What Are The Real Risks Of Blockchain?


blockchain-2-25-19.pngIn the landscape of innovative disruption, the public’s attention is often focused on bitcoin’s impact on financing and investment options. However, it is important to understand that blockchain, the underlying technology often conflated with bitcoin, carries an even greater potential to disrupt many industries worldwide.

The attraction of blockchain technology is its promise to provide an immutable digital ledger of transactions. As such, it is this underlying technology—an open, distributed ledger—that makes monetary and other transactions work.

These transactions can include bitcoin, but they may also include records of ownership, marriage certificates and other instances where the order and permanence of the transaction is important. A blockchain is a secure, permanent record of each transaction that cannot be reversed.

But with all the positive hype about its potential implications, what are the risks to banks?

The Risk With Fintech
One of the most disruptive effects of blockchain will be in financial services. Between building cryptocurrency exchanges and writing digital assets to a blockchain, the innovation that is occurring today will have a lasting effect on the industry.

One of the principles of blockchain technology is the removal of intermediaries. In fintech, the primary intermediary is a bank or other financially regulated entity. If blockchain becomes used widely, that could pose a risk for banks because the regulatory body that works to protect the consumer with regulatory requirements is taken out of the equation.

This disintermediation has a dramatic effect on how fintech companies build their products, and ultimately requires them to take on a greater regulatory burden.

The Risk With Compliance
The first regulatory burden to consider concerns an often-forgotten practice that banks perform on a daily basis known as KYC, or Know Your Customer. Every bank must follow anti-money laundering (AML) laws and regulations to help limit the risk of being conduits to launder money or fund terrorism.

Remove the bank intermediary, however, and this important process now must occur before allowing customers to use the platform.

While some banks may choose to outsource this to a third party, it is critical to remember that while a third party can perform the process, the institution still owns the risk.

There are a myriad of regulations that should be considered as the technology is designed. The General Data Protection Regulation (GDPR), the European Union’s online privacy law, is a good example of how regulations apply differently on a blockchain.

One of the GDPR rules is the so-called right to be forgotten. Since transactions are immutable and cannot be erased or edited, companies need to ensure that data they write to a blockchain doesn’t violate these regulatory frameworks.

Finally, while blockchains are sometimes considered “self-auditing,” that does not mean the role of an auditor disappears.

For example, revenue recorded on a blockchain can support a financial statement or balance sheet audit. While there is assurance that the number recorded has not been modified, auditors still need to understand and validate how revenue is recognized.

What’s Ahead
The use of blockchain technology has the potential to generate great disruption in the marketplace. Successful implementation will come to those who consider the risks up front while embracing the existing regulatory framework.

There has already been massive innovation, and this is only the beginning of a massive journey of change.

How And Where Blockchain Fits in Traditional Banking


blockchain-12-26-18.pngMany banks haven’t found an efficient way to deal with issues like payment clearing inefficiencies, consumer fraud, and the general limitations of fiat currencies.

Blockchain, however, may be the go-to solution for many of these challenges.

Issues Traditional Banks Face Today
Traditional banks and financial institutions have faced some challenges for decades, but we have yet to see the technical innovations to mitigate or eliminate them, including inefficient payment clearing processes, fraud and currency options.

Inefficient Payment Clearing Processes
One of the biggest roadblocks that banks face today is how to quickly clear payments while complying with regulatory procedures. The number of payment clearing options available in 2018, is not different from the options available in 2008 – a decade ago.

In the U.S., for example, same-day ACH is likely considered to be the biggest improvement during this decade. Only in recent years have cross-border fintech applications emerged that reduce payment clearing costs and wait times. For the most part, we are still stuck with old architectures that lack innovation, efficiency and the data to make a meaningful impact on money laundering and fraud reduction.

Inability to Stop Fraud
Fraud has always been notoriously difficult to stop. Unfortunately, this remains the case even today. Fraud costs are so high in the US, that interchange fees paid by merchants are some of the highest in the world. Despite an increase of available identity fraud detection systems, banks are still unable to make a material improvement in fraud reduction.

For banks, this leads to financial losses in cases where funds are paid to the fraud victim. For customers, this can reduce trust in the bank. For merchants, it means higher fees for facilities, which creates higher costs for customers. Additionally, customers often wait to receive a new bank card. In 2017 alone, the cost the data lost to identity theft totaled $16.8 billion.

Limited Number of Currency Options
Fiat currencies are limited by geography and slim competition.

When we think about fiat currency around the globe, we have seen a steady move towards standardization. This presents risks for banks and consumers. For example, a heavy reliance upon a single national currency relies upon factors like economic growth and monetary policy.

Twenty-eight nations have experienced hyperinflation during the past 25 years. Not only did banks fail in some cases, but entire economies collapsed. Because there were no currency choices, the problem could not be easily avoided.

This process continues to happen in many locations globally.

Benefits of Blockchain Over Traditional Systems
There are ways blockchain can reduce or eliminate these issues for financial institutions.

More Efficient Approval Systems
When compared to traditional payment approval processes, many blockchains are already more efficient. Instead of waiting days for payments to go through clearinghouses, a well-designed blockchain can complete the verification process in minutes or seconds. More importantly, blockchain also offers a more transparent and immutable option.

With innovations like KYC (Know Your Customer) and KYT (Know Your Transaction) transactions conducted via blockchain, banks can be more capable of preventing finance-related crimes. This means traditional finance can more effectively comply with laws for AML (Anti-Money Laundering), ATF and more.

In addition, legitimate transactions can be approved at a lower cost.

No More Fraud
While fraud seems like a pervasive issue in society, this can be reduced using technology. Blockchain can change how people prove identity and access services.

Instead of having to wait to stop a case of fraud, blockchain can stop transactions before they ever occur. The Ivy Network will have smart contracts which will allow banks and financial institutions to review a transaction and supporting KYC and KYT before accepting the deposit. Because blockchain transactions are immutable, we could see a reduction in counterfeiting of paper currency and consumer products.

Increased Digital Payment Options
While blockchain has many use cases, this is one example of how technology can change finance and the global economy. In the early days of cryptocurrency, there was really only bitcoin. Now, there is a range of coins and tokens like Ivy that serve important purposes within existing regulatory and legislative frameworks.

One of the biggest misconceptions is crypto and fiat payment systems have to be direct competitors. By creating a blockchain protocol that links fiat and cryptocurrency, businesses and consumers can have more, better market choices and use cases for cryptocurrency.

At the same time, financial institutions can serve an important role in the future of digital payments and fiat-crypto currency conversions.

As financial institutions look to solve many challenges they face around payment clearing inefficiencies, consumer fraud, and the limitations of fiat currencies, blockchain is a viable solution. Financial institutions that fail to embrace blockchain’s potential will face heightened monetary and reputational risks, and miss opportunities for growth and innovation.

How Digital Currency Innovation is Disrupting Equity Crowdfunding


crowdfunding-8-24-16.pngIn July of 2014, Facebook acquired virtual reality headset company Oculus Rift for around $2 billion. One of the most successful crowdfunded companies of all time, Oculus raised nearly $2.4 billion on the popular crowdfunding platform, Kickstarter.

Sounds like a great success story in crowdfunding, but here’s the catch: Kickstarter investors saw barely a dime from the lucrative buyout.

That’s because traditional crowdfunding platforms like Kickstarter are middlemen, set up to reward Kickstarter participants with things like tiered promotional items, and in the case of Oculus, early access to or discounts on the product. As it stands now, crowdfunding a startup gets platform investors just about anything except an actual piece of the company.

But that’s all set to change this year. The federal Jumpstart Our Business Startups (JOBS) Act has provisions set to kick in that will allow crowdfunded startups to issue equity directly to their investors. Financial technology companies are ready to move quickly, seeking to leverage digital currencies and innovations like bitcoin and the blockchain to create completely digital stock offerings for investors. Simply put, they want to cut out intermediaries like Kickstarter to provide investor with direct access and greater returns.

Here’s a look at what some of the early leaders in the space are doing, and how digital currency could be a major game changer to equity crowdfunding in 2016 and beyond. […]

This content was originally written for FinXTech.com. For the complete article, please click here.

How Digital Currency Innovation is Disrupting Equity Crowdfunding


crowdfunding.png

In July of 2014, Facebook acquired virtual reality headset company Oculus Rift for around $2 billion. One of the most successful crowdfunded companies of all time, Oculus raised nearly $2.4 billion on the popular crowdfunding platform, Kickstarter.

Sounds like a great success story in crowdfunding, but here’s the catch: Kickstarter investors saw barely a dime from the lucrative buyout.

That’s because traditional crowdfunding platforms like Kickstarter are middlemen, set up to reward Kickstarter participants with things like tiered promotional items, and in the case of Oculus, early access to or discounts on the product. As it stands now, crowdfunding a startup gets platform investors just about anything except an actual piece of the company.

But that’s all set to change this year. The federal Jumpstart Our Business Startups (JOBS) Act has provisions set to kick in that will allow crowdfunded startups to issue equity directly to their investors. Financial technology companies are ready to move quickly, seeking to leverage digital currencies and innovations like bitcoin and the blockchain to create completely digital stock offerings for investors. Simply put, they want to cut out intermediaries like Kickstarter to provide investor with direct access and greater returns.

Here’s a look at what some of the early leaders in the space are doing, and how digital currency could be a major game changer to equity crowdfunding in 2016 and beyond.

True Equity Crowdfunding is On The Way
While the regulatory framework for equity crowdfunding in the United States has only recently been codified, it will set the table for existing platforms like Seedrs and Crowdcube to enter the marketplace. Both companies have been operating in the United Kingdom for several years, as UK regulators have made it a point to work with fintech companies early on and implement favorable frameworks for their development.

Seedrs goes far beyond the Kickstarter model, allowing different shareholder equity models such as “funds” of startups (investors receive stock in a basket of startups, similar to a mutual fund) and convertible notes. With Crowdcube, investors can choose to fund businesses with a choice of equity or debt. Neither of these companies are issuing equity in digital currency (yet), but the synergies are becoming apparent as bitcoin-related startups like Bitreserve are using these platforms to raise money for their businesses.

Digital Equity Can Be Issued with the Counterparty Protocol
Also known as cryptocurrency, digital money like bitcoin is completely virtual and has a cap on the total amount that can be in circulation at any given time. Users can hold their bitcoin, exchange it into fiat currency or spend it on goods or services from retailers that accept bitcoin. Major retailers like Amazon, CVS and Target are among those that now accept bitcoin as payment. All transactions are secure and verifiable through a public digital ledger known as the blockchain, which presents several unique opportunities in terms of equity crowdfunding.

This is largely due in part to what’s known as the blockchain’s Counterparty Protocol, an API that allows assets like equity shares and dividends to be created and exchanged using bitcoin or other digital currency. Fueled by the open source Counterparty Foundation, startups can create their own digital tokens representing various assets (such as shares of stock) and issue those assets directly to their crowdfunding shareholders’ bitcoin wallets. Although any startup can complete this process independently, there is a high amount of trust involved in these transactions, with a certain amount of risk on both sides of the equation. Startups like Tokenly are emerging to bridge the gap to make these counterparty equity transaction more secure, easy and transparent.

Improved Investor Certainty and Participation on the Blockchain
Digital currency innovation has become increasingly ambitious over the last few years. Ethereum, in particular, has created its own bitcoin derivative called Ether. The express purpose of Ether is not to supplant bitcoin as a digital currency, but to create a better way for the creation and exchange of tokens like crowdfunded equity shares. Because Ethereum is capable of creating an entire Democratic Autonomous Organization (DAO) on the blockchain, startups can basically automate the financial administration of their company, including equity shareholder participation. When a company needs to take a vote from shareholders, for example, the entire process can be completed within Ethereum by identifying shareholders via their unique shareholder token and thereby allowing votes to be cast digitally on the blockchain.

The result is that when companies choose to crowdfund on Ethereum, they can issue equity shares in the form of tokens with pre-set rules and goals regarding when and how much investors will receive returns based on their initial investment. Digix, a startup that backs shares of gold with cryptocurrency, was recently one of the first companies to crowdsale their tokens on Ethereum’s DAO. In just under 12 hours Digix reached its crowdfunding goal of $5.5 million, with investors receiving a token tied to a specific amount of physical gold. The exact same process can be applied to equity crowdfunding of all shapes and sizes, giving investors a verified share of the company along with certainty (based on public DAO rules) as to when they’ll see a return.

So what does it all mean for the future of equity crowdfunding? The point is that, while traditional crowdfunding might be fun and rewarding in an intrinsic sense, there are severe limitations on the extrinsic financial rewards investors can receive. With innovations like counterparty equity and DAOs on the blockchain, fintech innovators are already on the move to ensure investors get more from their crowdfunding efforts than just a free t-shirt.

BNY Mellon Is Betting on Blockchain


blockchain-6-24-16.pngSometimes people ask BNY Chief Information Officer Suresh Kumar if blockchain is a friend or foe. “Why would I think of that as a foe?” Kumar told the magazine Fast Company in June. “It’s another piece of technology that could help us and our clients and remove friction from the system.”

Blockchain is the technology underlying bitcoin, the most popular form of cryptocurrency, a digital, encrypted currency that isn’t tied to a central bank. Blockchain is the public ledger for all bitcoin transactions, and each block on the blockchain represents a transaction. These transactions are irreversible.

Organizations, including banks, see potential for blockchain technology to revolutionize many areas of the financial industry and beyond, including securities trading, payments, fraud prevention and regulatory compliance. “We think blockchain can be transformative,” said BNY Mellon CEO Gerald Hassell, in the company’s first quarter 2016 earnings call. “We’re spending a lot of time and energy on it, but I think it’s going to take some time to see it play out in a full, meaningful way. We actually see ourselves as one of the major participants in using the technology to improve the efficiency of our operations and the resiliency of our operations.”

Saket Sharma, BNY Mellon’s chief information officer of treasury services, chairs a virtual team at the bank that includes all lines of the bank’s business. The team meets monthly, with the goal to foster understanding regarding how blockchain could impact each area of the organization. Meanwhile, BNY Mellon’s innovation center actively works with the technology. “We need to constantly be in touch with it, because technology’s evolving so rapidly,” he says.

BNY Mellon created an internal currency, called “BKoins,” to understand how blockchain technology could impact the bank. “We thought it would be good to do something purely internally, and learn about the technology,” says Sharma.

BKoin doesn’t have real value, but by working with it, the technology team now understands how the blockchain is generated, and from there is learning how it could transform different business lines, as well as the organization as a whole. It was widely reported last year that the cryptocurrency would be used as an internal rewards program, where employees could exchange BKoins for gift cards and perks. While the bank doesn’t rule out those possibilities for the future, Sharma says that this isn’t how BKoin is currently used and, aside from that, was never the goal. The goal is to educate BNY Mellon’s technology team and business lines about blockchain’s possibilities, and create a conversation about the technology’s potential for the organization. The approach has resulted in a significant increase in knowledge about blockchain at BNY Mellon in the span of just a few months, he says.

BNY Mellon isn’t the only bank using its own internal cryptocurrency to test blockchain’s potential. Citigroup and Japan’s Bank of Tokyo-Mitsubishi UFJ are also experimenting with proprietary digital currencies.

In addition to internal trials, BNY Mellon is also a member of a consortium of more than 40 global banks, including JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp., which is led by the financial innovation firm R3 in New York. Following a smaller test in January, 40 banks, including BNY Mellon, successfully traded fixed income assets in March using blockchains built by IBM, Intel and startup firms Chain, Eris Industries and Ethereum.

How blockchain will impact the banking industry is unclear for now. But the potential benefits are promising: Efficiency gains created through the technology could save the industry $20 billion annually by 2022, according to a joint paper released by Santander Innoventures, the consulting firm Oliver Wyman and London-based advisory firm Anthemis Group.

But the blockchain probably isn’t ready for primetime yet. In June, a hack resulted in the theft of almost 4 million “ether,” a cryptocurrency housed on the Ethereum blockchain, from the Decentralized Autonomous Organization (DAO), a crowdfunded venture capital firm. At the time, the stolen “ether” was valued at $79.6 million. After the discovery, the value of the cryptocurrency plunged precipitously. Bitcoin’s value stumbled as well.

Two days after the DAO incident, Ethereum creator Vitalik Buterin wrote: “There will be further bugs, and we will learn further lessons; there will not be a single magic technology that solves everything.”

Banks are less comfortable with the inevitable failures that come along with experimentation, but BNY Mellon and other global banks will continue to cautiously experiment, combining internal experiments with peer collaboration. “We’re going to have to work together with our industry peers to really drive [blockchain innovation],” says Sharma.