2018 was the second year that The Fintech Times supported the leading annual tech and fintech event in Luxembourg, ICT Spring, as a media partner. Analysing the various exhibitors’ profiles and the intensity of networking this year, we can say that Lux has significantly strengthened its role as the European tech and fintech hub and, not surprisingly, won over some global fintech brands. Among the newcomers was the first Bitcoin exchange, bitFlyer, which has chosen Lux as its third jurisdiction globally, and the first in Europe.
As Pierre Gramegna, Luxembourg Minister of Finance, said in his opening address at the event, Luxembourg is a natural choice for fintechs, due to some unique factors. First and foremost, Lux is a triple A country – Standard & Poor’s (S&P) and DBRS agencies confirmed Luxembourg’s AAA credit rating with a stable outlook in Spring 2018. In particular, DBS cited Luxembourg’s 3.4 percent real GDP growth in 2017, which exceeded that of the Eurozone and is expected to reach 4 percent in 2018. It also confirmed public debt levels of 22.9 percent for 2017, which is below the government’s 30 percent target. “Luxembourg has significant capacity to face potential adverse shocks. Despite risks of financial market volatility, the country’s economic prospects remain robust,” DBS wrote in the report, published in May.
The perfect balance
Luxembourg is a crossroad where all players feel comfortable. “We have 140 banks and thousands of investment funds in our ecosystem. We still love banks, but we also like fintechs”, Pierre Gramegna noted. Frank Roessig, FinTech Lead at the Luxembourg ICT company Telindus – a tech provider collaborating with startups, tech hubs and fintech initiatives – explained that Luxembourg’s ecosystem has historically been the heart of Europe in terms of fund administration, and is the the second fund hub in the world, with four trillion Euro total assets under administration. “So, here in Luxembourg, there is a tradition of nurturing collaborative fintech initiatives” he said. It’s interesting to look back to the middle of the 19th century, when the iron and steel industries accounted for as much as 80 percent of Luxembourg’s wealth. As the steel industry declined in the 70s, the economy shifted to other enterprises, and current prosperity is based on a combination of industry, a small agricultural sector, a growing import-export economy, satellites, the digital economy and financial services. Via those industrial shifts, banking and financial services became significant drivers for the economy. Nowadays, this sector is at the forefront of new services, such as e-commerce, digital banking and innovative finances.
Funding and development support
According to both incumbents and startups, the whole fintech ecosystem has grown in a way that’s made the government continually take initiatives and support innovations from the very early days. The result is that, coming to Lux today, you can find the right frame to incorporate and develop your startup. “Since 2015, we’ve built the infrastructure, simplifying an access for startups to the capital. Here in Lux you will be welcomed to develop your investment bank or investment fund, as well as get an access to the pool of investment resources,” the minister outlined. To support the funding and development of start-up companies in the field of information and communication technologies (ICT), which is considered a key sector of the national economic diversification, the Ministry of Economy, together with a group of private investors, has created a seed fund – The Digital Tech fund. Operational since May 2016, this fund is part of the strategy ‘Digital Lëtzebuerg’ in which the state seeks to strengthen and consolidate the eminent position of the country in the field of ICT. As such, the state participates in the fund with a budget of €5m. The financial contribution of other investors amounts to a total of €15.33m, of which €3m comes from the National Credit and Investment Company (SNCI), and €1m from the University of Luxembourg. With this grant, the fund supports start-up ICT companies, and boosts the national ecosystem favourable to the development of young innovative companies in the field of ICT. The fund will focus primarily, but not exclusively, on venture capital investments in areas such as cybersecurity, fintech, big data, digital health, media and the next-generation communication networks, digital learning, the Internet of Things and satellite telecommunications and services. In addition to that, local accelerators and private incubators help startups to develop their ideas and projects. This approach has attracted more and more startups willing to be incorporated in the country. For instance, the LHoFT – Luxembourg House of Financial Technology (one of the leading Fintech hubs in the country, of which Telindus is a founding partner) – has swiftly attracted over 25 Fintech startup residents so far.
Blockchain as the key
As Minister of Finance, Pierre Gramegna, says, blockchain is among the key areas of importance for the government – “We have launched Luxembourg’s Infrachain initiative, which aims to build a resilient infrastructure of blockchain nodes that will never be down and always be secure. We have in our ecosystem the Institute for Science and Technology, with a focus on security, reliability and trust. Lux has been focused on data centers development for many years, and we have up to 40 percent of the available data center capacity in Europe.” All of this can be considered an amazing opportunity for blockchain startups to get started, pilot ideas and raise funds. As a result, the first multi-jurisdictional blockchain exchange being incorporated in the country was bitFlyer, which has been based in Luxembourg since early 2017, operating from the Kirchbergbased LHoFT premises. Having been granted a payment institution license in Luxembourg on January 8, the world’s Bitcoin exchange bitFlyer is now ready to enter the European market from the ‘heart of Europe’. ‘’We want to provide a very good service in the fintech area in Luxembourg, Europe and all over the world, ‘’ co-founder and CEO of bitFlyer, Yuzo Kano, said at an event hosted by Luxembourg House of Financial Technology (LHoFT). By receiving the license to operate from the Luxembourg regulator for financial services, the CSSF, bitFlyer is now the first Bitcoin exchange to be regulated in Japan, the US and Europe.
ICT companies also play a significant role in blockchain infrastructure development. As an example, Telindus cocreated the LuxBlockHackathons, a 36-hour event in which teams construct solutions for the financial industry, using distributed ledger technology. The first event of its kind organised last year drew participants from around Europe and overseas. “We also have partnerships with Hyperledger, Stellar, Ethereum Enterprise Alliance, and other chains, which we have used to bolster our blockchain expertise. Through this internal development capacity, we build solutions for financial institutions for KYC, asset administration, shared powered signature, notarisation, etc. We have delivered the first operating solutions to our clients and, by the end of this year, we will launch new blockchain based modules (we have MVPs now),” Frank Roessig said. Pierre Gramegna reiterated his belief that blockchain is very important for the development of the tech sector, and verified that the Luxembourg government is ready
to discover the great potential of this technology. The Finance Minister further argued that fintech, blockchaintechnology, cryptocurrencies and payment companies are revolutionising the world through digitalisation.
The European gate
Alongside the ecosystem and established infrastructure, another crucial factor is to have a modernised legal frame. “Regulation is the key aspect for fintechs to develop their projects in a country. Lux is a place with a good reputation, high credibility and strict but clear rules,” said Pierre Gramegna. Frank Roessig added – “One of the strength of Luxembourg as a tech hub is that the regulatory framework is very stringent and it forces companies to have very high-tech data centers which enable the operation of highly resilient systems”.
That said, getting a licence to operate in the Grand Duchy is not easy, according to bitFlyer’s CEO, who explained that the team initially thought it would take three months to get the approval, but it actually took two years. The same opinion shared Dmitriy Norenko, CEO at bNesis :”For non-EU citizens lots of bureaucracy. But if you can sell fintech in Lux, you will be able to sell it anywhere. Great country to test your solution from the risks, reputation, regulations, old-school banking points of view. For sure, worth of trying. We are here for scaling & piloting in new region…”
“Things that are revolutionising the world are never easy. By doing the job very thoroughly, like we have done, we have an environment which is both well-regulated and business-friendly,” Pierre Gramegna argued. Gramegna also outlined that, in the context of Brexit, Luxembourg has been “extremely successful in attracting new companies, including fintech companies”. The one thing newcomers believe can do with some improvement is the chance to build a startup culture. Hiring staff is the challenging side of operating in Luxembourg, and an increase in the labor pool is very much needed.
Kate Shcheglova (Goldfinch), Science editor at The Fintech Times