. A monopolist has less incentive to innovate as it is comfortably earning
rents from the old technology
5
. Incumbents technologies eventually lose their leadership when new
radical technological innovations are adopted by startups that are ready to take risks. Finally, radical
innovations become the new paradigm and the newcomers leapfrog ahead of the formerly leading
firms or countries. Schumpeter, derived a new theory from the work of Karl Marx, named this as the
gales of creative destruction
6
.
Archibugi and Filippetti
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recently attributed the Global Financial Crisis in 2008 to the slow-down in
opportunities offered by information and communication technologies (ICTs). They argue that economic
recovery will occur when some new technological opportunities are identified and sustained.
Technological opportunities do not enter into economic and social life without deliberate efforts and
choices. We should be able to envisage new forms of organisation associated with emerging
technology. ICTs have already changed our lifestyle even more than our economic life: they have
generated jobs and profits, but above all they have transformed the way we use our time and interact
with the world. Biotech could bring about even more radical social transformations at the core of our life.
Why have these not yet been delivered? What can be done to unleash their potential? There are a few
basic questions that need to be addressed.
Archibugi et al.
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find persistence in innovation among ‘great’ innovators and are more likely to swim
against the tide by increasing innovation activities during the crisis. Since there is persistence or long
memory in past performance, they recommend that policies should support the good innovators, and
reward them under the assumption that their track record is a good indication of future performance. At
the same time, policies should also encourage the creation of new innovative firms.
While the persistence of good performance is a good predictor for the firms during the 2008 crisis, a
country leadership can lose its hegemony and another country can leapfrog that country. We have seen
4
Fudenberg, Drew, Gilbert, Richard J., Stiglitz, Joseph and Tirole, Jean (1983). Preemption, Leapfrogging, and
Competition in Patent Races. " European Economic Review. p. 22: 331.
5
Tirole, Jean (1988). The Theory of Industrial Organization. Cambridge: MA: MIT Press. p. 391-2.
6
Schumpeter, J. (1942). Capitalism, Socialism and Democracy. New York: Harper.
7
Daniele Archibugi and Andrea Filippetti, Innovation and Economic Crisis Lessons and Prospects from the
Economic Downturn, (London, Routledge, 2013).
8
Archibugi, Daniele, Filippetti, Andrea and Frenz, Marion (2013) Who Innovates Out of the Crisis”, The European
Business Review, Jan Feb 2013, Retrieved from http://www.danielearchibugi.org/wp-
content/uploads/2015/01/archibugi-filippetti-frenz-TEBRJan-Feb2013Who-Innovates-Out-of-the-Crisis_.pdf
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this a few times in the last fifty years. In this modern age, the US and Singapore have been leapfrogged
by China in the digital economy. China has become the hegemonic e-commerce and digital power of
the 21st century by its sheer size of the market. This paper uses China as a case study of how its digital
finance has leapfrogged the rest of the financial centres.
Recently, the counsellor of Myanmar was quoted saying that Myanmar is going to overtake Singapore
in twenty years. This statement is interesting as the Prime Minister of Singapore Lee Kuan Yew said the
same of Myanmar when Singapore achieved independence in the 1960’s. Perhaps one main reason is
that convergence is not consistent with the closed economic policy of some developing countries. Being
open to free trade policy is one solution. On what ground did Myanmar counsellor made that statement
and have there been any policy changes to suggest openness and promotion of free trade? Has
Myanmar taken advantage of significant changes in digital technology? Has Myanmar encountered small
and incremental technology change with increasing returns to scale that accentuates its economic
leadership? It may be premature to believe in leapfrogging despite a growth rate 2-3 times that of
Singapore at over 8%.
Faced with the possibility of being overtaken, what is Singapore doing to re-invent itself to ensure it
does not fall behind with many legacy and historical baggage? Given the success of the export-led model
with an emphasis on MNCs rather than SMEs, can Singapore overcome, utilise, or modify the large
business oriented industry? While production efficiency may have been achieved to the long-term
trend, can Singapore innovate with a lack of entrepreneurship and agility? At this time of a radical
innovation and significant digital technological breakthrough, has Singapore’s leadership in finance with
high wages and costs, deter the adoption of new ideas? Has Singapore fallen into the trap of viewing
new technology as inferior to old methods and yet that initial inferior technology may well have more
potential for improvements and adaptation? Will a time come that as technology takes the new form,
and Singapore’s economic leadership becomes its own downfall? This paper uses Singapore holistic
response in policy making to ensure resilience as another interesting case study.
Finally, decentralisation has many characteristics that will overcome the three main obstacles of why
convergence is not occurring. We conjecture that with decentralisation, cryptocurrency and blockchain,
these new technologies are going to accelerate the convergence and allow the developing ASEAN
economies to leapfrog.
China: The Rise of Internet Finance
Creation is the action or process of bringing something into existence. Invention is the action of
inventing something, typically a process or a device. Evolution is the gradual development of something.
In the past 15 years, we have seen the creation, invention and the evolution the Chinese Internet
Finance industry. Perhaps it is ironical to see capitalism at its best in a transition socialist economy. We
have seen “the essential fact about capitalism” or Joseph Schumpeter’s creative destruction of the
incessant product and process innovation mechanism in China, by which new production units replace
outdated ones. Ant Financial is a good example of the “process of industrial mutation that incessantly
revolutionises the economic structure from within, incessantly destroying the old one, incessantly
creating a new one." The concept underlying Ant Financial was born as a necessity of Alibaba, an e-
commerce firm that requires a trusted intermediary to act as an escrow. That simple needs, with the
imperfect money market that capped deposit rates and the push of socialist objective of financial
inclusion, became the catalyst for the birth of a capitalist Internet finance system in China. Banks deposit
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rates were capped for depositors. Banks were not lending to producers and the MSMEs. Regulations
were not in place and the imperfect markets were decentralised with abundant opportunities to
experiment with new ideas.
In China, the use the term DianFu (颠覆) or Revolution is not to mean an overthrow or repudiation and
the thorough replacement of an established government or political system by the people, but to
describe a sudden, complete or a marked change in the business world. The last three years was in fact a
period of rapid digitisation and digitalisation of the economy and especially in finance.
American Physicist and inventor John Vincent Atanasoff invented the first electronic digital computer in
1930’s at Iowa State College and that took a long time to diffuse. The Digital Revolution is the change
from mechanical and analogue electronic technology to digital electronics from the 1950’s with the
adoption and proliferation of digital computers and digital record keeping that continues to the present
day. We have seen the democratisation of information in this digital era that is characterised by an
increase in the speed and breadth of knowledge diffusion within the economy and society.
There were weak government capabilities in the digital economy. Policymakers could not identify
market failures of traditional banks and design the appropriate policies to redress them. At that time,
there was no efficacy of implementation with strong public management practices, and neither there
were processes for evaluating, adapting, and modifying or terminating policies when needed. The
governance was decentralised that there was hardly any coherence policy across the countries and
indeed there was no active coordination across ministries and agencies.
Unlike the recent crackdown in ICO’s
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that see seven ministries and agencies working together to have a
total ban, the Internet finance market back then was just a wild garden. In Chinese, the term used was
野草丛生,野蛮生长, which means that weeds were allowed to grow as wild as they could. These
Internet Finance firms were being viewed as insignificant that would not cause any instability to the
economic or financial system and were being left alone for many years. Long-term money market
instruments were packaged into short-term deposits with daily withdrawal facilities. That facility, which
was made possible by the Internet, handphone and apps, is what led to the mass adoption Alipay and
the exponential growth of deposits into Yu’e Bao. Policy consistency and predictability were not there.
There was no guarantee of a predictable environment for long-run innovation investing. It was all risk-
taking and all by chance that there was an infrastructure for digital communication using a smartphone,
the availability of QR code technology, and with an unpredictable regulatory environment that can
rule long-time unregulated activities to be illegal overnight
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. China's financial market is enormous and
that is positive for innovation to scale. However, it is also sprawling and difficult to control. It is
inconceivable that the rapid growth of innovation and reach can give rise to bubbles in a wide range of
asset classes, some more shadowy than others
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.
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ICO is an acronym for Initial Coin Offering, Initial Crypto-Token Offering or Token Sales. A method for the
blockchain projects or experiments to have access to funding using a swap of some common cryptocurrencies such
as bitcoin, Ether, Zcash and other heavily traded cryptocurrency for a new created token from the project.
10
Public Notice of the PBC, CAC, MIIT, SAIC, CBRC, CSRC and CIRC on Preventing Risks of Fundraising through Coin
Offering, retrieved from http://www.pbc.gov.cn/english/130721/3377816/index.html
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Acheson, Noelle (2017), China's ICO Ban: Understandable, Reasonable and (Probably) Temporary, retrieved from
https://www.coindesk.com/chinas-ico-ban-understandable-reasonable-probably-temporary/
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It was a rare occurrence in a decentralised and yet top-down environment that the world largest
Internet Finance company was born. Some may argue that this is the best example of Innovation
Paradox
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, i.e., for a disruptive idea to make a transition from an invention into a successful execution,
the skills, processes and environment that can work against creativity are also necessary for its
widespread adoption. In China, the paradox is unique. It is the desire to be a first mover in reaping the
returns that is an essential factor for the success of innovation and it is also the significant factor that
leads to heavy regulatory intervention. However, others may argue that it is just pure grit and a sense
of mission. This author has identified some of the characteristics of the companies that are successful at
this initial stage of transformation: LASIC. LASIC stands for Low Profits Margin, Asset Light, Scalability,
Innovative and Compliance Easy
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.
Primarily, the conditions were ripe for digitisation, digitalisation, disintermediate, and
democratisation. This is combined with the readiness of the economy for digital revolution and more
importantly, information revolution that is characterised by the shift from traditional industry to an
economy based on information computerisation. This information age, also known as computer age,
digital age or new media age, relies on digital means. However, what the definition of digital means
continues to evolve with the emergence of new technologies, modern user devices, and novel methods
of interaction with other humans and devices. China created a knowledge-based economy society with
the use of the smartphone as the telecommunication network was made available to the most remote
areas. It was the neutrality of connectivity inclusion mindset of the socialist that prepared the ground
for innovation in digital finance. However, the ingenuity of the Chinese is the ability of its technology
entrepreneurs to come up with new business models beyond the imagination of even Silicon Valley.
Innovation often consists of marginal improvements in process or products. However, it must eventually
lead to mass technology adoption or new product imitation. Having existing infrastructure is essential,
but without the capabilities, skills and more importantly the culture, generic services cannot scale.
Culturally, China is a very commercialised society. The information industry can cater to the personalised
needs of the individuals, simplifying the procedure of making a decision, and significantly lowering the
costs for both providers and buyers. The economic incentives were inclusive and accepted
overwhelmingly by participants from the entire economic activities for efficiency. Underlying this
information age formed by capitalising on digital microminiaturization of computers is social revolution.
Modernising of information and communication processes has become the driving force for this
revolution. This Chinese idea of Dian Fu is perhaps best summarised by this quotation
"…behind every technology is somebody who is using it and this somebody is a society... And that
technology is a weapon, and whoever feels that the world is not as perfect as it should be, should fight,
so that the weapon of technology is used to the benefit of society... so that we can build the society of
the future, no matter what name it may be given
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This is different from the traditional definition of the coexistence of the extraordinarily low levels of innovation-
related investment in poor countries with the dramatically high returns thought to accompany technological
adoption.
13
Lee, David Kuo Chuen and Ernie Teo, “Emergence of Fintech and the LASIC Principles”, Journal of Financial
Perspective, 2015, Vol 3, 3.
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- Ernesto (che) Guevarade La Srerna
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But in a socialist sense, the mission is about helping the small, underserved and growing community
using technology and then benefitting the business as a consequence:
“Help young people. Help small guys. Because small guys will be big. Young people will have the seeds
you bury in their minds, and when they grow up, they will change the world.
My job is making money, helping other people make money. I am spending money, trying to make sure
more people get rich, because you cannot spend a lot of money, right? So my job is spending money,
helping others.
- Jack Ma
The mindset was to scale and serve the entire pyramid rather than just bottom of the pyramid, and it is
about sustainability with innovation, low cost and low profit margin. Of course, China’s hands-off
approach to any projects that help its social objectives is key to the success of financial innovation in
China. The same argument can be applied to JD.com, Tencent, and many other Internet Finance
companies. China’s Internet Finance innovation is also an excellent example of the diffusion of
innovation
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theory. Rogers (2003) argues that diffusion is the process by which an innovation is
communicated over time among the participants in a social system. The entire innovation cycle of
Internet Finance can be explained how the idea and product gain momentum and spreads through the
entire population and social system in a period of four years.
Exhibit 1: The Diffusion Process
14
Interesting set of lecture notes retrieved from https://canvas.instructure.com/courses/949415
15
Rogers, Everett (16 August 2003). Diffusion of Innovations, 5th Edition. Simon and Schuster. ISBN 978-0-7432-
5823-4.
8
Source: Everett (2003) and Maloney (2011)
16
The catch-up theory was also clearly demonstrated in the proliferation of P2P lending in China with the
growth of platforms from cities spilling over to poorer rural areas. The employment numbers of the
people in the sector grew exponentially. The follower organisations and regions arose from the radiation
of ideas, products, and technologies. The paradox was not that the rural areas invested far less than
cities, or that firms and local governments appeared to miss out on productivity growth and lost
competitiveness. Instead, it was the exponential growth that created scams and bubbles that eventually
regulations had to be imposed on the sector. The paradox was that the very same factors that drove
innovation, was very much the same factor that destroyed the innovation. Success will lead to its own
failure and that is the most prominent innovation paradox in China. The diffusion process is more than
exponential, it is explosive as seen in ICOs. Given that China is vast and despite a stable central
government, the execution of governance is decentralised and that earned China the title of “The
largest sandbox in the world”. In fact, it is a large sand space as no box can contain the business ideas
that are flourishing in China. Exhibit 2 below shows the top ten FinTech companies in the world with five
from China denoted in red.
Exhibit 2: Top 10 FinTech Companies
Rank
FinTech Company
1
Ant Financial
2
Qudian
3
Oscar
4
Lufax
5
ZhongAn
6
Atom Bank
16
https://www.slideshare.net/ChrisMaloney2/the-16-rule-the-secret-to-accelerating-diffusion-of-innovation
9
7
Kredictech
8
Avant
9
Sofi
10
JD Finance
Source: From the companies and author
The five Chinese companies are Ant Financial, Qudian, Lufax, ZhongAn, and JD Finance. There are three
interesting observations:
1. The market valuation of FinTech companies is larger than banks. For example, Ant Financial
has a market capitalisation of USD60b and is larger than American Express Bank, Morgan
Stanley, PNC Financial and the Bank of New York.
2. There is great interest in fundraising in Chinese FinTech companies. In 2016, Ant Financial
raised USD4.5b in one of the largest funding rounds for a private Internet company, P2P lending
and Online wealth management company Lufax raised USD1.2b, online direct sales JD.com
subsidiary JD Finance raised USD1b and Installment e-commerce firm Qudian
17
,
18
(known as
Qufenqi before this exercise) raised USD449m. In Sep 2017, China’s first Internet-only insurer
ZhongAn Online Property and Casualty Insurance Co Ltd announced its intention to raise
USD1.5b in Hong Kong’s biggest ever FinTech IPO
19
. 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 enormous and there are good reasons to be
so.
3. Profits of Chinese FinTech companies are growing faster than global banks. For example, Ant
Financial’s revenue jumped 92% to 10.2 billion Yuan in 2014 with 2.6 billion in net profit,
resulting in a profit margin of 26%. What is more interesting is that it is expected to have a
compounded annual growth rate of 64% from 2015 to 2017. So FinTech companies like Ant
Financial have the advantage of economies of scale to further enhance its profit by taking
advantage of economies of scope from other additional services beyond being a trusted
payment agent between buyers and sellers on Alibaba. Similar numbers are seen in other
Chinese FinTech companies.
The exhibit below shows the growth of profits from Internet Finance that saw the exponential
growth in 2013 and 2014. Even with the tighter regulation of restrictions of subscription into digital
finance products and restriction in payment transfer, the projection for future years is still in double
digits. This shows the potential of the sector driven by innovation within and outside China. Many of
these Internet Finance companies are planning to step out of China” with listing on foreign
17
https://www.sec.gov/Archives/edgar/data/1692705/000119312517287443/d282719df1.htm
18
According to the company’s IPO prospectus, Qudian’ total revenues increased from RMB 24.1 million 2014 to
RMB235.0 million in 2015. Total revenues jumped 514% to RMB 1.4 billion in 2016 and further surged 393.3% from
RMB 371.6 million in the six months ending June 30, 2016, to RMB 1.8 billion in the same period in 2017. Qudian’s
net losses were RMB 233.2 million in 2015. It turned to profitability in 2016 with a net income of RMB 576.7
million in 2016, while in the first half of this year alone it has recorded a net income of RMB 973.7 million.
Retrieved from http://technode.com/2017/10/23/chinese-micro-lender-qudian-under-fire-after-splashy-us-ipo/
19
http://www.hkexnews.hk/listedco/listconews/SEHK/2017/0918/LTN20170918023.pdf
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exchanges and have their operation based in countries such as the US, Hong Kong and Singapore if
they have not already done so
20
.
Exhibit 3: Revenue of Chinese FinTech Industry from 2013-2020
Source: iReaserch
The Singapore Case: Holistic Policy Response
The export-led model has helped the Asian economies to grow their GDPs for the last 40 years. With the
influx of multinationals, attracted by free land and worker’s subsidies, unemployment has come down
from as high as 30% to below 2% for some countries such as Singapore. Tax incentives, overseas
headquarters, ease of business setup, regulatory arbitrage and other incentives have worked well for
many of the Asia countries. Except 1997 Asian Crisis, Asia as a whole has been growing at a pace that is
termed the East Asian Miracle. If we look at the growth rates of some of the more advanced ASEAN
countries in Exhibit 4, we can see that the export-led or the catch-up development model is facing some
headwinds especially in Singapore and Thailand.
Exhibit 4: Growth and Forecasts for Six ASEAN Countries
Country/Yr
2013
2014
2015
2016
2017 Forecast
Indonesia
5.6
5.0
4.8
5.0
5.3
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In 3Q 2017, Lufax’s International arm Lu International has been given a license in Singapore to operate their
wealth management platform.
11
Malaysia
4.7
6.0
5.0
4.2
4.3
Philippines
7.1
6.1
5.8
6.8
5.8
Singapore
4.6
3.3
2.0
2.0
2.2
Thailand
2.7
0.8
2.8
3.2
3.1
Vietnam
5.4
6.0
6.6
6.2
6.6
Source: Consensus Economics and HSBC
Singapore is different from China in many aspects but falls considerably behind in digital financial
innovation. The Monetary Authority of Singapore outlined the vision of a Smart Finance Centre
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as
part of the Smart Nation Initiative. It envisages that technology is not just about increasing efficiency,
creating opportunities, allowing for better management of risks, but also to devise new financial services
and products to improve lives. There is a distinct value proposition that embodies developing a vibrant
ecosystem, promoting open banking platform, providing safe spaces to experiment in Sandboxes,
instituting Financial Sector Technology & Innovation scheme, and building strong capabilities with
talents. Grants and schemes
22
such as those by
1. Spring Singapore: Startup SG Accelerator
23
, Startup SG Equity
24
, Startup SG Founder
25
, Startup
SG Talent
26
, Startup SG Tech
27
;
2. Info-communications Media Development Authority (IMDA): Capabilities Development Grant
Technology Innovation (CDG-TI)
28
;
3. MAS: Financial Sector Technology and Innovation (FSTI)
29
These schemes cover the setting up of accelerator, co-investment into startups, co-investment via
mentor partners, granting special permit for foreign startup founders, facilitating internships and to
access Singapore talents, investing in technology new concepts, financing to assist SMEs in building
capabilities, and providing support for the creation of a vibrant ecosystem for innovation.
It is interesting at the micro level, Application Programming Interfaces (APIs) have caught the interest of
the central bank
30
. MAS understand that APIs are crucial for harnessing the benefits of the global nature
of FinTech in a timely and efficient manner. MAS together with the Association of Banks has developed a
financial industry API playbook that identifies common and useful APIs for the industry and cross-
sectoral stakeholders. This playbook
31
also set out the standards and governance models for all FinTech
21
http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre.aspx
22
http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/Setting-up-your-Business.aspx
23
http://www.startupsg.net/startupsg-accelerator/
24
http://www.startupsg.net/startupsg-equity/
25
http://www.startupsg.net/startupsg-founder/
26
http://www.mom.gov.sg/passes-and-permits/entrepass,
https://www.smeportal.sg/content/smeportal/en/moneymatters/grants/technology-for-enterprise-capability-
upgrading--t-up-.html, http://ace.org.sg/ACE-SME-Talent-Program
27
http://www.startupsg.net/startupsg-tech/
28
https://www.imda.gov.sg/industry-development/programmes-and-grants/small-and-medium-
enterprises/initiatives/capabilities-development-grant---technology-innovation-cdg-ti
29
http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/FSTI-Proof-Of-Concept-Scheme.aspx
30
An API is a set of formalised commands that allow software applications to talk with each other in a seamless
manner. APIs make it possible for innovative applications to leverage on foundation services to create better
customer-centric services.
31
http://www.mas.gov.sg/~/media/Smart%20Financial%20Centre/API/ABSMASAPIPlaybook.pdf
12
players. However, a top-down approach may be very different from a decentralised community
approach that takes ownership. It is only through crowdsourced talents and wisdom that the
incumbents can leverage and tap on emerging and innovative FinTech. However, it is always tricky in
execution as most incumbents are comfortable with their board’s direction that focuses on short-term
profitability.
The most promising project is the Project Ubin
32
that creates central money using Distributed Ledger
Technology (DLT). If this project that explores DLT for clearing and settlement of payments and
securities are adopted, then the scalability of Singapore financial system will be phenomenal. The entire
ASEAN payments and securities market can then be integrated to reduce frictional and increase trade in
a collaborative P2P manner rather than on a government-to-government level, something that ASEAN
has been trying to achieve but has not been successful. Phase One of creating domestic inter-bank
payments using a central bank issued SGD equivalent has been completed and phase two of going
regional and with applications will be interesting
33
.
By far, the one that attracted much attention is the FinTech Regulatory Sandbox. As Singapore wishes
to maintain its position as the financial innovation centre, there are many uncertainties over whether
the innovation meets regulatory requirements. The high profile case is Initial Crypto-Token Offering in
which some are imposing a layer of blockchain technology over existing securities that is governed by
the Security Industry Act. In MAS website, the following is stated
34
In circumstances where it is less clear whether a new financial product or service complies with legal and
regulatory requirements, some financial institutions (FIs) or start-ups may err on the side of caution and
choose not to implement it. This outcome is undesirable as promising innovations may be stifled and this
may result in missed opportunities.
MAS is encouraging more FinTech experimentation so that promising innovations can be tested in the
market and have a chance for wider adoption, in Singapore and abroad. The regulatory sandbox will
enable FIs as well as FinTech players to experiment with innovative financial products or services in the
production environment but within a well-defined space and duration. It shall also include appropriate
safeguards to contain the consequences of failure and maintain the overall safety and soundness of the
financial system.
The MAS philosophy is that regulation should not be introduced prematurely to stifle innovation and
derail the adoption of useful technology. Keeping pace and running alongside innovation is what it seeks
to achieve. The other yardstick is the materiality and proportionality test that means regulation will
only come in when risk crosses a threshold. Even then, the regulation should be weighted carefully and
in proportion to the risk posed. Finally and perhaps the most difficult, it seeks to incentivise mitigating
existing risks and restraining new risks that come with innovation. A few concrete initiatives:
1. Activity-based regulation to keep pace with payments innovations.
2. Specific guidelines to promote secure cloud computing.
3. Enabling digital financial advice and insurance.
32
http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/Project-Ubin.aspx
33
http://www.mas.gov.sg/~/media/ProjectUbin/Project Ubin SGD on Distributed Ledger.pdf
34
http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/FinTech-Regulatory-Sandbox.aspx
13
4. A regulatory sandbox to test innovative ideas.
5. Strengthening cybersecurity.
The sandbox started in June 2016 is the most interesting as it leverages a range of technologies including
distributed ledgers, machine learning, and big data analytics. Given that Singapore has the highest trade
to GDP ratio averaging 400%, the trade and supply chain financing are two fascinating areas that the
Customs of Singapore has taken a keen interesting. It is building the National Trade Platform or NTP as a
trade and logistics IT ecosystem connecting businesses, community systems and platforms, and
government systems
35
. Singapore Customs (“Customs”), in partnership with Government Technology
Agency (“GovTech”) is issuing this Call for Collaboration (“CFC”) to invite companies to develop the
services of Multi-Banks Trade Finance Application Portal (“TFAP”) and Trade Finance Compliance (“TFC”)
on the National Trade Platform (“NTP”) in Singapore.
36
DLT will again be a very interesting application
given that trades are inherently decentralised, cross-border and require untrusted parties to
collaborate.
Singapore understands the ingredients of innovation and strives to focus and enhance in three areas for
its competitive advantages.
1. The critical complements to innovation investment needed to realise the high potential
returns.
The policies described above demonstrate the importance of innovation investment as
Singapore sees it. The two sovereign wealth funds and GLCs are at the forefront of investing in
technology companies. Capabilities are being built in such corporations as Fullerton Financial
Holdings that focus on financial inclusion. However, most of the investments are still focusing on
the top of the pyramid. Private sector investments are much broader and foreign investments
are the primary driver. Many technology companies such as Paypal, Lufax, CreditEase, Ants
Financial and others have set up offices in Singapore. In particular, a large number of ICO
projects set up their foundations and HQs in Singapore, taking advantage of Singapore’s
professional workforce, branding, clarity in regulation, advanced infrastructure, desirable
lifestyle, and inclusive culture. These include TenX, OmiseGo, Qtum that have gained access to
more than USD120m token sales collectively. Many others have used Singapore as a base to
reach out to the international market. The latest announcement on the relaxation on Venture
Capital license conditions
37
is another recognition that innovation investment is important.
2. The range of firm capabilities required to undertake innovation and take it to market is
essential.
Many training schemes and courses in the higher learning education institutions are geared
towards these efforts but the ability of SMEs to transform remains weak. These schemes will
bear fruit eventually but it takes time to change the mindset. Deep skills are still missing in many
35
https://www.customs.gov.sg/about-us/national-single-window/national-trade-platform
36
https://www.customs.gov.sg/about-us/national-single-window/national-trade-platform/industry-collaboration
37
http://www.mas.gov.sg/News-and-Publications/Media-Releases/2017/MAS-simplifies-rules-for-managers-of-
venture-capital-funds.aspx?from=timeline&isappinstalled=0
14
industries. The global startups and technology giants that are relocating to Singapore are driving
the change. This is the benefit of a small open economy that welcome all to part take in its
efforts of transformation.
3. The required government capabilities for implementing effective innovation policies are just as
critical as collaboration among them.
MAS has the FTIG group with Sandbox regulation, SGInnovate with focus on deep skills, IDMA
encourages innovation and investing in startups, JTC and others provide startups office spaces
are all initiatives. FTIG group has been implementing Project Ubin to use Decentralised Ledger
Technology (DLT) to create a payment system that allows untrusted parties to collaborate. By
building a Hinternet
38
, just like what Ant Financial has done, Singapore is ready to take
advantage of the One Belt, One Net strategy. Collaboration among different departments are
now more prominent than previously observed and the Smart Nation’s initiative is taking shape.
How successful these efforts are will depend on collaboration efficiency. Re-organisation of the
different units, ministries and departments are underway.
Unlike Singapore, most ASEAN firms and countries have the problems despite investment in innovation
as they fail to import appropriate technology, engage trained workers and professionals, and draw on
new organisation techniques. All these contribute to the low investment returns in innovation. On the
contrary, Singapore is well aware of the problem of high cost, and focus on having an open trade
regime, competitiveness framework, capital markets development, intellectual property protection, and
avoiding market failures that disincentivise the accumulation of knowledge. Singapore sets up
supporting institutions and takes care of all complementary factors for innovation such as to subsidise
costs, to promote free trade, to ensure fair competitions, to develop capital markets for startups, to
initiate IP protection, digital data and knowledge enhancements. Singapore emphasises the learning and
raising the capabilities for innovation and firms, and moves away from clustering or focus on specific
sectors.
These policy initiatives ensure Singapore and its firms are not lagging in capabilities to catch up with the
digital economy of China. As in many previous examples and unlike China, Singapore firms lack the
capabilities required to respond to disruption, to identify new technological opportunities as most SMEs
are intermediaries, let alone to develop a plan to explore it and to cultivate the necessary future skills
for innovation. The government is focusing on solving the technical unemployment issues and leaving
the identification of future skills to the private enterprises. However, if the private enterprises do not
even have a clue how to counter the disruption, there will be a market failure in skills future training.
Two universities
39
were chosen to assist in the transition but it remains to be seen how the human
resources will be retrained. Incumbents protected by regulation, will tend to believe that the business
will be as usual with no incentives to train for the disruptors. These are all consistent with observations
38
http://www.digitalfinancemedia.com/blog/2017/02/07/alternative-assets/ ,
https://www.smu.edu.sg/news/2016/03/23/FinTech-promise
39
The two are Singapore University of Social Sciences and Singapore Univeristy of Technology and Design.
15
with recent research that managerial capabilities are driven by good managers but failures to innovate
are due to the followings:
1. by enabling the most inefficient or regulation-protected firms to survive
2. by failing to provide adequate incentives for firms to upgrade
3. by failing to recognise that firms with diffuse ownership tend to be among the best, whereas
government-owned companies and family-owned firms are weaker.
The ubiquity of the latter in developing countries partly due to the weak rule of law, or that size and
regulation matter in the case of a small country. Recent examples in the transportation sectors and the
successful breaking down of the monopolistic market by Uber and Grab in Singapore sent a crucial
message to the incumbents. Monopolistic regulation instils a false sense of comfort for the incumbents
in well-organised society. However, such mindset that has hindered the change in behaviour may slow
the innovation and a country like Singapore may face the challenge from other ASEAN economies that
can leapfrog.
The successful examples in China and Singapore, one with a large domestic market and the other small,
have the common factor of using regulation or the lack of regulation as a way to influence firms
behaviour. Both have used incentives to attract foreign MNCs but have not been successful in changing
the behaviour of MNCs in the new disruptive economy. Instead, it was the disruptors that led the
change. Creating environment through investment in innovation, enhancing abilities of firms and
assisting them to go global have not produced evidence that they work. There are challenges in
changing the mindset and behaviour of large organisations.
Culture, besides regulation or the lack of it, plays an important role in China. In Singapore, innovative
policymaking that takes advantage of regulatory arbitrage almost always bears fruit in the financial
sector as evidenced in hedge fund management, private banking and Real Estate Investment Trust (REIT)
sectors. Few realise that one can set up a fund management firm in Singapore without a license until
2012 when the Chapter 298 Securities and Futures Act Section 41, 1(e) was repealed. But by then,
thousands of fund management firms were already set up and the economy benefitted. The same
happened in private banking and REITs that saw many foreign participants setting up in Singapore. It will
be interesting to see if Singapore can continue to transform itself by attracting new entrepreneurs or
creating and encouraging its own to flourish with the new set of policy. Singapore has grown by being
internal inclusive in its policy for businesses that are set up in Singapore, it will be interesting to see if it
can be external inclusive as the start-ups and businesses venture outside the country without the
advantage of regulatory arbitrage. Perhaps, decentralised inclusive tech may be a way forward.
Decentralisation: What It Can Do
The most important thesis of Cirera and Maloney (2017)
40
is that the observed low level of technological
adoption in developing countries is a rational response of firms to a range of conditions they face:
barriers to accumulating physical and human capital, low firm capabilities, and weak government
capacity. We are suggesting here that the decentralisation technology may be one of the solutions and
40
Cirera, Xavier and William F. Maloney (2017), “The Innovation Paradox: Develping-Country Capabilities and the
Unrealised Promise of Technological Catch-Up”, International Bank for Reconstruction and Development/World
Bank Group.
16
may result in accelerating catch-up via inclusive technology. We will use the example from the Crypto
or Token Economy to explain the possible use of such technology to achieve cross-border catch-up
bypassing the centralised authorities. The lack of technology, mobility of human resources, and the lack
of access to capital are major pain points for the low-income economy to catch up. The more freedom a
network has, the fastest the innovation
41
.
This is made worse with many physical barriers, non-transparencies and regulations that institute
control, opaque capital flows and perpetuate monopolistic power. Entrepreneurial entry is inversely
related to the size of the government, and more weakly to the extent of corruption according to AIdis et
al. Unlocking the enormous growth potential of moving countries closer to the technological frontier
however is not as simple if countries and businesses have no access to global talents and capital, and are
facing conflicting interest of the incumbents. General policy prescription has been from the centralised
policy-making perspective, for example, by providing additional incentives for research and
development. Moving countries closer to the frontier will require far-reaching policy changes that tackle
multiple constraints to technological adoption. Technology, if decentralised, may induce more
technological adoption if the country or businesses have access to open source, a benevolent economic
incentive structure that embodies interests of most, and global in market reach.
Bitcoin and ICO: The Most Success Use Cases of Blockchain
What is interesting is that decentralised technologies are excellent for countries that do not function as
efficiently with trade barriers, inadequate management capabilities, weak governance and regulatory
constraints. The example of Bitcoin is a very interesting diffusion technology that has reached global
scale. On 12 Oct 2017, the bitcoin market capitalisation was USD86.6b with a 24-hour transaction
volume of USD998.3m and 16.62m bitcoin in circulation.
Bitcoin was initially invented to bypass regulation as previous entities that create digital money had all
been closed down by authorities. The only way that Bitcoin will be irrelevant is to undermine the
underlying economic incentives by having an equitable and predictable global monetary system.
Without the Global Financial Crisis and Quantitative Easing, Bitcoin would not have taken off but the
timing was ripe. It is very much like the rise of Yu’E Bao in China.
The most potent feature of Bitcoin is that it is open source, which means that anyone with access to the
Internet can download the software, run it and be connected to a peer-to-peer network with no
permission needed. Being open source also allows Bitcoin Improvement Proposal (BIP) as a way to seek
consensus for changes. It is not only a mechanism to form consensus or non-consensus at times, but it
also allows for crowdsourcing resources such as talents. The first BIP (BIP 0001) was submitted by Amir
Taaki on 2011-08-19 and described what a BIP is
42
.
BIP stands for Bitcoin Improvement Proposal. A BIP is a design document providing information to the
Bitcoin community, or describing a new feature for Bitcoin or its processes or environment. The BIP
should provide a concise technical specification of the feature and a rationale for the feature.
41
Aidis, R., Estrin, S. & Mickiewicz, T.M. (2012) Size matters: entrepreneurial entry and government”, Small Bus
Econ, 39: 119. https://doi.org/10.1007/s11187-010-9299-y
42
https://en.bitcoin.it/wiki/BIP_0001
17
We intend BIPs to be the primary mechanisms for proposing new features, for collecting community
input on an issue, and for documenting the design decisions that have gone into Bitcoin. The BIP author
is responsible for building consensus within the community and documenting dissenting opinions.
Because the BIPs are maintained as text files in a versioned repository, their revision history is the
historical record of the feature proposal.
The open source culture in a network or bounty economy
43
,
44
, allows for low-income countries to
complement their inadequacy in sourcing short term talents that they do not have during a particular
stage of catching up. It does not impose on the economy any long-term liability but it solves the short
spell of inadequacy in the innovation cycle.
The other interesting feature of the crypto economy is the economic incentives. Bitcoin is deep in game
theory and economics with the incentives for as many to play by the rules. It is all about using economic
incentives to achieve favourable outcomes. Cryptography allows users to prove properties of memory or
past data; digital signature allows authorisation; hash chains allows for efficient memory linkages; and
zero-knowledge proofs allow for privacy; and finally decentralisation allows for security and sometimes
privacy. Combining cryptography, economic incentives and decentralisation allow for predictability of a
secure and transparent blockchain. More importantly, the benevolent design that embodies stakeholder
interests ensure alignment of interest to scale the network.
What economic incentives will help wider geographical distribution of Bitcoin nodes are an important
question. But it is even more important to ask the questions of how a complex technology can scale to
remote areas and the answers lie in the fact that cost of production of bitcoin
45
is spread across and
individually affordable. The fact is that every user of the network becomes a stakeholder and is
rewarded for participation. The miners
46
are voluntary contributors in the autonomous business of
bitcoin. All these are possible because of the economic incentives genius design of Bitcoin. The
transparency, even with zero-knowledge proof or zk-SNARK
47
, will increase the willingness of fund
contribution, allow for ownership of identity and certificate such as land title, food security, supply chain
etc.
The third feature of Bitcoin is that it is global and cross-border is a consequence of a decentralised
system without a legal entity. It is because of this global reach that capital can flow freely and this solves
43
The network economy is the emerging economic order within the information society. The name stems from a
key attribute - products and services are created and value is added through social networks operating on large or
global scales.
44
An economy that is based on rewards or a generous amount as a reward for certain activities or behaviour, such
as reaching a predefined economic goal, writing a programme to fix a bug, or performing a commnity service on
the Internet.
45
Bitcoin is used to denote the network and bitcoin with a small b is used to denote the currency.
46
Bitcoin mining is the process by which transactions are verified and added to the public ledger, known as the
block chain, and also the means through which new bitcoin are released. Anyone with access to the internet and
suitable hardware can participate in mining and participants are called miners. Retreived from
http://www.investopedia.com/terms/b/bitcoin-mining.asp#ixzz4vYqjemjs
47
The acronym zk-SNARK stands for “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge,” and
refers to a proof construction where one can prove possession of certain information, e.g. a secret key, without
revealing that information, and without any interaction between the prover and verifier. Retreived from
https://z.cash/technology/zksnarks.html
18
one of the main bottlenecks of the catch-up theory. The peer-to-peer transfer of value function will
allow for anyone from anywhere to move capital freely with no intermediaries.
The fourth feature is global fractional digital asset ownership that will allow for savings, lending and
transactions of a low-value object such as livestock. This will allow for innovation in financial inclusion in
conjunction with microfinancing institutions.
Bitcoin growth has been phenomenal as we can see from the number of wallets from Blockchain.info,
the market capitalisation and the unspent transaction output. The growth in these selected statistics
shows the global participation in an experiment that is open, benevolent in economic incentives and
global in the market. ICOs or token sales have taken off because they provide a way for blockchain
projects to access funds. The diffusion of the ICO innovation is seen from Exhibits 5-9 below with
USD96m tokens sales in 2016 to USD2.7b up to Oct 2017. Such scaling effect in a short-term is
phenomenal! This is only possible because of the open, encompassing economic incentives, global and
fractional ownership. Decentralisation has brought about a diminishing role of jurisdiction and become
borderless on the Internet. Decentralisation has also solved the pain point of access to global capital.
Decentralisation has addressed the issue of the global reach of developing countries. Finally,
decentralisation has allowed for fractional ownership with 10-8 of a digital asset. These are all the pain
points of catch-up theory. IMF has recently called on the banks to be mindful of the rise of
cryptocurrency and its power of disruption
48
. Successful banks may have to revise their own idea of “too
big to collaborate” in a decentralised world and embrace decentralisation for a more inclusive
innovative world.
48
Lagarde, Christine (2017), “Central Banking and FintechA Brave New World?
https://www.imf.org/en/News/Articles/2017/09/28/sp092917-central-banking-and-fintech-a-brave-new-world
19
Exhibit 5: Market Capitalisation of Bitcoin
Source: Blockchain.info
20
Exhibit 6: Number of Unspent Transaction Outputs
Source: Blockchain.info
Exhibit 7: Number of Blockchain Wallets
Source: Blockchain.info
21
Exhibit 8: 2016 and 2016 ICO Statistics
Source: Coinschedule
Exhibit 9: ICO Distribution
Source: Coinschedule
Conclusion
22
There are much to learn from the Bitcoin and ICO experiments for development economics and
innovation. We have seen how a catalyst such as the imperfect money market as well as the use of Yu’E
Bao to trigger the growth of the entire Internet Finance industry in China. We have seen how this has
created the Fear of Missing Out (FOMO) in countries that are comfortable incumbents with challengers
from the leapfrog economies. Forward-looking regulators such as Singapore and Japan
49
are taking
considerable calculated risks to allow for regulatory arbitrage so that innovation can take place. We
have also discussed the real mover and game changer for the catch-up theory and innovation paradox to
have a new direction is decentralisation. The real bottlenecks are barriers that are set up to retain
monopolistic power, an opaque structure for self-benefits, regulation to ward off challengers and the
canvassing of political votes.
However, the paradox is that its success factor will lead to its failure. Given the speed of the innovation,
literacy will never be able to catch up. It is precisely the speed of diffusion of knowledge that will lead to
scams, bubbles, speculation and the financial illiterates that will be taken advantage. While education
and consumer protection are essential for stability when the euphoria gets too wild, the catch-up theory
may become a reality.
With a decentralised structure that bypasses regulation, it may be a systematic way to allow for a faster
diffusion of innovation. We should be able to envisage new forms of organisation associated with
emerging decentralised technology. Smart contracts or Decentralised Autonomous Organisation (DAO)
may not be perfected, but they are already disrupting centralised exchanges with buyers and sellers
searching for each other through the Internet. The market price may eventually be closer to value as
homogeneous commodities are reverting to heterogenous barter exchange via digitisation and
digitalisation. These will encourage more exchange of values. We may be moving from market price to
digitised P2P value and eventually to the trading of digitised hedonic (shadow) valuation. We may see
the effect of speculation effect disappearing.
Decentralisation may eventually solve the pain points of catch-up theory of Creative Destruction in
Development Economics. Decentralisation via the Token Economy has great potential to level the
playing field for those that are small, less endowed, and with a weaker degree of access. Although the
decentralisation technology offers a new perspective, the implication of decentralisation on catch-up
theory and innovation is still to be studied further.
49
On May 25, 2016, Japan's Payment Services Act (PSA) was amended to regulate virtual currencies. The main
changes to the PSA were as follows: (1) Definition of virtual currency (Article 2-5); (2) Registration of virtual
currency exchanges (Article 63-2); (3) Regulation of virtual currency exchanges' operations (Article 63); (4)
Supervision of virtual currency exchanges (Article 63).
23
Appendix 1: Myanmar A Potential Leapfrog Economy
Exhibits A1-3 together show the financial scene in Myanmar with ample opportunities for payments,
savings, credit and insurance as FinTech activities. However, Myanmar problems are now well known:
capital constrained regulated the retail sector and product constrained low-quality financial product
sector. Access to financial services is low at only 30% have access to formal financial services. The vision
is By 2020, Increase Financial Inclusion in Myanmar from 30% to 40%, More than one product from 6%
to 15%, with full range of affordable, quality, effective and responsible financial services by getting all
stakeholders to work together in an integrated manner.
Myanmar faces many challenges such as a weak regulatory environment, cash-based economy, weak
saving culture, low trust in the formal system, inappropriate and insufficient products, capital
constraints, limited accessibility, weak institutions, absent infrastructure and lack of hard infrastructure.
However, these challenges can be viewed as opportunities as this is one country that have few legacy
systems and historical silo structure that plague other well developed financial centres. More than half
the debts are sourced informally, and that presents an opportunity for digital finance for more
transparency. According to UNDP’s report, 42% of the 5 million farmers used credit to deal with agri-
related risk.
Given that agriculture forms the backbone of the economy with half the population in agriculture,
MSMEs are critical for economic development, and low-income households are important for poverty
reduction, the priorities are in these three areas. These present significant opportunity for FinTech to
facilitate efficient payments, micro-savings, responsible credit and micro-insurance. Most people use
informal ways to save (e.g., gold), to borrow (e.g., friends and money lenders) and to transfer money
(traditional agents).
24
Exhibit A1: Central Bank of Myanmar: Access to finance in 2014
Source: author and Central Bank of Myanmar
25
Exhibit A2: Usage of account in Myanmar in 2014
Source: author and Central Bank of Myanmar
26
Exhibit A3 Broadening the bottom of pyramid in Myanmar
Source: author and Central Bank of Myanmar
The trend of FinTech in Myanmar and its general landscape may revive with its banking system has long
existed, but behind a wall
50
. Many of its largest banks are internationally blacklisted due to the
economic sanctions. Ninety-seven percent of the population has no bank accounts. The FinTech has
great opportunities, but still on its very initial stage.
There have been many improvements in the regulation, with the announcement of the rules for mobile
money operators. However, so far, there is no policy regulating the overall payment ecosystem. There
are a lot of grey areas, which give space to unregulated activities such as hundi [unofficial remittance
system]. Another issue is talent. There is limited local know-how in Myanmar, and it is still difficult to
attract foreign talents. Capital is also limited. Here, we have the Myanmar VC Club, but venture capitalist
funding is done more through foreign VC, coming from Singapore for instance. Last, the financial system
in itself is still under development: KYC is still not mandatory for Telcos and Money providers for
instance. Myanmar has, since the beginning of 2016, its clearance system, a stock exchange market and
a Payment System (PMU). However, those infrastructures are still under construction.
50
https://www.linkedin.com/pulse/yes-you-can-FinTech-change-what-traditional-burmese-banks-gueguen-1
27
Regarding expectation of Myanmar’s FinTech startups, its financial services industry has begun a
significant transformation with the explosive growth of mobile and internet penetration in a significant
impact. Mobile operators, partnering with banks, are best placed to expand the reach of financial
services in Myanmar to those that are unbanked today, leveraging the significant distribution networks
that are already in place.
As Myanmar continues its transition, it is critical that financial inclusion remains a priority and that
industry-wide collaboration occurs to develop business models that will be sustainable and beneficial to
the financially excluded. The government is playing an important role in ensuring that the right
regulatory model is put in place to allow for mobile operators and subsidiaries to provide these services.
Agent banking has been identified as an effective vehicle to drive true financial inclusion driven by rapid
mobile penetration rate with telcos are expected to cover 90% of the population within the next three
years compared to 10% in 2013, along with innovative financial technologies. The country is in the
middle of a positive economic transition and its market widely regarded as the last true frontier filled
with real opportunities.
Challenges have been identified as follows, awaiting the right responses. There is a lack of basic
infrastructure in general, and FinTech infrastructure, in particular, to kick-start in a country with at least
five power cuts per day and low Internet connectivity. There is also a lack of customer awareness and
trust in technology where education will be key. Also, FinTech should be simple, at least initially, as
better to walk before the industry can run.
A nascent financial system is where Western FinTech has been built on top of existing old systems.
Burmese FinTech has to start everything from scratch. Equally lacking is a limited talent pool. It was
repeated during our interviews: Burmese ‘FinTech talent is, so far, a scarce resource. However, some
‘tech hubs’, such as the Yangon MICT Park (and to a lesser extent the Mandalay’s one) might well be the
future hubs for appealing fresh and innovative spirits.
On the financial side, a limited capital pool is where venture capital (VC) funds are popping up in the
USA and family offices are investing in the Indian FinTech scene, but funds are still limited in Myanmar.
However, foreign investment, through local partnerships or joint ventures (JVs) might be
a good solution.
Accordingly, Myanmar must rid itself of strong regulatory barriers
51
. The Central Bank of Myanmar is
working to regulate e-money providers. However, the regulation regarding digital currencies,
crowdfunding, or even outbound international remittance is still to be debated. The strict regulation of
foreign investments might also limit the entry of successful foreign start-ups
A driver of innovation responding to a real need for efficient payment solutions and financial inclusion is
as missing. Also, the fast development of mobile penetration which is being seen as opportunities for
telecom companies, global banks and investors need to be reckoned with.
51
https://www.linkedin.com/pulse/yes-you-can-FinTech-change-what-traditional-burmese-banks-gueguen-1
28
As for companies
52
, there is Telenor Myanmar which is partnering with Yoma Bank to offer mobile
banking, with the aim of providing basic financial services. While the sector was dominated by a state-
owned monopoly Myanmar Post and Telecommunication, two international mobile operators -
Norway’s Telenor and Qatar’s Ooredoo – have been issued licenses. They will compete with two state-
owned operators (Myanmar Posts and Telecommunications, or MPT and the Yatanarpon Teleport Co
(YTP). Mobile networks to offer basic banking services accessible through customers’ mobile wallets.
The launch of Wave Money to drive financial services for the unbanked is launching, since it will start
with money transfer, an important on-ramp feature to active usage in such a nascent country. Other
innovative payment models in the works include Myanmar mobile money and myKat, as well as local
app MyCHAT, which is planning to enable mobile payment on its social chat.
More than 177 microfinance institutions had received a license to operate as a microfinance institution
from the Myanmar Microfinance Supervisory Enterprise since 2013 and this number has continued to
increase. These are likely partners for FinTech companies that utilised blockchain and other Internet of
Things and devices on the ground. Most of them are tiny organisations with less than a thousand clients,
and MFIs have a chance to reach significant scale if the technology is available to them. The largest
operator, PACT Global MFIs, is serving over 500,000 clients and has worked in Myanmar since 1997.
ACLEDA Bank, have also received licenses to operate as MFIs with other global champions such as Basix
and ASA are expected to follow soon.
In July 2013, the Central Bank of Myanmar became autonomous from the ministry of finance after the
Law of the Central Bank was passed in government. A key responsibility of the central bank is payments
and mobile banking. The priorities are probably in the areas of electronic payments, low-cost savings
products, agriculture input credit, unsecured credit, insurance products for health and funeral, as well as
insurance products for credit, especially in the agriculture sector.
According to CGAP, UNDP started funding microfinance projects in the mid-90’s and was followed by
several other agencies through the LIFT trust fund. Bilateral agencies such as DFID and USAID are
supporting financial inclusion. The World Bank Group (IFC and the World Bank) are supporting the
regulatory framework and good practices in the industry. UNCDF has been present in Myanmar since
2012 with MicroLead Expansion, CleanStart and Shaping Inclusive Finance Transformation with
emphasis on Green Energy, Financial Inclusion and Women. All these are catalysts for inclusive FinTech!
However, as the main text argues, the convergence of decentralisation technology with other
technologies may be the catalyst for Myanmar to leapfrog other countries such as Singapore using
scalable technology such as drone delivery, drone or balloon WiFi, LiFi that transmit WiFi using LED
lights, and Solar Panel. Myanmar has all the pain points of a developing economy and if decentralization
works, this will be one economy that potentially leapfrogs and benefit in accordance with catch-up
theory.
52
http://crossroadsmyanmar.com/focus/future-banking-myanmar-online-banking-and-challenges-lie-ahead
http://qz.com/48250/creating-online-banking-in-myanmar-a-country-with-little-of-either/
https://e27.co/FinTech-myanmar-gets-boost-new-e-commerce-payments-platform-20150224/
http://www.leotech.com.sg/myanmar-FinTech-collaborations-no-exclusives/
http://www.FinTechasia.net/why-mobile-financial-services-matter-for-myan/
http://blogs.accion.org/features/FinTech-in-myanmar-leapfrogging-to-mobile-money/
http://FinTechnews.sg/FinTech-events-singapore/
29
Appendix 2: Singapore: Grants and Schemes Available
53
Grant/Scheme
Description
Administrator
a.
Startup SG
Accelerator
Startup SG Accelerator supports partners,
primarily incubators and accelerators, in
strategic growth sectors that take on the role of
catalysing growth opportunities for high
potential startups through their programmes,
mentorship and provision of resources.
Startup SG Accelerator will provide funding
and non-financial support for these partners to
further enhance their programs and expertise in
nurturing successful startups.
For more information, please visit here.
SPRING Singapore -
Startup SG
Contact email
b.
Startup SG Equity
As part of the Startup SG Equity scheme,
government will co-invest with independent,
qualified 3rd party investors into a startup. This
scheme aims to stimulate private-sector
investments into innovative, Singapore-based
technology startups with intellectual property
and global market potential.
For more information, please visit here.
SPRING Singapore -
Startup SG
Contact email
c.
Startup SG Founder
Startup SG Founder aims to provide mentorship
support and startup capital grant to first-time
entrepreneurs with innovative business
concepts. The scheme provides up to $30,000
by matching $3 to every $1 raised by the
entrepreneur.
SPRING will fund the startups through
Accredited Mentor Partners (‘AMPs’). These
appointed partners will select applicants based
on the uniqueness of business concept,
SPRING Singapore -
Startup SG
Startup SG Founder
can only be applied
through an Accredited
Mentor Partner
(AMP).
53
Reproduced from http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/Setting-up-your-
Business.aspx
30
Grant/Scheme
Description
Administrator
feasibility of business model, strength of
management team, and potential market value.
Upon successful application, the AMP will
assist the startups with advice, learning
programs and networking contacts.
The AMP will decide on appropriate milestones
together with the applicant. Their recommended
application and milestones will be surfaced to
SPRING for vetting and approval. The grant
will be disbursed in 2 tranches based on agreed
project milestones over 12 months.
For more information, please visit here.
d.
Startup SG Talent
Startup SG Talent fosters a more conducive
environment for promising global talent to set
up innovative businesses in Singapore and for
startups to attract talent to be part of their team.
Schemes under this pillar include:
(a) EntrePass which allows eligible foreigners
to start and operate a new business in Singapore
(b) T-Up which allows businesses to access the
pool of talent from A*STAR’s Research
Institutes and build in-house R&D capabilities
in their business operations
(c) SME Talent Programme (STP) Internship
which will facilitate internship matching
between students and technology-based local
startups. In addition to internships, the
programme will also assist startups in building
their human capital development capabilities in
identified areas such as recruitment & retention
and talent management.
For more information on EntrePass, please visit
here.
For more information on T-Up, please visit
here.
Contact email for T-
Up
Contact email for STP
31
Grant/Scheme
Description
Administrator
For more information on SME Talent
Programme (STP), please visit here.
e.
Startup SG Tech
Startup SG Tech is a competitive grant in which
proposals are evaluated based on both technical
and commercial merits by a team of reviewers,
and the best are funded. Applicants may apply
for either the Proof Of Concept (POC) grant or
the Proof Of Value (POV) grant, depending on
the stage of development of the technology or
solution/concept.
For more information, please visit here.
SPRING Singapore -
Startup SG
Contact email
f.
Capabilities
Development Grant
Technology
Innovation (CDG-
TI)
The Capabilities Development Grant (CDG) is
a financial assistance programme designed to
help SMEs build their capabilities across 10 key
business areas. SMEs can use the CDG to defray
up to 70 percent of qualifying project costs (e.g.
consultancy, training, certification, equipment
and software costs) for upgrading initiatives in
areas like increasing productivity, process
improvement, product development and market
access.
It aims to increase the level of technology
innovation in local enterprises, supporting
companies that undertake projects to develop
innovative technology products or solutions.
For more information, please visit here.
Info-communications
Media Development
Authority (IMDA)
Apply
g.
Financial Sector
Technology and
Innovation (FSTI)
The FSTI scheme is launched to provide
support for the creation of a vibrant ecosystem
for innovation. MAS has committed S$225
million over a five-year period, for the
following four purposes:
32
Grant/Scheme
Description
Administrator
(a) Innovation Centres: To attract financial
institutions to set up their innovation labs in
Singapore;
(b) Institution-level projects: To catalyse the
development of innovation solutions that have
the potential to promote growth efficiency or
competitiveness; and
(c) Industry-wide projects: To support the
building of industry-wide technology
infrastructure or utility that is required for the
delivery of new, integrated services.
(d) POC scheme: The POC scheme provides
support to both FIs and non-FIs for early stage
development of innovative projects in the
industry. For more details on the POC scheme,
you can refer here.
... The main services of FinTech companies in this area include "drafting proposals for directing the customer in investment" based on their financial background, risk-taking or risk aversion status, and financial goals. FinTech companies can also "implement and provide robotic consultants (robo-advisers) to provide appropriate pieces of advice to customers to guide (2018) Li et al. (2017) Mackenzie (2015) Nakashima (2018) Qi and Xiao (2018) Shim and Shin (2016) Wonglimpiyarat (2018) Yoon and Jun (2018) investment based on customer-accepted investment goals, and ultimately to "investor asset portfolio management" (Lee Kuo Chuen, 2018). Robo-advisers help customers with little knowledge of the capital market control their own investment portfolio (Li et al. 2017;Razzaque et al. 2020). ...
... In this area, FinTech companies contribute to the development of the banking business "by providing technical platforms for offering omnichannel services to banks and financial institutions" (Gozman et al. 2018). Also, by developing platforms for analyzing customer data, they "make it possible for banks and financial institutions to recognize customers' preferences and provide intelligent and targeted customer-centered advertising" (Lee Kuo Chuen, 2018). In the advertising sector, FinTech companies can also offer financial training related to the use of financial service platforms, new models of loans such as P2P and crowdfunding, automated payment processes, validation, and personalized services to bank customers through social networks and media (Tran et al. 2018). ...
... The third business domain in this field is "sales," and it deals with "commission" and "underwriting." One of the services of FinTech companies to banks in this area is "the reduction of bank fees by providing banking services through various channels" (Lee Kuo Chuen 2018;Kauffman and Ma 2015;Boot et al. 2021). Another service of FinTech companies is "providing a platform for underwriting and security underwriting offers to the customers based on artificial intelligence" (Kotarba 2016). ...
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... The main services of FinTech companies in this area include "drafting proposals for directing the customer in investment" based on their financial background, risk-taking or risk aversion status, and financial goals. FinTech companies can also "implement and provide robotic consultants (robo-advisers) to provide appropriate pieces of advice to customers to guide (2017) (2018) investment based on customer-accepted investment goals, and ultimately to "investor asset portfolio management" (Lee Kuo Chuen, 2018). Robo-advisers help customers with little knowledge of the capital market control their own investment portfolio (Li et al. 2017;Razzaque et al. 2020). ...
... In this area, FinTech companies contribute to the development of the banking business "by providing technical platforms for offering omnichannel services to banks and financial institutions" (Gozman et al. 2018). Also, by developing platforms for analyzing customer data, they "make it possible for banks and financial institutions to recognize customers' preferences and provide intelligent and targeted customer-centered advertising" (Lee Kuo Chuen, 2018). In the advertising sector, FinTech companies can also offer financial training related to the use of financial service platforms, new models of loans such as P2P and crowdfunding, automated payment processes, validation, and personalized services to bank customers through social networks and media (Tran et al. 2018). ...
... The third business domain in this field is "sales," and it deals with "commission" and "underwriting." One of the services of FinTech companies to banks in this area is "the reduction of bank fees by providing banking services through various channels" (Lee Kuo Chuen 2018;Kauffman and Ma 2015;Boot et al. 2021). Another service of FinTech companies is "providing a platform for underwriting and security underwriting offers to the customers based on artificial intelligence" (Kotarba 2016). ...
Article
Full-text available
Most activities of FinTech companies in the real world are limited to a variety of banking services such as payment and funds transfer, while the scope of banking services is much broader than the current activities of FinTech companies. In recent years, extensive research has also been conducted on how FinTech companies contribute to the provision of banking services. The present study identifies ideas for new and innovative areas of FinTech companies’ activity by reviewing the relevant literature. These areas are categorized using the Banking Industry Architecture Network (BIAN) service landscape and are identified and described through thematic analysis. The outcome of this study is a model which reveals that the main service domains belong to the “banking operations and execution,” “sales and services,” “risk and compliance,” “business support,” and “reference data.” According to the findings of the present research, FinTech companies have the capability to provide banking services in 22 domains out of 36 BIAN domains. Theoretical contributions and comparative analysis are discussed.
... According to the convergence theory developed by Abramovitz (1986), if poor countries grow faster than developed and rich countries, they can catch up with developed countries in terms of per capita income. However, this assumption will be valid if the methods and technologies used in developed countries are copied (Lee, 2017). In this context, blockchain technology is seen as an important tool by developing countries and financial institutions to contribute to the development of countries by increasing financial participation. ...
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Blockchain technology originally finding applications in Fintech and supply chain management is rapidly expanding applications to other industries as well as the public sector. “Blockchain has been compared to the invention of the internet and its comprehensive impact on almost every industry.” R. Beck and B. Markey-Towler (2017) A recent study by PWC (2020) found that, “Blockchain technology has the potential to boost global gross domestic product by $1.76 trillion USD over this decade.” It has been argued that the digital revolution has favored more developed nations and that has helped create a “digital divide” with less developed nations. Business and governmental infrastructure in developing nations have lagged that of more developed nations. Some of these challenges faced by developing nations include the registration of property ownership, financial systems, modern efficient supply chains often accompanied by a lack of trust and the ability to verify and audit organizational processes rapidly and economically. Blockchain technology has the promise to address many of the critical needs of developing countries internally and in external trade relationships to help enable them to be more competitive. This paper will review the literature and examine the impact of Blockchain technology on how its adoption may ameliorate many of these critical challenges for developing nations helping to improve governance and economic benefits that are shared more equitably. Potential for both positive and negative impacts with be discussed along with policy implications for public policy makers and private enterprises.
... However, Abramovitz's predictions will fail in cases of missing social and technological capabilities. Therefore, the democratization of technology is a prerequisite to a proper functioning of the catching-up effect (Lee 2017). ...
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Blockchain technology, born as a tool to support Bitcoins (the most popular and controversial cryptocurrency in the world) has set itself in a very short time as a disruptive technology able not only to revolutionize existing businesses but also to create new ones. This work illustrates the main characteristics of the blockchain and its functioning, and then focuses on the potential applications that can be implemented for developing countries. More specifically, the work, considers the case of financial inclusion in Africa, on the basis of the Global Findex 2017 data, the World Bank Survey on financial inclusion. The empirical analysis identifies the weaknesses in the current financial system in Africa and constitues the basis to discuss potential blockchain solutions to reduce the current level of financial exclusion and pursue sustainable development for African countries.
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