London has built a reputation as a global fintech center over the last decade.
Neobanks including Monzo and Revolut have raised millions at billion dollar valuations. Transferwise and WorldRemit built world-leading cross-border payments systems.
Now, as the U.K. grapples with the realities of Brexit, its long-drawn-out and uncertain departure from the European Union, cryptocurrency developers want to help London’s financial center evolve to serve a decentralized finance (DeFi) future.
“London has this mix of skill-sets unlike anywhere else,” said Piers Ridyard, the chief executive of London-based DeFi startup Radix DLT, speaking over the phone. Radix has recently raised $12.7 million via a public token sale to build a decentralised finance protocol. “Crypto has a similar overlap of skills—finance, technology and development.”
The funds from the public token sale take the total raised by Radix to $22.7 million since 2013. In July, Radix raised $4.1m from TransferWise co-founder Taavet Hinrikus and London venture capital firm LocalGlobe.
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The popularity of DeFi—using crypto technology to recreate traditional financial instruments such as loans and insurance—has exploded over the last year or so, growing to a $16 billion global market. The price of ethereum, the world’s second largest cryptocurrency by value, has soared this year as investors pour funds into DeFi projects that are built on top of it.
“There’s more and more DeFi inovators in London,” said Stani Kulechov, the founder and chief executive of London-based technology company and DeFi protocol Aave, speaking over the phone. “Up until recently, fintechs and banks have been all about innovating on the front-end—the user experience. Now, DeFi is helping the back-end innovate.”
Aave, a money market for lending and borrowing assets, has become one of the top DeFi protocols since it was created in 2017 and was given an Electronic Money Institution license in July by the U.K.’s Financial Conduct Authority (FCA).
“I think we’ll see London emerge as hub for DeFi,” added Kulechov.
The City of London, a financial powerhouse rivaled only by New York, is currently under threat as the U.K. prepares to end its transition out of the European Union at the end of this month. Banks that have long called London home are moving billions of dollars worth of assets and services to other European cities, such as Paris or Frankfurt.
Meanwhile, the U.K. is looking to get ahead of rivals when it comes to digital finance, with lawmakers looking to capitalize on its newly-found regulatory freedom.
“We are starting a new chapter in the history of financial services and renewing the U.K.’s position as the world’s pre-eminent financial centre,” Rishi Sunak, the U.K. chancellor, said in a November statement alongside proposals to regulate private stablecoins, cryptocurrencies pegged to traditional currencies or assets, while also researching central bank digital currencies, or CBDCs, as an alternative to cash.
“The regulators are still trying to get their heads around DeFi. The difference is how people use and interact with it,” said Ridyard, explaining that when users send money to a DeFi protocal they’re not sending it to a company in the same way as they would traditional financial service providers. The technology holds the funds, not the company.
But the evolution from the City’s old school finance, to 21st century fintech, and into a DeFi future is unlikely to be a smooth one.
“Brexit might give flexiblity but it also gives uncertainty,” said Kulechov. “DeFi is full of uncertainty. It’s practially an open movement and based on open source technology. The biggest challenge is how to get big banks and traditional finance involved in the space.”