Investing in the Digital Finance ecosystem

By Manie Eagar

First one would need to address the issue of digital currency as a currency, a unit of account or a store of wealth? It is all three, and more. In short, the protocol allows one to designate it any way you choose. There is increasingly talk of the internet of money, converging with the internet of value (exchange) and the ‘internet of things’ and greater understanding of the opportunity in digital finance services and infrastructure development.

The digital finance landscape is evolving to fill all the spaces creating convergence and integration opportunities and niche plays alike. At the end of the day the users/consumers of all these offerings will decide which variations suites them best based on ease of use, access, stability, store of value, security, friction, exchangeability, transferability etc. – ultimately the best UX for the money.

Delivery platforms from every sector of the industry will vie for a stake in this lucrative and necessary business – from the so-called over to under banked parts of the world. The  financial system needs innovation such as branchless banking and mobile transactions/payments. There is a great chance that digital currency itself could become disintermediated if it does not step up its game as technologies, business processes and alternative currencies and protocols emerge or become adopted by existing players in the financial and mobile payment sectors.

New players, from a digital currency perspective, will compete with the vast resources of the incumbent players in the financial sector, to win the regulators over (or at least build a common understanding) and to provide room for the evolution of this disruptive innovation, and last but not least, convince the consumers that this can work for them. Ultimately, these are the drivers for the digital currency business models and ROI’s to make enterprise digital currency sustainable.

Hybrid digital finance

What this implies is a hybridization of technologies and meshing of centralized, decentralized and centralized platforms and delivery channels. There are a number of reasons why this dual economy is likely to emerge, including the ease with which digital currency can unite global consumers and merchants, the low cost of digital currency payments, the openness of consumers to new innovations and the growing influence of technology companies.

Some expert envision a hybrid digital currency fiat future where the existence of a euro-denominated economy and a digital currency economy raises the prospect of an internal balance of payments between two sub-economies where suppliers may prefer one currency over another as a means of payment (for different goods and services).

Multi-currency economies are not unusual.  For example, the US dollar is accepted in many economies alongside the local legal tender.  Also, there are a number of regional currencies in existence in parts of France and Switzerland that aim to encourage transactions in local goods and services.

But unlike these examples, rapid advances in information and mobile technology suggest that such a virtual currency could evolve.  The factors behind this might include:

  • the ease with which transactions can occur between counter-parties located anywhere in the world;
  • the relatively low cost of effecting payment and transmitting funds;
  • the fact that many large technology companies are household names that are recognisable and trusted; and
  • the possibility of engaging a large market with a broad demographic span, particularly in terms of age, which is open to new innovations.

Alternative digital currency options – good or bad?

As there are many loyalty schemes, token systems, voucher offerings, etc. there will be many similar and unique altcurrencies. Many service providers have relationships with a number of large retailers that participate in consumers gifting each other via a protocol backed platform as part of their loyalty and reward programs.

Many offer hybrid digital value exchange solutions embracing the principles of the decentralization and distribution of credit, debit or assets.

There will be many more ventures in this strategically critical space in the near future including integration with legacy banking offerings. The foot race for consumer adoption and inclusion has just begun with Paypal partnering service providers to provide support to the millions of PayPal users and Apple Pay positioning itself in the lucrative market for mobile payments and customer loyalty apps indicating fresh approaches to new and existing markets. There are many lessons here for digital currencies specifically and digital finance solution builders in general.

There are already many reports of future potential plays by financial institutions to adopt digital currency-like protocols or to re-invent or enhance their current platform offerings. Many advanced partnership discussions are taking place behind the scenes between digital currency ventures and established financial institutions and mobile transaction players to scale offerings into their existing and new markets.

In the end, there could be thousands of currencies/coins that are offered by individuals, groups, countries and retailers – to provide an exchange of value or to provide rewards to an underlying base of users/customers/citizens not to mention denominating coins/tokens to represent other stores of value such as contracts, physical goods, digital services, shares, gold bullion, etc. And then there is also crowdfunding, gifting, brand promotions (remember the old soda bottle top competitions?) etc. promising huge growth opportunities reaching second markets globally.

The emerging digital finance investment landscape

The cornerstones for the new digital finance world is emerging – from decentralized applications; to trusted computing; to currency exchanges; and telecom, capital and banking partners.

In a recent analysis of the startup landscape, 541 active companies representing $330 million in capital raised were identified.


A shortlist of current the ecosystem investment opportunities include:

Exchanges: Platforms where consumers can buy or sell digital currencies in currencies of their choice. Some play matchmaker (tracking bid/ask prices and linking up a seller with a buyer with the spreads close) while others are broker/dealers.

Wallets: offer consumers a place to securely store their digital currencies through public / private key encryption. Many offer enhanced security features such as cold storage, multi-step/sig authentication, and deposit insurance.

Payments: Merchants and consumers pay for real-world goods / services using digital currencies as the medium of exchange.

Mining: Includes those who either “sell the pickaxe” or “swing the pickaxe”. Typically hardware companies selling the latest ASIC’s specifically designed for mining. Mostly conglomerates of rig-operators that have come to dominate so much of the mining activity.

Financial services: Players offering typical banking services, but with a focus on digital currencies. Firms offer financial investment advice on how to manage portfolios of digital currencies, focusing on providing remittance payments, and providing loans denominated in digital currencies.

Infrastructure: Includes those who are building a backbone into the digital currency enterprise. This cluster includes the people responsible for maintaining the open-source code itself, offering white-label solutions, and the physical-world Automated Teller Machines.

Applications: A very broad category attempting to capture all the players that use digital currencies for a specific purpose. Includes online sites that rate services, and aggregated lists of all the places you can spend digital currencies for real-world goods.

News and data: Organizations that offer up-to-date pricing information, original content, analytics and aggregated sources of digital currency-related news.

Investment funds: Organizations that have built dedicated funds or investment vehicles to move large amounts of money into digital currencies themselves or into the startups building the ecosystem.

Big data: A core feature of digital currencies is the public ledger which maintains a transparent and complete record of all transactions. Companies in this space parse and analyze that block chain to allow their customers to gain useful insights.

Estimates for the larger financial technology industry is 990 active companies with $12 billion raised and the Internet of Things sector with 566 companies seeking funding with $2.72 billion raised so far.

Emerging business opportunities

This is a quick checklist of upcoming opportunities for startups and investors in the next phase of development and deployment:

  • Tax declaration, block chain ledgers, triple entry accounting, auditing and financial reporting
  • Compliance regulatory, verification and licensing
  • Governance and risk management
  • Merchant and agent solutions at POS
  • Customer facing, fraud prevention, privacy identity management
  • Legal and investment advisory services; mergers and acquisitions
  • VC and crowdfunding advisory services
  • Security from customer to financial services providers to securitization
  • Storage multi-key versus cold storage versus secured devices
  • Integration banking, mobile transactions
  • Build Operate Deploy such as  inter-exchanges
  • Business process management

Considering the currently addressable market opportunities in ecommerce, digital banking the IT investment into this sector is substantial. It is projected that there will be a compound annual growth rate of 6.4% from 2014 to 2018. By the end of this period, global IT spending in financial markets is predicted to surpass $100 billion.

There is a desire for the established financial institutions to move toward more centralized banking functions which is further driving up IT spending in this sector. By using technology to consolidate functions, firms hope to improve their efficiency. Account holders demand visibility and control, leading to larger investments in client servicing systems. Corporate banks, on the other hand, are putting money into IT as a means of gaining greater insight into lending decisions, which should reduce risk and increase responsibility.

If we consider the 2.5 billion unbanked in the next stage of global financial inclusion, these markets cannot be reached economically and feasibility/efficiently by conventional and legacy banking solutions,. This is where the new hybridized delivery models will come into their own converging digital banking, digital currency offerings and mobile transactions via the internet of value exchange. This will involve a meshwork of centralized, decentralized and distributed financial networks and delivery platforms with substantial integration and compliance requirements.


Some in the EU have summed up the future challenges for service providers and regulators from a Eurocentric perspective as follows:

  • who is transacting?
  • how safe is the payments infrastructure?
  • how much economic activity is denominated in virtual currencies?
  • to what extent is the ‘virtual currency economy’ connected with the euro-denominated economy?
  • how do we distinguish between transactional activity and speculative/investment activity?

And from a monetary policy perspective, there is also the fundamental question of understanding the supply of the digital currency and its impact as a form of money.

In conclusion, there is a lot of work ahead for many players at many levels to address and deliver the promise of digital finance.