 Welcome everyone to the fifth crowd-investing symposium here in Berlin. Let me state at the outset, we've been hit heavily by the storm. We lost around a third of our participants for the scientific workshop, so we appreciate every single one of you. And we did not only lose some of our participants for the scientific workshop, for the scientific part of the conference, but also for the panel discussion. So Mrs. Schwerthner from FIGO will not be able to join us. Currently Jens Tönnesmann, who is supposed to be moderating the panel discussion, is stuck in a bus from Hamburg to Berlin. So I might have to fill in as moderator, which of course is something a law professor is not used to at all. But I will try to do my best. Also, Levin Holler of the Ministry of Finance cannot be here, but we are very glad that Doris Dietze will be here to replace him. Also from the Ministry of Finance. Of course, I will introduce our participants of the panel discussion later. So I'm not a big fan of long introductions, so I will keep it very very short. This conference is a part of a research project, which started five years ago. Five years ago, the conference consisted of basically two presentations, if I remember correctly, one by Lars Honow, on the economic side of crowdfunding, one by me, of the legal side of crowdfunding. And since then, we've grown and this year we've had 41 participants, around 20 presentations and comments, participants from eight different countries, and we're very happy to see this kind of development. Also, we moved the conference from Munich to Berlin, so you can see we're definitely making some kind of progress here. Alright, so one final point on today's subject. I think it's an open secret that the digitalization of finance is probably the most interesting part of securities regulation right now. And the reason for this is very easy to understand. If you think about how banks affect everybody's life and the economy as a whole, it's very important to see how this industry is developing and what the changes are and what we should do about this. And this of course is not a problem of Germany or the EU alone, but of every industrialized country, any developed country. And that's why we are very happy to have a very special guest here to do the keynote lecture. Let me introduce Douglas Cumming to you. Douglas is Professor of Finance and Entrepreneurship at the Ontario Research Chair in Economics and Public Policy at the School of Business, York University. He is one of the world's leading experts in the field of corporate finance. He's won numerous academic awards and he has consulted for a number of private and governmental organizations in North America and in Europe and in Australia. And we're very happy to have you here as a keynote speaker. But before we turn to the peak of this evening, let me just briefly thank a couple of persons or institutions. So first of all, thank you very much to our sponsor, Neur Rechtsanwälte, for providing generous support to make this event happen. And thank you to the Bibliotheksgesellschaft of Humboldt University, Berlin and the German Research Foundation for additional support. Thanks to Humboldt University for providing this awesome location. I'm really thrilled by these rooms. Thanks to all participants, all presenters, discussants and chairmen and women at the scientific part of the conference and last but not least, thanks to my assistants Tobias Schilling and Antonia Felber for basically doing all the work which was involved in organizing this conference. Thank you very much. So without further ado, Douglas, please. Super. Thanks very much for the opportunity to be here and talk about FinTech and the risk of financial regulation. I know I was supposed to talk about sort of financial regulation in general in FinTech. And so I molded over for quite a while and wondered what sort of angle I would take. And part of where I rested on focusing on the risk of regulation stemmed from a number of experiences that I've had over the past couple of years, dealing with regulators in Canada. I'm Canadian. So I'd like to say I apologize for being born Canadian. That just happened. I couldn't control it. I'm still sorry about that. We apologize about everything in Canada. And so I had thought I'd give a bunch of anecdotes about financial regulation in Canada and how that really does involve a lot of risk and a lot of uncertainty. And now that I see there's some cameras on, I'm a little more nervous about doing that. So we'll see how we progress. So just a bit of a roadmap. We'll begin a little bit with an overview of FinTech and regulation of FinTech. And I'm going to show how that can involve a number of extreme risks, some of the consequences of those risks. And at the risk of doing something a little more academic, I can apply this to a project that I had worked on with Armin Schwenbacher and show how those risks are non-trivial. But I know it's late in the day on Friday, so I promise not to show you any tables or regressions. Just maybe a few cute pictures and the like. Good. So FinTech, what is it about? Well, people love talking about these 5Ds of FinTech. So it's nice to always keep this in mind what the objective is, including democratization, so the democratization of capital, which is terrific in the day and age of, for example, lawsuits against Kleiner Perkins for gender bias and venture capital, ethnic bias, other problems that come in the allocation of capital, having a capital democratize, everybody loves it, disaggregation, so we end up with services that are faster, better, cheaper, not centralized through inefficient vehicles, getting rid of the middleman entirely, disintermediation. I'll talk about that a little bit more on the next slide. Decentralization. So there's some nice advantages associated with self-regulation, better technology and consensus to catch wrongdoers, and lastly, devising. So if you get rid of conflicts of interest in the financial system, you end up with an overall better financial system. And these 5Ds really sort of point to a general thing that makes us all super excited about FinTech, which is the fact that it can disrupt people that deserve to be disrupted. And no better example of this than mutual funds. So I'm going to begin with a fun example of mutual funds. And it's so fun to hate mutual funds because there's so many great examples going back to books written by John Bogle, the founder of Vanguard, he has these colorful characterizations and colorful titles on some of his books about the battle for the soul of capitalism, where you have whole industries where their fees exceed their returns. So in other words, another way to say this is that they're, you know, negative value added in the sense that they charge more for their services than the returns that they give, and that's on average, on average. Of course there are some outliers that do better, but it's really fun to think about this. And I'm going to tell you this fun thing that's going on in Canada over the last number of years, which is what you have been smart to get rid of in continental Europe dating back to about a decade ago, is you go rid of these things called trailer fees, which essentially pay an advisor an annual commission for keeping a client's money into a fund. And those trailing commissions, you know, range is typically in a quarter of a percentage point, up to one and a half percentage points. So say hypothetically, if you had $100,000 in mutual funds, every year a thousand of that, say if it's a 1% fee, a thousand would go to pay your advisor just for the service of keeping you within that fund. And in Canada, those fees collectively are quite large, so the magnitude is in the order of $6 billion per year. And when we did a study, so this is a little bit of self-promotion, I guess you say, we did a study of this over the last couple of years, and this showed up in the paper last week because I'm facing a lot of people in Canada in the mutual fund industry that have told me that I should move, that on my gravestone it's going to say responsible for the death of the Canadian mutual fund industry. And other sort of colorful things that people are extremely allocate upset with me about for doing this project, showing that these fees really give rise to misallocation of capital. And of course there are policy consequences to this, but that's, you know, whether those policy consequences, you know, happen and the regulators do the right thing is a matter of significant debate because we really don't know where that's going to end up and whether they'll do what they did in continental Europe and in the UK and Australia and ban these fees or not. But if they did, we certainly think it would be a useful, useful thing. And so where does that take us? Well, it takes us to what I want to think about in these nice pictures of financial intermediation and how that could relate to regulation and our 5Ds that we like with FinTech. So the first is this potential for disintermediation. So what that means is that you have this intermediary in the middle, whether it's a bank, a mutual fund, private equity, venture capital, some other intermediary. If we disintermediate, we're essentially removing the middle man. Democratizing capital, we end up, you know, having a broader set of investors, a broader set of entrepreneurs that can access the financial system. If there's some sort of decentralization, then the spotlight, if you will, is much broader, not through centralized intermediaries. And disaggregation, FinTech has this potential to have less friction, faster services, lower costs, and significantly no bias in reporting, which is often one of the main agency problems associated with intermediaries. Now, where does regulation typically happen in this traditional system? So in the traditional system, we have regulation, financial regulation largely, not exclusively, but largely focused on controlling what the intermediary does. So if you take, for example, the banks, then regulation, a significant part of it anyway, is done through the Basel rules, such as capital adequacy ratios and the like. If you were to look at hedge funds, they face different regulations around the world, including minimum capitalization, restrictions on what type of service providers they're allowed to use, where those service providers are located, and who they can actually sell their products to through different distribution channels. Mutual funds themselves have all sorts of regulations that, again, are focused on the intermediary. With FinTech and disintermediation, things have changed a lot, which is interesting because it's going to really change the regulatory landscape because there's less of a need to focus on the intermediary, particularly if the intermediary is in some way disrupted or possibly doesn't exist anymore, depending on the particular type of FinTech innovation that exists. And so what some regulators have done in some context has shifted our regulatory focus from the intermediaries to focusing on investors that might invest in users of that capital, which could include individuals, entrepreneurs, public firms, or any other people that might have a need for capital. And so the FinTech regulation is a rather different animal relative to what we've seen with regular financial intermediation. And examples of this, and I'll shift in a minute to crowdfunding. Some of you or many of you today have presented papers on crowdfunding, and some of these examples include, for example, limits on investment amounts on investors, how many times they can invest each year, other such things. On the individual side and entrepreneurs, some great examples include how many times you can raise capital or how much capital you are allowed to raise. And that's, of course, quite an interesting, different approach because in the traditional sense, if I can back up and remind you with banks, hedge funds, mutual funds, and the like, we don't have regulators telling us you're only allowed to put a certain amount of money into mutual funds, for instance, and support the lavish lifestyle and trailer fees with mutual funds and not with other forms. And then likewise, banks are not going to tell you, oh, you can only put a certain amount of money into a bank. So that's really a sort of almost pejorative or hand-holding approach to financial regulation as a way to, if you will, curtail possible risks associated with the system and possible concerns that might give rise to career concerns that regulators face. And we'll talk about that in a minute. Before we do that, just a quick look at crowdfunding platforms because, indeed, so many papers on the program on crowdfunding and it's extremely popular today these days. And in this case, we haven't done away with the financial intermediary. We've just introduced a new type. And with that new type, we have a mixed form of regulation that includes typically limits on investment amounts. On the platforms, there can be stringent due diligence requirements for what is posed in regards to allowing entrepreneurs to participate. And then likewise with entrepreneurs, we still put limits on the amount of capital that they're able to raise each year. So that's our new world of financial regulation with Fintech. And what I would like to do at this stage then is say some things that make me a bit nervous to have the cameras rolling. So I've got to buy my tongue a little bit, but we'll see what comes out. So the three things I want to talk about are firstly, who writes the rules and how that rule writing process has happened. And as I said, I'll give some anecdotes from a Canadian perspective. And then secondly, I'll talk about the political interference with respect to financial regulation. Then secondly, I'll give you some anecdotes about lobbyist involvement in rule writing. And then lastly, talk about some consequences associated with banks. And each of these things are pertinent to Fintech and apply to some other contexts as well, but naturally Fintech our focus. So to begin the first of these three, part one or part A of the first of these three is to think about employees at securities regulators and how we should think about the risks of financial regulation. So the typical employee at a securities regulator has strong incentives to be safe. And so over the past year, for instance, I've been on a board, the small and medium sized enterprise board at the Ontario Securities Commission. Believe it or not in Canada, if you're not aware, we have different securities commissions in every province, including for instance Prince Edward Island where there's about 100,000 people living there, for example. So it's a little bit of a crazy thing. Canadians are crazy. As I said, I'm sorry, I'm Canadian, especially in the context of securities regulation. So on this board at the Ontario Securities Commission, I had discovered that they were extremely hardworking and diligent in respect of introducing crowdfunding rules. And they recognized that that is an essential thing to have. We need to have crowdfunding because every other country seems to be doing it. So we must also have it in Canada and there's tremendous demand for it. But what a set of extremely risk averse incentives does is that it can lead to, in some cases, regulatory overkill. And so just to give a sort of insight as to how this can work out for you is that and how this process happened over this review. So the review that was done was so extensive, looking at every possible risk that could take place in respect of crowdfunding, all the different angles of every possible thing that could go wrong and writing a set of rules to cut off all possible conflicts of interest or wrongdoing that can happen. And what you end up having is such a, if you will, like building this room with four knocks around it and where the walls are so strong that actually nobody can enter. So you have a new securities exemption without anybody taking up that exemption. So that's one possible outcome with those types of incentives. A second example is what I've discovered in the context of this mutual fund regulation that I've been involved with, or I should say contributing to on the empirical side over the last few years, is you discover that everybody at the regulator isn't necessarily interested in that as their end game. And so there's this great story, for instance, a few years ago that came out of Rolling Stone magazine, believe it or not, where they talked about financial regulators frequently being hired by Wall Street firms as a huge payoff and huge incentive to go work for a financial regulator. And what I'm now relieved that I retracted the anecdote that I had up on the slide and maybe just sort of cut to the chase is that in mutual fund regulation, especially when there's $6 billion at stake, what you end up seeing is sometimes people get hired away. So when this project started, for instance, one of the head legal councils at the commission was hired by one of the biggest mutual funds that's the greatest defender vis-a-vis these trailer fees. And likewise other people at the commission seem to have differential preferences towards being accommodating towards industry. So that's a second risk about how you might end up with some random outcomes vis-a-vis financial regulation. This is part two of my outline here about who writes rules. The third one that can come into play with regards to financial regulation is political involvement in writing rules that influence intermediaries. And here I'm going to just show you some fun examples. So it may be where we have a very cool politician as our prime minister in Canada and our cool politician is really good at politics and not so great at economics. His background was in, he was an elementary school teacher that taught drama that became Canada's prime minister. And so the one of his election promises to a group that funded his campaign was to bring back something known as the labor sponsored venture capital tax credit which was brought back at the federal level. And that was banned by the prior government. There's good reason why it was banned and this is a graph I put up a few times in the past and shown some folks. So this will be a reminder for you. But what this picture is just telling you from the early 90s up until roughly 2005 that it was extremely unfortunate to have these tax subsidies to subsidize this financial intermediary called a labor sponsored venture capital fund. Really really inefficient tax subsidy and you see the returns to U.S. venture capital to small cap stocks, large cap stocks and 30-day T-bills. So the worst possible return you could ever hope to beat and our tax subsidized vehicle barely beat the 30-day T-bill index and the peak of the internet bubble and then basically went back down to zero. So it's the equivalent of designing a financial regulation where you have someone dig a hole and then with the same dirt that you just took out you put it back into the hole because you're not creating any economic value. And so the federal government recognized this roughly about five years ago and then with the new politician that comes in play they reintroduced this rule because there are some very wealthy people that have been helped out by this type of regulation and gets put back into place. And so back in these latter years after showing folks this I was told many, many times that I'm one of these dumb academics that's backward looking at data. You need to think of the future and how things are going to go. So just for fun I decided to do, you know, I was told by tons of people stop looking back. You're missing the good opportunities that we can create. So if you're wondering how things worked out since then, instead of, you know, here's the labor sponsored funds that tax subsidized financial vehicle. You, instead of just keeping your money, you would have lost about half of it since the meantime. So politicians involved in financial regulation is a significant risk. So it's not just the people at the Securities Commission right regulation, also their political involvement. I'll show you another good example of political involvement in regulation and business subsidies. This is another one from Ontario and it's unique data. As far as I'm aware no other similar data exists elsewhere. But why this one is so fun is it just gives a nice graphic as to what politicians cater to. And here we see significant catering. In other words, government programs that where you get substantially more money and you're way more likely to get money if you're substantially larger. So instead of subsidizing entrepreneurial markets, they cater to large organizations as well as older organizations. So the larger you are, the older you are, the more likely you're going to get benefits and handouts through government created programs. So the next part I want to tell you about risk and financial regulation. By the way, how are we doing for time? Excellent. So the next part I want to tell you about is lobby groups and advocacy groups. And in many places what we see taking a non-trivial role in debating what the right financial regulation is or should be involves think tanks. And the trouble that we've seen for example in the case of this mutual fund regulation is that when think tanks get involved, they typically receive their funding from institutions that benefit by keeping bad rules still in place. And do things like putting pressure on those that are at the securities commission among other things to promote regulation that is less efficient which would otherwise be. Now my third final point on this issue is in respect of FinTech and how regulation can sometimes result in some extreme outcomes. And this is a fun picture from The Economist this week if you didn't see it where they have this nice graphic where we show what happened in China where China used to be the most significant player in respect of Bitcoin in terms of worldwide trading volume. And then for some ambiguous reasons that are speculated on in The Economist, possibly to do with who works at financial regulators and politicians, some things that we've just talked about, they decided to ban it. And when you see the implications of that are quite clear on this graph showing where trading volume is not happening anymore and typical Bitcoin prices over these periods. So regulatory changes in other words can have drastic implications for the development of new financial products. And the regulation themselves is a non-trivial concern that even in some otherwise well-to-do countries can lead to some rather random outcomes. Okay, so that's a long way of getting to my main message is that financial regulation is indeed a risk and the regulations that we end up with aren't always the optimal ones which can have significant implications for FinTech. So I'm going to show you an application of this idea in work that I did with Harman Schwenbacher who is in the audience. And we decided that we'd look at FinTech venture capital. And why FinTech venture capital? Well, VCs are really good at figuring out what the new disruptive technology is going to be. And in the last few years they have really gotten into this game in a significant way. Not just in Germany but also around the world. And we were inspired by a number of quotes. So here's a few that I took from Business Insider. We got from Computer Business Review, Venture Beat, and Bloomberg, other sources. Are they saying that, you know, this is incredibly important. You should look at this. And that's what we decided to do. And largely this FinTech, of course, as you're sure you're aware, began with the financial crisis which showed this incredible, incredible boom in many places around the world. Now one thing we also noticed is this is from Forbes about a year ago. What Forbes talked about is that regulation in FinTech is, of course, extremely important. Something that needs to be focused on. And for early stage startups, if you're faced with regulatory burdens then that could be a tremendous source of problems for you. And so one thing that Forbes says here is that small companies and big companies often face the same set of regulations. But there's tremendous differences in the enforcement of those regulations depending on your size and depending on where you're located. So in particular places that have a relative dearth of regulation, a comparative dearth, and those in particular in countries that have less enforcement, especially in places without a financial center, startups for FinTech have some advantages, some advantages. And we wanted to see whether or not that's actually true in the data that we examined. So we went out and got a worldwide data set from the Thompson SCC data set. And we wanted to see whether, in fact, regulation is systematically, you know, the risk of regulation systematically drives international differences in FinTech deals. And, you know, our best guess based on what we saw in Forbes is that indeed FinTech is going to be relatively more popular in places without a financial center that would have a less severe enforcement of regulation. Likewise, in the VC world, there is enormous heterogeneity in good VCs and bad VCs. And good VCs that have memory, such as the VCs that experienced the dot-com bubble, perhaps less inclined to get hyped up by the bubble, which in turn would lead to some differences in success of these types of deals. And I said I wouldn't show you any equations or numbers, but this is just one real simple equation I'm just going to show you without scaring anybody off, I hope, or annoying people at the end of a long day, is you can of course run differences, differences and differences regressions to see whether or not the impact of regulation in countries without major financial centers after the financial crisis gave rise to a differential impact on FinTech. And in terms of the data and the statistical significance, it's of course there. The economic significance is actually quite large in this really simple estimate. You see about 100% difference in the deal changes after the financial crisis. You want to look at some of these things graphically. So what we put up here in dark are the ones with FinTech in non-financial centers and then the red dotted ones are FinTech in, sorry, the non-FinTech in non-financial centers. And looking at the, here, these are differences, the FinTech in the non-financial centers versus the FinTech in financial centers and do the same differencing for the non-FinTech for the non-financial centers versus the financial centers. And if we normalize 2007, the start of the financial crisis as our point of comparison, you see that over the subsequent years, a significant rise in FinTech deals in non-financial centers relative to financial centers compared to their non-FinTech counterparts. You could do this for different types of venture capitalists. So the limited partnerships versus the corporate versus the financial institutions. We took a look at this for differences among VCs depending on their size and their investment rounds. And essentially where we see the big differences arising are with the limited partnership ones and the smaller ones. So the smaller, less sophisticated ones. And graphically shows up in a very pronounced way where financial regulation seems to be an enormous driver of where startups happen. Again, this is number of investment rounds, the VC rounds, and then the total volume of these rounds. No matter which way you cut the data, you see this come out in the sample. And then how do these deals work out? Well, they tend to not do so well, particularly when it's been done by a less sophisticated investor in the absence of regulatory oversight. So far on average, those deals haven't done as well. Okay, so my just a quick wrap up. What I've tried to convey today is that with a few Canadian anecdotes and one or two from China as well, that FinTech regulation is a risk, a non-trivial risk that I think as academics, we sort of take regulation for granted without thinking of where that regulation came from and whether or not it's the most efficient or proper thing to have in the system. And in the case of FinTech, it can either create a market or completely destroy a market. And I gave you a few anecdotes to show you how that has come to be. Take Bitcoin and China, take crowdfunding, equity crowdfunding in Canada, where you can literally have markets either facilitated or totally impeded. And how those regulations come to be is rather, I dare say random, but definitely involves tremendous amount of risk. And do people pay attention to these risks? Well, certainly in this small application that we saw to the venture capital market, it does appear to be something that people are focusing on to a great deal. So, thanks once again. Hope I didn't go over time. Appreciate the opportunity. Thank you.