An analysis of some of the developments in the Blockchain and Digital Assets sector.
Goldman Sachs gets fined $1billion
A shake up in Bond markets
IP protection heling to protect composers, writers, photographers’ artistic creations
ESG — how Blockchain technology is being harnessed
PwC’s ‘Time for Trust’ — The Economic Impact of Blockchain
Digital Bytes show on Blockchain Radio
4th November 2020 Digital Bytes
Goldman Sachs is fined $1billion
Amazing — yet again, another bank is fined for allegedly not following regulations and breaching rules. This time Goldman Sachs has pleaded guilty to violating anti-bribery provisions and was fined $1billion, on top of the $2.97 billion it had already been fined this year for other misdemeanors.
A report from the publication, Finance in Bold (Finbold) revealed that global banks have racked up fines of over $10.5billion so far in just 2020 YTD, with thirty banks each being obliged to pay out over $500,000. The commonest reason for this has been attributed to poor AML systems and procedures, although KYC and personal data breaches were also cited as reasons for the banks being fined. For AML breaches alone in 2019, there were $7.7 billion of fines, a significant increase from $1.6 billion the year before. Once again, the US banks have faced the brunt of the regulators’ wrath, attracting 74% of fines. One does wonder, are the American banks managed so ineptly, or are other jurisdictions taking a more lenient stance towards banks operating in their jurisdictions?
AML fines 2002–2019
Source: Encompass Corporation
Another study from LexisNexis Risk Solutions claimed that global financial services companies will pay $180.9 billion in compliance costs this year. However, on a more positive note, according to Santander, Blockchain technology could reduce financial services infrastructure costs by as much as $20 billion p.a.
Increasingly, regulated companies are using FinTech firms (such as CoinFirm, Blockpass and Kompany) which have built stand-alone KYC/AML solutions to help ensure the companies, themselves, have more robust procedures thus improving their risk monitoring and compliance procedures. Additionally, there are also the traditional and well-established firms such as Alaco (which many lawyers and corporate brokers use to help with background checks on companies carrying out larger corporate transactions) which are building an AML solution. No doubt Alaco sees a demand in the market for addressing the on-going challenge faced by the regulated firms. However, the introduction of the 5 AML directive now means it is not only regulated financial services firms which need to carry out KYC/AML checks on clients, but those organisations trading in cars, art or property now also have to comply.
Yet, still, regulators fret over the potential for misdemeanours with Cryptocurrencies.
Then again, it’s worth remembering the adage — ‘use a thief to catch a thief’. Ex-bankers-turned-regulators have born witness to many of the tricks the regulated and so-called trustworthy institutions (and even governments) have been up to over the years. Maybe they believe it is only natural that those involved with Cryptocurrencies will follow their lead?
A shake up in bond markets
It has been estimated that to issue $6.8 trillion of US corporate debt, the cost was approximately $46 billion. If HSBC is correct in using Blockchain technology to issue bonds, it could reduce costs by 90%, saving $40 billion, and that would dent a lot of Wall Street bonuses! However, this would offer better value for issuers, especially those organisations issuing the most debt — i.e., governments. This being the case, will governments begin putting pressure on institutions to embrace the digitisation of debt issues, thus we will see even more bonds being created using Blockchain technology?
Certainly, there is evidence that governments are already using Blockchain technology to help make the process of bond issuance more efficient and cost-effective. The World Bank has already issued two tranches of the Bond-i bond for Australia, raising $100 million of bonds using Blockchain technology, and, more recently, we have seen IBM issue $1.6 billion for the Thai government. Singapore Exchange, in conjunction with HSBC and Temasek, has completed its first Digital Asset-backed bond replicating a traditional S$400 million 5.5 year bond. The bond uses HSBC’s Blockchain-powered platform and employs smart contracts to record and assign the rights and obligations of all stakeholders involved, such as depository agents, lawyers, and custodians. Yuval Rooz, co-founder, and CEO of Digital Asset (the firm which helped write the smart contracts in this project) has stated,
“The bond market is one of the last bastions of risk, holding on to paper and manual processes. Despite the growth in electronic bond trading, there are still many aspects that require manual intervention. SGX’s DAML smart contract solution solves a major pain-point that market participants have been working to fix for years.”
Meanwhile, in Europe, Clearstream and the Luxembourg Stock Exchange have recently invested in Origin, a firm offering the ability to create digital bonds. Additionally, they have teamed up with Credit Suisse Asset and Natixis to launch FundsDLT, a Blockchain-based technology platform for the investment fund industry. To illustrate their intentions, Robert Scharfe, CEO of the Luxembourg Stock Exchange, has informed the press that
“the launch of FundsDLT is an important step toward our shared goal of promoting the adoption of blockchain and digital assets across the financial industry. The Luxembourg Stock Exchange has played a catalysing role in this development, and it is exciting to see the expanding ecosystem around FundsDLT.”
However, for governments fighting the impact of COVID-19, the amount of debt has escalated to record levels, and companies have been borrowing aggressively to execute out share buybacks by way of a means to boost EPS. Meanwhile, a consequence of being ‘locked down’ and hence not being able to go out and spend has meant that household indebtedness in the UK has fallen by £2,000. According to Allianz, savings have increased globally by +7.0% since the end of 2019, so presumably, with such low-interest rates available from banks, this money will be looking for a place to invest?
Global debt as a % of GDP- worse than after WWII
One of the consequences of making bonds faster and cheaper to issue is we could start to see smaller firms tapping the debt markets to raise capital and thus offering investors more corporate bonds? Could this be something those income-hungry investors currently earning almost nothing on their bank deposits will choose? The present yields of 5% to 12% for corporate bonds on a number of UK household company names seem appealing, provided the economy does not disappoint.
IP protection helping safeguard composers’, writers’ and photographers’ artistic creations
According to a study carried out in 2019 by the European Union Intellectual Property Office
(EUIPO) and the Organisation for Economic Co-operation and Development
(OECD), Intellectual Property (IP) infringement may account for up to 6.8% of EU imports, or €121 billion of fake goods per annum. Recently, the US Supreme Court refused a re-trial of a long-running legal case where it was claimed that damages could amount to over $58 million regarding the IP one of the most famous songs in the world, Led Zeppelin’s ‘Stairway to Heaven’. Potentially, the case could have been resolved a lot faster had the song been registered on a database when first written.
Transporting us out of the 1970s to the present day, TikTok, the Chinese social network which has 600+ million users(many of which make $millions of dollars a year in advertising, sponsorship, and merchandise revenue) has not taken any steps to protect the IP on its images posted onto the site. So it ought to be of no surprise for Jack Ma, the canny Chinese business magnate, that his Ant Group (set to IPO carry out a dual listing in Hong Kong and Shanghai) is projected to raise $30 billion. Together with this, according to analysts cited by the FT, Ant Group could be worth as much as $318 billion when it floats. Notably, it is using Blockchain technology to keep a time-stamped register of copyright material — such as from music, videos, images, and written documents (articles and essays). Ant Group states that, at present, more than 10 million original works are certified every day on the platform. Rather, ironic though that to promote the AntChain register, it uses a track from Rodgers’ and Hammerstein’s The Sound of Music! Ant Group has much experience with patents as both itself and its former parent company, Alibaba, own over 1,500 Blockchain patents with 1 billion clients and having transacted $17+trillion. This is 25 times the amount of payments PayPal has processed to date in 2020 and more than any other company globally. PayPal is valued at $231billion, with Ant Group potentially being valued at $300+billion, surely one of them has to be mis-priced?
In the USA, the “Copyright Alternative in Small-Claims Enforcement Act” proposes the creation of in effect a small claims court for copyright infringement. This would enable creators of IP content to be able to represent themselves; damages would be capped at $15,000 for each infringed work and top out at $30,000 total. This offers a big opportunity for California based company called FileProtected because using its Blockchain-powered platform one can register their IP and then use the time-stamped record and represent themselves providing immutable evidence into a court.
The challenge is that the current copyright framework would seem not fit for purpose in an increasingly digital economy that we find ourselves in. There are 95+ million images and videos shared just on Instagram every day! Copyright law never saw social media sharing sites like Instagram coming and the laws rely on an analogue based solution trying to solve an ever-increasing digital problem. Its incompatibilities with a digital economy no longer provide a satisfactory solution. It’s too slow, cost-prohibitive, complex to navigate, and dependant on attorneys.
Another firm that is based in the USA using Blockchain technology to register ideas and IP is Mytitle. It offers a service for IP creators to buy digital certificates for $3.Meanwhile, in Australia, Ucrowdme has a platform using Blockchain technology to facilitate individuals and companies in time stamping and registering ideas which can be bought and sold globally — ideal for the millions of SMEs who currently do not register and often are unable to monetize their ideas and inventions so missing out on being the next Amazon or Alibaba.
A solution for the registration of IP is offered by The World Intellectual Property Organisation (WIPO) which also provides a time-stamped database and issues tokens to those who register their IP and is already being used in 117 countries. Interestingly though, it does not actually use Blockchain technology since it believes that for Blockchain technology to be used effectively to manage IP rights, there needs to be a set of globally agreed standards.
As with all technology, the Blockchain-powered platforms are vulnerable to ‘garbage in, garbage out,’ i.e., there is little point relying on a database that cannot be altered if the original data entered is incorrect. Blockchains that integrate with other technologies, that do not rely on human intervention, e.g., IoT enables data to be captured from verifiable sources. Nevertheless, we are undoubtedly seeing some jurisdictions using Blockchain-powered platforms, such as Ant’s, being used to settle IP infringement claims.
ESG — how Blockchain technology is being harnessed
Oxfam claims at least 60 million people face worsening hunger and poverty because of climate change and scientists believe that much of the climate change is due to the impact of too much carbon being released into the atmosphere. Meanwhile, global supply change chains have become longer and more sophisticated, offering the opportunity to eat almost any type of fruit or vegetable at any time of the year. Just look at where your food comes from next time you are in a supermarket! Unfortunately, by not providing food seasonally and, instead, giving consumers such an abundance of choice all year round, there is a price to pay. The price is the rising levels of carbon impacting on our environment as more goods are being transported and grown in far-flung places across the world. More than 500 million smallholders produce 80% of the food in the developing world. The sheer number of small farmers creates a challenge as concerns collating and storing information about how and where food being produced, although IMB has its Food Trust, which supports the retailers Walmart and Carrefour, and Ariledgerwhich helps Haitian farmers receive more money for the food they produce. Food production is responsible for 25% of all greenhouse gas (GHG) emissions, subsequentially meaning there needs to be an increasing focus on consuming food with a lower carbon footprint. Incredibly, a chocolate bar from a de-forested rainforest has a larger carbon footprint than a serving of low-impact beef!
The KGs of carbon produced from what you eat
Source: Poore Nemecek
The public is increasingly asking for greater transparency and for brands wanting to build trust with their customers. These are both achievable via the greater use of Blockchain technology in supply chains. A report from the Food Marketing Institute in America found that 75% of consumers will buy brands offering more information beyond what is on physical labels. We have already seen retailers such as JD.com in China and Carrefour in France using Blockchain technology with QR codes, enabling consumers with mobile phones to scan foodstuffs clarifying where, when, and how the food they are about to purchase has come from as well as the sustainability credentials.
Gartner predicts that 20% of top global grocers will use Blockchain for food safety and traceability by 2025. According to data from Juniper Research, potentially, Blockchain technology will facilitate $31 billion in food fraud savings by the year 2024. The World Economic Forum has a project, Redesigning Trust: Blockchain for Supply Chains, with partners representing 85% of the world’s cocoa supply chain, including Hitachi executives, 60 transport ministers from across the world, and 30+ organisations from the United Arab Emirates Blockchain ecosystem. Blockchain-powered platforms using smart contracts can capture more data about supply chains using IoT and devices, signifying it is becoming easier to measure more accurately a supply chain’s carbon emissions.
Furthermore, there is increasing evidence that institutions are responding to client demand and looking to use the Blockchain technology being developed by specialist FinTech firms. One such firm is Halotrade, which has a Blockchain-powered platform being tested by BNP Paribas SA, Barclays PLC, Rabobank, Standard Chartered PLC, J Sainsbury PLC, and the Unilever Group. It is designed to gather and store the ESG data on suppliers as part of a sustainable supply chain finance program. Investors, too, are looking for funds that can demonstrate their ESG credentials. According to Accenture, funds accounted for 30% (US$31 trillion) of all funds being managed globally. Additionally, green bonds are being issued in the debt markets for those projects having positive environmental or social impacts, and in 10 years, the green bond market has grown rapidly to about $500 billion in value. HSBC was the world-leading green bond manager in 2019, overseeing more than $14.8 billion in assets and claiming that by using Blockchain technology, it has been possible for HSBC to issue bonds and save up to 90% of the costs usually associated with issuing traditional bonds.
Without a doubt, ESG is becoming more and more important for companies to pay close attention to in relation to the products and services they offer for their customers and for their shareholders. If you look at Google trends, there has been a steady increase in people searching for information on ESG. There have also been various surveys and reports carried out confirming that consumers will pay more for a product with proven provenance and that sustainability, inclusivity, and other key ESG considerations are undoubtedly becoming progressively more important for potential investors.
Time for Trust — PwC’s, The Economic Impact of Blockchain
Haydn Jones, Senior Blockchain Market Specialist, PwC United Kingdom, and author of ‘The Executive Guide to Blockchain’
I can distinctly remember those first few weeks back in late 1995. I’d signed up for my first proper job in an investment bank. Starry-eyed, and with a misplaced idealism, I expected perfection. Having trained as an engineer, there was a general expectation that you create things that work, that are safe, and are efficient. Investment banking operations were very different. At that time, some eight years after the City’s Big Bang, banks were still being fused, much of the legacy infrastructure remaining intact, which was costly, complex, and prone to failure, and was especially painful at times. Spreadsheet and email risk were endemic — copy-paste errors, incorrect formulae, overflowing sheets — all of which were just the tip of the iceberg relative to some of the greater operational issues we encountered, such as the driver forgetting to drop the payments pouch off.
Fundamentally, our biggest challenge then was sending cash, safe in the knowledge securities would arrive back in return, and vice versa. This requirement to synchronise the two, simultaneously, sits at the heart of a principle called Delivery Versus Payment (DVP). Perfect DVP eliminates settlement risk, where you have sent something of value, and got nothing in return. At the heart of this challenge lies some foundational principles around the way the securities market operates. Securities are separate legal instruments, whether debt, equity, or derivatives thereof, with a history, which for the bulk of time, has been paper- based and are held by securities depositories. Whereas money is the preserve of central banks, who underpin the infrastructure that is colloquially referred to as payments.
But never the twain shall meet, as my father used to say. Central banks don’t hold securities, and payments providers don’t transmit electronic versions of share certificates. And therein lies the opportunity. What if the two could be synchronized perfectly? What if a standalone digital event could be written onto a ledger that was a store of value? Or, what if any kind of financial instrument could be written in code and stored on a shared ledger. Distributed ledger technology underpinned by a blockchain provides that capability. Shared ledgers, as opposed to multiple copies of what is effectively the same information, albeit equal and opposite, can be used to record the ownership of digital assets, whether they be a store of value in the purest sense or something more sophisticated. And this is the trick — distributed ledgers allow multiple parties to write to, and read from a single common repository, which holds a record of who owns what, whether that be value, securities, or something even more financially sophisticated.
Blockchain’s economic impact around the world
It’s against this backdrop that the PwC report, published earlier this month is important for two reasons. Firstly, it attempts to apply blockchain technology in a structured manner to different parts of the economy — Money, Material Things, Agreements, Attributes (such as Identity), and Marketing, which gives economies a boost. Secondly, it attempts to quantify the economic value add of deploying blockchain technology in each of those areas, applied by sector and geography. For example, what would be the net economic value if all money was digital, captured on a blockchain, and could be programmed, so that the receipt of value could be synchronized with the delivery of goods or services? (This is the DVP problem again).
As it stands, the PwC report outlines the value of blockchain in the context of Payments and Financial Instruments, estimating the potential boost to global GDP by 2030: US$433 billion. Central banks, including the Bank of England, are exploring blockchain use to improve payment infrastructure by using central bank-issued digital currencies (CBDCs). Wholesale, these could create more efficient clearing operations between banks whilst in a retail setting, they could be used as a digital currency. Stable coins, similar to cryptocurrency but backed by real-world assets or government-issued currency, could lower fees for cross-border payments and enable instant transactions. It is, however, that we are not just seeing blockchain technology being used with currencies but other assets too. For example, the Australian Securities Exchange (ASX) plans to introduce a new blockchain system for local equity trades in 2022.
The PwC -Time for Trust report is available for download here and also covers four other areas where blockchain is likely to have a major impact by 2030. I should add, it does not include anything on spreadsheets.
Digital Bytes show on Blockchain Radio
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