Andrzej Horoszczak – CEO and Founder, Billon
Almost nothing In the history of computer technology has created such a polarised response as cryptocurrencies. On the one hand, some consider crypto assets a flash in the pan that has made a few people very rich and many a bit poorer. On the other, some consider them to be the the financial invention of our time; a new asset class that liberates individuals and redefines how money is transferred and secured.
However, the real innovation is blockchain behind distributed ledgers, cryptocurrencies are only one potential branch. This innovation has so much potential and is so powerful, it promises to challenge the fundamentals of how banking and payments work. It allows us to recalibrate the existing systems of authorization, transactions, and risk into a completely new system of economic exchange.
Digital information is an incredibly valuable asset, especially when permanently combined with money. The specific digital currency being used is not so critical. More relevant for future systems is instead to ask, “how do we improve the interaction of people in society when we reduce friction and risk in value exchange?” Can the fundamental technology innovation behind blockchain use both money and data to create an improved system? Can future generations of financial systems use the decentralized technology used in blockchain to secure our digital money and our trusted digital information?
The problem with payments
How we pay for things has changed dramatically over time. From bartering, to metal coins, payments transitioned into credits and paper. Common to all these methods is the notion of a transaction. You get ‘this’, you pay ‘that’. What is new today is that there is also much more data involved in transactions: business data, product data, and other contextual information. This additional data has the potential to transform a purchase from being a simple one-off payment, and enrich it with information that may inform future transactions. Simply put, the addition of data can evolve financial transactions from mere payment methods to now include the context, product, and person.
Concurrent with this transformation, financial systems need to develop a better consumer-centric approach to payments. Today, payments are made in isolation from business data. People don’t know what payments are being used for, which fosters negativity and scepticism. There are also a multitude of intermediaries such as banks and other financial institutions involved in even the smallest payment. Intermediaries add cost and complexity, and a loss of control any as intermediary can block the process or make an error in transmitting data. A long chain simply has more links where things can go wrong.
The fundamental of design
The technology that defines blockchain can solve many of these problems, but it must have the right architectural design from the start. In first generation systems, money and business data can be unified in one blockchain structure with a single intermediary (the miner). However, blockchains based upon cryptocurrencies introduce a new set of problems. First, they are by design not integrated with existing financial systems, and they do not support regulatory regimes and risk management. To deeply integrate crypto would require completely rebuilding the banking industry and its supporting legal framework, which would be prohibitively expensive and organizationally unfeasible.
Instead of cryptocurrencies we need a “civilised” blockchain technology. Civilized means a blockchain that conforms to consumer, business, legal, regulatory, and financial system requirements. A blockchain that can be easily adopted by businesses and consumers without requiring a complete overhaul of existing financial systems. A blockchain that empowers users and businesses to have full, transparent control over their own money, data, and processes, while benefiting from additional privacy and security. Finally a blockchain available to the mass market at such low cost to open new, currently unaddressed populations and markets, regardless of occupation, geography or language.
Rewarding the Gig Economy
The world of payments should change to reflect how people work today. Much has been made of the Gig Economy and overall it’s clear that the independent workforce is here to stay. By its nature it seamlessly blends work and life specifically for each individual. The Gig Economy empowers people with choices around their work, lifestyle, money, and data. It is already a huge market – 70 million – and growing.
Gig Economy workers may have less rigid schedules and work periods than in traditional jobs. Periodic or infrequent payments may replace monthly salaries, and to incentivize workers the focus must shift to sending money to the right person as quickly as possible for a task completed. For example, being able to immediately pay a contract worker electronically after their eight hour shift is finished.
Traditional payment cycles do not fit the Gig Economy. Why should people wait days or weeks to get paid for a short task? Workers are frustrated about the money, while payroll has more paperwork to track short-term employees. This is where a new payment architecture, one using blockchain, can help. By using blockchain to present the same, unified view of money and data to the worker and the business, payment timelines and processes are reduced, while complexity and intermediaries are eliminated. Payment in real time directly to the user through blockchain motivates independent workers while reducing administration. That is a glimpse of the real world revolution blockchain can provide.
Banging the drum for blockchain
However, within corporations, payroll isn’t going to champion this new approach. There’s an element of self-preservation to this, as professions like accountants or auditors would have to redefine their jobs, allowing another system to handle their traditional tasks. So, aside from the workers, who is banging the drum for blockchain?
Line managers are at the front of the queue to stop wasting time following up payment issues. They need a team of happy, rewarded and motivated staff at their disposal. Operations wants to improve efficiencies and can clearly see the benefit of cutting unnecessary paperwork, while improving the ability to check data in reconciliation and error handling. Regulatory positions like the financial controller and auditor are also natural promoters. Ultimately, they have to explain to employees, the CEO, or even the tax man when things go wrong.. While small, £10, £20 bonuses and vouchers that fall through the financial net still need to be audited and accounted for with all parties. Who wouldn’t want to rid themselves of that burden with an improved system, given the choice?
Banking today and tomorrow
Consumer banking penetration plateaued in the 90s, with high IT costs that limit the total addressable number of clients. Payment systems also have high fixed costs which limit their flexibility in both payment amounts and frequency. This leaves unaddressed a very large (and growing) market that covers numerous demographic groups: Gig Economy workers, but also youth and migrant workers. To reach these groups it is vital that we transition away from the high-cost payroll, banking, card payments and money transfer systems that we have today.
We are just starting this transition, one which I believe will see the world move towards a distributed wallet system. I believe the technological innovations which enable blockchain technology can enable such a move, but only a “civilised” blockchain that seamlessly integrates with existing systems. Adopted by users, consumers, banks, and regulators such a civilised blockchain will power future payments with a data-rich experience centred around the consumer and their mobile device. In this system consumers, workers, and businesses are themselves empowered to be their own payment processor and they will be masters of their own destiny.
Seven lessons from 2020
Rebeca Ehrnrooth, Equilibrium Capital and CEMS Alumni Association President
Attending a New Year’s luncheon on 31 December 2019, we played a game that involved predicting the world in 2020. Some of the questions included: would Uber become profitable? Would the three-decade bond rally finally come to an end? Would the US hit a recession?
Unlike any of our predictions based on a traditional approach to business and predicting, we now know that 2020 became the year where business, professional and personal plans were turned upside down, reshaped and put-on hold. The proverbial black swan had arrived.
As revealed in a new CEMS Guide to Leadership in a Post-COVID-19 World, to which I contributed, the COVID-19 pandemic has exposed deficiencies in the 20th Century vision of leadership, giving a rare opportunity to question the status quo.
So, what are the main lessons from 2020?
- Humans are enormously adaptive. This is not an extinction scenario. The world is getting used to dealing with global human disaster which may become a recurring event. Life continues guided by new parameters.
- No sector or country is immune to rapid change. Just as the leveraged finance and equity markets ground to a halt during the Global Financial Crisis, we have seen a disruption in the financial markets (including M&A) in 2020, including a significant redistribution of wealth between sectors; think tech vs airlines and the hospitality industry. When a market is disrupted it has secondary and tertiary effects such as less work for accountants, lawyers, financiers etc.
- Location is not as important anymore. The belief that finance staff need to be based in one of the financial capitals to be effective has been forever altered. Pursuing a career in finance from anywhere is becoming possible. However, it’s likely that over time, financial controls and human interaction will move the work model back towards the traditional office approach, as work is a critical sanctuary for people. While working from home may allow more time for family, chores and sports, it is mainly effective for people who already have their internal and external networks. For junior employees it presents a notable challenge as they may be forced to spend their formative years without a chance to really build their networks.
- Change is likely to be lasting. The opportunity for alternative finance and tech focused providers is enormous and 2020 will accelerate this shift. For example, many retail banks are providing rather poor customer service, blaming the pandemic. Even the most loyal customers will be heading elsewhere. For recent graduates and current students this is a major shift; future winners and key employers may not be names we are used to seeing in the headlines.
- There will be a spotlight on leaders with visionary strategy and understanding of the operations. 2020 showed many politicians and business leaders behaving like they were playing a game of snakes and ladders, rather than executing a thought-out strategy. The next wave of thoughtful leadership is urgently required.
- Collaboration leads to success. The definition of a pandemic is an infectious disease prevalent worldwide. A global problem requires a collaborative solution rather than each country and industry on their own. Quoting Steven Riley, professor of infectious disease dynamics at Imperial College London: “Once you have the knowledge and you share the knowledge, then you are able to take measures to push transmission much lower”. This principle is transferable to management education. In a world more complex than ever, investing in a degree is hard currency. Combined with the full global alumni network, corporate partners and schools, CEMS is capital that doesn’t depreciate.
- Resilience has become a watch word. Saint-Exupéry’s quote resonates with me: “If you want to build a ship, don’t drum up people to collect wood and don’t assign them tasks and work, but rather teach them to long for the endless immensity of the sea.” We are in a new paradigm – so prepare for the next change. For COVID-19, while we hope that the vaccine will soon upon us, the broader long-term positive challenge remains.
Data after Brexit: How does the end of the transition affect GDPR?
By John Flynn, Principal Security Consultant at Conosco
The UK has officially left the European Union now that the transition period has ended on January 1st 2021. But this could raise issues with one of the biggest bugbears for many companies – the international transfer of personal data.
Businesses can relax, somewhat – GDPR, which took businesses months to get their heads around, is not being replaced. It will continue as the UK GDPR 2018, and will still be based on the criteria of the Data Protection Act of 2018. However, the UK will retain the right to change the UK GDPR as it sees fit in the future.
The main changes apply to those who receive data coming into the UK from Europe. Transfers from the UK to other countries can continue under existing arrangements.
We know it can be difficult to cut through the legal jargon, so we have simplified what you need to know to protect yourself and your data:
1 – Update your privacy notice
Most businesses do not have the correct clauses in place ahead of January 1st, potentially exposing their liability, should something happen to their data. All company privacy notices online will need to be updated to specifically state ‘UK GDPR’, as opposed to ‘EU GDPR’. You will also need standard contractual clauses in place, which cover both parties – those transferring and those receiving the data.
The Information Commissioner’s Office (ICO) has a list of what needs to be included in the standard contractual clause here. The ICO will remain the UK regulator for data protection, regularly liaising with each EU member state.
This also applies to Multi Corporate Groups who operate in multiple countries, who need to update their documentation and privacy notice to expressly cover the data transfers. The UK has applied for an adequacy assessment, which would negate the need for contractual clauses, however this has not yet been approved by the EU.
2 – Data privacy assessments
Any company which runs applications and software should always perform a Data Privacy Impact Assessment. This was also in the guidelines before, but these assessments are now more important for those who outsource their IT operations internationally.
For example, when using a service such as a cloud-based system, the company must be sure that its service provider adheres to UK GDPR and stores the data within the European Economic Area (EEA), or has a binding corporate agreement with the company, where data is stored outside of the EEA. You should also, as mentioned above, make sure that a contractual clause is in place.
3 – Review local legislation
Contracts should now have contractual clauses that specify the responsibilities of the data controller and the data processor. If you are receiving personal data from a country territory or sector covered by a European Commission adequacy decision, the sender of the data will need to consider how to comply with its local laws on international transfers. You should check local legislation and guidance in this case.
4 – Cyber Security health check
The ICO is increasing its capacity and efforts to crack down on data breaches, post-Brexit. Now is a great time for all companies to have a health check to understand their Information Security posture and GDPR compliance. Nobody wants to be caught handling data improperly and fined when it could have been prevented with education and training.
A gap analysis performed by an expert is money well-spent. It’s also a fact that companies that have cybersecurity and Information Security controls are not only able to better defend against attacks but are also far better placed to recover from an attack.
It’s important that all businesses – large and small – are properly preparing their data storage and transferring for the 1st January. ICO has been busy setting examples by fining large, high-profile companies for failing to keep millions of customers’ personal data safe.
It will continue to come down hard on the data breaches of personal identifiable information and special categories of data. The saying ‘prevention is better than a cure’ rings truer than ever this year, and you will thank yourself if you make the efforts to properly store your data now, and not when it’s too late.
2020 reflections and 2021 outlook
By John Hunter, Head of Banking and Fiduciaries, Finance Isle of Man
Reflections on the most surreal year
The Covid-19 pandemic has completely changed the world as we knew it, resulting in catastrophic loss of life and fears of a downturn hang over global economies like a sword of Damocles. In the UK, the new strain has further exacerbated the situation. As I am sure many have already said we are living in what could be called the most surreal times. People have been trying to cope with this “new normal”, by changing their lifestyles and evolving behaviours.
The Isle of Man responded swiftly to the pandemic by closing its borders and enforcing social restrictions which everyone respected and adhered to. Socially and culturally the Island demonstrated all the good things that come from living on a relatively small Island where community still means so much.
The Isle of Man’s financial services sector adapted quickly, seamlessly transitioning to working from home. The banks too adopted flexible remote working practices and continued to support clients around the world helping them navigate the challenging situation and making the most of any opportunities that arose.
Although there is no substitute for face-to-face interactions, we all embraced web-conferencing platforms like Microsoft Teams and Zoom to stay connected with contacts around the world and build and nurture business relationships, whether it was with financial services firms or high net worth individuals looking to relocate to the Island.
Furthermore, a priority for the Isle of Man has been to reinvigorate the business and cultural ties with South Africa. In a normal world, we would have travelled to the country, held in-person meetings with businesses and industry representatives and talked about building on our wonderful historic ties. However, because of the scale and breadth of disruption we had to change all our plans! We hosted a virtual roadshow which comprised a series of webinars exploring why it has never been more important for South African businesses and individuals to choose the right jurisdiction for long term financial planning.
Looking ahead to the future
We are all hoping that the global rollout of vaccines will provide the pathway to some form of return to normality and all the things people are missing will be back. Like amidst all periods of immense turmoil, interesting, new possibilities have emerged such as the revolution in work culture and a renewed importance of being close to nature and green spaces is. And these possibilities can help reshape society for the better.
The global economic recovery and rebuild might seem further away in the current environment especially amidst the new lockdowns. But we are confident in the resilience of economies and are hopeful that different industrial sectors and governments working together would result in green shoots.
The financial services industry has an important role to play in getting the world economy back on its feet. It is a core component of the solution to continue facilitating the financing of corporates, as well as to develop sustainable finance and nurture digital technologies which have proven to be vital during the pandemic. The sector should continue its cooperation and collaboration with governments and regulators to ensure efficient capital flows and financial stability for businesses and individuals.
Banks too have a crucial role to play as they are instrumental to the effective transmission of monetary policies and stimulus packages. As mentioned in a report by EY: “Financial insecurity in the wake of COVID-19 will require banks to boost consumer confidence and help build a more resilient working world.”
We expect the Isle of Man’s financial services sector and banks to continue navigating the situation with resilience as they have been doing thus far and contributing to the global recovery process. Also, we truly hope this will be our busiest year ever (subject to our ability to travel), with an extensive global schedule of planned activity to promote the Island as an international financial centre of excellence and innovation. Personally, I had planned to be in South Africa for the British & Irish Lions tour, but regrettably, it might not take place and as such we will look forward to catching up with friends there as and when we can.
No doubt, there are significant challenges for the world ahead but as Albert Einstein said: “in the midst of every crisis lies great opportunity”. And it is this opportunity that we all need to work together to identify and make the most of. We are confident that in 2021 the Isle of Man will continue to support financial services businesses help their clients, employees, and the wider society through these surreal times. We are all in this together.
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