David Lee Kuo Chuen

Emergence of Fintech and the Lasic Principles

Financial technology (FinTech) has been receiving much attention lately. And, although the development of FinTech is still in early stages, many believe that it will define and shape the future of the financial services industry, and at the same time, increase participation by those who have until recently been under- or unserved. Given the intense competition, however, success in this space will not be easy, and various factors, both internal and external, will play key roles in identifying those that will be successful. In this article, we identify some of these factors, which we term the LASIC (low margin, asset light, scalable, innovative and compliance easy) principles. FinTech companies could benefit from applying some of the ideas presented in this article to their businesses.

A Risk and Complexity Rating Framework for Investment Products

Many investors who bought such investments as Lehman Brothers’ minibonds did not understand the products’ complicated features. This fact suggests that if the inherent risk and complexity of products’ structure are not clearly understood by investors, they will be unable to make informed decisions. Some practitioners have recently attempted to calibrate product complexity. The authors propose a framework for classifying investment product risk and complexity separately with a list of factors that contribute to these attributes. They demonstrate the framework’s simplicity and usefulness in helping investors make informed decisions, showing that it can be used to calibrate a variety of investment products. Investors often do not have a clear understanding of the complicated features embedded in complex investment products. In the aftermath of the 2008 global financial crisis, regulators have increasingly looked for various ways to provide such information, motivated by the need to enhance consumer protection. Although risk indicators are well developed and widely adopted, the financial industry as a whole does not have a common methodology to calibrate the complexity of investment products. In this article, we propose a simple, integrated framework to classify both the risk and the complexity of investment products. Risk is decomposed into six main factors: volatility, liquidity, credit rating, duration, leverage, and the degree of diversification. Product complexity is measured by five basic factors: the number of structural layers, the expansiveness of derivatives used, the availability and use of known valuation models, the number of scenarios determining return outcomes, and the transparency/ease of understanding. We simulated and stress tested the proposed framework with a range of weights for the chosen factors and found it to be technically robust. The framework can be used by industry players to enhance product transparency as well as to offer their clients suitable products, appropriately classified by risk and complexity. Editor’s note: This article was reviewed and accepted by Executive Editor Robert Litterman.

Fintech Tsunami: Blockchain as the Driver of the Fourth Industrial Revolution

This short opinion piece discusses the potential role of blockchain in the 4th industrial revolution. It explores how Satoshi Nakamoto (2008) white paper has changed the way market functions with the examples of bitcoin, public blockchain, private blockchain and Initial Crypto-Token Offering (ICO) or sometimes known as Initial Token Sales (ITS). The most powerful feature of blockchain is the sharing of asset ownerhsip and the paper describes how this is evolving with ITS.

Cryptocurrency: A New Investment Opportunity?

Bitcoin was the first cryptocurrency using blockchain and has been the market leader since the first bitcoin was mined in 2009. After the birth of bitcoin in the Genesis Block, more than 1000 altcoins and crypto-tokens have been created with at least 919 trading actively on unregulated or registered exchanges. This entire class of cryptocurrency and tokens has been classified by some tax authorities as having the same status as commodities. If cryptocurrency is viewed in the same class as commodities, how different it is in terms of its risk and return structure? This paper sets out to help the readers to understand cryptocurrencies, and to explore the risk and return characteristics using a portfolio of cryptocurrency represented by the CRIX Index. Substantial discussions are centred on bitcoin and its close variants. Some questions are raised about the potential of cryptocurrencies as an investment class. Results show that the correlations between the cryptocurrencies and traditional assets are low, and incorporation of CRIX index will improve the performance of the portfolio that consists mainly of mainstream assets. Sentiment analysis also indicates the CRIX index has a relatively high Sharpe ratio. While we may view the results with care, a new form of financing for crypto and blockchain start-ups is born. The disruption brought about by bitcoin may be felt beyond payments through what is known as Initial Crypto-Token Offering (ICO) or Initial Token Sales (ITS).