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Five Points to Consider Regarding the Regulation of Cryptocurrency

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Five Points to Consider Regarding the Regulation of Cryptocurrency

By Elliott Phillips, Partner, Signature Litigation and Steven De Lara, Senior Associate, Signature Litigation

Despite the rapid ascent of the world’s leading cryptocurrency—such that $4,000 will buy 1 Bitcoin, and there are $66 billion worth of Bitcoins in circulation—there remains no regulatory legislation in place in Britain. Herein, we investigate the complexities of constructing an adequate regulatory framework for cryptocurrency, in five stages. 

One: The UK’s Lack of Cryptocurrency Regulation

Elliott Phillips

Elliott Phillips

The first, is simply to acknowledge the increasing void left by the UK’s lack of cryptocurrency regulation.

Last year, HMRC issued guidance in the form of a letter concerning VAT, stating that Bitcoin—the revolutionary cryptocurrency set to re-sculpt the global financial landscape—was to be treated as a single-purpose face-value voucher. This meant that anyone selling Bitcoin, or operating an exchange, would have to charge VAT on the value of the Bitcoin being sold.

HMRC quickly and quietly withdrew this guidance, and is currently re-examining how and when VAT should be applied.

Further, the Financial Conduct Authority (FCA) has confirmed not only that it does not regulate digital currencies, but that it has no intention of doing so in the future. This means that Bitcoin businesses do not have to register with or be authorised by the FCA. When it comes to Anti-Money Laundering (AML) legislation, there is currently no formal obligation to prevent money laundering through Bitcoin dealings despite the imminent EU legislation.

Two: The Nature of Bitcoin

The second point, regards the strange and speculative nature of crypotocurrency, present from its founding, which makes regulation so problematic. Bitcoin’s emergence, involves an anonymous inventor, calling themselves Satoshi Nakamoto, complex mathematics, and billions of pounds of ‘electric cash’ circulating in a subterranean international financial system.

Nakamoto summarised the original vision for cryptocurrency in a 2009 abstract “Bitcoin: A Peer-to-Peer Electronic Cash System”, which states ‘a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.’

Inherently removed from the regulatory jurisdiction of financial institutions, cryptocurrency is distributed via blockchains, which use distributed ledger technology (DLT) to scatter information across multiple participants that is unamendable without universal consent. The method requires sophisticated technology and engineers a potentially transparent and virtually unhackable environment.

Three: The Problem of Compliance

Steven De Lara

Steven De Lara

The third point, issuing from the concept of ‘electric cash’ and DLT underlying cryptocurrency, regards the problem of enforcing compliance.

The immense digital security of cryptocurrency—provided through hashes: an algorithm-created sequence of letters and numbers, which are stored along with the block and date-stamped at the end of the blockchain—is counteracted from a regulators perspective by the immensely problematic cloak of anonymity.

Although all Bitcoin transactions are recorded on a universally-visible shared ledger, they are difficult to track because of when Bitcoins are placed in customers’ digital wallets. With no way of identifying an individual Bitcoin unit (or sub unit), trailing bitcoins and successfully pursuing the owner of a particular wallet can be near impossible.

Consequently, cryptocurrency is the money of choice for international crime rings; ranging from money laundering and drug trafficking, to tax evasion and terrorism.Most recently, the Russian national Alexander Vinnik, 38, was arrested in Greece and charged (27 July 2017) by a US grand jury over the alleged money laundering of $4billion over several years.

Such high-profile criminal activity has in turn spurred several countries to declare Bitcoin exchanges to be subject to AML laws.

Four: International Regulatory Responses

The fourth point regards the necessity for regulatory frameworks to include Bitcoin and other cryptocurrencies becoming increasingly apparent in foreign countries.  For example, China and Japan have announced their intention to regulate local bitcoin exchanges, followed more recently by Australia.

In the US, various government agencies have been tasked to ensure that Bitcoin transactions are undertaken within the law. However, last year, a Florida court ruled that Bitcoin should not be classified as money.

Similarly, the EU has promised to tighten digital currency law, including Bitcoin, by the end of this year, but specifics are yet to emerge. Meanwhile,Gibraltar is quickly establishing itself as one of the first jurisdictions to propose the introduction of a regulatory framework (currently expected in January 2018) that would encompass firms operating with distributed ledger technology (DLT). Its main aims are to:

  • Provide regulatory confidence for DLT firms based in Gibraltar;
  • Provide sufficient flexibility to enable the effective regulation of novel business activities, products, processes, and business models;
  • Enhance consumer confidence in dealing with properly regulated firms using novel technology; and
  • Encourage DLT firms to be established in Gibraltar because there is an appropriate regime for regulating their activities

As a jurisdiction open to new technology, but with a solid reputation as a progressive and safe financial center, Gibraltar is uniquely placed to secure the benefits of DLT firms operating Bitcoin and other cryptocurrencies while providing essential protections to those seeking to invest in this fast-developing sector of financial technology.

 Five: A Call for New Legislation 

Following this international response,the UK’s distinct absence of regulation or judgments defining the status of DLT is brought into sharper focus. As cryptocurrencies like Bitcoin continue to increase in value and legitimacy, Britain’s head-in-the-sand approach surely cannot be maintained. Perhaps it will take a string of high-profile litigation cases, like that following the $450m collapse of Mt.Gox in 2014, a leading bitcoin exchange. It is, however, unwise to wait for catastrophe.

Preparations should be being made, regardless of the still rapidly changing face of cryptocurrency.

Finance

From fundamentals to digital evolution: Deutsche Bank and ACT release comprehensive guide for treasurers

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From fundamentals to digital evolution: Deutsche Bank and ACT release comprehensive guide for treasurers 1

The Association for Corporate Treasurers (ACT), in partnership with Deutsche

Bank, has today announced the release of “The Group Treasurer: An ACT guide to the first 100 days”, which provides valuable insights on the role of the treasury function – serving as an in-depth guide to those moving into senior treasury roles for the first time, as well as a valuable refresher on the latest developments for treasury professionals.

Treasury departments are often staffed by people who move across from other finance disciplines and, for them, navigating their first 100 days – with a host of new, often alien, concepts and the need to quickly get up to speed –can be a challenge.

The Guide serves as a complete compendium of the crucial, need-to-know information – starting with the basics, including the role of treasury, how departments are set up and what you need to know about treasury policy, before moving on to a series of deep dives into the critical features of life in treasury, including all you need to know about cash and liquidity management, the innovative technologies that are driving change, as well whether an in-house bank is right for you. Scattered throughout the Guide are useful insights from treasury professionals across a wide range of industries and geographies – providing best practice advice for gaining maximum benefit from your time in treasury.

“We have looked to create a guide that goes back to basics – and the ACT seemed the perfect partner for this” says Ole Matthiessen, Global Head of Cash Management, Deutsche Bank. “While the ACT can provide treasury professionals with training and qualifications necessary for a successful career, Deutsche Bank, in its role as a trusted advisor, can provide up-to-date insight on the options available for treasurers in the market.”

The Guide is also a reaction to the sweeping changes seen in treasury over the last few years. With new processes and technologies moving centre stage, the Guide seeks to provide treasury professionals with a concise “refresh” of the latest developments – especially for perennial challenges, such as the availability of liquidity.

Release 1 | 2  “I hope readers will find the Guide a useful tool” says Caroline Stockmann, Chief Executive, ACT. “And remember: the ACT is here to support you, whether you are a member or not, as our Mission is to embed the highest standards of professionalism and integrity in the treasury world, and act as its leading advocate.”

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Finance

Satisfaction with Credit Card Issuers in Canada Remains Flat Amid COVID-19, J.D. Power Finds

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Satisfaction with Credit Card Issuers in Canada Remains Flat Amid COVID-19, J.D. Power Finds 2

Tangerine Bank Ranks Highest in Overall Credit Card Customer Satisfaction for Second Consecutive Year

With 73% of credit card customers in Canada saying COVID-19 has negatively affected them financially and 24% who say they are unable to make monthly credit card payments, overall satisfaction with their primary credit card issuer remains relatively flat year over year at 764 (on a 1,000-point scale), according to the J.D. Power 2020 Canada Credit Card Satisfaction Study,SM released today.

“While credit card issuers in Canada are faring somewhat better than their U.S. counterparts in averting the negative effects of COVID-19 on customer satisfaction, they are not out of the woods,” says John Cabell, director of banking and payments intelligence at J.D. Power. “Credit card companies are falling behind in key areas related to the customer experience, especially in factors linked to financial sensitivity and customer support channels, which are crucial during the pandemic.”

According to the study, despite a one-point increase in overall satisfaction from 2019, credit card issuers have experienced a year-over-year decline in key performance indicators (KPIs) related to interactions with credit card customers, such as showing concern for customer needs; appreciating customer business; problem-free experiences; card activation; and reward redemption. As a result, satisfaction is down 12 points in assisted online experience and down 11 points for call centres.

More than half (55%) of cardholders acknowledge COVID-19 has changed their card usage habits, mainly by spending less. Understanding customers’ needs and addressing their changing priorities can help card issuers to mitigate future decline in satisfaction and elevate loyalty. The study shows that offering free or discounted services in response to COVID-19 are the actions driving a more positive impression of the issuer (39% and 35%, respectively), followed by gestures such as employee support (33%); waiving fees (32%); and community support (32%).

“The pandemic presents an opportunity for issuers to align their card services and benefits with customers’ evolving needs,” Cabell said. “Issuers can increase the perceived value of the card and strengthen loyalty. Offering discounted airline tickets or free airport lounge access is probably not as lucrative these days for cardholders as, for example, it would be to extend the duration of annual fees.”

Following are additional key findings of the 2020 study:

  • Satisfaction declines with household income: With 29% of cardholders earning less during the pandemic, many are looking for relief from their credit card company and are more critical of card issuers. In fact, credit card satisfaction among customers whose household income has declined due to the pandemic is lower than among those whose income remained unchanged. The largest gaps in satisfaction are in rewards (-12 points); benefits and services (-11); communication (-8); and customer interaction (-8).
  • Call centre woes: The pandemic has put a greater strain on call centres, which has negatively affected satisfaction. Caller wait times jumped to more than 12 minutes during the pandemic compared with less than 8 minutes prior to the pandemic. Also, caller satisfaction with the level of courtesy exhibited by call centre representatives declined significantly, which calls out the need for card issuers to restore best practices among their reps and identify better ways to manage customer support.
  • Cardholders are digitally savvy: Nearly two-thirds (64%) of cardholders solely rely on digital channels to manage their primary credit card activities, and those cardholders are more likely to say it is easy to understand information about their account and do business with their issuer than do cardholders who do not rely solely on digital channels. In fact, one of the bright spots in the study is improvements in customer satisfaction with mobile and online interaction of 8 points and 7 points, respectively, from 2019.

Study Rankings

Tangerine Bank ranks highest in overall customer satisfaction with a score of 825, which is 61 points higher than the industry average of 764. American Express (801) ranks second and Canadian Tire (793) ranks third.

The Canada Credit Card Satisfaction Study measures satisfaction of cardholders’ primary credit card issuer. The study measures performance in six factors critical to the customer experience (in alphabetical order): benefits and services; communication; credit card terms; customer interaction; key moments; and rewards. The study includes responses from 6,728 cardholders who used a major credit card in the past three months and was fielded in May-June 2020.

Satisfaction with Credit Card Issuers in Canada Remains Flat Amid COVID-19, J.D. Power Finds 3

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Finance

The impact of the Accounts Payable risk landscape

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The impact of the Accounts Payable risk landscape 4

By David Thorley, Director of Customer Development, FISCAL Technologies

The current economic climate has never been so uncertain. Not since the 2008 financial crash has there been a period where organisations are mindful about how the markets will play out and the effect this will have on economies around the globe. As a result, organisations have become increasingly conscious about the way they spend money, but they have also become more aware about how they save money.

The Accounts Payable (AP) department aims to reduce the amount of money lost in an organisation, making sure all payments are completed on time and are done so correctly, but this is unfortunately not always the case. For example, half of large organisations have duplicated or misdirected a payment to suppliers. This roughly accounts for £3 million being directed to the wrong supplier and resulting in a long and lengthy process in getting this money reclaimed.[1] On top of this, 33% of organisations experience internal fraud every year, with an average loss of half a million.[2]

Therefore, it is clear that in almost every financial department things slip under the radar, but what are some of the risks in the AP department and how can they impact a company?

Lost opportunities reducing income

The capacity for AP resources to work on higher value activities is reduced due to error and query resolution, this can range from anything from chasing up suppliers to looking for a misplaced document. As a result, those within the department are limited to what they can do due to these mundane, repetitive tasks.

Ultimately, lengthy pre or post audit activity reduces the ability of the business to transact, limiting growth and reducing competitiveness, all of which can be avoided if the correct tools are in place.

Financial penalties

In some geographies and industries, errors and adverse findings in statutory audits can lead to financial penalties. These penalties can be anywhere from a few thousand pound to tens of millions. Just last year a leading consultancy was fined almost £20m for poor auditing. Payment Policy infringements can reduce an organisation’s ability to bid for certain types of contracts; critical infrastructures for example, which can have a significant impact on the way an organisation operates.

Restricted cashflow

Payment errors and fraud directly affects the bottom line, which can result in a major impact in the financial reporting. Often financial reporting is skewed resulting in liquidity and profits being reduced. In public sector organisations, these lost funds reduce the capital available for frontline services, which can not only impact the quality of service provided but could also affect the reputation.

Increased processing costs

Invoice exceptions prevent supplier invoices being processed automatically. AP staff spend an inordinate amount of time checking, correcting and managing invoice exceptions, which significantly increases processing costs and time. Given the current climate, this time and money could be put to better use, helping a company grow and expand.

Audit administration

Organisations making overpayments – paying duplicate or incorrect invoices – and fraud are a common problem. Together, these account for between 0.5% and 1.5% of the number of invoices processed, with the cost running into millions in many cases.[3]

As a result, whenever an audit is conducted, the AP team spends time finding and providing information and documents. The more issues that are found, the more time audits take to identify and recover lost cash.

Wasted time

AP teams will frequently need to check supplier records during their normal transaction processing. Large, unmanaged MSF hold numerous duplicates and no-longer-required records that create more payment errors and hours spent investigating and resolving queries.

Reputational damage

Whether a private or non-profit organisation, fraud, errors, compliance breaches or poor financial results all heighten the risk of reputational damage for the organisation generally and the finance director in particular. The reputational damage caused by a high profile incident of fraud can be significant, affecting the business’ credibility and even the share price.

The shockwave from fraud can be more damaging than the financial loss. After a fraud is discovered, considerable time will be taken up investigating every new potential risk of fraud. Whatever the outcome of the investigation, this is an unwelcome distraction for the managers concerned. But, more importantly, the effect on morale and belief in the leadership’s capabilities throughout the organisation – not just the finance team – will be harmed.

Managing these risks

AP assures the protection of cash within an organisation, identifying risks and resolving them. To do this effectively and efficiently it’s imperative AP departments have the correct tools in place to ensure they follow a simple process that allows them to save time and money, helping their organisation both in the short and long term

[1] (The Hackett Group, Key Issues Study 2020)

[2] Source: https://www.qsoftware.com/fraud-prevention-and-detection/erp-fraud-prevention-key-measures/

[3] https://www.cfo.com/payments/2020/03/metric-of-the-month-detect-and-prevent-duplicate-or-erroneous-payments/

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