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MANAGING THE RISK OF REGULATION: HOW SELF-REGULATION COULD REINVIGORATE THE CRYPTOCURRENCY BOOM

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MANAGING THE RISK OF REGULATION: HOW SELF-REGULATION COULD REINVIGORATE THE CRYPTOCURRENCY BOOM

Alexander Larsen, FIRM

President, Baldwin Global Risk Services Ltd & Fellow of the Institute of Risk Management

Calls for regulation & the G20 Summit

The cryptocurrency space has been fraught with cases of fraud and scams and with it being such a new industry with little in the way of regulation, it has been an ongoing focus of governments. This focus has only increased in recent months due to the number of high profile incidents, such as the theft of $500 million of digital money from the Coincheck Exchange.

This incident, and subsequent action from the regulators, added to the ongoing pressures to introduce regulation into the cryptocurrency space; assuming that we haven’t seen a bubble burst, it was one of the major contributing factors to the fear, uncertainty and doubt that has seen a cryptocurrency crash and an ongoing bear market, prices having fallen over 70% from all-time highs set in December 2017 and January 2018.

The discussions around Cryptocurrency regulations have even reached as high as the recent G20 Summit in Argentina (March 19th 2018).

Whilst some key concerns around cryptocurrency dangers were highlighted (such as consumer and investment protections and their use to shield illicit activity and for money laundering and terrorist financing), the G20 has rejected calls for regulation and have instead been urged to lessen the risks by working together to improve conduct, market integrity and cyber resilience in the cryptocurrency sector.

This has alleviated some of the fears in the industry of any major regulation being implemented any time soon and opens up opportunity for the industry to work with governments and take action to ensure this delay of regulation becomes permanent.

Response in Japan, UK, South Korea and USA

In a proactive move, The Japan Blockchain Association (JBA) and the Japan Cryptocurrency Business Association are expected to merge to create a new self-regulatory organization to strengthen self-regulation which, if approved, could act as an independent regulatory body of the government.

The UK has followed suit with seven British cryptocurrency companies having set up CryptoUK, a crypto trade association intended to improve industry standards and engage policymakers. Meanwhile, in South Korea 66 members have signed up to the Korean Blockchain Association including 25 of the biggest crypto exchanges with a view to self-regulate.

Perhaps the biggest news however, is that of the Winklevoss twins’ intention to create the Virtual Commodity Association, a self-regulatory organisation meant to police digital-currency markets and custodians in the USA. The high-profile brothers, who run the Gemini exchange, aim to develop industry standards, promote transparency and work with regulators including the U.S. Commodity Futures Trading Commission to prevent fraud.

Benefits of Self-Regulation

Having a self-regulatory body for the cryptocurrency space has a number of benefits to the industry.

Combatting heavy regulation

One of the key benefits is demonstrating that the industry is being proactive and responsible about protecting investors, preventing fraud, protecting against cyber-attacks and stamping out scams. This could be enough to appease regulators enough to delay or stop the introduction of heavy regulation. This assumes that the self-regulation goes far enough and proves to be effective.

By removing the threat of heavy regulation and replacing it with self-regulation, a high level of uncertainty is removed, bringing back confidence in the market and allowing organisations to plan effectively with a renewed focus on innovation.

Fit for purpose and industry specific

Industry driving self-regulation will ensure that this regulation is not only fit for purpose, allowing innovation in the space to continue, but also adaptable and able to evolve according to need or market changes. Additionally, rather than a one size fits all approach, separate and specific regulations could be developed for different types of cryptocurrencies such as privacy coins, smart contracts and settlement networks amongst others. The following graph provides an example of how cryptocurrencies may be differentiated, although this could be split even further.

A global solution

Self-regulation also combats one of the drawback of every country potentially having different regulation, which makes it increasingly difficult for companies to operate on a global scale. Self-regulatory bodies have more opportunity to collaborate with each other and introduce global regulations that are consistent and meet the needs of investors and cryptocurrency companies.

Beneficial to Government

Self-regulation can often be useful for governments too. It is not only faster to implement, but the burden of costs falls on the industry rather than the government. This is a major selling point of self-regulation and as long as governments are involved and are kept informed, they may be happy to leave it in the hands of self-regulatory bodies.

Influence

Another aspect that should be considered as being highly desirable to the industry is that it allows them to lobby, interact with and educate regulators and legislators. This can ensure that any future regulation introduced is not detrimental to the industry and is developed in conjunction with businesses in the space.

Effective self-regulation:

Whilst the benefits of self-regulation are clear, the regulatory body in place needs to be strong, fit for purpose and effective. Some key areas for consideration by newly formed self-regulatory bodies are covered below.

Government supported and backed by law

In order to remove the introduction of government regulation, the industry needs to ensure that the self-regulatory body is backed by law and has a government regulatory partner. A positive relationship needs to be built with them in order to have successful self-regulation. Unfortunately, there is a widely held view within the cryptocurrency space that the government and banks are enemies of cryptocurrency and are looking for every opportunity to shut the industry down. This view needs to change if self-regulation is going to work and if they want the industry to flourish.

Industry support

Another critical success factor will be industry support and involvement in the creation of regulation. This helps the buy-in process and also ensures well thought out and extensive regulations are put in place that have been agreed by all members. The more participation the better as self-regulation can have little effect if companies are not involved.

Accountability

With self-regulation, members need to be prepared to accept that there will be penalties and sanctions for non-compliance. Therefore, a strong accountability program that includes transparent reporting to stakeholders, should be implemented and committed to in writing by members with annual certified compliance submissions. It should focus on sound financial and non-financial practices with oversight and transparency and members should expect for information to be shared with government regulators as appropriate.

Detection

A key challenge with self-regulation is that of detection. There needs to be a system in place for detection from audits and reviews to Incentivize the detection and deterrence of manipulative and fraudulent acts and practices, including partnering with regulators and particularly the CFTC to share or refer information, as appropriate.

What areas should be self-regulated:

Once a self-governing body has been established and has the right framework in place to be effective, the areas of self-regulation to consider are numerous and some examples follow.

Specific requirements dependent on Cryptocurrency status

One of the advantages of self-regulation, as mentioned earlier, is the ability to develop specific regulations for different types of cryptocurrencies depending on their status. Exchanges for example will have very different requirements from privacy coins or technologies that provide a platform for other tokens to be launched such as Ethereum/EOS.

Exchange regulation might focus on investor protection and ensure money on the platform is well protected, enough liquidity is available should the worst happen and all user data is safe. Platform-based tokens on the other hand might focus on ensuring that they do due diligence before allowing a token to be launched on their platform.

ICOs

A major area of concern for regulators has been ICOs. Investors have lost a lot of money as a result of scams and fraud and the industry should focus on ensuring that every ICO meets minimum requirements such as clarity of who the board members are, and ensuring other minimum due diligence has been undertaken by an external and approved organisation, etc. before it can be listed by any of the exchanges that are members of the self-governing body.

Minimum requirements

Fraud and money laundering

One of the ongoing criticisms of cryptocurrencies, whether valid or not, is that it is being used by terrorists and money launderers. Ensuring members properly screen their customers or analyse usage on their exchanges for trends that might indicate criminal activity could be one way of improving the image of the industry.  There needs also to be action taken by members when identifying such activity such as sharing information with the relevant agencies or regulators or freezing assets or accounts.

Cyber Security

Cyber security is the topic that launched regulators into action in the first place. Cyber risk has been a growing threat in the last few years. Going forward we can only expect hackers to become more organised and well-funded, which, alongside advances in AI and technology, will lead to more sophistication in their attacks.

Some organisations are already spending hundreds of millions of pounds on cyber security, whilst governments are spending billions in order to prevent these attacks. It therefore makes sense for the cryptocurrency industry to be working hard to ensure this is the case for them too.

Conclusion

It may not be enough to convince regulators that government regulation is not required. All is not lost however, and just by having self-regulation, the industry will have prepared organisations for a regulated industry making them more resilient to change and therefore reducing the overall impact that regulations have on cryptocurrencies.

This in itself could be enough to reinvigorate the cryptocurrency boom and see new all-time highs in the market and drive innovation further.

Our new Strategic Insights into Cyber Risk course can be found here: https://www.theirm.org/training/all-courses/strategic-insights-into-cyber-risk.aspx

The Institute of Risk Management offers a variety of in-house and public courses on all aspects of risk management, find out more here: www.theirm.org

Finance

Staying connected: keeping the numbers moving in the finance industry

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Staying connected: keeping the numbers moving in the finance industry 1

By Robert Gibson-Bolton, Enterprise Manager, NetMotion

2020 will certainly be hard to forget. Amongst the many changes we have come to live with, for many of us it has been adapting to a new style of working. Whatever your take on it is, remote working, working from home or even agile working, one thing remains clear – for many of us, this could be the new-normal for the foreseeable future. The professional services sector is no different. For example, many finance practices around the world are now allowing staff to work from home part of the time. In addition, a recent KPMG report found that half of the UK’s financial services workforce want to work from home after COVID-19.

Will this therefore become the de facto working practice for the finance industry too? We can’t say for sure, but this agile approach to working has certainly caused a major rethink for many firms. And as they evolve and adapt to meet the demands of a different way of working, firms need to ensure that their workforce can seamlessly interact with each other and their clients – this is key if they want to continue to deliver exceptional client service. Whilst financial services organisations everywhere are busy adopting innovative new technologies to better reflect the ‘work from anywhere environment’, they need to ensure secure access to resources and strive towards enhancing the end user experience. Success will be replicating the office working experience at home or wherever else they may be.

It’s all well and good for a firm to boast about the ability of their staff to work successfully from home, but how do they also establish that their people are just as productive as they were before? Whilst the IT department will have to grapple with security and compliance issues that arise from agile and remote working, they must also ensure that their people can connect securely, without eschewing user experience. And it needs to be completely seamless, without compromising the service level provided to clients.

Why all the fuss?

Which brings us nicely to persistent connectivity. Persistent connectivity effectively allows you to do more. How frustrating for the user when connectivity drops, or when the device that they are working on can’t find a network to connect to (or if the device switches between different networks). When connectivity drops, and re-connection is required then there is that small period where the user is not connected at all. And the user might have to re-authenticate or log into their VPN again (most VPNs are rubbish when they lose connectivity). All of these different scenarios ultimately disrupt the user experience – persistent connectivity provides the flexibility to overcome these challenges. When you enjoy consistent connectivity, you are making sure that the technology works as it was designed to work, allowing staff to rely on optimum user experience, anytime, anywhere – in effect, supplying them with that office-like experience, wherever they are. Just think about how many hours might be spent on a train, in a hotel or even on a client site. Consistent connectivity is key here – consistent in any of these locations.

Connectivity will be a fundamental component for successful remote working as firms try to meet the demands of an increasingly mobile workforce. Ultimately, they need encrypted and reliable connections that enable them to quickly and easily reach business applications and services. Working in a disconnected environment can lead to frustrated workers, hardly fitting given all the new remote working policies in place.

Getting the user experience spot-on

When you fine-tune connection performance so that essential business applications run reliably across networks, you are essentially talking about traffic optimization. Mobile traffic optimization ensures that applications, resources and connections are tuned for weak and intermittent network coverage and can roam between wireless networks as conditions and availability change. When connections aren’t performing well, applications that are crucial for job performance can experience packet loss, jitter or latency that can make working on the hoof extremely tricky. Compared to wired networks, wireless networks operate under highly variable conditions, including such factors as terrain or congested mobile towers. When you optimise the flow of traffic, you are helping to manage packet loss. Effectively, packet losses are data loss, which happens very regularly when you’re on the move or transitioning between different networks. Applications that require a lot of data tend to become fairly unusable when you hit even minor packet loss, which can be a common occurrence for many on residential broadband or on local Wi-Fi. conversely, NetMotion can enable critical applications to work and prevent disruptions at over 50% packet loss – in this way, employees can rely on technology performing well in situations and locations where it simply could not before. That is incredibly powerful for firms.

The finance industry is facing many of the same challenges presented to other industries. It is a question of balancing the requirement for more sophisticated ways to ensure secure access to resources with the need to enhance the end user experience (key team members in particular). For finance firms everywhere, adopting the right technologies will ensure that their people can enjoy a ‘work-from-anywhere’ environment.

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Hong Kong’s Cathay Pacific warns of capacity cuts, higher cash burn

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Hong Kong's Cathay Pacific warns of capacity cuts, higher cash burn 2

(Reuters) – Cathay Pacific Airways Ltd on Monday warned passenger capacity could be cut by about 60% and monthly cash burn may rise if Hong Kong installs new measures that require flight crew to quarantine for two weeks.

Hong Kong’s flagship carrier said the expected move will increase cash burn by about HK$300 million ($38.70 million) to HK$400 million per month, on top of current HK$1 billion to HK$1.5 billion levels.

Hong Kong is set to require flight crew entering the Asian financial hub for more than two hours to quarantine in a hotel for two weeks, the South China Morning Post reported last week, citing sources.

“The new measure will have a significant impact on our ability to service our passenger and cargo markets,” Cathay said in a statement, adding that expected curbs will also reduce its cargo capacity by 25%.

The airline, in an internal memo seen by Reuters, requested for volunteers among its crew who could fly for three weeks, followed by two weeks of quarantine and 14 days free of duty, adding it will be a temporary measure and not all its flight will require such an operation.

“We continue to engage with key stakeholders in the Hong Kong Government,” the memo said.

The government did not immediately respond to a request for comment.

Separately, a company spokeswoman said the airline could not detail the impact on vaccine transport specifically in terms of cargo shipments.

The aviation industry has been hit hard by the COVID-19 pandemic as many countries imposed travel restrictions to contain its spread.

In December, Cathay’s passenger numbers fell by 98.7% compared to a year earlier, though cargo carriage was down by a smaller 32.3%.

($1 = 7.7512 Hong Kong dollars)

(Reporting by Shriya Ramakrishnan in Bengaluru; Additional reporting by Jamie Freed in Sydney and Twinnie Siu in Hong Kong; Editing by Bernard Orr and Arun Koyyur)

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Travel stocks pull FTSE 100 lower as virus risks weigh

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Travel stocks pull FTSE 100 lower as virus risks weigh 3

By Shashank Nayar

(Reuters) – London’s FTSE 100 fell on Monday, with travel stocks leading the declines, as rising coronavirus infections and extended lockdowns raised worries about the pace of economic growth, while fashion retailers Boohoo and ASOS gained on merger deals.

The British government quietly extended lockdown laws to give councils the power to close pubs, restaurants, shops and public spaces until July 17, the Telegraph reported on Saturday.

The blue-chip FTSE 100 index dipped 0.1%, with travel and energy stocks falling the most, while the mid-cap index rose 0.1%.

“Stock markets are crawling between optimism around the rollout of vaccines and worries that a jump in virus infections and fresh local lockdowns could further affect recovery prospects,” said David Madden, an analyst at CMC Markets.

Britain has detected 77 cases of the South African variant of COVID-19, the health minister said on Sunday while urging people to strictly follow lockdown rules as the best precaution against the country’s own potentially more deadly variant.

Prime Minister Boris Johnson had earlier warned that the government could not consider easing lockdown restrictions with infection rates at their current high levels and until it is confident that the vaccination programme is working.

The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy.

Online fashion retailers Boohoo and ASOS surged 4.8% and 5.9%, each. Boohoo bought the Debenhams brand, while ASOS was in talks to buy the key brands of Philip Green’s collapsed Arcadia group.

Recruiter SThree Plc gained 0.9% after its profit, which nearly halved, still managed to beat market expectations and the company said it had resumed dividends.

(Reporting by Shashank Nayar in Bengaluru; editing by Uttaresh.V)

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