Answer

Foundations of Fintech, Fall 2018: Final Exam

Fintech Startups and Behavioral Fintech: Rally Road

#1

The enforcement actions embraced by Securities and Exchange Commission (SEC) in the fall of 2018 significantly impacted corporate fundraising plans of Rally Road. Having established that it was not selling to accredited investors, as required by the SEC, the company was compelled to convert its utility token into a security token. Such an approach resulted into legal clarity in that the company treated its token as a security, which enabled it to comply with the relevant laws of securities established by the SEC. Rally Road opted to securitize classic cars, as opposed to tokenizing them. Securitization involves the provision of debt securities supported by a collection of a single form or type of standardized assets (Schwarcz et al., 2001). The firm’s decision to securitize classic cars was informed by the need to convert low-liquidity assets, which in this case was classic cars, into security instruments of higher liquidity. In this manner, the company could manage to trade classic cars both over-the-counter and on markets and enhance its corporate fundraising plans. 

#2

Cognitive biases refer to tendencies to reason in some ways that can result into systematic shifts from a good judgment or standard of rationality (Schwarcz et al., 2001). As such, cognitive biases possess a significant impact on individuals’ financial choices. In relation to this, Rally Road app exploits anchoring as a cognitive bias influencing financial choice.  Anchoring, which is also known as focalism, focuses on the description of the common tendency of humans to depend too heavily on the initial piece of information provided when making judgments or decisions (Schwarcz et al., 2001). During the process of making decision, anchoring happens when individuals employ an original piece of information in making subsequent judgments or decisions. The setting of an anchor allows for the setting of other judgments by making adjustments based on the anchor, which results into bias towards the interpretation of other information by focusing on the anchor. Rally Road’s app effectively employs this strategy in accomplishing the firm’s financial objective. For example, the company buys collector vehicles and possesses the titles of these cars via a subsidiary firm. Rally Road than hosts offerings registered by SEC, essential an Initial Public Offering for a car, where an investor can purchase one or even more that 2000 shares of equity (Techcrunch, n.d.). The registration of vehicles for sale is done via registered broker-dealer existing within 32 states (Techcrunch, n.d.). Such an undertaking enables investors to make their purchases decisions or judgments by focusing on car titles held by Rally Road.   

#3

Yes, employing the Rally Road application in investing in classic cars improves the financial wellbeing of users. The app enables users to invest in classic cars such as Lamborghinis, Porsches, and Ferraris among other classical models of cars for as little as $50 for every share (Techcrunch, n.d.). As such, all users irrespective of their financial classes are offered an opportunity to acquire ownership in Rally Road by buying shares of its stock.  By purchasing equities using the Road Rally app, users are subjected to a range of financial benefits including income from dividends, capability for capital appreciation, and liquidity.

Valuation Tech or Fin? Equity Zen

#1

Yes, Equity Zen is considered a regulatory arbitrage. Schwarcz et al. (2001) define regulatory arbitrage as a practice whereby companies capitalize on loopholes within regulatory systems with the aim of circumventing unfavourable regulation. Several tactics can be employed in accomplishing arbitrage opportunities including financial engineering, geographic relocation, and restructuring transactions. Equity Zen focuses on marketable investment opportunities, which do not possess any known limitations that would hinder the occurrence of a transaction (Equity Zen, 2018). As such, it can be argued that the firm operates in a setting void of excessive regulatory burdens, which is a feature of geographic relocation. Moreover, considering that the firm serves as a platform that matches sellers and buyers of private company shares, it is involved in the restricting of transactions.

#2

Equity Zen should be valued as a financial company. Even though the firm is technology-based, it majorly serves as a platform for matching sellers and buyers of shares in private companies, which make it a broker dealer. Moreover, the company is essentially involved in the execution of financial operations. For instance, the firm focuses on marketable investment opportunities, which entail a range of financial transactions and investor interests (Equity Zen, 2018). Therefore, Equity Zen is a financial firm that only employs technology to accomplish its goals. The company should be valued as a financial organization.

#3

Unicorns are associated with rapidly increasing or growing valuations. However, when buying shares in unicorns, individuals often face the issue of absence of liquidity. Such companies deny investors the luxury of selling whenever they want. Moreover, most of these companies take long period, which falls between 10 and 11 years, to become public (Capitalist Exploits, 2016). As such, I would advise users buying private company shares on Equity Zen platform to invest in the early phases of the firm’s development (currently), but not to put all their investments in the company, as it would take long for it to go public.

Fintech Cyber Crime

Yes, blockchain can mitigate the danger of cyber-crime within financial services businesses associated with latency risk. According to Aitken (2017), blockchain bears a significant potential for range applications within the sector of finance. The major areas of application where this technology has a tremendous potential is the mitigation of cybercrime in complex and basic financial transactions executed using smart contracts (Aitken, 2017). In fintech companies, cybercrime issues are associated with viruses and malware, inappropriate use of information technology resource by employers, electronic data leakage, incidents impacting IT infrastructures that a third party hosts, and physical loss of media or device containing data (Aitken, 2017).  Nonetheless, the emergence of novel blockchain platforms has proven effective in addressing these security concerns. For example, firms such as Confideal and Gladius, which is situated in Maryland, are intensifying their efforts towards leveraging decentralization aimed at offering platforms that enhance confidence of clients in fintech firms. While Gladius focuses on tackling cyber-attacks in pioneering and new ways, Confideal offers firms access to smart contract establishment that can be employed in facilitating transactions in a secure manner. Since the regulation of these platforms is not under a singular entity, they are effective in easing concerns developed by a splurge of contemporary breach disclosures (Aitken, 2017). Aitken (2017) adds that services established upon blockchain possess the capability of inspiring renewed confidence owing to the transparency developed into the technology.

Blockchain-based security system is associated with several features that limit latency risk. It is vital to note that advancements in blockchain have surpassed crypto-currencies and recordkeeping. For example, the incorporation of smart contract development within blockchain platforms has resulted into several applications including cyber-security (Aitken, 2017). Gladius continues to work on a blockchain-based platform or system that would enable users to rent out spare bandwidth for resources needed to power distributed denial-of-service (DDoS) and content delivery networks (CDN) attack mitigation services (Aitken, 2017). The blockchain distributed smart contracts and network are employed in building a comprehensive network with the ability to deliver accessible web performance, as well as security services. Gladius’ innovative employment of the blockchain possesses the capability of dramatically reducing the potential of criminals to launch cyber-attacks to fintech firms. Moreover, the company’s innovative application of blockchain has the ability of lowering the costs for companies to mitigate against cyber-crimes when they occur. Besides, it allows businesses and consumers to exploit their underutilized bandwidth (Aitken, 2017).

Blockchain also contributes to enhance security by ensuring that business transactions are more reliable. This technology also enhances the ease of adopting smart contract by businesses. For instance, certain blockchain platforms feature a mechanism of arbitration that allows customers and businesses to settle financial disputes arising from cyber-attacks. Therefore, it can be argued that blockchain offers a suitable platform on which fintech companies with latency risk can mitigate dangers associated with cyber-attacks. By employing blockchain, details of transactions are kept secure and transparent regardless of how long it takes for feedback or response to be delivered by the company or customers (Aitken, 2017). In addition, blockchain’s distributed and decentralized network enable businesses to evade failures associated with a single point, thereby making it complex for malicious individuals to tamper with or steal businesses data or data associated with financial transactions.

Digital India

Yes, Indian Prime Minister Narendra Modi’s “Digital India” project unleashes fintech innovations that improve financial inclusion. When examined within the financial inclusion context, effective regulation ensures that the expansion of financial access and use is executed in a way that does not harm financial stability (Bank for International Settlements, 2018). In relation to this, fintech bears the potential to contribute to financial inclusion and financial inclusion, which justify the “Digital India” initiative. With the potential of fintech along with the attainment of digital connectivity, India has commenced the revolution of unparalleled scale and speed. Financial inclusion has transformed into a reality for approximately 1.3 billion Indians (Narendra Modi, 2018). The Digital India initiative has enabled the country to generate over 1.2 billion biometric identities in a few years (Narendra Modi, 2018). Moreover, the country aims to issue a bank account to each Indian (Narendra Modi, 2018). In a span of only three years, India has managed to open 330 million novel bank accounts (Narendra Modi, 2018). These bank accounts are considered 330 million sources of opportunities, dignity, and identity (Narendra Modi, 2018). In 2014, less than 50% of Indians owned bank accounts. Currently, the number of Indians with back accounts is almost universal. Over 50 billion dollars or 3.6 lakh crore of benefits from the Indian administration have reached individuals directly (Narendra Modi, 2018). Millions of Indians, who lived in uncertainty, have access to insurance within their accounts. These individuals also have access to old age pension.

Students continue to receive scholarships directly in their accounts. In addition, banking has been brought to the doorsteps of Indians even within remote villages via 400,000 micro Automatic Teller Machines (Narendra Modi, 2018). With the launching of the Digital India project, the country has managed to launch the globe’s largest scheme of healthcare known as Ayushman. This healthcare scheme is expected to offer affordable health insurance to approximately 500 million Indians (Narendra Modi, 2018). Moreover, the project has enabled India to extend loans amounting to 140 million for small entrepreneurs via Mudra scheme. In the next four years, this figure is expected to rise to 90 billion dollars or Rupees 6.5 lakh crore (Narendra Modi, 2018). It is significant to note that approximately 75% of the loans have been awarded to women (Narendra Modi, 2018).  The project has also resulted into the development of the India Post Payment Bank. According to Narendra Modi (2018), over 150 thousand post offices throughout India along with 300,000 postal service workers are employing the technology in offering house banking. Therefore, considering these advancements, it can be noted that the Digital India program continues to unleash fintechs that promote financial inclusion.

Robo-apocalypse

Yes, fintech innovation is an unalloyed benefit for society. Fintech has led to a novel paradigm to the implementation and design of approaches for financial inclusion, while enhancing the effectiveness of financial services businesses to mitigate against cyber-attacks. In 1970s, the emergence of core banking systems marked fintech’s incorporation of the aspect of financial inclusion (Entrepreneur Network, 2017). Prior to the establishment of core banking systems, every bank branch was involved in manual processing of its own transactions. This process was labor-intensive and expensive. Costs were transferred to consumers, which made it possible for only the wealthiest societal members to afford such expenses (Entrepreneur Network, 2017). As such, only the wealthiest members of the society owned bank accounts.  With the emergence of core banking, an IT system that permitted the connection of a series of bank branches, logging, and settlement of transactions upon the central system of core IT was introduced (Entrepreneur Network, 2017).  As a result, significant financial inclusion was attained. Moreover, the development of blockchain enhanced the security of transactions or data.

The inclusion of individuals within the system of formal finance contributes largely to the society’s economic progress. By including individuals in formal financial system, their ability to establish credit history, start companies, access credit, and pay for services and goods is enhanced.  These actions enable individuals to grow their wealth, as well as improve life quality (Entrepreneur Network, 2017). Fintech has also brought novel opportunities in credit and lending, online retailing, and loyalty among other areas. Finetch, through fintech startups, is associated with significant financial gains to banks. These gains are realized when banks focus their seed investing on risk management tools, software with measurable cost-saving or back-office process-automation, as opposed to direct-to-customer approach. Such an undertaking ensures that the combination of returns on equity plus cost savings result into a positive return on investment (Finovate, 2015).The criticism that fintech has resulted to financial surveillance does not hold, as financial surveillance is a safety measure against issues related to fraud or corruption. Financial surveillance serves as a regulative mechanism against societal actions that can lead to financial harm to the society or even compromise the integrity of financial institutions. As such, financial surveillance cannot be employed as a point of criticism for fintech. As such, fintech continues to be an unparalleled benefit to the society.