Or maybe just some of the best jewels in that crown…

In a few months, on June 23rd, Britain has a referendum on whether to stay in the EU. London has certainly become the Fintech capital of Europe and some in London would argue that it is the Fintech capital of the world. Talent and capital is highly mobile today; entrepreneurs go where it is easy to do business and investors follow them. Many entrepreneurs in London originated elsewhere in Europe, but chose London proactively (for some mix of capital, talent, regulation and fun). Will Fintech entrepreneurs still come to London if it is no longer part of the EU? Luxembourg is waiting with open arms if they get cold feet about London.

Brexit risk calculator

We don’t do politics on Daily Fintech, so I leave it to the Daily Telegraph to run the odds of Brexit.

In short, the unthinkable has become a scenario worth planning for.

Heartbeat of Europe

Luxembourg is tiny, with a population of about 500,000 (which is not a lot more than Iceland). Entrepreneurs might view those 500,000 as a test market (a large public Beta) to get to Product Market Fit. However entrepreneurs come to Luxembourg to be part of the EU, which is the largest single market in the world.

You can feel the heartbeat of Europe in Luxembourg. You meet people from all over Europe. Some are commuting for the day and live somewhere cheaper in France or Germany. Some moved residence to Luxembourg leaving France or Germany or the UK. So ventures can tap a talent pool that is much bigger than those 500,000. This is the reality of micro multinational startups today; engineers can be in Berlin, the jurisdiction can be Luxembourg and the marketing can be in London. Which one is “head” office?

Nordics show that entrepreneurial Europe is possible

The dialogue in the UK (and USA) about Europe is about bureaucracy and sclerosis. Who wants that? Given a choice between EU or Entrepreneurial, most would choose Entrepreneurial. A quick look at the Nordics (Finland, Sweden, Norway, Denmark) tells you this is a false choice.

If you want a dynamic Fintech success story inside the EU, take the Fintech city tour to Stockholm. Look at huge Fintech success stories like Klarna in Stockholm or Saxo Bank in Copenhagen. Go to Money 2020 in Copenhagen. Smart Silicon Valley money sees this magic quadrant of EU + Entrepreneurial; check out the 500 Startups Nordic Fund.

Talent is mobile

No, I don’t mean that entrepreneurs use mobile phones. I mean that entrepreneurs can set up wherever makes most sense for them; they are not constrained by where they come from. This is a subject we covered in this Daily Fintech research note about the emergence of micro-multinational startups working globally from day one.

Jurisdiction/regulation is one factor that influences location choice for startup Fintech teams. This matters most around Bitcoin, where startups must have regulatory clarity in order to operate. We have already covered the ground-breaking move from Silicon Valley to Zurich for Xapo for Jurisdiction/regulation reasons.

This may be happening in Luxembourg for Bitcoin startups.

Bitcoin – the jurisdictional wildcard

If you buy the Bitcoin is dead, long live permissioned Blockchains story…click away. If not, read on.

Two stories about Bitcoin regulation at the EU level:

European union to crack down on bitcoin after Paris attacks. Takeway: make sure you have your AML/KYC technology nailed.

Bitcoin exchange is tax free. Takeway: set up your exchange in the EU.

Within that context, there are two relocate to Luxembourg stories from Bitcoin ventures:

Snapswap 

Holytransaction

Then there is a phoenix from the ashes story reborn In Luxembourg.

DigiCash, founded in 1989, pioneered anonymous digital transactions well before Bitcoin popularized the concept. Digicash was too far ahead of its time and declared bankruptcy in 1998. Digicash is now based in Luxembourg and seems to be executing well:

• Digicash holds a full EU payment institution license.

• Digicash has been implemented by 4 retail banks and deployed at a national scale.

The big but unglamorous Fund operations business

The part of London Fintech that is most up for grabs by Luxembourg post Brexit is the Fund Operations business that gets the klunky UCITS tag (Undertakings for Collective Investment in Transferable Securities). In short, how do you manage the complexities (legal, operational, technical) of marketing a fund cross border?
Luxembourg leads this market, with London and Dublin following. Due to a history that includes Clearstream being based in Luxembourg, it has become the go to place for global funds and payments operations. This give Luxembourg an expertise supply chain that is hard to beat; big global funds and payment operations set up shop in Luxembourg because it has this critical mass of expertise.

These are not nameplate operations in Luxembourg. Global companies have significant human capital based in the city plus an expertise supply chain (lawyers, accountants, technologists, administrators).

Once this kind of concentration of expertise happens it tends to accelerate innovation and fuel more startups. In short, success breeds success. Even without Brexit, Luxembourg’s lead in this niche is likely to increase. If Brexit happens, one can envisage a rapid movement by firms from London to Luxembourg in this niche market.

This matters to Fintech because of the movement to blockchain-based real time based clearing and settlement that we have been tracking on Daily Fintech in two posts:

Will blockchain enable near real time capital markets settlement?

Who will create near real time capital markets settlement?

In short, blockchain-based real time clearing and settlement will change everything in the capital markets, probably starting with fund operations. This is as disruptive as it gets.

You can already see one Luxembourg startup emerging to serve a specialist need within this nascent market – ScoreChain.

PSD2 XS2A – pesky bureaucrats or innovation catalysts?

Fund Operations is niche. It is a big niche, but it is still niche. Bitcoin may or may not get mainstream traction. For Fintech in mainstream consumer banking, we need to look at some work by those much maligned EU bureaucrats by understanding what PSD2 and XS2A means.

For a full explanation, please see this excellent work at Innopay. Our quick summary briefing:

• Payments Services Directive (PSD2) was defined on 16 November 2015. It enables a third party provider (TPP) access to accounts held at Banks. For TPP read Fintechs and challenger Banks. Basically it mandates that banksmust provide access to customers of the Fintechs and challenger Banks. That is a big deal. It will reduce the dominance of a few big banks and open the market to competition and innovation.

• Payment Initiation and Account Information Services (‘XS2A’) is howPSD2 is achieved securely and makes PSD2 realistic. This is a Regulatory Technical Standard (RTS). You could argue that XS2A is an example of the public sector getting too deep into technology which should be purely private sector; this view is often expressed in America and UK in which the EU is viewed as sclerotic and run by meddling bureaucrats. Or you can take the view that promoting innovation in the digital age must be a technical grounded activity; without that technical grounding it simply degenerates into political grandstanding.

Big banks don’t want PSD2 and will lobby against it. If Britain stays in EU, UK banks will have to comply with PSD2. Post Brexit, big banks in UK could win by avoiding PSD2 and Fintechs could decamp to somewhere in Europe where the market is more open to competition. Politics, regulation and technology are interrelated and all three are important for the wealth creation that comes from innovation.

Expect a spirited debate on this subject at the Innovate Finance Global Summit in London in April.