Nowadays, it’s becoming far too easy to feel old and out of touch: all you have to do is attend a meeting on Fintech. Despite being an avid technology reader I still, sometimes, find myself in conversations that make me feel that the world must have moved on.
Luckily the internet has more than balanced the demand for information with an infinite supply. The following is a list of terms that are essential for anyone operating in the financial services and related sectors.
Fintech
Financial technology is broadly defined as any technological innovation in financial services. Those engaged in the industry develop new technologies to disrupt traditional financial markets. Various start-ups have been involved in the process of creating these new technologies, but many of the world's top banks including HSBC and Credit Suisse have been developing their own fintech ideas as well. Fintech companies utilise technology from widely available payment apps to more complex software applications such as artificial intelligence and big data.
Cryptocurrency
A cryptocurrency is a decentralised digital currency which uses encryption – the process of converting data into code – to generate units of currency and validate transactions independent of a central bank or government. Bitcoin and Ether are the most common form of digital currencies. But there are other forms of virtual cash, such as Litecoin, Ripple and Dash.
Bitcoin
Bitcoin is the first and one of the most prominent cryptocurrencies used by traders in the world of Fintech. It all began when an unknown person(s), under the pseudonym Satoshi Nakamoto, designed bitcoin as a peer-to-peer payment network without the need for governance by any central authority. In an introductory white paper introducing the virtual currency, Nakamoto defined bitcoin as: "A purely peer-to-peer version of electronic cash (which) would allow online payments to be sent directly from one party to another without going through a financial institution."
Blockchain
Blockchain is a form of distributed ledger technology. This means that it maintains records of all cryptocurrency transactions on a distributed network of computers, but has no central ledger. It secures the data through encrypted 'blocks'. Various blockchain experts believe the technology can provide transparency for a multitude of different industries, not just financial services. The original blockchain network was created by bitcoin-founder Nakamoto to serve as the public ledger for all bitcoin transactions.
Ethereum
Ethereum is another type of blockchain network. It was proposed by a 19-year-old Russian-Canadian programmer, Vitalik Buterin, in 2013. Ethereum differs from the original blockchain in that it is designed for people to build decentralised applications. These are applications which allow users to interact with each other directly rather than having to go through any middlemen. Ether is the value token of the Ethereum blockchain. It is traded on cryptocurrency exchanges.
Disruptive innovation
Disruptive innovation happens whenever new technologies alter the way markets operate. Though not exclusively a fintech term, it is often used to describe events in the financial services where technological developments force financial institutions to rethink their approach to the industry.
Initial Coin Offering
An initial coin offering (ICO) is a crowdfunding measure for start-ups that use blockchain. It involves the selling of a start-up's cryptocurrency units in return for cash. ICOs are similar to initial public offerings (IPOs), where the shares of a company are sold to investors for the first time. But ICOs differ to IPOs in that they deal with supporters of a project rather than investors, making the investment more similar to a crowdfunding experiment. Last month China banned ICOs over concerns that the practice is not regulated and can be opened up to fraudsters.
Open banking
Open banking refers to an emerging idea in the financial services and fintech which stipulates that banks should allow third party companies to build applications and services using the bank's data. It involves the use of application programming interfaces (API) – codes which allow different financial programs to communicate with each other – to create a connected network of financial institutions and third-party providers. Proponents of open banking believe that an "open API ecosystem" will allow fintech start-ups to develop new applications such as mobile apps to allow customers greater control over their bank data and financial decisions.
Smart contracts
Smart contracts are computer programs that automatically execute contracts between buyers and sellers. Smart contracts are often blockchain-based and can save huge amounts of time and costs involved in transactions which usually require a human to execute them. In Ethereum for example, the contracts are treated as decentralised scripts stored in the blockchain network for later execution.
Disclaimer:
This article was issued by Antoine Briffa, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.