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New Chinese threat to global banking system
By Gary McFarlane | Wed, 30th August 2017 - 10:09
In this first in a series of occasional articles on initial coin offerings (ICOs) from blockchain-based fintechs, we assess the token sale of an outfit called LakeBanker, a peer-to-peer banking proposition that aims to turn the industry upside down.
What are ICOs? Here are 20 questions to ask before taking part in an ICO.
The banking industry still relies on old systems for doing business and, as such, is ripe for disruption. Debit cards and ATMs remain integral to bank operations, but this is technology first introduced in the late 1960s; it makes no sense when most money exists in digital form not cash.
Despite this fact, paper processes still play a pivotal part in bank business processes today. Add to that the huge expense of maintaining the physical infrastructure of branch networks and it is easy to see why banking operations today are costly to run.
The problems don't stop there. It can take hours for an individual to transfer money from one bank account to another, sometimes days. And there is the problem of access, where approximately two billion people are 'unbanked', according to the World Bank's Global Findex report.
The figure is much higher for those that are poorly served by banking services (the underbanked), perhaps as high as three billion. Put those two figures together and LakeBanker has an addressable audience of five billion people worldwide.
There are clearly major issues of cost, efficiency and access that the current incumbents are yet to solve. It's a problem LakeBanker aims to solve - its tagline declares its goal is "free banking for the world". So how does it plan to achieve this lofty aim with an enterprise it claims to be both a business venture and humanitarian endeavour?
LakeBanker uses a 'crowd-banking' model: a peer-to-peer network for banking. This comprises a network of nodes made up of "individuals, merchants and other institutions" providing banking services direct to customers. Each node is a LakeBanker offering the equivalent services of a traditional high-street bank, such as providing deposit and withdrawal services, alongside other financial services as the network grows.
The LakeBanker network has been running on a trial basis for a year and a half. With no marketing, the company - the LakeBanker Foundation - already boasts 2,000 LakeBankers. Most transactions range from $50 to $5,000 and 40 fiat currencies are supported. Each LakeBanker has to undergo training, which includes a focus on Know Your Customer and anti-money laundering procedures.
LakeBanker is now looking to "grow the network exponentially" says Fei Fei, vice president of corporate alliances. That's where the ICO comes in.
The following is an example of how the system works.
A user in Hong Kong wants to deposit cash in the LakeBanker system. The customer launches the LakeBanker app on their smartphone and makes a deposit request. The network's artificial intelligence technology - called Sage - finds the best match from among the nearest LakeBankers. The customer goes to the physical address of the LakeBanker and hands over the cash deposit which is then credited on the system free of charge.
Compare this to an established branch network of a high-street bank that has to meet the considerable cost of renting the property, maintaining the building and employing staff. In the case of LakeBanker, these costs are much reduced, which means the transaction cost in this example is near zero. The model equally applies to banking services such as withdrawals and money transfers.
The value of the network to users grows as it increases in size. This is the so-called network effect seen in businesses such as telecoms - the more people there are with phones, the more valuable the network becomes to each individual phone user and others on the network.
LakeBanker is a spin-off from the highly regarded Chinese cryptocurrency exchange LakeBTC based in Shanghai, China. In business since 2013, LakeBTC claims to have never been hacked or have 'lost' client coins. Its reliability is one of the reasons it ranks among the top 30 exchanges worldwide.
All "core banking services" on LakeBanker will be free, states the White Paper. LakeBankers are incentivised to provide these services by being paid fees by the network, adjusted dynamically by Sage, which applies machine learning to the 'Big Data' available within the app to efficiently set rates and allocate nodes.
The company will make its money by offering additional financial services for a fee, such as loans and mortgages, but these credit-based services will not be available until the network has enough data and information on customers to enable Sage to conduct the due diligence necessary for handling credit risk.
LakeBanker sees its localised network of individuals and merchants as providing valuable knowledge and insights about potential borrowers' creditworthiness that will be an instrumental part of credit management.
Craig McGee, 27, is a LakeBanker based in the UK. Interactive Investor asked what attracted him to the platform. "It's a way of earning a bit of money whilst enjoying something I love - finance," he says.
He adds that "being a LakeBanker is a really great opportunity to make a little extra money whilst helping people to deposit and withdraw from their LakeBTC accounts", but warns that "for anti-fraud reasons I won't accept funds from someone's bank unless it is verified with Know Your Customer".
McGee says he will be taking part in the token sale and is a keen cryptocurrency investor. "I'm very excited about the potential for the new LakeBanker service. I'm into all sorts of crypto. I mainly own bitcoin, and virtacoin (XVP), which is currently slowly rising in value."
LakeBTC is well-connected in China and LakeBanker plans to reveal who its "strategic partners" are after the token sale has closed. It says it is not yet in a position to reveal the names of official partners. The partners will include a credit card company, a licensed People's Bank of China payment processing company, a large wealth management firm and a major credit rating company.
This ICO offers western investors a rare opportunity to gain exposure to the Chinese tech scene on the ground floor, but that has its attendant risks, such as lack of regulatory transparency, although is that much different to the situation in the West?
Connectivity, regulation and competition
Internet coverage is not an issue in the advanced economies, but what about further afield in India and Africa for instance? With a number of projects from Facebook and others aimed at bringing internet access to underdeveloped regions, LakeBanker's efforts could be positioned at just the right time.
Although LakeBanker is not using the bitcoin blockchain, in a sign of possible near-term connectivity solutions, startup Blockstream is leasing satellites to beam it to all areas of the globe. Additionally, for its push into frontier markets, LakeBanker plans to give away smartphones after the business reaches the end of its development roadmap in 2019.
"We plan to distribute free smartphones one or two years later (the most optimistic case). The market price for smartphones with basic functionalities is around $20 and we plan to contract a manufacturer closer to the time," says Fei.
Another obstacle facing the project is the not inconsequential matter of gaining a banking licence for the jurisdictions it operates in and the issue of competition from blockchain-based rivals.
Humaniq is one such competitor, seeking as it does "to connect unbanked people to the global economy", although its business plan requires transactions on its network to use its token (HMQ). This creates the considerable problem of how to get potential customers to adopt it. LakeBanker's multiple currency on - and off-chain approach seems more likely to gain traction.
How the token sale works
LakeBanker's token - called BAC - is being sold in two phases. The first phase is already up and running and is being used to get feedback and generate interest, make improvements and consult with tax and legal professionals. In phase one the token price is fixed, starting at 1 ETH (ether) = 1,300 BAC. After 4pm UTC on 15 September the price rises to 1 ETH = 1,100 BAC up until 3pm UTC on 20 September.
The second phase of the token sale begins in October (the exact date is yet to be announced) and is organised as a Dutch auction, which means tokens start at a high price that gets lowered until buyers are found. This is a common method used in initial public offerings. The price for the first hour of sale is set at 1 ETH = 100 BAC.
More details on the token sale are available at lakebanker.com. The phase one offer size is capped at 10 million while the second phase is capped at 240 million. Trading in BAC will be enabled on the LakeBTC exchange some time before 1 November 2017.
The total number of tokens will not exceed 500 million. Half of that figure is being sold in the ICO, a further quarter is reserved for the User Growth Fund and a quarter for the team. The five-year token vesting schedule for the team stipulates that only 20% becomes available for trading each year, thereby committing team members to successfully launching the business.
According to the project roadmap, the business should be fully up and running by 2019, with at least 100,000 LakeBankers having been trained and the network acquiring enough data by then for credit risk management purposes. This, in turn, will enable it to start issuing credit cards, agree mortgages and the like.
The BAC token drives the transactions in the LakeBanker ecosystem, with all fees and interest denominated in the token. The token is based on the Ethereum blockchain and, as such, is ERC20-compliant.
LakeBTC's reputation for strong security is a plus for offshoot LakeBanker, which, among other measures, uses cold storage, offline wallets and locks on accounts for 48 hours after a change is made, to keep tokens safe.
This last feature is especially important for guarding against the growing number of attacks from cybercriminals aimed specifically at cryptocurrency investors, where hackers gain control of an investor's telephone number (phone porting hacks) and use two-factor authentication to change passwords on exchanges and then steal funds from online wallets.
In another form of attack, clients of the Enigma blockchain project recently had $500,000 in ether stolen from them after hackers were able to take control of Enigma's domain, its channel on the Slack collaboration platform and its client mailing list.
The hackers then launched a fake ICO in Enigma's name to which its unwitting clients began sending funds to an equally fake receiving address. LakeBanker's systems are built on tried and tested systems already in place at LakeBTC.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.